AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 13, 1996
REGISTRATION NO. 333-7703
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
CONTIFINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 6162 13-3852588
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
-------------------
277 PARK AVENUE
NEW YORK, NEW YORK 10172
(212) 207-2800
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
-------------------
ALAN L. LANGUS, ESQ.
CHIEF COUNSEL
CONTIFINANCIAL CORPORATION
277 PARK AVENUE
NEW YORK, NEW YORK 10172
(212) 207-2822
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------------
COPIES TO:
<TABLE>
<S> <C>
MARK W. LORIMER, ESQ. KRIS F. HEINZELMAN, ESQ.
DEWEY BALLANTINE CRAVATH, SWAINE & MOORE
1301 AVENUE OF THE AMERICAS 825 EIGHTH AVENUE
NEW YORK, NEW YORK 10019-6062 NEW YORK, NEW YORK 10019
(212) 259-7300 (212) 474-1000
</TABLE>
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CONTIFINANCIAL CORPORATION
FORM S-1
REGISTRATION STATEMENT
CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM IN FORM S-1 LOCATION IN PROSPECTUS
---------------------------------------------- --------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus........ Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.................................... Inside Front Cover and Outside Back
Cover Pages
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges..................... Outside Front Cover Page; Prospectus
Summary; Risk Factors
4. Use of Proceeds............................... Use of Proceeds
5. Determination of Offering Price............... Not Applicable
6. Dilution...................................... Not Applicable
7. Selling Security Holders...................... Not Applicable
8. Plan of Distribution.......................... Outside Front Cover Page; Prospectus
Summary; Underwriting
9. Description of Securities to be Registered.... Outside Front Cover Page; Description
of the Notes
10. Interests of Named Experts and Counsel........ Not Applicable
11. Information with Respect to the Registrant
(a) Description of Business................... Prospectus Summary; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Regulation
(b) Description of Property................... Business--Properties
(c) Legal Proceedings......................... Business--Legal Proceedings
(d) Common Equity Securities.................. Not Applicable
(e) Financial Statements...................... Index to Consolidated Financial
Statements
(f) Selected Financial Data.................. Prospectus Summary; Selected Financial
Data
(g) Supplementary Financial Information....... Not Applicable
(h) Management's Discussion and Analysis of
Results of Operations and Financial
Condition................................. Management's Discussion and Analysis
of Financial Condition and Results of
Operations
(i) Changes in and Disagreements With
Accountants on Accounting and Financial
Disclosure............................... Not Applicable
(j) Directors and Executive Officers......... Management
(k) Executive Compensation.................... Management
(l) Security Ownership of Certain Beneficial
Owners and Management.................... Principal Stockholders
(m) Certain Relationships and Related
Transactions.............................. Certain Transactions
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................... Not Applicable
</TABLE>
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED AUGUST 13, 1996
PROSPECTUS
$300,000,000
CONTIFINANCIAL CORPORATION
% SENIOR NOTES DUE 2003
The % Senior Notes Due 2003 (the "Notes") offered hereby are being
offered by ContiFinancial Corporation (the "Company") and will mature on
, 2003. The Notes will be redeemable as a whole or in part, at the
option of the Company, at any time or from time to time, at a redemption price
equal to the greater of (i) 100% of their principal amount and (ii) the sum of
the present values of the remaining scheduled payments of principal and interest
thereon discounted to the date of redemption on a semiannual basis (assuming a
360-day year consisting of twelve 30-day months) at the Treasury Yield (as
defined herein) plus 50 basis points, plus in each case accrued interest to the
date of redemption. Upon a Change of Control (as defined), each holder of Notes
may require the Company to repurchase the Notes held by such holder at 101% of
the principal amount thereof plus accrued interest to the date of repurchase.
See "Description of the Notes."
The Notes will be senior unsecured obligations of the Company and will rank
pari passu in right of payment with all existing and future Senior Indebtedness
(as defined) of the Company and will be senior in right of payment to all future
subordinated indebtedness of the Company. The Notes will be effectively
subordinated to all existing and future secured indebtedness of the Company and
all existing and future indebtedness of the subsidiaries of the Company. As of
June 30, 1996, after giving effect to the issuance of the Notes and the
application of the proceeds therefrom, the Company's other Senior Indebtedness
outstanding would have been approximately $203 million, and the indebtedness of
the subsidiaries of the Company would have been approximately $248 million. See
"Description of the Notes."
There is no established trading market for the Notes and the Company does
not intend to apply for listing of the Notes on any national securities
exchange.
------------------------
FOR INFORMATION CONCERNING CERTAIN FACTORS THAT SHOULD BE CAREFULLY
CONSIDERED BY PROSPECTIVE INVESTORS, SEE "RISK FACTORS" BEGINNING ON PAGE 9.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------------
<TABLE><CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC (1) DISCOUNT COMPANY (2)
<S> <C> <C> <C>
Per Note................................ % % %
Total................................... $ $ $
</TABLE>
(1) Plus accrued interest, if any, from , 1996.
(2) Before deducting expenses payable by the Company estimated at $ .
The Notes are offered by the several Underwriters (the "Offering"), subject
to prior sale, when, as and if issued to and accepted by them, and subject to
the approval of certain legal matters by counsel for the Underwriters and
certain other conditions. The Underwriters reserve the right to withdraw, cancel
or modify such offer and to reject orders in whole or in part. It is expected
that delivery of the Notes will be made in New York, New York on or about
, 1996.
------------------------
Joint Book-Running Managers
BEAR, STEARNS & CO. INC. CS FIRST BOSTON
------------------------
UBS SECURITIES
The date of this Prospectus is , 1996.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
-------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE
ACCOUNTS OF OTHERS IN THE NOTES PURSUANT TO EXEMPTIONS FROM RULES 10B-6, 10B-7,
AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
-------------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy statements
and other information filed by the Company with the Commission can be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's regional offices located at Seven World Trade Center, New York, New
York 10048, and Suite 1400, Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661. Copies of such materials can be obtained from the
Public Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Such materials can also be
inspected at the New York Stock Exchange, 20 Broad Street, New York, New York
10005.
The Company has filed with the Commission, a Registration Statement on Form
S-1 under the Securities Act of 1933, (the "Securities Act"), with respect to
the Notes offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Notes, reference is hereby made to such Registration Statement and the exhibits
and schedules thereto. Statements contained in this Prospectus as to the
contents of any contract or other documents are not necessarily complete and, in
each instance, reference is made to the copy of such contract or document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. The Registration Statement, including
exhibits thereto, may be inspected and copied at the offices of the Commission,
or obtained at prescribed rates from the Public Reference Section of the
Commission at the address set forth above.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements
appearing elsewhere in this Prospectus. Unless the context indicates otherwise,
all references in this Prospectus to the Company include ContiFinancial
Corporation and its subsidiaries, ContiMortgage Corporation ("ContiMortgage"),
ContiTrade Services L.L.C. ("ContiTrade"), ContiFinancial Services Corporation
("ContiFinancial Services"), ContiSecurities Asset Funding Corp. ("CSAF"),
ContiSecurities Asset Funding Corp. II, ContiSecurities Asset Funding II, L.L.C.
and ContiFunding Corporation. For a description of certain terms used in this
Prospectus, see "Glossary."
THE COMPANY
The Company engages in the consumer and commercial finance business by
originating and servicing home equity loans and providing financing and asset
securitization structuring and placement services to originators of a broad
range of loans, leases and receivables. Securitization provides significant
benefits, including greater operating leverage and reduced costs of funds, in
the financing of assets such as non-conforming home equity loans, equipment
leases, home improvement loans, franchise loans, commercial/multi-family loans,
sub-prime auto loans and leases, small business loans and timeshare loans. For
the year ended March 31, 1996 and the three months ended June 30, 1996, the
Company originated or purchased $2.3 billion and $678 million, respectively, of
home equity loans through ContiMortgage. In addition, for the same periods, the
Company securitized or sold $2.0 billion and $301 million, respectively, of
loans and other assets for its clients.
Through ContiMortgage, the Company is a leading originator, purchaser,
seller and servicer of home equity loans made to borrowers whose borrowing needs
may not be met by traditional financial institutions due to credit exceptions or
other factors. Loans are made to borrowers primarily for debt consolidation,
home improvements, education or refinancing and are primarily secured by first
mortgages on one- to four-family residential properties. ContiMortgage is
devoting substantial resources and capital to: (i) increasing its market
penetration beyond the mid-Atlantic region; (ii) expanding its broker loan
network to complement its existing wholesale loan network; (iii) adding new loan
products, such as adjustable rate mortgages; (iv) expanding and diversifying its
origination sources; and (v) investing in information services and collection
technologies.
Two distinct factors drive the expansion of the Company's home equity loan
business -- growth in volume of loans and access to the capital markets to
facilitate the most efficient sale of these loans through securitization. The
Company believes it has a competitive advantage because the management of
ContiMortgage is able to focus exclusively on expanding the volume of loans
originated or purchased, enhancing loan underwriting efficiencies and building
its servicing portfolio, while relying upon the professional staff of ContiTrade
and ContiFinancial Services to focus exclusively on providing warehouse
financing, hedging and securitization structuring and placement services. This
specific industry expertise enables the Company to minimize its financing costs
and interest rate exposure and maximize the proceeds and profits from its
securitizations and its growing servicing portfolio. From April 1, 1991 through
June 30, 1996, ContiMortgage completed 23 AAA/Aaa-rated REMIC securitizations
totalling $4.9 billion. As of June 30, 1996, ContiMortgage had a servicing
portfolio of $4.3 billion.
The Company, through its subsidiaries, ContiTrade and ContiFinancial
Services, provides financing and asset securitization structuring and placement
services. In this area, ContiTrade's management and execution of ContiMortgage's
financing, hedging and securitization needs has served as a model for the
Company's strategic alliances with originators of a broad range of consumer and
commercial loans and other assets ("Strategic Alliances"). The Company offers
Strategic Alliance clients complete balance sheet liability management,
including warehouse financing, interest rate hedging services and
3
<PAGE>
the structuring and placement of asset portfolios in the form of asset-backed
securities. This allows the management of its Strategic Alliance clients to
focus on expanding and improving asset origination and servicing. For the years
ended March 31, 1995 and 1996, services provided by ContiTrade to Strategic
Alliance clients contributed $14.8 million and $108.5 million, respectively, to
the total gross income of the Company.
ContiFinancial Corporation is a Delaware corporation incorporated on
September 29, 1995. The principal executive offices of the Company are located
at 277 Park Avenue, New York, New York 10172 and its telephone number is (212)
207-2800.
INDUSTRY OVERVIEW
The home mortgage loan market is the largest consumer finance market in the
United States. Over the past several years, the non-conforming home equity loan
sector of the home mortgage loan market, which is relatively fragmented, has
grown at a faster rate than the overall market. Industry studies have estimated
that non-conforming home equity loan originations grew at an estimated compound
annual growth rate of 8.6% from $96 billion in 1990 to $145 billion in 1995.
According to studies performed by the David Olson Research Co., a group that has
been analyzing the home equity loan industry since 1969, the growth in the
volume of non-conforming home equity loans is attributable to, among other
factors: (i) a larger number of borrowers seeking to consolidate their revolving
credit debt and auto loans for a lower rate and payment; (ii) slow growth in
real estate appreciation causing an increase in the number of borrowers seeking
to make home improvements; (iii) increased entry into the home equity loan
market by commercial banks as well as the growth in the number and size of
mortgage brokers making home equity financing more readily available; and (iv)
growth in overall consumer awareness of the availability of home equity
financing. In addition, the asset-backed securitization market has provided an
important source of financing for originators of home equity loans.
BUSINESS STRATEGY
The Company's strategy is to continue its strong growth through geographic
expansion, Strategic Alliance activities, selective acquisition opportunities
and investments in origination, servicing and collection information systems and
technology. Currently only 10% of the Company's loan volume is originated west
of the Mississippi. In accordance with the Company's plans to expand into the
western United States, in fiscal 1995, the Company opened two regional offices
in California and Arizona and expects that these offices will increase its
market share in this region. At the same time, the Company plans on increasing
penetration in existing markets on the East Coast by continuing to pursue
opportunities to build market share by expanding current relationships with
mortgage bankers and brokers.
The Company's strategy with respect to Strategic Alliance activities is to
replicate its success with ContiMortgage by: (i) targeting classes of consumer
and commercial loans, leases and receivables that have the potential to be
financed more efficiently through securitization; (ii) identifying and
establishing Strategic Alliances with originators of these assets that have
experienced management teams, sophisticated systems and a proven track record of
originating, underwriting, servicing and collecting consumer and commercial
loans, leases, and receivables; and (iii) securing from these originators a
consistent flow of securitizable assets. In addition, the Company may, from time
to time, make an equity or subordinated debt investment in a Strategic Alliance
client.
4
<PAGE>
RECENT DEVELOPMENTS
SINCE JULY 1, 1996, CONTITRADE HAS COMPLETED TWO ADDITIONAL
SECURITIZATIONS CONSISTING OF ONE COMMERCIAL AND ONE HOME EQUITY LOAN
TRANSACTION, TOTALLING $242 MILLION AND, IN AUGUST 1996, CONTIMORTGAGE
EXPECTS TO COMPLETE AN ADDITIONAL REMIC SECURITIZATION IN THE AMOUNT OF
$550 MILLION.
RELATIONSHIP WITH CONTINENTAL GRAIN
Continental Grain Company ("Continental Grain") currently owns approximately
81% of the Company's outstanding common stock, $.01 par value ("Common Stock").
Prior to the Company's initial public offering of 7,130,000 shares of its Common
Stock in February 1996 (the "IPO"), the Company was a wholly-owned subsidiary of
Continental Grain. Continental Grain is a privately held, multinational
agribusiness company. Continental Grain has advised the Company that its current
intention is to continue to hold all the shares of Common Stock beneficially
owned by it. However, there can be no assurance that Continental Grain will not
sell all or a portion of its holdings at some future date. As a result of its
ownership interest, Continental Grain has voting control on all matters
submitted to stockholders, including the election of directors and the approval
of extraordinary corporate transactions. See "Principal Stockholders."
Continental Grain has provided the Company with intercompany financing in the
form of the Intercompany Debt (as defined). For a description of the
Intercompany Debt and certain other transactions between Continental Grain and
the Company, see "Certain Transactions" and "Description of Certain Indebtedness
and Financing Arrangements."
RISK FACTORS
Prior to making an investment decision, prospective investors should
carefully consider all the information set forth in this Prospectus and, in
particular, should evaluate the factors set forth in "Risk Factors."
THE OFFERING
<TABLE>
<S> <C>
Securities Offered........... $ aggregate principal amount of % Senior Notes
Due 2003 (the "Notes").
Maturity Date................ , 2003
Interest Payment Dates....... and , commencing 1997.
Optional Redemption.......... The Notes are redeemable at the option of the Company, in
whole or in part, at the redemption price set forth herein,
plus accrued interest to the date of redemption. See
"Description of the Notes -- Optional Redemption."
Change of Control............ Upon a Change of Control (as defined), each holder of Notes
may require the Company to repurchase the Notes held by such
holder at 101% of the principal amount thereof plus accrued
interest to the date of repurchase. See "Description of the
Notes -- Change of Control."
Ranking...................... The Notes will be senior unsecured obligations of the
Company and will rank pari passu in right of payment with
all existing and future Senior Indebtedness (as defined) of
the Company and will be senior in right of payment to all
future subordinated indebtedness of the Company. The Notes
will be effectively subordinated to all existing and future
secured indebtedness of the Company and all existing and
future indebtedness and liabilities of the subsidiaries of
the Company. As of June 30, 1996, after giving effect to the
issuance of the Notes and the application of the proceeds
therefrom, the Company's other Senior Indebtedness
outstanding would have been approximately $203 million and
the indebtedness of the subsidiaries
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
of the Company would have been approximately $248 million.
See "Description of the Notes -- Ranking."
Certain Covenants............ The indenture pursuant to which the Notes will be issued
(the "Indenture") will contain certain covenants, including
covenants with respect to the following matters: (i)
limitations on indebtedness; (ii) limitations on
indebtedness and preferred stock of subsidiaries; (iii)
limitations on liens; (iv) limitations on restricted pay-
ments such as dividends, repurchases of the Company's or its
subsidiaries' stock and repurchases of subordinated
obligations; (v) limitations on restrictions on
distributions from subsidiaries; (vi) limitations on sales
of assets and subsidiary stock; and (vii) limitations on
merger and consolidation. However, all these limitations are
subject to a number of important exceptions and
qualifications. See "Description of the Notes."
Use of Proceeds.............. The net proceeds to the Company from the sale of the Notes
are estimated to be approximately $293.3 million. The
Company will use such net proceeds to repay certain
Intercompany Debt and for general corporate purposes. See
"Use of Proceeds."
Absence of Market............ There is no established trading public market for the Notes
and the Company does not intend to apply for listing of the
Notes on any national securities exchange. The Underwriters
have advised the Company that they presently intend to act
as market makers for the Notes. The Underwriters, however,
are under no obligation to make a market in the Notes and
any such market-making activities may be discontinued at any
time without notice. There can be no assurance as to the
liquidity of the trading market for the Notes or that an
active public market for the Notes will develop.
Same-Day Settlement
and Payment................ Settlement of the Notes will be made in immediately
available funds. The Notes will trade in the Same-Day
Settlement System of The Depository Trust Company ("DTC"),
and, to the extent that secondary market trading activity in
the Notes is effected through the facilities of DTC, such
trades will be settled in immediately available funds. All
payments of principal and interest will be made by the
Company in immediately available funds. See "Description of
the Notes -- Same-Day Settlement and Payment."
</TABLE>
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
(DOLLAR AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE><CAPTION>
THREE MONTHS ENDED
YEARS ENDED MARCH 31, JUNE 30,
------------------------------------------------------------ -----------------------
1992 1993 1994 1995 1996 1995 1996
---------- -------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Gross income:
Gain on sale of
receivables..................... $ 11,418 $ 18,587 $ 49,671 $ 67,512 $ 146,529 $ 22,555 $ 31,166
Interest..................... 16,130 11,385 20,707 42,929 91,737 17,883 28,515
Net servicing income......... 1,191 1,842 3,989 9,304 29,298 4,766 9,073
Other income................. (41) (147) 162 2,252 4,252 968 1,009
---------- -------- ---------- ---------- ---------- ---------- ----------
Total gross income.......... $ 28,698 $ 31,667 $ 74,529 $ 121,997 $ 271,816 $ 46,172 $ 69,763
---------- -------- ---------- ---------- ---------- ---------- ----------
---------- -------- ---------- ---------- ---------- ---------- ----------
Total interest expense
(including warehouse
financing)...................... $ 12,686 $ 6,529 $ 12,124 $ 29,635 $ 74,770 $ 15,245 $ 19,662
Income before income taxes and
minority interest............ $ 7,765 $ 12,149 $ 35,286 $ 56,988 $ 126,536 $ 19,682 $ 32,695
Income taxes................... $ 2,948 $ 4,640 $ 13,726 $ 22,168 $ 49,096 $ 7,656 $ 13,262
Net income..................... $ 4,073 $ 5,909 $ 16,484 $ 26,092 $ 74,130 $ 8,716 $ 19,433
Primary and fully dilutive
earnings per common share
(pro forma at March 31, 1996
only)........................ $ 2.00 $ 0.44
CASH FLOW DATA:
(Used in) provided by operating
activities...................... $ (22,939) $ 15,525 $ (32,360) $ (35,336) $ (300,457) $ (89,020) $ (1,948)
Used in investing activities... (186) (685) (615) (1,816) (37,243) (494) (57)
Provided by (used in) financing
activities...................... 23,167 (15,435) 35,061 37,666 367,357 91,074 (5,555)
---------- -------- ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash
and cash equivalents......... $ 42 $ (595) $ 2,086 $ 514 $ 29,657 $ 1,560 $ (7,560)
---------- -------- ---------- ---------- ---------- ---------- ----------
---------- -------- ---------- ---------- ---------- ---------- ----------
OPERATING DATA:
Number of loans serviced (at
period end)..................... 8,788 11,093 20,146 38,740 65,121 44,478 71,082
Face value of loans serviced
(at period end).............. $ 314,260 $484,857 $1,105,393 $2,192,190 $3,863,575 $2,537,104 $4,256,949
Securitization and whole loan
sales volume:
ContiMortgage:
--Securitization............ $ 141,279 $194,668 $ 733,182 $1,258,919 $2,030,000 $ 300,000 $ 505,000
--Whole loan................ 46,441 77,876 39,142 33,772 270 -- 187,953
Non-ContiMortgage:
--Securitization............ 921,000 426,000 418,000 906,000 1,926,680 155,000 300,560
--Whole loan................ -- -- -- 89,000 36,000 36,000 --
---------- -------- ---------- ---------- ---------- ---------- ----------
Total securitization and whole
loan sales volume............ $1,108,720 $698,544 $1,190,324 $2,287,691 $3,992,950 $ 491,000 $ 993,513
---------- -------- ---------- ---------- ---------- ---------- ----------
---------- -------- ---------- ---------- ---------- ---------- ----------
LOAN LOSS DATA (a):
Delinquency rate (at end of
period) (b)..................... 3.68% 1.20% 0.97% 1.64% 2.51% 1.64% 4.05%
Default rate (at end of period)
(c)............................. 2.46% 1.70% 0.81% 1.16% 3.54% 1.13% 3.98%
Net losses as a percentage of
average amount outstanding... 0.27% 0.26% 0.15% 0.08% 0.13% 0.03%(d) 0.05%(d)
FINANCIAL RATIOS:
Ratio of earnings to fixed
charges (e)..................... 1.55x 2.62x 3.49x 2.63x 2.65x 2.07x 2.66x
Percentage of indebtedness to
total capitalization (f)..... 79.63% 18.38% 40.97% 62.85% 52.36% 72.92% 50.64%
Pre-tax interest coverage ratio
(g)............................. 1.98x 3.94x 7.87x 6.56x 6.59x 7.02x 6.25x
</TABLE>
<TABLE><CAPTION>
AS OF JUNE 30, 1996
-------------------------
AS
ACTUAL ADJUSTED (H)
---------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................ $ 24,919 $ 193,219
Excess spread receivables (interest-only and residual certificates)...... 223,802 223,802
Receivables held for sale................................................ 364,159 364,159
Total assets............................................................. 891,672 1,066,672
Notes payable to affiliates.............................................. 324,000 199,000
% Senior Notes Due 2003.................................................. -- 300,000
Total liabilities........................................................ 575,864 750,864
Stockholders' equity (i)................................................. 315,808 315,808
</TABLE>
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<TABLE>
<C> <S>
(a) Loan loss data represents data for the home equity loan business of ContiMortgage only.
See "Business -- Home Equity Loan Origination and Servicing."
(b) The delinquency percentage represents, as a percentage of the aggregate principal
balance of loans as of the relevant date, the outstanding principal balance of home
equity loans for which payments are contractually past due, exclusive of home equity
loans in foreclosure, bankruptcy, real estate owned or forbearance.
(c) The default percentage represents, as a percentage of the aggregate principal balance
of loans as of the relevant date, the dollar value of delinquent payments on home
equity loans in foreclosure, bankruptcy, real estate owned or forbearance.
(d) This percentage is based on data for the three months ended June 30, 1995 and 1996 and
is not necessarily indicative of an annualized percentage.
(e) Amounts represent the ratio of (i) the sum of income before income taxes and minority
interest plus interest expense less minority interest to (ii) interest expense.
(f) Amounts in fiscal 1992, 1993, 1994 and 1995 and for the three months ended June 30,
1995 represent the ratio of amounts due to Continental Grain to total capitalization.
(g) Amounts represent the ratio of (i) the sum of income before income taxes and minority
interest plus interest expense on funded debt to (ii) interest expense on funded debt.
(h) The as adjusted balance sheet as of June 30, 1996 reflects this Offering, net of $6,700
of estimated offering expenses and the repayment of the $125,000 Term Note. See
"Capitalization."
(i) The Company paid cash dividends to Continental Grain of $305 in fiscal year 1996.
</TABLE>
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RISK FACTORS
Prior to making an investment decision, prospective investors should
carefully consider all information set forth in this Prospectus and, in
particular, should evaluate the factors described below.
LEVERAGE
The Company currently has substantial outstanding indebtedness and
subsequent to the Offering the Company will be significantly leveraged. At March
31, 1996 and June 30, 1996, on an "as adjusted basis" to give effect to the
Offering and repayment of the $125 million Term Note (as defined in "Description
of Certain Indebtedness and Financing Arrangements"), the aggregate outstanding
consolidated indebtedness (including the current maturities thereof) of the
Company would have been approximately $473 million and $751 million,
respectively, of which $272 million and $248 million, respectively, would have
been indebtedness of subsidiaries to which the Notes are effectively
subordinated. See "Capitalization." In addition, at March 31, 1996 and June 30,
1996, the Company had approximately $91 million and $178 million, respectively,
of contingent recourse obligations associated with its sales of Excess Spread
Receivables. The Company's ability to make payments of principal or interest on,
or to refinance its indebtedness (including the Notes) depends on its future
operating performance, which to a certain extent is subject to economic,
financial, competitive and other factors beyond its control.
The degree to which the Company is leveraged could have important
consequences to the holders of the Notes, including: (i) the Company's increased
vulnerability to adverse general economic and industry conditions; (ii) the
Company's ability to obtain additional financing for future working capital,
capital expenditures, acquisitions, general corporate purposes or other
purposes; (iii) the dedication of a substantial portion of the Company's cash
flow from operations to the payment of principal and interest on indebtedness
and to payments under capital leases, thereby reducing the funds available for
operations and future business opportunities; and (iv) all the indebtedness
incurred in connection with the Intercompany Debt becomes due prior to the
maturity of the Notes. In addition, the Intercompany Debt and the Indenture
contain certain covenants which could limit the Company's operating and
financial flexibility. See "--Financial Covenants of the Intercompany Debt
Agreements," "Description of Certain Indebtedness and Financing Arrangements"
and "Description of the Notes--Certain Covenants."
The Company's ability to sustain its growth is dependent on its ability to
secure further debt arrangements and purchase and sale facilities with certain
financial institutions (the "Purchase and Sale Facilities"). As of March 31,
1996, the Company had $1.03 billion of committed (and an additional $625 million
of uncommitted) sale capacity under Purchase and Sale Facilities and had
utilized $565 million of such capacity. As of June 30, 1996, the aggregate
committed and uncommitted sales capacity under its Purchase and Sale Facilities
was $1.45 billion and $1.05 billion, respectively and the Company had utilized
$597 million of such capacity. In addition, the committed amount of the Purchase
and Sale Facilities might be considered by potential creditors or by potential
Purchase and Sale Facility counterparties in deciding whether to enter into
financing arrangements with the Company. See "--Ability to Service Debt;
Negative Cashflows and Capital Needs--Dependence on Purchase and Sale
Facilities."
ABILITY TO SERVICE DEBT; NEGATIVE CASHFLOWS AND CAPITAL NEEDS
Although the Company believes that cash available from operations will be
sufficient to enable it to make required interest payments on the Notes and its
other debt obligations and other required payments, there can be no assurance in
this regard and the Company may encounter liquidity problems which could affect
its ability to meet such obligations while attempting to withstand competitive
pressures or adverse economic conditions. In such circumstances, the value of
the Notes could be materially adversely affected.
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In a securitization, the Company recognizes a gain on sale for the loans or
assets securitized upon the closing of the securitization, but does not receive
the cash representing such gain until it receives the Excess Spread, which is
payable over the actual life of the loan or other assets securitized. The
Company incurs significant expenses in connection with a securitization and
incurs both current and deferred tax liabilities as a result of the gain on
sale. Net cash used in operating activities for fiscal 1994, 1995 and 1996 and
the three months ended June 30, 1996 was $32.4 million, $35.3 million, $300.5
million (which included $220.5 million used to purchase receivables which it
intends to securitize and sell in fiscal 1997) and $1.9 million, respectively.
Therefore, the Company requires continued access to short- and long-term
external sources of cash to fund its operations.
The Company has operated, and expects to continue to operate, on the
negative cash flow basis described above, which is expected to increase as the
volume of the Company's loan and asset purchases and originations increases and
its securitization program grows. The Company's primary cash requirements are
expected to include the funding of: (i) mortgage, loan and lease originations
and purchases pending their pooling and sale; (ii) the points and other expenses
paid in connection with the acquisition of wholesale loans; (iii) fees and
expenses incurred in connection with its securitization program; (iv)
overcollateralization or reserve account requirements in connection with loans
and leases pooled and sold; (v) ongoing administrative and other operating
expenses; (vi) payments related to its tax obligations under a tax sharing
agreement with Continental Grain (the "Tax Sharing Agreement"); and (vii)
interest and principal payments under the Intercompany Debt and the Notes and
the costs of the Company's Purchase and Sale Facilities. The Company's primary
sources of liquidity in the future are expected to be existing cash, sales of
the loans, leases and other assets through securitization, the sale of loans
under the Purchase and Sale Facilities, the sale of Excess Spread Receivables
and further issuances of debt (subject to the covenants of the Notes). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The Company's primary sources of liquidity as described in the paragraph
above are expected to be sufficient to fund the Company's liquidity requirements
for at least the next 12 months if the Company's future operations are
consistent with management's current growth expectations. Subsequently, the
Company anticipates that it may need to arrange for additional external cash
financing. The Company has no commitments for additional financing and there can
be no assurance that the Company will be successful in consummating any such
financing transactions in the future on terms the Company would consider to be
favorable, if at all.
Dependence on Securitization Program
Since 1991, the Company has pooled and sold substantially all loans or other
assets which it originates or purchases through securitization. Accordingly,
adverse changes in the securitization market could impair the Company's ability
to originate, purchase and sell loans or other assets on a favorable or timely
basis. Any such impairment could have a material adverse effect upon the
Company's business and results of operations. In addition, the securitization
market for many types of assets is relatively undeveloped and may be more
susceptible to market fluctuations or other adverse changes than more developed
capital markets. Finally, any delay in the sale of a loan or other asset pool
would postpone the recognition of gain on such loans until their sale. Such
delays could cause the Company's earnings to fluctuate from quarter to quarter.
In addition, in order to gain access to the securitization market for home
equity loans and certain other classes of assets, the Company has relied on four
monoline insurance companies to provide guarantees on outstanding senior
interests in the related REMIC, owner trust or grantor trust to enable it to
obtain an "AAA/Aaa" rating for such interests. Any unwillingness of the monoline
insurance companies to guarantee the senior interests in the Company's home
equity loan or other asset pools could have a material adverse effect on the
Company's financial position and results of operations.
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Dependence on Purchase and Sale Facilities
In order to fund new loan and asset originations and purchases, the Company
is dependent upon ContiTrade's ability to sell loans and other assets under its
Purchase and Sale Facilities with certain financial institutions. The Purchase
and Sale Facilities allow ContiTrade to sell, with limited recourse, interests
in designated pools of loans and other assets. A portion of the purchase price
for any assets (typically 5% to 10%) is generally deposited by ContiTrade into
an account held by the financial institution on behalf of ContiTrade, against
which the financial institution may set off any losses incurred in the resale of
such assets. The Purchase and Sale Facilities provide that prior to disposing of
any asset purchased from ContiTrade, the counterparty shall offer the asset for
sale to ContiTrade at the original purchase price. Unless waived, each Purchase
and Sale Facility will terminate upon the occurrence of certain events, which
include: (i) failure of ContiTrade or the Company (as guarantor) to perform
under the terms and covenants of the Purchase and Sale Facility (including
payment obligations), to make true representations and warranties regarding the
assets sold and certain other matters, to make material scheduled payments under
all indebtedness or to perform under any other agreement with the financial
institution; (ii) any material adverse change in the financial condition of
ContiTrade or the Company (as guarantor); and (iii) certain bankruptcy events of
ContiTrade or the Company (as guarantor). The Company has guaranteed
ContiTrade's obligations under the Purchase and Sale Facilities.
As of March 31, 1996, the Company had $1.03 billion of committed (and an
additional $625 million of uncommitted) capacity under the Purchase and Sale
Facilities and had utilized $565 million of such capacity. The Company utilized
the Purchase and Sale Facilities to sell and repurchase assets totaling $1.2
billion, $2.5 billion, $5.7 billion and $1.0 billion in fiscal 1994, 1995, 1996
and the three months ended June 30, 1996, respectively. As of June 30, 1996, the
aggregate committed and uncommitted sales capacity under its Purchase and Sale
Facilities was $1.45 billion and $1.05 billion, respectively and the Company had
utilized $597 million of such capacity. The Company's need for capacity under
the Purchase and Sale Facilities or from other third party financing will
increase as its volume of loan origination and purchasing grows.
Although the Company expects to be able to obtain replacement financing or
asset purchase commitments when the Company's current Purchase and Sale
Facilities expire or additional financing or asset purchase commitments when
such agreements become fully utilized, there can be no assurance that such
financing will be obtainable on as favorable terms, if at all. To the extent
that the Company is unable to arrange any third party or other financing, the
Company's loan origination and purchasing activities would be adversely
affected, which could have a material adverse effect on the Company's
operations, financial results and cash position.
EFFECT OF CONTINENTAL GRAIN'S DEBT AGREEMENTS ON THE COMPANY
Continental Grain's debt agreements with the lenders to Continental Grain
and certain guarantees provided by Continental Grain for the benefit of the
Company (the "Continental Grain Debt Agreements") place certain restrictions on
Continental Grain and the Company which will limit the Company's operating
flexibility. Although the Continental Grain Debt Agreements prohibited the
issuance of the Notes, Continental Grain and its lenders have amended the
Continental Grain Debt Agreements to allow the issuance of the Notes. Certain of
the Continental Grain Debt Agreements also require the consent of the lenders if
the Company were to raise equity financing. In order to comply with the other
financial covenants applicable to Continental Grain and its subsidiaries under
the Continental Grain Debt Agreements, Continental Grain will place limitations
upon the Company's ability to incur debt, to pay dividends to its stockholders,
to sell its assets, to incur liens, to make acquisitions, investments and
capital expenditures, to incur off-balance sheet contingent obligations, to
reduce its working capital and to otherwise expand the Company's business in a
manner that would be possible in the absence of such restrictions. The presence
of such financial covenants in the Continental Grain Debt Agreements could
present situations involving potential conflicts of interest for those members
of the board of directors of the Company who also owe fiduciary duties to
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Continental Grain by virtue of their positions as officers or directors of
Continental Grain. There can be no assurance that such conflicts of interest
will be resolved in favor of the Company. Although it is Continental Grain's
intention to seek to exclude the Company from the application of all or many of
the covenants of Continental Grain's future debt agreements, there can be no
assurance that the future debt agreements of Continental Grain will not continue
to impose substantial limitations upon the Company.
FINANCIAL COVENANTS OF THE INTERCOMPANY DEBT AGREEMENTS
In order to fund the Company's past growth, Continental Grain has provided
and currently provides the Company with intercompany financing ("Intercompany
Debt"). The Intercompany Debt places certain restrictions on the Company which
may limit the Company's operating flexibility. The Intercompany Debt includes
the following financial covenants for the Company: a minimum current ratio
(current assets to current liabilities), a maximum total liabilities to equity
ratio, a maximum long-term debt to equity ratio, a minimum net worth
requirement, a limitation on incurring certain liens, and a limitation on
acquisitions, investments or capital expenditures of the Company. From time to
time in the past, the Company has sought and received amendments or waivers
relating to certain financial covenants with respect to its Intercompany Debt
from Continental Grain. Should the Company be unable to comply with the
financial covenants under the Intercompany Debt in the future, there can be no
assurance that Continental Grain would agree to appropriate amendments or
waivers. In such a case, the failure to obtain appropriate amendments or waivers
could have a material adverse effect upon the Company. Although the Intercompany
Debt prohibited the issuance of the Notes, the Company and Continental Grain
have amended the Intercompany Debt to allow the issuance of the Notes. See
"Description of Certain Indebtedness and Financing Arrangements."
EXCESS SPREAD RECEIVABLES
As a fundamental part of its business and financing strategy, the Company
sells substantially all of its loans or other assets through securitization. In
a securitization, the Company sells loans or other assets that it has originated
or purchased to a trust for a cash purchase price and an interest in the loans
or other assets securitized in the form of the Excess Spread. The cash purchase
price is raised through an offering of pass-through certificates by the trust.
Following the securitization, the purchasers of the pass-through certificates
receive the principal collected and the investor pass-through interest rate on
the certificate balance, while the Company receives the Excess Spread. The
Excess Spread generally represents, over the life of the loans or other assets,
the excess of the weighted average coupon on each pool of loans or other assets
sold over the sum of the pass-through interest rate plus a normal servicing fee,
a trustee fee, an insurance fee and an estimate of annual future credit losses
related to the loans or other assets securitized.
The majority of the Company's gross income is recognized as gain on sale of
loans or other assets, which represents the present value of the Excess Spread,
less origination and underwriting costs (the "Excess Spread Receivable"). The
Company recognizes the gain on sale of loans or other assets in the fiscal year
in which such loans or other assets are sold, although cash (representing the
Excess Spread and servicing fees) is received by the Company over the life of
the loans or other assets. Concurrent with recognizing such gain on sale, the
Company records the Excess Spread Receivable as an asset on its consolidated
balance sheet.
In 1994, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"), which requires fair value accounting for these
securities. In accordance with the provisions of SFAS 115, the Company
classifies subordinated classes of REMICs, owner trusts and grantor trusts as
"trading securities" and, as such, they are recorded at fair value with the
resultant unrealized gain or loss recorded in the results of operations in the
period of the change in fair value. The Company determines fair value on a
quarterly basis based on a discounted cash flow analysis. The cash flows are
estimated as the excess of the weighted average coupon on each pool of consumer
and commercial loans, leases and receivables
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(collectively, the "Receivables") sold over the sum of the pass-through interest
rates plus a normal servicing fee, a trustee fee, an insurance fee and an
estimate of annual future credit losses related to the Receivables securitized,
over the life of the Receivables. These cash flows are projected over the life
of the Receivables using prepayment, default, and interest rate assumptions that
the Company believes market participants would use for similar financial
instruments subject to prepayment, credit and interest rate risk and are
discounted using an interest rate that the Company believes a purchaser
unrelated to the seller of such a financial instrument would demand. Higher than
anticipated rates of loan prepayments or credit losses on the loans or other
assets underlying the Excess Spread Receivables would require the Company to
write down the value of the Excess Spread Receivables, which could have a
material adverse impact on the Company's financial position and results of
operations.
At June 30, 1996, the Company's consolidated balance sheet reflected Excess
Spread Receivables of $223.8 million. While the Company has consummated
contingent recourse sales of Excess Spread Receivables from time to time, there
is no liquid market for such Excess Spread Receivables. In fiscal 1995, CSAF
began to sell certain Excess Spread Receivables. In connection with such sales,
CSAF retains negotiated levels of recourse obligations in the event the
purchaser does not realize expected cash flows from the Excess Spread
Receivables that have been sold. Continental Grain has guaranteed, for a fee,
CSAF's performance obligations under such sales, but is under no obligation to
provide such guarantees for future transactions. If Continental Grain does not
provide such guarantees in the future, the Company's ability to raise cash
through CSAF by entering into future sales of its Excess Spread Receivables with
retained recourse could be impaired. CSAF's recourse obligations under the sales
transactions could result in losses in the event cash flow from the Excess
Spread Receivables that have been sold is significantly less than was
anticipated at the time of the related sale. ContiFinancial Corporation, as well
as Continental Grain, have guaranteed CSAF's performance obligations under each
such sale. The cash proceeds from such sales aggregated $50 million in fiscal
1995 and $54.5 million for fiscal 1996. On April 1, 1996, CSAF completed a
contingent recourse sale of Excess Spread Receivables for total cash proceeds of
$96.5 million. Of the Company's $293.2 million of Excess Spread Receivables at
March 31, 1996, $56.4 million represented the fair value of subordinated
retained interests in Excess Spread Receivables which the Company sold pursuant
to contingent recourse sales. Of the Company's $223.8 million of Excess Spread
Receivables at June 30, 1996, $90.5 million represented the fair value of
subordinated retained interests in Excess Spread Receivables which the Company
sold pursuant to contingent recourse sales. Since subordinated retained
interests are designed to absorb changes in both the residual interest and the
recourse sale amount, their value may be more adversely impacted than unsold
Excess Spread Receivables under certain circumstances.
In addition, in fiscal 1994, 1995 and 1996, the Company sold without
recourse $17.6 million, $26.3 million and $53.5 million of interest-only
certificates which the Company generated from its securitization activities.
These sales represent an important source of liquidity for the Company. Any
impairment of the Company's ability to sell these interest-only certificates
would require the Company to obtain the liquidity from other sources and thus
could have a materially adverse impact on the Company's financial position or
results of operations.
Although the Company intends to continue to pursue opportunities to sell
Excess Spread Receivables, no assurance can be given that such opportunities
will be available in the future or that all or any portion of Excess Spread
Receivables could in fact be sold at their stated value on the balance sheet, if
at all. The Intercompany Debt, the Indenture, and the Continental Grain Debt
Agreements place certain limitations on the Company's ability to incur
indebtedness secured by its Excess Spread Receivables. Although the Company may
seek in the future to negotiate such financing within the terms of such
limitations, there can be no assurance that the Company will be able to identify
sources of such financing or whether the terms of any such financing, if
available, would be on terms the Company would consider favorable.
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SIGNIFICANCE OF SERVICING INCOME
At March 31, 1996, the Company had a $3.9 billion servicing portfolio on
which it earned approximately 50 basis points (per annum), or $19.5 million of
cash income, in fiscal 1996. At June 30, 1996, the Company had a $4.3 billion
servicing portfolio on which it earned approximately 50 basis points (per
annum), or $6.3 million of cash income for the three months ended June 30, 1996.
If prepayments on this portfolio were to significantly exceed management's
estimate, there would be a material adverse effect on the Company's future
cashflow. In addition, effective April 1, 1995, the Company adopted SFAS No. 122
"Accounting for Mortgage Servicing Rights" ("SFAS No. 122") which requires that
upon sale or securitization of servicing retained mortgages, companies
capitalize the cost associated with the right to service mortgage loans based on
its relative fair value. Higher than anticipated rates of loan prepayments,
including repayments due to foreclosures or charge-offs, would require the
Company to write down the value of capitalized servicing rights, which could
have a material adverse impact on the Company's financial position or results of
operations.
FINANCING EXCESS SPREAD RECEIVABLES FOR STRATEGIC ALLIANCE CLIENTS
The Company finances the Excess Spread Receivables of certain Strategic
Alliance clients through loans secured by such Excess Spread Receivables or by a
pledge of the stock of the special purpose corporation holding such Excess
Spread Receivables. As of March 31, 1996 and June 30, 1996, the total committed
amount of such financings was $57.6 million and $81.1 million, respectively, and
the amount outstanding in connection with such financings was $32.4 million and
$29.0 million, respectively. The financed Excess Spread Receivables are
generated through securitizations of home equity loans. While all financed
Excess Spread Receivables were issued in securitizations which yielded
securities rated investment grade by nationally recognized statistical rating
organizations, and all are financed at a discount to fair value determined after
application of discounts for expected loss, prepayment and interest rate
factors, the Strategic Alliance clients are often companies with limited
operating histories and capital and have not been rated or have a non-investment
grade credit rating. The value of the financed Excess Spread Receivables is
dependent on, among other things, the ability of the Strategic Alliance client
to service its securitized assets in accordance with the specifications of the
related pooling and servicing agreements. If a Strategic Alliance client were
unable to meet its obligations under the pooling and servicing agreement
pertaining to the financed Excess Spread Receivables, the value of such Excess
Spread Receivables could decline to less than the amount of the loan it secures.
In such cases, the Company would suffer losses.
HOLDING COMPANY STRUCTURE
The Company is a holding company which derives substantially all its
operating income from its wholly-owned subsidiaries. The Company intends to loan
or contribute a portion of the net proceeds from the sale of the Notes to
certain of its subsidiaries which will use the proceeds for general working
capital purposes. The Company must rely upon payments from its subsidiaries to
generate the funds necessary to meet its obligations, including the payment of
interest on and principal of the Notes. The ability of the Company's
subsidiaries to make such payments will be subject to, among other things,
applicable state laws. Claims of creditors of the Company's subsidiaries,
including trade creditors, will generally have priority as to the assets of such
subsidiaries over the claims of the Company and the holders of the Company's
indebtedness, including the Notes. See "Description of the Notes--Ranking."
ECONOMIC CONDITIONS
General
The risks associated with the Company's business become more acute in any
economic slowdown or recession. Periods of economic slowdown or recession may be
accompanied by decreased demand for consumer and commercial credit and declining
real estate and other asset values. In the mortgage business, any material
decline in real estate values reduces the ability of borrowers to use home
equity to
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support borrowings and increases the loan-to-value ratios of loans previously
made by the Company, thereby weakening collateral coverage and increasing the
possibility of a loss in the event of a default. Delinquencies, foreclosures and
losses generally increase during economic slowdowns or recessions.
Because of the Company's focus on credit-impaired borrowers in the home equity
loan market and certain other markets, the actual rates of delinquencies,
foreclosures and losses on such loans could be higher under adverse economic
conditions than those experienced in such markets in general. In addition, in an
economic slowdown or recession, the Company's servicing costs will increase. Any
sustained period of increased delinquencies, foreclosures, losses or increased
costs could adversely affect the Company's ability to sell loans or other assets
through securitization and could increase the cost of selling loans or other
assets through securitization, which could adversely affect the Company's
financial condition and results of operations.
Interest Rates
Profitability may be directly affected by the level of and fluctuations in
interest rates which affect the Company's ability to earn a spread between
interest received on its loans and the costs of its liabilities. While the
Company monitors the interest rate environment and employs a hedging strategy
designed to mitigate the impact of changes in interest rates, there can be no
assurance that the profitability of the Company would not be adversely affected
during any period of changes in interest rates. During periods of increasing
interest rates, the Company generally experiences market pressure to reduce
servicing spreads. In addition, an increase in interest rates may decrease the
demand for consumer or commercial credit. A substantial and sustained increase
in interest rates could, among other things: (i) adversely affect the ability of
the Company to purchase or originate loans or other assets; (ii) reduce the
average size of loans underwritten by the Company; and (iii) reduce the gains
recognized by the Company upon their securitization and sale. A significant
decline in interest rates could decrease the size of the Company's loan
servicing portfolio by increasing the level of loan prepayments, thereby
shortening the life and impairing the value of the Excess Spread Receivables.
Fluctuating interest rates also may affect the net interest income earned by the
Company resulting from the difference between the yield to the Company on loans
held pending sale and the cost of funds obtained by the Company to finance such
loans. In addition, inverse or flattened interest yield curves could have an
adverse impact on the profitability of the Company because the loans or assets
pooled and sold by the Company are priced based on long-term interest rates
while the senior interests in the related REMIC, owner trust or grantor trust
are priced on the basis of intermediate term United States Treasury rates.
CONTINGENT RISKS
Although the Company sells substantially all loans or other assets which it
originates or purchases, the Company retains some degree of risk on
substantially all loans or other assets sold. During the period of time that
loans or other assets are held pending sale, the Company is subject to the
various business risks associated with the lending business including the risk
of borrower default, the risk of foreclosure and the risk that an increase in
interest rates would result in a decline in the value of loans or other assets.
The Company continues to be subject to the risks of default and foreclosure
following the sale of the loans or other assets through securitization to the
extent that actual losses covered by the Excess Spread exceed the loss
assumption made by the Company in the securitization. The documents governing
the Company's securitization program require (i) the Company to establish
deposit accounts or (ii) the related trust to build overcollateralization levels
by retaining Excess Spread distributions or applying Excess Spread distributions
to reduce the principal balances of the senior interests issued by the trust.
These actions serve as credit enhancement for the related trust and are
therefore available to fund losses realized on loans or other assets held by
such trust. At March 31, 1996, credit-enhancement amounts (in the form of
deposit accounts and overcollateralization levels) aggregated approximately $128
million. In addition, documents governing the Company's securitization programs
require the Company to commit to repurchase or replace loans or other assets
which do not conform to the
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representations and warranties made by the Company at the time of sale. When
borrowers are delinquent in making monthly payments on loans included in a
REMIC, owner trust or grantor trust, the Company is required, if it is the
servicer of such loans, to advance amounts equal to the delinquent interest on
such loans to the extent that the Company deems such advances ultimately
recoverable. These advances may require funding from the Company's capital
resources but have priority of repayment out of the trust from the succeeding
month's payments on loans in the trust. The Company also has contingent risk
with respect to financing through its Purchase and Sale Facilities and the sale
of Excess Spread Receivables. See "--Ability to Service Debt; Negative Cashflows
and Capital Needs-- Dependence on Purchase and Sale Facilities" and "--Excess
Spread Receivables."
COMPETITION
The home equity loan market is highly competitive. The Company faces
competition from other consumer finance lenders, mortgage lenders, mortgage
brokers, commercial banks, mortgage banks, large securities firms, smaller
boutique securities firms, credit unions, thrift institutions, credit card
issuers and finance companies. Many of these competitors are substantially
larger and have more capital and other resources than the Company. Competition
can take many forms, including convenience in obtaining a loan, customer
service, marketing and distribution channels and interest rates charged to
borrowers. In addition, the current level of gains realized by the Company and
its competitors on the sale of their home equity loans could attract additional
competitors into this market with the possible effect of lowering gains that may
be realized on the Company's future loan sales.
In fiscal 1996, 75% of the total home equity loans purchased and originated
by ContiMortgage were wholesale loans. Wholesale loans are expected to remain a
significant part of the Company's home equity loan production program. As a
purchaser of wholesale loans, the Company is exposed to fluctuations in the
volume and cost of wholesale loans resulting from competition from other
purchasers of such loans, market conditions and other factors.
CONCENTRATION OF OPERATIONS IN MID-ATLANTIC REGION
For the year ended March 31, 1996, approximately 34.4% (by dollar volume) of
the home equity loans originated by the Company were secured by properties
located in six mid-Atlantic states (New Jersey, New York, Pennsylvania,
Maryland, Connecticut and Virginia). Although the Company has expanded its
mortgage origination network outside the mid-Atlantic region, the Company's
origination business is likely to remain concentrated in that region for the
foreseeable future. In addition, a substantial majority of the loans in the
existing securitization pools are secured by properties located in such region.
Consequently, the Company's results of operations and financial condition are
dependent upon general trends in the economy and the residential real estate
market in the mid-Atlantic region.
RIGHT TO TERMINATE SERVICING
At March 31, 1996, approximately 89% (by dollar volume) of the Company's
servicing portfolio consisted of loans securitized by the Company and sold to
REMICs. The Company's form of pooling and servicing agreement for each of these
trusts provides that the monoline insurance company insuring the senior
interests in the related REMIC may terminate the Company's servicing rights if,
among other things, the number of loans included in the REMIC which are
delinquent for 90 days or more (including properties acquired upon foreclosure
and not sold) exceeds 10% of the aggregate number of the loans included in such
trust in four consecutive months. There can be no assurance that delinquency
rates with respect to Company-sponsored pools will not exceed this rate in the
future or, if exceeded, that the servicing rights would not be terminated. See
"Business -- Home Equity Loan Origination and Servicing -- Loan Servicing."
16
<PAGE>
CREDIT-IMPAIRED BORROWERS
In the home equity loan market and certain other markets, the Company
targets credit-impaired borrowers. Loans made to such borrowers may entail a
higher risk of delinquency and higher losses than loans made to more
creditworthy borrowers. While the Company believes that the underwriting
policies and collection methods it employs enable it to control the higher risks
inherent in loans made to credit-impaired borrowers, no assurance can be given
that such criteria or methods will afford adequate protection against such
risks. In the event that pools of loans warehoused, sold and serviced by the
Company experience higher delinquencies, foreclosures or losses than
anticipated, the Company's financial condition or results of operation could be
adversely affected.
ELIMINATION OF MORTGAGE INTEREST DEDUCTION
Members of Congress and government officials have from time to time
suggested the elimination of the mortgage interest deduction for federal income
tax purposes, either entirely or in part, based on the level of a borrower's
income, type of loan or principal amount. Because many of the Company's mortgage
loans are made to borrowers for the purpose of consolidating consumer debt or
financing other consumer needs, the competitive advantages of tax deductible
interest, when compared with alternative sources of financing, could be
eliminated or seriously impaired by such government action. Accordingly, the
reduction or elimination of these tax benefits could have a material adverse
effect on the demand for mortgage loans of the kind offered by the Company.
ENVIRONMENTAL LIABILITIES
In the course of its business, the Company has acquired, and may in the
future acquire, properties securing loans that are in default. There is a risk
that hazardous substances or waste, contaminants, pollutants or source thereof
could be discovered on such properties after acquisition by the Company. In such
event, the Company might be required to remove such substances from the affected
properties at its sole cost and expense. There can be no assurances that the
cost of such removal would not substantially exceed the value of the affected
properties or the loans secured by the properties or that the Company would have
adequate remedies against the prior owner or other responsible parties, or that
the Company would not find it difficult or impossible to sell the affected
properties either prior to or following any such removal.
GOVERNMENT REGULATION
The home equity loan and financing operations of the Company are subject to
regulation by federal, state and local government authorities, as well as to
various laws and judicial and administrative decisions, that impose requirements
and restrictions affecting, among other things, the Company's loan originations,
credit activities, maximum interest rates, finance and other charges,
disclosures to customers, the terms of secured transactions, collection,
repossession and claims-handling procedures, multiple qualification and
licensing requirements for doing business in various jurisdictions and other
trade practices. Although the Company believes that it is in compliance in all
material respects with applicable local, state and federal laws, rules and
regulations, there can be no assurance that more restrictive laws, rules and
regulations will not be adopted in the future that could make compliance much
more difficult or expensive, restrict the Company's ability to originate,
purchase or sell loans, further limit or restrict the amount of interest and
other charges earned on loans originated or purchased by the Company, further
limit or restrict the terms of loan agreements, or otherwise adversely affect
the business of the Company. In addition, changes in government sponsored loan
programs, such as the Title I home improvement loan program, could adversely
affect the business of the Company.
In September 1994, the Riegle Community Development and Regulatory
Improvement Act of 1994 (the "Riegle Act") was enacted. Among other things, the
Riegle Act makes certain amendments to the Truth in Lending Act. Because the
Riegle Act became effective in October 1995 the Company
17
<PAGE>
has limited experience and historical data to determine its impact. Although the
Company believes that the Riegle Act will not have a material impact on its
business, no assurance can be given. See "Regulation."
As part of the Company's financing and asset securitization business,
ContiFinancial Services is required to register as a broker-dealer with certain
Federal and state securities regulatory agencies and is a member of the National
Association of Securities Dealers, Inc. (the "NASD"). As a registered
broker-dealer, ContiFinancial Services is subject to certain minimum net capital
rules and certain other requirements. Any changes in such requirements or the
loss of the broker-dealer license of ContiFinancial Services, for any reason,
could have a material adverse effect on the Company.
INVESTMENT COMPANY ACT CONSIDERATIONS
The Company believes that it is not, and after giving effect to the Offering
and use of proceeds therefrom will not be, an investment company as defined in
the Investment Company Act of 1940, as amended (the "Investment Company Act").
Among other things, under the Investment Company Act, an investment company is
prohibited from engaging in certain activities, is restricted from entering into
certain transactions with affiliated persons and interested persons, is governed
by certain laws that limit the issuance of debt securities, preferred stock,
warrants and rights to subscribe or purchase a security and is subject to
certain restrictions on the payment of dividends, the making of loans and the
purchase and redemption of its securities.
The Company intends to continue its business and to conduct its operations
so as not to become regulated as an investment company under the Investment
Company Act. The Company's business strategy includes acquiring equity or debt
interests in Strategic Alliance clients and investing in loans, other assets and
Excess Spread Receivables. In order to avoid becoming an investment company, the
Company will have to limit certain types of its investments or its activities.
If the Company were to become an investment company for any reason, the Company
could be required either (i) to change significantly the manner in which it
conducts its operations to avoid being required to register as an investment
company or (ii) to register as an investment company, either of which could have
a material adverse effect on the Company and the market prices for the Notes.
CONTROL OF THE COMPANY
Continental Grain owns approximately 81% of the outstanding shares of Common
Stock. Consequently, Continental Grain is in a position to elect all the
directors of the Company and to determine the outcome of any matter submitted to
a vote of the Company's stockholders for approval. While Continental Grain has
advised the Company that its current intention is to continue to hold all the
shares of Common Stock beneficially owned by it, there can be no assurance that
Continental Grain will not decide to sell all or a portion of its holdings at
some future date. See also "Certain Transactions" for a description of certain
transactions between Continental Grain and the Company and for a description of
an investigation of Continental Grain by the Department of Justice.
KEY MANAGEMENT PERSONNEL
The Company is dependent upon the services of its executive officers and
other key employees. The loss of these services could have a material adverse
effect on the Company. See "Management."
ABSENCE OF PUBLIC MARKET FOR THE NOTES
There is no public market for the Notes, and the Company does not intend to
apply for listing of the Notes on any national securities exchange. The Company
has been advised by Bear, Stearns & Co. Inc., CS First Boston Corporation and
UBS Securities LLC (collectively, the "Underwriters") that, following the
completion of the Offering, they presently intend to make a market in the Notes;
however, they are under no obligation to do so and market-making activities with
respect to the Notes may be discontinued at any time without notice. There can
be no assurance as to the liquidity of the trading market for the Notes or that
an active public market for the Notes will develop. If an active public market
for the Notes does not develop, the market price and liquidity of the Notes may
be adversely affected.
18
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Notes
are estimated to be approximately $293.3 million.
The net proceeds from the Offering will be used by the Company to repay to
Continental Grain the Term Note (as defined) (which has an aggregate principal
amount of $125 million, a variable rate of interest equal to one month LIBOR
plus 125 basis points, adjusted monthly, and matures on September 30, 1997) and
for general corporate purposes, including funding loan originations and
purchases, supporting securitization transactions (including the retention of
Excess Spread Receivables) and other working capital needs. See "Description of
Certain Indebtedness and Financing Arrangements-- Certain Indebtedness" and
"Capitalization."
19
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of June 30, 1996, and as adjusted to give effect to (i) the sale by
the Company of the Notes offered in the Offering and (ii) the application of the
estimated gross proceeds therefrom. See "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources," "Description of Certain Indebtedness and
Financing Arrangements" and the Consolidated Financial Statements included
elsewhere herein.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
LONG-TERM DEBT:
Term Note (a)....................................................... $125,000 $ --
Four Year Note (b).................................................. 74,000 74,000
Indenture Note (c).................................................. 125,000 125,000
% Senior Notes Due 2003............................................. -- 300,000
-------- -----------
Total long-term debt.............................................. 324,000 499,000
STOCKHOLDERS' EQUITY:
Preferred stock ($0.01 par value) 25,000,000 shares authorized; none
issued and outstanding -- --
Common stock ($0.01 par value) 250,000,000 shares authorized;
44,378,953 shares issued and outstanding.............................. 444 444
Paid-in capital..................................................... 294,701 294,701
Retained earnings................................................... 42,081 42,081
Deferred compensation............................................... (21,418) (21,418)
-------- -----------
Total stockholders' equity........................................ 315,808 315,808
-------- -----------
Total capitalization............................................ $639,808 $ 814,808
-------- -----------
-------- -----------
</TABLE>
- ------------
<TABLE>
<C> <S>
(a) The Term Note will mature on September 30, 1997 and pays interest monthly at a variable
rate equal to the one month London Interbank Offered Rate ("LIBOR") plus 125 basis
points, adjusted monthly.
(b) The Four Year Note will mature on February 14, 2000 and pays interest semi-annually at
a fixed rate of 8.02% per annum. Until February 14, 1998, interest on the Four Year Note
will not be paid in cash but will accrue and be added to the principal amount of the Four
Year Note. After February 14, 1998, interest on the Four Year Note will be payable in
cash.
(c) The Indenture Note will mature on February 14, 2001 and bears interest at a rate of
7.96% per annum. The principal amount of the Indenture Note is required to be repaid in
four equal annual installments commencing on February 14, 1998.
</TABLE>
20
<PAGE>
SELECTED FINANCIAL DATA
(DOLLAR AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
The historical financial data set forth below for fiscal years 1992 and 1993
have not been separately audited but have been derived from Continental Grain
audited financial statements which are not included herein. The historical
financial data set forth below for fiscal years 1994, 1995 and 1996 have been
derived from, and should be read in conjunction with, the audited Consolidated
Financial Statements of the Company included elsewhere herein. The historical
financial data set forth below for the three months ended June 30, 1995 and 1996
have been derived from, and should be read in conjunction with, the unaudited
Consolidated Financial Statements of the Company included elsewhere herein. In
the opinion of the Company, such unaudited financial statements reflect all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the results for such periods. Results for the three months ended
June 30, 1996 are not necessarily indicative of results for the full year and
are subject to year end adjustments. The following table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE><CAPTION>
THREE MONTHS ENDED
YEARS ENDED MARCH 31, JUNE 30,
------------------------------------------------------------ -----------------------
1992 1993 1994 1995 1996 1995 1996
---------- -------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Gross income
Gain on sale of
receivables.................. $ 11,418 $ 18,587 $ 49,671 $ 67,512 $ 146,529 $ 22,555 $ 31,166
Interest.................. 16,130 11,385 20,707 42,929 91,737 17,883 28,515
Net servicing income...... 1,191 1,842 3,989 9,304 29,298 4,766 9,073
Other income.............. (41) (147) 162 2,252 4,252 968 1,009
---------- -------- ---------- ---------- ---------- ---------- ----------
Total gross income...... 28,698 31,667 74,529 121,997 271,816 46,172 69,763
---------- -------- ---------- ---------- ---------- ---------- ----------
Expenses
Compensation and
benefits..................... 4,335 6,870 14,674 23,812 52,203 7,840 12,408
Interest.................. 12,686 6,529 12,124 29,635 74,770 15,245 19,662
Provision for loan
losses....................... 685 2,018 4,499 1,935 285 148 219
General and
administrative............... 3,227 4,101 7,946 9,627 18,022 3,257 4,779
---------- -------- ---------- ---------- ---------- ---------- ----------
Total expenses.......... 20,933 19,518 39,243 65,009 145,280 26,490 37,068
---------- -------- ---------- ---------- ---------- ---------- ----------
Income before income taxes
and minority interest..... 7,765 12,149 35,286 56,988 126,536 19,682 32,695
Income taxes................ 2,948 4,640 13,726 22,168 49,096 7,656 13,262
Minority interest of
subsidiary................... 744 1,600 5,076 8,728 3,310 3,310 --
---------- -------- ---------- ---------- ---------- ---------- ----------
Net income.................. $ 4,073 $ 5,909 $ 16,484 $ 26,092 $ 74,130 $ 8,716 $ 19,433
---------- -------- ---------- ---------- ---------- ---------- ----------
---------- -------- ---------- ---------- ---------- ---------- ----------
Primary and fully dilutive
earnings per common
share (pro forma at
March 31, 1996 only)...... $ 2.00 $ 0.44
---------- ----------
---------- ----------
CASH FLOW DATA:
(Used in) provided by
operating activities...... $ (22,939) $ 15,525 $ (32,360) $ (35,336) $ (300,457) $ (89,020) $ (1,948)
Used in investing
activities................... (186) (685) (615) (1,816) (37,243) (494) (57)
Provided by (used in)
financing activities...... 23,167 (15,435) 35,061 37,666 367,357 91,074 (5,555)
---------- -------- ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in
cash and cash
equivalents.................. $ 42 $ (595) $ 2,086 $ 514 $ 29,657 $ 1,560 $ (7,560)
---------- -------- ---------- ---------- ---------- ---------- ----------
---------- -------- ---------- ---------- ---------- ---------- ----------
OPERATING DATA:
Number of loans serviced (at
period end).................. 8,788 11,093 20,146 38,740 65,121 44,478 71,082
Face value of loans serviced
(at period end)........... $ 314,260 $484,857 $1,105,393 $2,192,190 $3,863,575 $2,537,104 $4,256,949
Securitization and whole
loan sales volume:
ContiMortgage:
--Securitization........ $ 141,279 $194,668 $ 733,182 $1,258,919 $2,030,000 $ 300,000 $ 505,000
--Whole loan............ 46,441 77,876 39,142 33,772 270 -- 187,953
Non-ContiMortgage:
--Securitization........ 921,000 426,000 418,000 906,000 1,926,680 155,000 300,560
--Whole loan............ -- -- -- 89,000 36,000 36,000 --
---------- -------- ---------- ---------- ---------- ---------- ----------
Total securitization and
sales volume.............. $1,108,720 $698,544 $1,190,324 $2,287,691 $3,992,950 $ 491,000 $ 993,513
---------- -------- ---------- ---------- ---------- ---------- ----------
---------- -------- ---------- ---------- ---------- ---------- ----------
</TABLE>
21
<PAGE>
<TABLE><CAPTION>
THREE MONTHS ENDED
YEARS ENDED MARCH 31, JUNE 30,
------------------------------------------------------------ -----------------------
1992 1993 1994 1995 1996 1995 1996
---------- -------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
LOAN LOSS DATA (a):
Delinquency rate (at end of
period) (b)............... 3.68% 1.20% 0.97% 1.64% 2.51% 1.64% 4.05%
Default rate (at end of
period) (c).................. 2.46% 1.70% 0.81% 1.16% 3.54% 1.13% 3.98%
Net losses as a percentage
of average amount
outstanding.................. 0.27% 0.26% 0.15% 0.08% 0.13% 0.03%(d) 0.05%(d)
FINANCIAL RATIOS:
Ratio of earnings to fixed
charges (e)............... 1.55x 2.62x 3.49x 2.63x 2.65x 2.07x 2.66x
Percentage of indebtedness
to total capitalization
(f).......................... 79.63% 18.38% 40.97% 62.85% 52.36% 72.92% 50.64%
Pre-tax interest coverage
ratio (g).................... 1.98x 3.94x 7.87x 6.56x 6.59x 7.02x 6.25x
</TABLE>
<TABLE><CAPTION>
AS OF MARCH 31, AS OF JUNE 30,
------------------------------------------------------------ -----------------------
1992 1993 1994 1995 1996 1995 1996
---------- -------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents... $ 817 $ 222 $ 2,308 $ 2,822 $ 32,479 $ 4,382 $ 24,919
Excess spread receivables
(interest-only and
residual certificates)....... 31,543 51,270 94,491 143,031 293,218 172,858 223,802
Total assets................ 77,760 76,526 217,856 327,742 892,540 482,007 891,672
Payables to affiliates...... 60,311 12,463 49,846 114,907 337,734 206,347 334,448
Total liabilities........... 61,486 18,743 138,513 243,579 597,721 370,317 575,864
Minority interest of
subsidiary................... 844 2,444 7,520 16,248 -- 35,059 --
Stockholders' equity (h).... 15,430 55,339 71,823 67,915 294,819 76,631 315,808
AS ADJUSTED BALANCE SHEET
DATA (I):
Cash and cash equivalents.............................................................................. $ 193,219
Excess spread receivables (interest-only and
residual certificates)............................................................................... 223,802
Receivables held for sale.............................................................................. 364,159
Total assets........................................................................................... 1,066,672
Due to affiliates...................................................................................... 10,448
Notes payable to affiliates............................................................................ 199,000
% Senior Notes due 2003................................................................................ 300,000
Total liabilities...................................................................................... 750,864
Stockholders' equity (h)............................................................................... 315,808
</TABLE>
- ------------
<TABLE>
<C> <S>
(a) Loan loss data represents data for the home equity loan business of ContiMortgage only.
See "Business -- Home Equity Loan Origination and Servicing."
(b) The delinquency percentage represents, as a percentage of the aggregate principal
balance of loans as of the relevant date, the outstanding principal balance of home
equity loans for which payments are contractually past due, exclusive of home equity
loans in foreclosure, bankruptcy, real estate owned or forbearance.
(c) The default percentage represents, as a percentage of the aggregate principal balance of
loans as of the relevant date, the dollar value of delinquent payments on home equity
loans in foreclosure, bankruptcy or real estate owned or forbearance.
(d) This percentage is based on data for the three months ended June 30, 1995 and 1996 and is
not necessarily indicative of an annualized percentage.
(e) Amounts represent the ratio of (i) the sum of income before income taxes and minority
interest plus interest expense less minority interest to (ii) interest expense.
(f) Amounts in fiscal 1992, 1993, 1994 and 1995 and for the three months ended June 30, 1995
represent the ratio of amounts due to Continental Grain to total capitalization.
(g) Amounts represent the ratio of (i) the sum of income before income taxes and minority
interest plus interest expense on funded debt to (ii) interest expense on funded debt.
(h) The Company paid cash dividends to Continental Grain of $305 in fiscal year 1996.
(i) The as adjusted balance sheet as of June 30, 1996 reflects this Offering, net of $6,700
of estimated offering expenses and the repayment of the $125,000 Term Note. See
"Capitalization."
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with "Selected Financial Data"
and the Company's Consolidated Financial Statements (including the notes thereto
which are an integral part thereof) contained elsewhere in this Prospectus.
GENERAL
The Company is engaged in the consumer and commercial finance business by
originating and servicing home equity loans and providing financing and asset
securitization expertise to originators of a broad range of loans, leases and
receivables. Through ContiMortgage, the Company is a leading originator,
purchaser, seller and servicer of home equity loans made to borrowers whose
borrowing needs may not be met by traditional financial institutions due to
credit exceptions or other factors. Through ContiTrade and ContiFinancial
Services, the Company provides financing and asset securitization expertise,
respectively, to ContiMortgage and its Strategic Alliance clients.
The Company closed an initial public offering in the United States and
internationally of 7,130,000 shares of its common stock on February 14, 1996.
Proceeds to the Company from the IPO were approximately $138.1 million, net of
related expenses. Prior to the IPO, the Company was wholly-owned by Continental
Grain. Following the IPO and the grant of "restricted" common stock to certain
key ContiFinancial employees, approximately 81% of the Company's Common Stock
was held by Continental Grain.
The Company's Strategic Alliance clients are originators of consumer and
commercial loans, leases and receivables. The Company provides financing and
asset securitization execution and expertise to the Strategic Alliance client
while the client provides a consistent flow of securitizable assets to the
Company. In certain Strategic Alliances, the Company had received Strategic
Alliance Equity Interests in the Strategic Alliance client. Those Strategic
Alliance Equity Interests received from Strategic Alliances prior to the IPO
were retained by Continental Grain. Strategic Alliance Equity Interests received
after the IPO will be retained by the Company. The realization of value on such
Strategic Alliance Equity Interests is subject to many factors, including the
future growth and profitability of the Strategic Alliance clients and the
completion of initial public offerings by such Strategic Alliance clients.
The Company's total gross income increased from $46.2 million for the three
months ended June 30, 1995 to $69.8 million for the three months ended June 30,
1996, representing a 51% increase. The Company's total gross income increased
from $74.5 million in fiscal year 1994 to $271.8 million in fiscal year 1996,
representing a 91% annual compound growth rate. Net income increased from $8.7
million for the three months ended June 30, 1995 to $19.4 million for the three
months ended June 30, 1996, representing a 123% increase. Net income increased
from $16.5 million for the year ended March 31, 1994 to $74.1 million for the
year ended March 31, 1996, representing a 112% annual compound growth rate.
23
<PAGE>
On a percentage basis, the following table sets forth the composition of the
Company's results as a percentage of total gross income for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED MARCH 31, JUNE 30,
-------------------------- -----------------
1994 1995 1996 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Gross income:
Gain on sale of receivables... 66.65% 55.34% 53.91% 48.85% 44.67%
Interest...................... 27.78 35.19 33.75 38.73 40.87
Net servicing income.......... 5.35 7.63 10.78 10.32 13.01
Other income.................. 0.22 1.84 1.56 2.10 1.45
------ ------ ------ ------ ------
Total gross income........ 100.00% 100.00% 100.00% 100.00% 100.00%
------ ------ ------ ------ ------
Expenses:
Compensation and benefits..... 19.69% 19.52% 19.21% 16.98% 17.79%
Interest...................... 16.27 24.29 27.51 33.02 28.18
Provision for loan losses..... 6.03 1.59 0.10 0.32 0.31
General and administrative.... 10.66 7.89 6.63 7.05 6.85
------ ------ ------ ------ ------
Total expenses............ 52.65% 53.29% 53.45% 57.37% 53.13%
------ ------ ------ ------ ------
Income before income taxes and
minority interest............... 47.35% 46.71% 46.55% 42.63% 46.87%
Income taxes.................... 18.42 18.17 18.06 16.58 19.01
Minority interest of
subsidiary...................... 6.81 7.15 1.22 7.17 --
------ ------ ------ ------ ------
Net income................ 22.12% 21.39% 27.27% 18.88% 27.86%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
CERTAIN ACCOUNTING CONSIDERATIONS
As a fundamental part of its business and financing strategy, the Company
sells substantially all of its loans or other assets through securitization in
the form of REMICs, owner trusts or grantor trusts. In a securitization, the
Company sells loans or other assets that it has originated or purchased to a
trust for a cash purchase price and an interest in the loans or other assets
securitized (in the form of the "excess spread"). The cash purchase price is
raised through an offering of pass-through certificates by the trust. Following
the securitization, the purchasers of the pass-through certificates receive the
principal collected and the investor pass-through interest rate on the
certificate balance, while the Company receives the Excess Spread. The Excess
Spread represents, over the life of the loans or other assets, the excess of the
weighted average coupon on each pool of loans or other assets sold over the sum
of the pass-through interest rate plus a normal servicing fee, a trustee fee, an
insurance fee and an estimate of annual future credit losses related to the
loans or other assets securitized. The majority of the Company's gross income is
recognized as gain on sale of loans or other assets, which represents the value
of the Excess Spread less origination and underwriting costs. The present value
of the Excess Spread is the Excess Spread Receivable. The Excess Spread
Receivable is either a contractual right or a certificated security generally in
the form of an interest-only or residual certificate. The majority of the
Company's Excess Spread Receivable at June 30, 1996, March 31, 1996 and 1995 was
interest-only and residual certificates. Consequently, the Company's
consolidated balance sheets designate Excess Spread Receivable as "interest-only
and residual certificates."
The Company recognizes the gain on sale of loans or other assets in the
fiscal year in which such loans or other assets are sold, although cash
(representing the Excess Spread and servicing fees) is received by the Company
over the life of the loans or other assets. Concurrent with recognizing such
gain on sale, the Company records the Excess Spread Receivable as an asset on
its consolidated balance sheets. The Excess Spread Receivable is reduced as cash
distributions are received from the securitization.
24
<PAGE>
Due to the fact that the gain recognized in the year of sale is equal to the
present value of the estimated future cash flows from the Excess Spread, the
amount of cash actually received over the lives of the loans or other assets
normally exceeds the gain previously recognized at the time the loans or other
assets were sold and therefore interest income is recognized over the life of
the loans or other assets securitized. In periods subsequent to the sale, the
Company may recognize an increase in fair value of Excess Spread Receivable as
gain on sale of receivables to the extent that estimates of the loan pools
future remaining lives exceed those originally projected. This estimate of
extended life is performed by reviewing past prepayment experience and
estimating future prepayment experience by considering numerous factors which
include current market assumptions, the interest rate environment and economic
factors. If actual prepayments with respect to sold loans occur faster or credit
experience is worse than projected at the time such loans were sold, the
carrying value of the Excess Spread Receivable may have to be written down
through a charge to earnings in the period of adjustment. To date, the Company
has not been required to record such a downward adjustment on its portfolio as a
whole. The Company believes that one factor contributing to this positive
experience is the Company's determination that over time home equity loan
prepayments have been less volatile than conventional mortgage prepayments. See
also Note 3 to Consolidated Financial Statements of the Company.
Effective April 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing
Rights" ("SFAS 122") which requires that upon sale or securitization of
servicing retained mortgages, companies capitalize the cost associated with
the right to service mortgage loans based on its relative fair value. The
Company determines fair value based on the present value of estimated net future
cash flows related to servicing income. The cost allocated to the servicing
rights is amortized in proportion to and over the period of estimated net future
servicing fee income. The Company periodically reviews capitalized servicing
fees receivable for valuation impairment. This review is performed on a
disaggregated basis for the predominant risk characteristics of the underlying
loans which are loan type, term and credit quality. The Company generally makes
loans to credit impaired borrowers whose borrowing needs may not be met by
traditional financial institutions due to credit exceptions. The Company has
found that credit impaired borrowers are payment sensitive rather than interest
rate sensitive. As such the Company does not consider interest rates a
predominant risk characteristic for purposes of valuation impairment. Impairment
is recognized in a valuation allowance for each disaggregated stratum in the
period of impairment.
RESULTS OF OPERATIONS
The following table sets forth information regarding the components of the
Company's total gross income for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED MARCH 31, JUNE 30,
------------------------------- ------------------
1994 1995 1996 1995 1996
------- -------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Gain on sale of
receivables.............. $49,671 $ 67,512 $146,529 $22,555 $31,166
Interest................. 20,707 42,929 91,737 17,883 28,515
Net servicing income..... 3,989 9,304 29,298 4,766 9,073
Other income............. 162 2,252 4,252 968 1,009
------- -------- -------- ------- -------
Total gross
income................... $74,529 $121,997 $271,816 $46,172 $69,763
------- -------- -------- ------- -------
------- -------- -------- ------- -------
</TABLE>
25
<PAGE>
The following table sets forth the components of the Company's expenses for
the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED MARCH 31, JUNE 30,
------------------------------ ------------------
1994 1995 1996 1995 1996
------- ------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Compensation and
benefits.................. $14,674 $23,812 $ 52,203 $ 7,840 $12,408
Interest.................. 12,124 29,635 74,770 15,245 19,662
Provision for loan
losses.................... 4,499 1,935 285 148 219
General and
administrative............ 7,946 9,627 18,022 3,257 4,779
------- ------- -------- ------- -------
Total expenses...... $39,243 $65,009 $145,280 $26,490 $37,068
------- ------- -------- ------- -------
------- ------- -------- ------- -------
</TABLE>
Three Months Ended June 30, 1996 Compared to Three Months Ended June 30, 1995
The Company's total gross income increased $23.6 million or 51% to $69.8
million for the three months ended June 30, 1996 as compared to $46.2 million of
total gross income for the corresponding period in 1995. The Company's total
expenses as a percentage of total gross income decreased to 53% for the three
months ended June 30, 1996 from 57% in the corresponding period in 1995. As a
result, net income for the three months ended June 30, 1996 increased $10.7
million or 123% to $19.4 million compared to net income of $8.7 million for the
three months ended June 30, 1995.
Income. The increase in total gross income was due to a greater volume of
loans originated as a result of the expansion of the Company's wholesale and
broker origination sources, as well as the Company's development of Strategic
Alliances.
Gain on sale of receivables was the primary component of total gross income,
comprising 45% and 49% of total gross income in the three months ended June 30,
1996 and 1995, respectively. Gain on sale of receivables as a percentage of
total gross income was lower for the first quarter of fiscal 1997 due to an
increase in servicing income associated with a larger servicing portfolio and
balance of interest earning assets. Gain on sale of receivables increased $8.6
million or 38% for the three months ended June 30, 1996 as compared to the
corresponding period in 1995.
Gain on sale of receivables represents income primarily from the structuring
and sale of pools of fixed rate home equity loans originated by ContiMortgage
and Strategic Alliance clients of the Company to REMICs, owner trusts and
grantor trusts. In addition, gains on sale of receivables are earned upon whole
loan sales and upon the securitization of adjustable rate home equity loans,
commercial and multi-family loans, self-storage facilities, Title I home
improvement loans, franchise loans, small business loans and equipment leases
which are sold into REMICs and whole loan and other trust structures
(collectively, "Structured Finance Transactions").
The increase in the amount of gain on sale of receivables was due to an
increased volume of loans and leases structured and a wider differential between
the interest rate earned on the underlying securitized loans and leases and the
pass-through rate paid to the securitization investors. The Company structured
and sold $1.0 billion of mortgages and leases in the three months ended June 30,
1996, an increase of $0.5 billion from the three months ended June 30, 1995,
which contributed $13.0 million of the increase in gain on sale of receivables.
The increase in gain on sale of receivables was also affected by the change
in the yield curve (resulting in pass-through rates on Structured Finance
Transactions increasing more rapidly than interest rates on loans and leases)
which resulted in a loss of 90 basis points in Excess Spread or a $4.4 million
reduction in gain on sale of receivables in the three months ended June 30, 1996
as compared to the corresponding period in 1995. The combination of the $4.4
million decline due to a smaller rate differential and the $13.0 million
increase due to increased securitization volume netted to
26
<PAGE>
a total increase in gain on sale of receivables from the three months ended June
30, 1996 to the three months ended June 30, 1995 of $8.6 million. The gain on
sale of receivables as a percentage of loans securitized and sold for the three
months ended June 30, 1996 and 1995 was 3.7% and 4.6%, respectively.
Interest income increased $10.6 million or 59% for the three months ended
June 30, 1996 from the corresponding period in 1995. Interest income represents
interest earned on loans originated or purchased by the Company during the
period from their origination or purchase until the actual sale of the loans, as
well as the recognition of the increased value of the discounted Excess Spread
Receivables over time. The interest earned on loans originated and purchased
contributed $6.1 million to the increase between the three months ended June 30,
1996 and 1995. The increase in interest earned on loans originated and purchased
was due primarily to the increase in the average balance of loans originated and
purchased but not yet securitized during the periods, an increase of $410.6
million in the three months ended June 30, 1996 as compared to the corresponding
period in 1995. The recognition of the increased value of the discounted Excess
Spread Receivables over time accounted for $4.5 million of the increase in
interest income which was due to the increase in the average investment in
Excess Spread Receivables in the three months ended June 30, 1996 as compared to
the corresponding period in 1995.
Net servicing income increased $4.3 million or 90% for the three months
ended June 30, 1996 compared to the corresponding period in 1995 due to the
increase in the size of the servicing portfolio and the volume of loan sales and
securitizations. The Company's loan servicing portfolio increased $1.7 billion
or 68% to $4.3 billion from June 30, 1995 to June 30, 1996, contributing $2.5
million or 58% of the increase between the three months ended June 30, 1996 and
1995. Additionally, net servicing income increased by $1.8 million in the first
quarter of fiscal 1997 as compared to the first quarter of fiscal 1996 due to
capitalized servicing income associated with the 131% increase in loan sales and
securitization volume for the three months ended June 30, 1996 as compared to
the corresponding period in 1995.
Other income remained relatively constant at $1.0 million for each of the
three month periods ended June 30, 1996 and 1995. Other income consists
primarily of "purchase premium refunds" received from certain origination
sources related to loans that prepay within a contractually set time period.
Upon origination of a loan, the Company will pay a wholesale originator a
purchase premium for the loan or pools of loans. The Company negotiates
agreements with wholesale originators that provide that a portion of such
purchase premium will be repaid if individual loans are repaid within a
contractually set time period. The income from "purchase premium refunds"
remained relatively constant due to declines in the fee rates which offset
increases in origination volume.
Expenses. Total expenses for the three months ended June 30, 1996 increased
$10.6 million or 40% from the corresponding period in 1995. This increase in
total expenses was due to the increase in number of employees, the granting of
"restricted" common stock and the costs associated with increased home equity
volume.
Compensation and benefits expenses increased $4.6 million or 58% for the
three months ended June 30, 1996 compared to the corresponding period in 1995
due to the addition of new personnel, the restricted stock awards and
commissions paid to certain employees on volume of loan originations. On June
30, 1996, the Company had 515 employees as compared to 291 employees on June 30,
1995, which primarily contributed to a $2.6 million increase in compensation
costs for the three months ended June 30, 1996 as compared to the corresponding
period in 1995. In connection with the IPO, shares of "restricted" common stock
were granted to certain key employees. The "restricted" common stock granted,
subject to the employee's continued employment with the Company, will vest
between February 14, 1996 and March 31, 2000. The granting of "restricted"
common stock increased the compensation expense for the three months ended June
30, 1996 by $1.6 million. The commissions paid
27
<PAGE>
to certain ContiMortgage employees increased $0.4 million for the three months
ended June 30, 1996 as compared to the corresponding period in 1995.
Compensation and benefits expenses represented 18% and 17% of total gross income
for the three months ended June 30, 1996 and 1995, respectively.
Interest expense increased $4.5 million or 29% to $19.7 million for the
three months ended June 30, 1996 as compared to $15.2 million for the
corresponding period in 1995 primarily as a result of increased borrowings from
Continental Grain and the costs of the sale, with limited recourse, of Excess
Spread Receivables, partially offset by an overall decline in the cost of
borrowing. The average borrowings from Continental Grain and Excess Spread
Receivables sold, with limited recourse, increased by $255.7 million for the
three months ended June 30, 1996 as compared to the corresponding period in 1995
resulting in a $4.6 million increase in interest expense. The decrease in the
Company's combined interest rates by 7 basis points lowered interest expense by
$0.1 million for the three months ended June 30, 1996 as compared to the
corresponding period in 1995. The combination of the $0.1 million decline due to
the lowered combined interest rate and the $4.6 million increase due to
increased balances resulted in a net increase of $4.5 million in interest
expense for the three months ended June 30, 1996 compared to the corresponding
period in 1995.
Provision for loan losses increased to $0.2 million or 48% for the three
months ended June 30, 1996 as compared to $0.1 million for the three months
ended June 30, 1995. Provision for loan losses is recorded in sufficient amounts
to maintain an allowance at a level considered adequate to cover anticipated
losses resulting from liquidation of outstanding receivables. The increase in
the three months ended June 30, 1996 as compared to the corresponding period in
1995 resulted from a determination of adequate reserves in light of actual loss
experience.
General and administrative expenses increased $1.5 million or 47% for the
three months ended June 30, 1996 compared to the corresponding period in 1995,
and represented 7% of total gross income for the three months ended June 30,
1996 and 1995, respectively. The increase was due to the increase in costs
associated with underwriting, originating and servicing higher loan volumes. In
the three months ended June 30, 1996, the origination volume increased 52% as
compared to the three months ended June 30, 1995.
Income Taxes. The Company is included in the consolidated Federal income tax
return of Continental Grain. The Company's provision for income taxes was $13.3
million and $7.7 million for the three months ended June 30, 1996 and 1995,
respectively. The increase in taxes of 73% for the three months ended June 30,
1996 compared to the corresponding period in 1995 was directly related to the
increase in income before taxes and minority interest over the same period. The
effective tax rate for the three months ended June 30, 1996 increased to 40.6%
from 38.9% in the comparable period in fiscal 1996 due to a change in the
provision for state income taxes.
Minority Interest. Minority interest represents the portion of income before
taxes and minority interest due to the 20% minority shareholders of
ContiMortgage. Minority interest was $3.3 million for the three months ended
June 30, 1995. The change in minority interest was directly related to the
change in the Company's ownership percentage of ContiMortgage. On June 19, 1995,
ContiTrade Services Corporation ("ContiTrade Services") effectively acquired
control of the remaining 20% minority interest in ContiMortgage, which became a
wholly-owned subsidiary of ContiTrade Services. Accordingly, the results of
operations for the three months ended June 30, 1995 included approximately
three months of minority interest of $3.3 million, while the comparable period
of fiscal 1997 reflected 100% ownership of ContiMortgage during the period.
Year Ended March 31, 1996 Compared to Year Ended March 31, 1995
The Company's total gross income increased $149.8 million or 123% to $271.8
million in fiscal 1996 as compared to $122.0 million of total gross income in
fiscal 1995. The Company's total expenses as a percentage of total gross income
remained stable at 53% in fiscal 1995 and 1996. As a result, net
28
<PAGE>
income for fiscal 1996 increased $48.0 million or 184% to $74.1 million compared
to net income of $26.1 million in fiscal 1995.
Income. The increase in total gross income was due to a greater volume of
loans originated as a result of the expansion of the Company's wholesale and
broker origination sources (including the growth of two regional branch offices
which were opened in fiscal 1995), as well as the Company's development of
Strategic Alliances.
Gain on sale of receivables was the primary component of total gross income,
comprising 54% and 55% of total gross income in fiscal 1996 and 1995,
respectively. Gain on sale of receivables increased $79.0 million or 117% in
fiscal 1996 as compared to fiscal 1995. The increase in the amount of gain on
sale of receivables was due to an increased volume of loans and leases
structured and a wider differential between the interest rate earned on the
underlying securitized loans and leases and the pass-through rate paid to the
securitization investors. The Company structured and sold $4.0 billion of
mortgages, loans and leases in fiscal 1996, an increase of $1.7 billion from
fiscal 1995, which contributed $62.6 million of the increase in gain on sale of
receivables. The increase in gain on sale of receivables was also affected by
the change in the yield curve (resulting in pass-through rates on Structured
Finance Transactions falling more rapidly than interest rates on loans and
leases) which contributed an additional 72 basis points to Excess Spread or
$16.4 million of the increase in gain on sale of receivables. The gain on sale
as a percentage of loans securitized and sold for fiscal 1996 and 1995 was 3.7%
and 3.0%, respectively.
Interest income increased $48.8 million or 114% in fiscal 1996 from fiscal
1995. Interest income represents interest earned on loans originated or
purchased by the Company during the period from their origination or purchase
until the actual sale of the loans, as well as the recognition of the increased
value of the discounted Excess Spread Receivables over time. The interest earned
on loans originated and purchased contributed $35.5 million to the increase
between fiscal 1995 and fiscal 1996. The increase in interest earned on loans
originated and purchased was due primarily to the increase in the average
balance of loans originated and purchased but not yet securitized during the
periods, an increase of $591 million in fiscal 1996 as compared to fiscal 1995.
The recognition of the increased value of the discounted Excess Spread
Receivables over time accounted for $13.3 million of the increase in interest
income between fiscal 1995 and fiscal 1996.
Net servicing income increased $20.0 million or 215% in fiscal 1996 compared
to fiscal 1995. This increase was due to the increase in the size of the
servicing portfolio and a change in accounting principle in fiscal 1996. The
Company's loan servicing portfolio increased $1.7 billion or 76% to $3.9 billion
from March 31, 1995 to March 31, 1996, contributing $8.3 million of the increase
between fiscal 1995 and fiscal 1996. Additionally, the adoption of SFAS 122 in
the beginning of fiscal 1996 increased servicing income by $11.7 million as
compared to fiscal 1995.
Other income increased $2.0 million to $4.3 million in fiscal 1996 as
compared to fiscal 1995. Other income consists primarily of "purchase premium
refunds" received from certain origination sources related to loans that prepay
within a contractually set time period. Upon origination of a loan, the Company
will pay a wholesale originator a purchase premium for the loan or pools of
loans. The Company negotiates agreements with wholesale originators that provide
that a portion of such purchase premium will be repaid if individual loans are
repaid within a contractually set time period. The increase in "purchase premium
refunds" is primarily due to the increases in origination volume. In fiscal
1996, origination volume increased 74% as compared to fiscal 1995.
Expenses. Total expenses for fiscal 1996 increased $80.3 million or 123%
from fiscal 1995. This increase in total expenses was due to the increase in
number of employees, increased accruals for incentive compensation related to
increased profits and costs associated with increased mortgage volume.
29
<PAGE>
Compensation and benefits increased $28.4 million or 119% in fiscal 1996
compared to fiscal 1995 due to the accrual of incentive compensation under a
formula based on pre-tax income, the restricted stock awards, the addition of
new personnel and commissions paid to certain employees on volume of loan
originations. The fiscal 1996 accrual for incentive compensation was $28.0
million as compared to $12.4 million in fiscal 1995 contributing $15.6 million
to the increase between the years. In connection with the IPO, shares of
"restricted" common stock were granted to certain key employees. The
"restricted" common stock granted, subject to the employee's continued
employment with the Company, vests between February 14, 1996 and March 31, 2000.
The granting of "restricted" common stock increased fiscal 1996 compensation
expense by $5.0 million. On March 31, 1996, the Company had 455 employees as
compared to 234 employees on March 31, 1995 which primarily contributed to a
$6.4 million increase in compensation costs in fiscal 1996 as compared to fiscal
1995. The commissions paid to certain ContiMortgage employees increased $1.4
million from fiscal 1995 to fiscal 1996. Compensation and related expenses
represent 19% and 20% of total gross income for fiscal 1996 and 1995,
respectively.
Interest expense increased to $74.8 million in fiscal 1996 as compared to
$29.6 million in fiscal 1995 primarily as a result of increased borrowings from
Continental Grain and costs of various Purchase and Sale Facilities with
financial institutions. The average borrowings from Continental Grain and
amounts sold (but not yet resold by the respective financial institution) under
the Company's Purchase and Sale Facilities increased $627.4 million in fiscal
1996 as compared to fiscal 1995 resulting in a $43.0 million increase in
interest expense. The increase in interest rates contributed $2.2 million to the
increase in interest expense between fiscal 1996 as compared to fiscal 1995.
Provision for loan losses decreased to $0.3 million in fiscal 1996 as
compared to $1.9 million in fiscal 1995. Provision for loan losses is recorded
in sufficient amounts to maintain an allowance at a level considered adequate to
cover anticipated losses resulting from liquidation of outstanding receivables.
The decrease in fiscal 1996 as compared to fiscal 1995 resulted from a
determination of adequate reserves in light of actual loss experience.
General and administrative expenses increased $8.4 million or 87% in fiscal
1996 compared to fiscal 1995, and represented 7% and 8% of total gross income in
fiscal 1996 and 1995, respectively. The increase was due to an increase in
volume related expenses. In fiscal 1996, the origination volume increased 74% as
compared to fiscal 1995.
Income Taxes. The Company is included in the consolidated Federal income tax
return of Continental Grain. The Company's provision for income taxes was $49.1
million and $22.2 million for the years ended March 31, 1996 and 1995,
respectively. The Company is included in the consolidated Federal income tax
return of Continental Grain. The increase in taxes was directly related to the
increase in income before taxes and minority interest over the same period. The
effective tax rate for each year remained relatively consistent at 38% to 39%.
Minority Interest. Minority interest represents the portion of income before
taxes and minority interest due to the 20% minority shareholders of
ContiMortgage. Minority interest decreased $5.4 million or 62% in fiscal 1996
compared to fiscal 1995. This decrease in minority interest was directly related
to the change in the Company's ownership percentage of ContiMortgage. On June
19, 1995, ContiTrade Services effectively acquired control of the
remaining 20% minority interest in ContiMortgage, which became a wholly-owned
subsidiary of ContiTrade Services. Accordingly, the results of
operations for fiscal 1996 included approximately three months of minority
interest of $3.3 million, while the comparable period of fiscal 1995 included 12
months of minority interest of $8.7 million.
Year Ended March 31, 1995 Compared to Year Ended March 31, 1994
The Company's total gross income increased $47.5 million or 64% to $122.0
million in fiscal 1995 as compared to $74.5 million of gross income for fiscal
1994. The Company's total expenses as a percentage of total gross income
remained stable at 53% in fiscal 1994 and 1995. As a result, net income
30
<PAGE>
for fiscal 1995 increased $9.6 million or 58% to $26.1 million compared to net
income of $16.5 million in fiscal 1994.
Income. The increase in total gross income was due to a greater volume of
loans originated as a result of the expansion of the Company's wholesale and
broker origination sources (including the opening of two regional branch offices
in fiscal 1995) as well as the Company's development of Strategic Alliances.
Gain on sale of receivables was the primary component of total gross income,
comprising 55% and 67% of total gross income in fiscal 1995 and 1994,
respectively. The reduction in the contribution of gain on sale of receivables
to total gross income was due to a larger servicing portfolio and balance of
interest earning assets. Gain on sale of receivables increased $17.8 million or
36% in fiscal 1995 as compared to fiscal 1994. Gain on sale of receivables
represents income from Structured Finance Transactions. This increase resulted
primarily from the Company's ability to securitize more loans in Structured
Finance Transactions. The Company structured and sold $2.3 billion of mortgages,
loans and leases in fiscal 1995, an increase of $1.1 billion from fiscal 1994,
which contributed $32.4 million of the increase in gain on sale of receivables.
The increase in gain on sale of receivables was also due to the change in the
yield curve. The yield curve is the relationship between interest rates and
maturity. As the Company originates and sells loans and leases based on the
interpolated United States Treasury interest rate plus a negotiated additional
interest rate, the gain on sale of receivables is affected by unequal movements
in interest rates at various maturities. The interpolated Treasury interest rate
is based on the Company's estimate of the average life of the pool of loans or
leases. In fiscal 1995 as compared to fiscal 1994, mortgage rates moved to the
level of pass-through rates resulting in a smaller difference between medium
term rates and long term rates. This smaller difference resulted in a loss of
121 basis points in Excess Spread or $14.6 million reduction of gain on sale of
receivables in fiscal 1995 as compared to fiscal 1994. The combination of the
$14.6 million decline due to a smaller rate differential and the $32.4 million
increase due to increased volume netted to a total increase in gain on sale of
receivables from fiscal 1994 to fiscal 1995 of $17.8 million. The gain on sale
as a percentage of loans securitized and sold for fiscal 1995 and 1994 was 3.0%
and 4.2%, respectively.
Interest income increased $22.2 million or 107% in fiscal 1995 from fiscal
1994. Interest income represents interest earned on loans originated or
purchased by the Company during the period from their origination or purchase
until the actual sale of the loans, as well as the recognition of the increased
value of the discounted Excess Spread Receivables over time. The interest earned
on loans originated and purchased contributed $19.0 million to the increase
between fiscal 1994 and fiscal 1995. The increase in interest earned on loans
originated and purchased was due primarily to the increase in the average
balance of loans originated and purchased but not yet securitized during the
periods, an increase of $179 million in fiscal 1995 as compared to fiscal 1994.
The recognition of the increased value of the discounted Excess Spread
Receivables over time accounted for $3.2 million of the increase between fiscal
1994 and fiscal 1995.
Net servicing income increased $5.3 million or 133% in fiscal 1995 compared
to fiscal 1994. This increase was due to the increase in the size of the
servicing portfolio in fiscal 1995 compared to fiscal 1994. The March 31, 1995
loan servicing portfolio balance of $2.2 billion represented a 98% increase over
the March 31, 1994 portfolio balance.
Other income increased $2.1 million to $2.3 million in fiscal 1995 as
compared to fiscal 1994. Other income consists primarily of "purchase premium
refunds" received from certain origination sources related to loans that prepay
within a contractually set time period. Upon origination of a loan, the Company
will pay a wholesale originator a purchase premium for the loan or pools of
loans. The Company negotiates agreements with wholesale originators that provide
that a portion of such purchase premium will be repaid if individual loans are
repaid within a contractually set time period. The increase in "purchase premium
refunds" was primarily due to the increases in origination volume. In fiscal
1995, origination volume increased 68% as compared to fiscal 1994.
31
<PAGE>
Expenses. Total expenses for fiscal 1995 increased $25.8 million or 66% from
fiscal 1994. This increase in total expenses was due to the increase in number
of employees, increased accruals for incentive compensation related to increased
profits and costs associated with increased mortgage volume.
Compensation and related expenses increased $9.1 million or 62% in fiscal
1995 as compared to fiscal 1994 due to the accrual of incentive compensation
under a formula based on pre-tax income, the addition of new personnel and
commissions paid to certain employees on volume of loan originations. The fiscal
1995 accrual for incentive compensation was $12.4 million as compared to $7.6
million for fiscal 1994 contributing $4.8 million to the increase between the
periods. On March 31, 1995, the Company had 234 employees compared to 163
employees on March 31, 1994, contributing $3.5 million to the increase in
compensation costs from fiscal 1994 to fiscal 1995. The commissions paid to
certain employees on volume of loans originated increased $0.8 million during
the same period. Compensation and related expenses represented 20% of total
gross income for both fiscal 1995 and 1994, respectively.
Interest expense increased to $29.6 million in fiscal 1995 as compared to
$12.1 million in fiscal 1994 primarily as a result of increased borrowings from
Continental Grain and costs of various Purchase and Sale Facilities with
financial institutions. The average borrowings from Continental Grain and
amounts sold (but not yet resold by the respective financial institution) under
the Company's Purchase and Sale Facilities increased $198.8 million in fiscal
1995 as compared to fiscal 1994 resulting in a $12.7 million increase in
interest expense. The increase in interest rates contributed $4.8 million to the
increase in interest expense between fiscal 1995 as compared to fiscal 1994.
Provision for loan losses decreased to $1.9 million in fiscal 1995 as
compared to $4.5 million in fiscal 1994. Provision for loan losses is recorded
in sufficient amounts to maintain an allowance at a level considered adequate to
cover anticipated losses resulting from liquidation of outstanding receivables.
The decrease in fiscal 1995 as compared to fiscal 1994 resulted from a
determination of adequate reserves in light of actual loss experience.
General and administrative expenses increased $1.7 million or 21% in fiscal
1995 compared to fiscal 1994, and represented 8% and 11% of total gross income
in fiscal 1995 and 1994, respectively. The overall dollar increases were
primarily due to the increase in costs associated with underwriting, originating
and servicing higher volumes of loans and the expansion of ContiMortgage's
headquarters and branch offices. The increase associated with higher volumes was
$1.1 million in general and administrative expenses in fiscal 1995 as compared
to fiscal 1994. The expansion of ContiMortgage's facilities contributed $0.6
million to the increased general and administrative expenses in fiscal 1995 as
compared to fiscal 1994. The percentage decrease was primarily due to increases
in the above-mentioned volume related expenses partially offset by
ContiMortgage's reversal of overallotments of servicing costs. In fiscal 1994,
the Company implemented a risk management program with an insurer under which
the insurer indemnifies the Company against certain contingencies related to its
mortgage servicing operation, thus allowing the Company to eliminate accruals of
losses as well as accruals to third party service providers resulting in a
variation in fiscal 1995 compared to 1994.
Income Taxes. The Company is included in the consolidated Federal income tax
return of Continental Grain. The Company's provision for income taxes was $22.2
million and $13.7 million for the years ended March 31, 1995 and 1994,
respectively. The increase in taxes was directly related to the increase in
income before taxes and minority interest over the same period. The effective
tax rate for each year remained relatively consistent at 38% to 39%.
Minority Interest. Minority interest represents the portion of income before
taxes and minority interest due to the 20% minority shareholders of
ContiMortgage. Minority interest increased $3.6 million or 72% in fiscal 1995
compared to fiscal 1994. The fiscal 1995 increase in minority interest as
compared to fiscal 1994 was directly related to the increase in ContiMortgage's
net income before taxes and minority interest.
32
<PAGE>
FINANCIAL CONDITION
June 30, 1996
Securities purchased under agreements to resell increased $3.3 million from
$179.9 million at March 31, 1996 to $183.2 million at June 30, 1996. The Company
hedges its interest rate exposure on its receivables held for sale and loans and
other assets sold, with recourse, under its Purchase and Sale Facilities with
certain financial institutions, through the use of United States Treasury
securities and futures contracts. Securities purchased under agreements to
resell are part of this hedging strategy. The increase in securities purchased
under agreement to resell was primarily due to the increase in the Company's
securitization volume.
Interest-only and residual certificates decreased $69.4 million from $293.2
million at March 31, 1996 to $223.8 million at June 30, 1996. This decrease
represented $96.5 million of sales of such certificates and $10.1 million of
collections partially offset by $30.0 million recorded during the three months
ended June 30, 1996 related to new securitizations and recorded interest income
of $7.2 million.
Capitalized servicing fees receivable increased $3.1 million from $11.7
million at March 31, 1996 to $14.8 million at June 30, 1996. This balance
reflected the capitalization under SFAS 122 of $4.4 million of servicing rights
partially offset by amortization of $1.3 million.
Trade receivables increased by a net amount of $66.5 million from $352.3
million at March 31, 1996 to $418.8 million at June 30, 1996. This increase was
primarily due to a net increase in receivables held for sale from $296.2 million
as of March 31, 1996 to $364.2 million at June 30, 1996. The net increase in
receivables held for sale was primarily due to the investment of the cash
proceeds available from the IPO and the sale of certain Excess Spread
Receivables.
Premises and equipment, net of accumulated depreciation, decreased $0.2
million from $3.9 million at March 31, 1996 to $3.7 million at June 30, 1996
primarily as a result of insignificant office equipment acquisitions which were
more than offset by the normal periodic depreciation of owned equipment.
Cost in excess of minority interest equity was $14.4 million at June 30,
1996, a decrease of $0.2 million from March 31, 1996. On June 19, 1995,
ContiTrade Services effectively acquired control of the remaining 20% minority
interest in ContiMortgage, which became a wholly-owned subsidiary of ContiTrade
Services and subsequently in December 1995 became a wholly-owned subsidiary of
ContiFinancial. The decrease in the balance represented the amortization of the
cost in excess of the minority interest over the useful life of 25 years.
Other assets increased $3.6 million from $3.9 million at March 31, 1996 to
$7.5 million at June 30, 1996. Other assets represents prepaid expenses, margin
deposits and other real estate owned. The increase in the balance was related to
the increase in the Company's securitization volume.
Accounts payable and accrued expenses decreased $23.8 million from $73.5
million at March 31, 1996 to $49.7 million at June 30, 1996. The balance
decreased primarily due to a decrease in amounts payable under the Company's
Purchase and Sale Facilities and due to the payment of the fiscal 1996 incentive
accruals during the three months ended June 30, 1996.
Securities sold but not yet purchased increased $3.8 million from $180.7
million at March 31, 1996 to $184.5 million at June 30, 1996. The Company hedges
its interest rate exposure on its receivables held for sale and loans and other
assets sold with recourse under its Purchase and Sale Facilities through the use
of United States Treasury securities and futures contracts. Securities purchased
under agreements to resell are part of this hedging strategy. This increase in
securities sold but not yet purchased was primarily due to the increase in the
Company's securitization volume.
Payables to affiliates decreased $3.3 million from $337.7 million at March
31, 1996 to $334.4 million at June 30, 1996. The decrease was due to payments
made pursuant to intercompany agreements with Continental Grain.
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<PAGE>
Other liabilities of $7.2 million at June 30, 1996 primarily represented
deferred income in connection with the origination and securitization of loans
and other assets.
Stockholders' equity increased $21.0 million from $294.8 million at March
31, 1996 to $315.8 million at June 30, 1996 due to net income of $19.4 million
and the amortization of deferred compensation of $1.6 million.
March 31, 1996
Securities purchased under agreements to resell increased $95.2 million from
$84.7 million at March 31, 1995 to $179.9 million at March 31, 1996. The
increase in securities purchased under agreements to resell was primarily due to
the increase in the Company's securitization volume as of March 31, 1996 as
compared to March 31, 1995.
Interest-only and residual certificates increased $150.2 million from $143.0
million at March 31, 1995 to $293.2 million at March 31, 1996. This increase
represented $271.3 million recorded during fiscal 1996 related to new
securitizations and recorded interest income of $20.9 million partially offset
by $115.2 million of sales of such certificates and $26.8 million of
collections.
Capitalized servicing fees receivable was $11.7 million at March 31, 1996.
This balance reflected the capitalization under SFAS 122 of $13.8 million of
servicing rights partially offset by amortization of $2.1 million.
Trade receivables increased by a net amount of $260.2 million from $92.1
million at March 31, 1995 to $352.3 million at March 31, 1996. This increase was
primarily due to a net increase in receivables held for sale from $77.3 million
as of March 31, 1995 to $296.2 million at March 31, 1996.
Premises and equipment, net of accumulated depreciation, increased $1.4
million from $2.5 million at March 31, 1995 to $3.9 million at March 31, 1996
primarily as a result of acquisition of office furniture and equipment to
support the increase in staff from 234 at March 31, 1995 to 455 at March 31,
1996.
Cost in excess of minority interest equity was $14.6 million at March 31,
1996. On June 19, 1995, ContiTrade Services effectively acquired control of the
remaining 20% minority interest in ContiMortgage, which became a wholly-owned
subsidiary of ContiTrade Services and subsequently in December 1995 became a
wholly-owned subsidiary of ContiFinancial. The purchase price exceeded the
recorded minority interest by $15.1 million which was partially offset by
amortization of $0.5 million.
Other assets increased $2.0 million from $1.9 million at March 31, 1995 to
$3.9 million at March 31, 1996. Other assets represents prepaid expenses, margin
deposits and other real estate owned. The increase in the balance was related to
the increase in the Company's securitization volume.
Accounts payable and accrued expenses increased $31.9 million from $41.6
million at March 31, 1995 to $73.5 million at March 31, 1996. The balance
increased primarily due to amounts payable under the Company's Purchase and Sale
Facilities, accruals for securitization obligations and incentive accruals.
Securities sold but not yet purchased increased $99.0 million from $81.7
million at March 31, 1995 to $180.7 million at March 31, 1996. This increase in
securities sold but not yet purchased was primarily due to the increase in the
Company's securitization volume.
Payables to affiliates increased $222.8 million from $114.9 million at March
31, 1995 to $337.7 million at March 31, 1996. Prior to the IPO, Continental
Grain provided the Company with short-term intercompany financing. On February
14, 1996, the Company refinanced a portion of the short-term financing with
three notes totaling $324.0 million. The primary use of the proceeds from
borrowing was to fund the increase in trade receivables between March 31, 1995
and March 31, 1996.
Other liabilities of $5.8 million at March 31, 1996 primarily represented
deferred income in connection with the origination and securitization of loans
and other assets.
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Stockholders' equity increased $226.9 million from $67.9 million at March
31, 1995 to $294.8 million at March 31, 1996 due to net income of $74.1 million,
the net proceeds from the IPO of $138.1 million, Continental Grain's $10 million
capital contribution to ContiTrade and the amortization of deferred compensation
of $5.0 million, net of $0.3 million of dividends paid to Continental Grain.
LIQUIDITY AND CAPITAL RESOURCES
In a securitization, the Company recognizes a gain on the sale of loans or
assets securitized upon the closing of the securitization, but does not receive
the cash representing such gain until it receives the Excess Spread, which is
payable over the actual life of the loan or other assets securitized. The
Company incurs significant expenses in connection with a securitization and
incurs both current and deferred tax liabilities as a result of the gain on
sale. Therefore, the Company requires continued access to short and long term
external sources of cash to fund its operations. The Company's primary cash
requirements are expected to include the funding of: (i) mortgage, loan and
lease originations and purchases pending their pooling and sale; (ii) the points
and expenses paid in connection with the acquisition of wholesale loans; (iii)
fees and expenses incurred in connection with its securitization program; (iv)
overcollateralization or reserve accounts requirements in connection with loans
and leases pooled and sold; (v) ongoing administrative and other operating
expenses; (vi) payments related to its tax obligations under the Tax Sharing
Agreement with Continental Grain; (vii) interest and principal payments under
the notes payable; and (viii) the costs of the Purchase and Sale Facilities.
As a result of its growing securitization program, the Company has operated,
and expects to continue to operate, on a negative cash flow basis, which is
expected to increase as the volume of its loan and asset purchases and
originations increases and its securitization program grows. During fiscal 1994,
1995 and 1996, the Company securitized and sold in the secondary market $1.2
billion, $2.3 billion and $4.0 billion of loans, respectively. The Company used
$32.4 million, $35.3 million and $300.5 million of cash in operations during
fiscal 1994, 1995 and 1996, respectively. In the three months ended June 30,
1995 and 1996, the Company securitized and sold in the secondary market $491.0
million and $993.5 million, respectively, of loans and other assets. The Company
used $1.9 million of cash in operations during the three months ended June 30,
1996.
During the life of the REMIC, owner trust or grantor trust, the Company
subordinates to the rights of holders of senior interests a portion of the
Excess Spread otherwise due to the Company as a credit enhancement to support
the sale of senior interests. The terms of the REMIC, owner trusts and grantor
trusts generally require that the Excess Spread otherwise payable to the Company
during the early months of the trusts be used to increase the cash reserve
account, or to repay the senior interests in order to increase
overcollateralization to specified maximums. The value of such "deposit"
accounts is included in the value of Excess Spread Receivables and the related
gain on sale of receivables, net of necessary reserves for credit losses, if
applicable.
In addition, the increased use of securitization transactions as a funding
source by the Company has resulted in a significant increase in the amount of
gain on sale of receivables recognized by the Company. During fiscal 1994, 1995
and 1996, the Company recognized gain on sale of receivables in the amounts of
$49.7 million, $67.5 million, and $146.5 million, respectively. During the three
months ended June 30, 1996, the Company recognized gain on sale of receivables
in the amount of $31.2 million compared to $22.6 million for the corresponding
period in 1995. The recognition of gain on sale of receivables will have a
negative impact on the cash flows of the Company to the extent the Company is
required to pay state and Federal income taxes on these amounts in the period
recognized, notwithstanding that the Company does not receive the cash
representing the gain until later periods as the related loans are repaid or
otherwise collected.
The Company's primary sources of liquidity are sales of loans, leases and
other assets through securitization, the sale of loans, leases and other assets
under the Purchase and Sale Facilities, the sale of Excess Spread Receivables
and the financing provided by Continental Grain. In its securitizations, the
Company often enters into an agreement to deliver loans to a trust in the future
at an agreed upon price. Under such a pre-funding arrangement, the Company
typically delivers 75% of the loans or other
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assets sold at the closing and the remaining 25% up to 90 days after the
closing. In addition, while the Company sells Excess Spread Receivables from
time to time, there is no liquid market for such Excess Spread Receivables.
As of March 31, 1996, the Company, through ContiTrade, had $1.025 billion of
committed sale capacity under its Purchase and Sale Facilities with various
financial institutions. Subsequent to March 31, 1996, the Company added new
Purchase and Sale Facilities which has brought the total committed sale capacity
to $1.45 billion. The Purchase and Sale Facilities allow ContiTrade to sell,
with limited recourse, interests in designated pools of loans and other assets.
The Company has guaranteed ContiTrade's obligations under the Purchase and Sale
Facilities. These agreements generally have one year renewable terms (one
Purchase and Sale Facility has a two-year term), all of which will expire
between July 1996 and June 1998. As of March 31, 1996 and June 30, 1996, the
Company had utilized $565 million and $597 million, respectively, of the
capacity under these agreements. The Company currently anticipates that it will
be able to renew these facilities when they expire and to obtain additional
facilities.
Prior to the closing of the IPO on February 14, 1996, the amount of
Intercompany Debt was $384.7 million. The amount of Intercompany Debt fluctuates
depending on the working capital needs of the Company. With the completion of
the IPO, the Company transferred $60.7 million of its Excess Spread Receivables
to Continental Grain in order to reduce the amount of the Intercompany Debt to
$324 million. To refinance the remaining Intercompany Debt, simultaneously with
the completion of the IPO, Continental Grain purchased from the Company a $125
million five-year note issued under an indenture (the "Indenture Note"), a $74
million four-year note (the "Four Year Note") and a $125 million Term Note (the
"Term Note") for $324 million in aggregate. The Indenture Note matures on
February 14, 2001 with interest payable quarterly at a fixed rate of 7.96%. The
principal amount of the Indenture Note is required to be repaid in four equal
annual installments commencing on February 14, 1998. The Four Year Note matures
on February 14, 2000 and pays interest semi-annually at a fixed rate of 8.02%.
During the first two years after its issuance, interest on the Four Year Note
will not be paid in cash but will accrue and be added to the principal amount of
the Four Year Note. After February 14, 1998, interest on the Four Year Note will
be payable in cash. The Term Note matures on September 30, 1997 with interest
payable monthly at a variable rate equal to one month LIBOR plus 125 basis
points, adjusted monthly. The Company's ability to refinance the Intercompany
Debt is subject to limitations imposed by certain financial covenants contained
in the Continental Grain Debt Agreements.
In fiscal 1995, CSAF began to sell certain Excess Spread Receivables to
provide a source of cash flow to fund the Company's securitization program.
During fiscal 1995, CSAF sold, with limited recourse, an interest in certain
interest-only and residual certificates for $50.0 million which were outstanding
at March 31, 1995. During the year ended March 31, 1996, CSAF sold an additional
$54.5 million of certain interest-only and residual certificates with limited
recourse. At March 31, 1996, $91.0 million of these aforementioned sales were
outstanding. On April 1, 1996, CSAF sold $96.5 million of certain interest-only
and residual certificates, and ContiFinancial Corporation, as well as
Continential Grain, guaranteed CSAF's performance thereunder. Under the recourse
provisions of the agreements, CSAF is responsible for losses incurred by the
purchaser within an agreed-upon range. CSAF's performance obligations in these
transactions are guaranteed by Continental Grain for an agreed-upon fee.
Although the Company intends to continue to pursue opportunities to sell Excess
Spread Receivables, no assurance can be given that such opportunities will be
available in the future.
The net proceeds from the IPO were used by the Company for general corporate
purposes, including funding loan originations and purchases, supporting
securitization transactions (including the retention of Excess Spread
Receivables) and other working capital needs. Sales of the loans, leases and
other assets through securitizations, the sale of loans under the Purchase and
Sale Facilities, the sale of Excess Spread Receivables and further issuances of
debt (subject to the covenants of the Notes), together with cash on hand, are
expected to be sufficient to fund the Company's liquidity requirements for at
least the next 12 months if the Company's future operations are consistent with
management's current growth expectations. The Company has no commitments for
additional financing and there can
36
<PAGE>
be no assurance that the Company will be successful in consummating any such
financing transactions in the future on terms that the Company would consider to
be favorable. Furthermore, no assurance can be given that Continental Grain will
provide such financing if the Company is unable to obtain third party financing
or that the terms of the Continental Grain Debt Agreements will permit the
Company to obtain such financing.
EFFECTS OF ACCOUNTING PRONOUNCEMENTS
In May 1993, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
which addresses the accounting and reporting for investment in equity securities
that have readily determinable fair values and for all investment in debt
securities. The statement was adopted in fiscal 1995 and did not have a material
impact on the Company's financial position or results of operations.
In November 1992, the FASB issued SFAS No. 112, "Employers' Accounting for
Post-employment Benefits." This statement was adopted by Continental Grain in
fiscal 1995. The adoption did not have a material impact on the Company's
financial position or results of operations.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan" ("SFAS 114"). SFAS 114 was amended by SFAS No. 118
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures," ("SFAS 118") issued in October 1994. As the Company generally
sells its loans within a relatively short period, the adoption of SFAS 114, as
amended by SFAS 118, did not have a material impact on the Company's financial
position or results of operations.
SFAS No. 105, "Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk" and SFAS No. 119, "Disclosure about Derivative Financial Instruments and
Fair Value of Financial Instruments" require the disclosure of the notional
amount or contractual amounts of financial instruments. In managing its interest
rate exposure, the Company may use financial instruments. These instruments are
used for the express purpose of managing interest rate risk related to loans
purchased prior to securitization, and are not used for any trading or
speculative purposes. As of March 31, 1994, 1995 and 1996 and June 30, 1995 and
1996, all of the Company's financial instruments were designated as hedges and
accounted for as such.
In February 1992, the FASB issued SFAS No. 109, "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 requires a change from the deferred method under
Accounting Principles Board Opinion 11 to the balance sheet method of accounting
for income taxes. SFAS 109 was adopted in fiscal 1994. The adoption did not have
a material impact on the Company's financial position or results of operations.
In October 1995, the FASB issued SFAS NO. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") which was adopted on April 1, 1996. SFAS 123 allows
companies either to continue to account for stock-based employee compensation
plans under existing accounting standards or adopt a fair value based method of
accounting for stock options as compensation expense over the service period
(generally the vesting period) as defined in the new standard. SFAS 123
requires that if a company continues to account for stock options under
Accounting Principles Board ("APB") Opinion No. 25, it must provide annual pro
forma net income and earnings per share information "as if" the new fair value
approach had been adopted. The Company will continue to account for stock based
compensation under APB Opinion No. 25 and will make the required disclosures for
the fiscal year ended March 31, 1997. As a result, the adoption of this
standard did not have any impact on the Company's financial position or results
of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS 125")
which addresses the accounting for transfers of financial assets in which the
transferor has some continuing involvement either with the assets transferred or
with the transferee. A transfer of financial assets in which the transferor
surrenders control over those assets is accounted for as a sale to the extent
that consideration other than beneficial interest in the transferred assets is
received in exchange. SFAS 125 requires that liabilities and derivatives
incurred or obtained by the transferor as part of a transfer of financial assets
be initially measured at fair value, if practicable. In addition, SFAS 125
requires that servicing assets and liabilities be subsequently measured by the
amortization over their estimated life and assessment of asset impairment be
based on such assets' fair value. SFAS 125 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996, and is applied prospectively. The Company is currently
evaluating the impact of SFAS 125 on its financial position and results of
operations.
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ANALYSIS OF OPERATING CASHFLOW
The table below summarizes cash flow generated by operating activities. This
analysis segregates cash income, cash expenses, sales and transfers of Excess
Spread Receivables, cash invested in receivables held for sale, and the cash
impact of changes in other assets and liabilities.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------
1994 1995 1996
-------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING CASH INCOME:
Excess cash flows received from securitization trusts.... $ 12,165 $ 17,182 $ 40,214
Cash servicing fees...................................... 6,144 10,761 19,487
Interest received........................................ 15,817 32,948 66,281
Other cash income........................................ 146 2,056 3,481
-------- --------- ---------
Total Operating Cash Income.......................... 34,272 62,947 129,463
-------- --------- ---------
OPERATING CASH EXPENSES:
Securitization and loan acquisition costs................ (21,136) (68,417) (193,558)
Cash operating expenses.................................. (16,684) (28,293) (44,897)
Taxes paid (including tax payments to affiliates)........ (11,383) (24,607) (44,696)
Interest paid on Purchase and Sale Facilities............ (6,952) (18,834) (51,197)
Interest paid on funded debt............................. (5,140) (10,234) (20,586)
-------- --------- ---------
Total Operating Cash Expenses........................ (61,295) (150,385) (354,934)
-------- --------- ---------
Cash flow before sales of Excess Spread Receivables........ (27,023) (87,438) (225,471)
Proceeds from sales of Excess Spread Receivables (a)....... -- 50,000 54,500
Proceeds from transfer of certain Excess Spread Receivables
to Continental Grain..................................... -- -- 60,701
Proceeds from sale of securitizations at a premium over par
of interest-only certificates from such
securitizations............................................ 17,583 26,310 53,475
-------- --------- ---------
Cash flow after sales of Excess Spread Receivables (a)..... (9,440) (11,128) (56,795)
Cash (used in) provided by other payables and
receivables................................................ (1,304) 11,126 (23,162)
Cash used in receivables held for sale..................... (21,616) (35,334) (220,500)
-------- --------- ---------
Net Cash Used in Operating Activities................ $(32,360) $ (35,336) $(300,457)
-------- --------- ---------
-------- --------- ---------
</TABLE>
- ------------
(a) On April 1, 1996, the Company sold, with limited recourse, Excess Spread
Receivables for total cash proceeds of $96.5 million.
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INDUSTRY OVERVIEW
The home mortgage market is the largest consumer finance market in the
United States. Industry studies have estimated that home mortgage originations
grew at an estimated 6.2% compound annual growth from $589 billion of home
mortgages originated in 1990 to $797 billion of home mortgages originated in
1995. The non-conforming home equity loan sector of the home mortgage loan
market has grown at a faster rate than the overall market. Industry studies have
estimated that the non-conforming home equity loan originations grew at an
estimated compound annual growth rate of 8.6% from $96 billion in 1990 to $145
billion in 1995. Despite the rapid growth and the size of this market, it is a
relatively fragmented industry. The Company believes that the top five
non-conforming home equity lenders accounted for only 9% of total non-conforming
origination volume in calendar 1995.
According to studies performed by the David Olson Research Co., a group that
has been analyzing the home equity loan industry since 1969, the growth in the
volume of non-conforming home equity loans is attributable to, among other
factors: (i) a larger number of borrowers seeking to consolidate their revolving
credit debt and auto loans for a lower rate and payment; (ii) slow growth in
real estate appreciation causing an increase in the number of borrowers seeking
to make home improvements; (iii) increased entry into the home equity loan
market by commercial banks as well as the growth in number and size of mortgage
brokers making home equity financing more readily available; and (iv) growth in
overall consumer awareness of the availability of home equity financing. In
addition, the asset-backed securitization market has provided an important
source of financing for originators of home equity loans. Industry publications
report that asset-backed issuance of securities collateralized by home equity
loans accounted for 13.7% or $4.7 billion, of the $34.1 billion asset-backed
securities issued in the first quarter of 1996.
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BUSINESS
GENERAL
ContiFinancial Corporation engages in the consumer and commercial finance
business by originating and servicing home equity loans and by providing
financing and asset securitization structuring and placement services to
originators of a broad range of loans, leases and receivables. Securitization
provides significant benefits, including greater operating leverage and reduced
costs of funds, in the financing of assets, such as non-conforming home equity
loans, equipment leases, home improvement loans, franchise loans,
commercial/multi-family loans, sub-prime auto loans and leases, small business
loans and timeshare loans. For the year ended March 31, 1996 and the three
months ended June 30, 1996, the Company originated or purchased $2.3 billion and
$678 million, respectively, of home equity loans through ContiMortgage. In
addition, for the same periods, the Company securitized or sold $2.0 billion and
$301 million, respectively, of loans and other assets for its clients. For the
year ended March 31, 1996, approximately 72% of the Company's net income was
derived from ContiMortgage's home equity lending business, while the remainder
was derived from the Company's financing and asset securitization business.
Through ContiMortgage, the Company is a leading originator, purchaser,
seller and servicer of home equity loans made to borrowers whose borrowing needs
may not be met by traditional financial institutions due to credit exceptions or
other factors. Loans are made to borrowers primarily for debt consolidation,
home improvements, education or refinancing and are primarily secured by first
mortgages on one- to four-family residential properties. ContiMortgage is
devoting substantial resources and capital to: (i) increasing its market
penetration beyond the mid-Atlantic region; (ii) expanding its broker loan
network to complement its existing wholesale loan network; (iii) adding new loan
products, such as adjustable rate mortgages; (iv) expanding and diversifying its
origination source; and (v) investing in information services and collection
technologies.
Two distinct factors drive the expansion of the Company's home equity loan
business -- growth in volume of loans and access to the capital markets to
facilitate the most efficient sale of these loans through securitization. The
Company believes it has a competitive advantage because the management of
ContiMortgage is able to focus exclusively on expanding the volume of loans
originated or purchased, enhancing loan underwriting efficiencies and building
its servicing portfolio while relying upon the professional staff of ContiTrade
and ContiFinancial Services to focus exclusively on providing warehouse
financing, hedging and securitization structuring and placement services. This
specific industry expertise enables the Company to minimize its financing costs
and interest rate exposure and maximize the proceeds and profits from its
securitizations and growing servicing portfolio. From April 1, 1991 through June
30, 1996, ContiMortgage completed 23 AAA/Aaa-rated REMIC securitizations
totalling $4.9 billion. As of June 30, 1996, ContiMortgage had a servicing
portfolio of $4.3 billion.
The Company, through its subsidiaries, ContiTrade and ContiFinancial
Services, provides financing and asset securitization structuring and placement
services. In this area, ContiTrade's management and execution of ContiMortgage's
financing, hedging and securitization needs has served as a model for the
Company's Strategic Alliances. The Company's strategy is to replicate its
success with ContiMortgage by: (i) targeting classes of consumer and commercial
loans, leases and receivables that have the potential to be financed more
efficiently through securitization; (ii) identifying and establishing Strategic
Alliances with originators of these assets that have experienced management
teams, sophisticated systems and a proven track record of originating,
underwriting, servicing and collecting consumer and commercial loans, leases,
and receivables; and (iii) securing from these originators a consistent flow of
securitizable assets. The Company offers Strategic Alliance clients complete
balance sheet liability management, including warehouse financing, interest rate
hedging services and the structuring and placement of asset portfolios in the
form of asset-backed securities. This allows the management of its Strategic
Alliance clients to focus on expanding and improving asset origination and
servicing. For the
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years ended March 31, 1995 and 1996, services provided by ContiTrade to
Strategic Alliance clients contributed $14.8 million and $108.5 million,
respectively, to the total gross income of the Company.
The Company earns fees for the financing and asset securitization services
provided to its Strategic Alliance clients. In addition, in order to support its
Strategic Alliance clients and to further enhance its returns, the Company may
take what it believes to be manageable risk positions in its Strategic Alliances
by purchasing whole loans (and issuing asset-backed securities and thus
recognizing gain on sale) and providing financing of the Excess Spread
Receivables owned by its clients. In certain of its Strategic Alliances, the
Company may receive Strategic Alliance Equity Interests. The Company believes
that its Strategic Alliance strategy results in the Company being less
transaction oriented and more focused on increasing the long-term value of its
Strategic Alliance clients. All Strategic Alliance Equity Interests existing
prior to the consummation of the IPO were retained by Continental Grain, and
therefore, these assets are not reflected in the Company's Consolidated
Financial Statements included herein. The Company currently holds two Strategic
Alliance Equity Interests. Based on its prior experience, the Company does not
anticipate that any Strategic Alliance Equity Interest that it may acquire in
the future will have any effect on the Company's financial position or results
of operations until the business of the Strategic Alliance client matures, which
typically takes several years.
The Company's successful execution of its Strategic Alliance strategy to
date has resulted in the addition of the following new business lines and
securitization volume from 1991 through June 30, 1996: 26 home equity loan
securitizations representing $2.1 billion (for clients other than
ContiMortgage), 17 equipment lease securitizations for $1.3 billion, five
adjustable rate mortgage securitizations for $642 million, seven Title I home
improvement loan securitizations for $245 million, five franchise loan
securitizations for $291 million, three commercial/multi-family whole loan
portfolio sales for $275 million, three sub-prime auto securitizations for $201
million and one small business loan securitization for $20 million. The Company
currently has 17 active Strategic Alliances. Five specialize in home equity
loans, four focus on auto loans and the remainder focus on other asset classes.
THE COMPANY'S STRATEGY
The Company's strategy is to continue its strong growth through geographic
expansion of ContiMortages's loan production, continued Strategic Alliance
activities, selective acquisition opportunities and investments in origination,
servicing and collection information systems and technology.
Currently only 10% of the Company's loan volume is originated west of the
Mississippi. In accordance with the Company's plans to expand into the western
United States, in fiscal 1995 the Company opened two regional offices in
California and Arizona and expects that these offices will increase its market
share in this region. At the same time, the Company plans on increasing
penetration in existing markets on the East Coast by continuing to pursue
opportunities to build market share by expanding current relationships with
mortgage bankers and brokers.
The Company's strategy with respect to Strategic Alliance activities is to
replicate its success with ContiMortgage by: (i) targeting classes of consumer
and commercial loans, leases or receivables that have the potential to be
financed more efficiently through securitization; (ii) identifying and
establishing Strategic Alliances with originators of these assets that have
experienced management teams, sophisticated systems and a proven track record of
originating, underwriting, servicing and collecting consumer and commercial
loans, leases, and receivables; and (iii) securing from these originators a
consistent flow of securitizable assets. Understanding the cash flow and credit
characteristics associated with each of the asset classes with which it works,
ensuring that each pool of assets is securitizable prior to purchase or
origination and controlling its own warehouse take-out risk through its
placement capabilities, allows the Company to assume controllable risks, support
new business and introduce more securitizable assets to the institutional
marketplace. The Company offers Strategic Alliance clients complete balance
sheet liability management, including warehouse financing, interest rate hedging
services, Excess Spread
41
<PAGE>
Receivable financing, the structuring and placement of asset portfolios in the
form of asset-backed securities. This allows the management of its Strategic
Alliance clients to focus on expanding and improving asset origination and
servicing. In addition, the Company may, from time to time, make an equity or
subordinated debt investment in a Strategic Alliance client.
Because of the extensive time and resources that the Company commits to a
Strategic Alliance, the Company seeks to develop and maintain only a limited
number of Strategic Alliance clients in each of its business lines. As a
Strategic Alliance client experiences significant growth and profitability, such
Strategic Alliance client is likely to ultimately require the services of a
larger full service investment bank. The Company's strategy, however,
contemplates this evolution through: (i) continuing to purchase whole loans from
the Strategic Alliance client; (ii) creating new loan conduits; (iii)
recognizing the value of any Strategic Alliance Equity Interests; and, most
importantly, (iv) continuing to develop new securitizable assets and Strategic
Alliances. In addition, the Company may consider acquisition opportunities as a
means of expanding its sources of loan origination and/or to more efficiently
diversify its product lines.
HOME EQUITY LOAN ORIGINATION AND SERVICING
Through ContiMortgage, the Company is a leading originator, purchaser,
seller and servicer of non-conforming home equity loans. ContiMortgage's home
equity loan production has increased from $161.5 million for the year ended
March 31, 1992 (its first full year of operations under the Company) to $2.3
billion for the year ended March 31, 1996, representing a 95% annual compound
growth rate.
Loan Production
Origination. ContiMortgage's principal loan product is a non-conforming home
equity loan with a fixed principal amount, interest rate, and term to maturity
which is typically secured by a first mortgage on the borrower's residence.
Non-conforming home equity loans are home equity loans made to borrowers whose
borrowing needs may not be met by traditional financial institutions due to
credit exceptions or other factors and that cannot be marketed to agencies, such
as Ginnie Mae, Fannie Mae and Freddie Mac. In fiscal 1994, ContiMortgage
introduced an adjustable rate mortgage as part of its strategy to expand its
product lines and service a broader range of borrower needs. The Company
originates or purchases loans through ContiMortgage's headquarters in Horsham,
Pennsylvania and five regional offices nationwide. ContiMortgage obtains its
loans through two primary sources in 47 states and the District of Columbia:
wholesale, which represents loans purchased from mortgage bankers and commercial
banks; and broker, which represents loans referred by brokers and are funded
directly by ContiMortgage. New wholesale and broker relationships are subject to
a thorough due diligence and approval process to ensure quality sources of new
business. Once approved, loans from these new sources are initially subject to a
higher level of scrutiny and quality control. See "-- Quality Control."
For fiscal 1996, wholesale originations accounted for approximately 75% of
ContiMortgage's loan production. The Company believes that wholesale loan
sourcing provides a cost effective means of growing and sustaining origination
volumes. Because wholesale sources underwrite loans to ContiMortgage's
underwriting guidelines and fund those loans in their own name, wholesale
sources deliver pre-approved loan packages to ContiMortgage typically in excess
of $1.0 million in size. As a result, the general and administrative expenses of
the Company associated with wholesale loan purchases are significantly less than
when loans are purchased or originated on a loan-by-loan basis. For fiscal 1996,
ContiMortgage purchased loans from 107 wholesale sources with no one source
accounting for more than 10% and the top five wholesale sources accounting for
31% of total wholesale loan production.
42
<PAGE>
The following table illustrates the sources of ContiMortgage's loan
production:
SOURCES OF LOAN ORIGINATIONS AND PURCHASES
<TABLE>
<CAPTION>
AS OF MARCH 31,
------------------------------------
1994 1995 1996
-------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Independent Mortgage Brokers:
Principal Balance...................................... $144,897 $ 304,196 $ 574,354
Number of Loans........................................ 2,112 4,862 8,465
Average Principal Balance per Loan..................... $ 68.6 $ 62.6 $ 67.9
Wholesale Correspondents:
Principal Balance...................................... $641,913 $1,024,779 $1,737,117
Number of Loans........................................ 10,390 17,759 28,268
Average Principal Balance per Loan..................... $ 61.8 $ 57.7 $ 61.5
Total Loan Originations and Purchases:
Principal Balance...................................... $786,810 $1,328,975 $2,311,471
Number of Loans........................................ 12,502 22,621 36,733
Average Principal Balance per Loan..................... $ 62.9 $ 58.7 $ 62.9
</TABLE>
Historically, ContiMortgage's loan production growth has been achieved
through origination principally from the mid-Atlantic region of the United
States. The Company believes that the western United States market offers
significant opportunities for expanding its home equity loan production
capabilities. As part of its geographic expansion strategy, management believes
that the opening of its Arizona and California regional offices and the emphasis
on its adjustable rate mortgage programs (the most popular mortgage product in
the western United States market) will contribute significantly to
ContiMortgage's loan production growth in the future.
The Company's current origination volumes by state are delineated as
follows:
GEOGRAPHIC DISTRIBUTION OF U.S. LOAN ORIGINATIONS AND PURCHASES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
States:
Michigan......................................................... 5% 7% 11%
New York......................................................... 16 10 9
New Jersey....................................................... 14 12 9
Ohio............................................................. 6 7 8
Illinois......................................................... 6 7 7
Pennsylvania..................................................... 8 8 7
Florida.......................................................... 6 7 5
Maryland......................................................... 4 4 5
North Carolina................................................... 6 7 5
Massachusetts.................................................... 3 4 4
Indiana.......................................................... 3 4 4
Georgia.......................................................... 5 4 3
Connecticut...................................................... 2 2 2
Virginia......................................................... 1 2 2
South Carolina................................................... 2 2 2
California....................................................... 0 0 2
All other States................................................. 13 13 15
---- ---- ----
Total........................................................ 100% 100% 100%
</TABLE>
43
<PAGE>
Underwriting. All loans are underwritten to the Company's underwriting
guidelines. The underwriting process is intended to assess both the prospective
borrower's ability to repay the loan and the adequacy of the real property
security as collateral for the loan. In the underwriting process, a credit
package is submitted to the Company which includes a current appraisal from an
independent appraiser, a property inspection, a credit report and a verification
of employment. On a case-by-case basis, after review and approval by the
Company's underwriters, home equity loans may be made or purchased which vary
from the underwriting guidelines. However, any variations from guidelines must
be approved by a senior underwriter or by an executive officer of ContiMortgage.
The Company generally purchases or originates loans which either fully
amortize over a period not to exceed 360 months or provide for amortization over
a 360-month schedule with a "balloon" payment required at the maturity date,
which will not be less than five years after origination. The loan amounts
generally range from a minimum of $10,000 to a maximum of $350,000 unless a
higher amount is specifically approved by the Chief Executive Officer of
ContiMortgage. Management estimates that the current average home equity loan
purchased or originated by ContiMortgage is approximately $65,000. ContiMortgage
primarily purchases or originates non-purchase money first or second mortgage
loans although ContiMortgage has programs for origination of certain purchase
money first mortgages.
The homes used for collateral to secure the loans may be either residential
(mostly primary residences, but also second and vacation homes) or
investor-owned one- to four-family homes, condominiums or townhouses. Generally,
each home must have a minimum appraised value of $35,000. Mobile housing or
agricultural land are not accepted as collateral. In addition, mixed-use loans
secured by owner-occupied properties, including one- to four-family and small
multi-family residences, are made where the proceeds may be used for business
purposes.
Each property proposed as security for a loan must be appraised not more
than six months prior to the date of such loan. The combined loan-to-value ratio
of the first and second mortgages generally may not exceed 85%. If a prior
mortgage exists, the Company reviews the first mortgage history. If it contains
open end, advance or negative amortization provisions, the maximum potential
first mortgage balance is used in calculating the combined loan-to-value ratio
which determines the maximum loan amount. The Company does not purchase or
originate loans where the first mortgage contains a shared appreciation clause.
The Company also requires a credit report by an independent credit reporting
agency which describes the applicant's credit history. Such credit reports
typically reflect all delinquencies of 30 days or more, repossessions,
judgments, foreclosures, garnishments, bankruptcies, divorce actions and similar
adverse credit events that can be discovered by a search of public records.
Written verification is obtained on any first mortgage balance, its status and
whether local taxes, interest, insurance and assessments are included in the
applicant's monthly payment on the first mortgage. All taxes and assessments not
included in the monthly payment must be verified as current.
Each loan applicant is required to secure property insurance in an amount
sufficient to cover the new loan and any prior mortgage. If the sum of the
outstanding first mortgage, if any, and the home equity loan exceeds replacement
value, insurance at least equal to replacement value may be accepted.
Quality Control. The purpose of the Company's quality control program is:
(i) to monitor and improve the overall quality of loan production generated by
ContiMortgage's regional offices and wholesale sources; and (ii) to identify and
communicate to management existing or potential underwriting and loan file
packaging problems or areas of concern. Each month, the following sample of
funded loans are examined: (i) a 10% random sample of all funded loans; (ii) a
1-3% random sample of loans underwritten at the maximum loan-to-value ratios for
such risk class of loans; (iii) a 1-3% random sample of loans with a
debt-to-income ratio greater than 50%; (iv) a minimum of the first five loans
from any new origination source; and (v) loans selected in accordance with such
other criteria as may be determined by management. The quality control file
review examines compliance with underwriting guidelines and federal and state
regulations. This is accomplished through a focus on: (i) accuracy of all
44
<PAGE>
credit and legal information; (ii) collateral analysis including re-appraisal of
property (field or desk) and review of the original appraisal; (iii) employment
and income verification; and (iv) legal document review to ensure that the
appropriate documents are in place.
Purchase and Sale Facilities
As of June 30, 1996, through ContiTrade, the Company had $1.45 billion of
committed (and an additional $1.05 billion of uncommitted) sale capacity under
its Purchase and Sale Facilities. The Purchase and Sale Facilities allow
ContiTrade to sell, with limited recourse, interests in designated pools of
loans and other assets. The Company utilized the facilities to sell assets
totalling $1.2 billion, $2.5 billion, $5.7 billion and $1.0 billion in fiscal
years 1994, 1995, 1996 and the three month ended June 30, 1996, respectively.
As of March 31, 1996 and June 30, 1996, the Company had utilized $565 million
and $597, respectively, of the sale capacity under the Purchase and Sale
Facilities. See "Risk Factors -- Ability to Service Debt; Negative Cashflows
and Capital Needs -- Dependence on Purchase and Sale Facilities," "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" and Note 11 to Consolidated Financial
Statements.
Loan Securitization
General. The primary funding strategy of the Company is to securitize loans
purchased or originated. ContiMortgage benefits from the reduced cost of funds
and greater leverage provided through securitization. Through June 30, 1996,
including its first $31 million AAA/Aaa-rated REMIC pass-through certificate
offering, which was privately placed by ContiFinancial Services in March 1991,
ContiMortgage had completed 23 AAA/Aaa-rated REMIC securitizations totalling
$4.9 billion. Management has structured the operations and processes of
ContiMortgage specifically for the purpose of efficiently originating,
underwriting and servicing loans for securitization in order to meet the
requirements of rating agencies, credit enhancers and AAA/Aaa-rated REMIC
pass-through investors. ContiMortgage generally seeks to enter the public
securitization market on a quarterly basis. In connection with these
securitizations, ContiTrade and ContiFinancial Services provide securitization
structuring and placement services, respectively.
In a securitization, the Company sells the loans that it has purchased or
originated to a REMIC, owner trust or grantor trust for a cash purchase price
and an interest in the loans or other assets securitized (in the form of the
Excess Spread). The cash purchase price is raised through an offering of
pass-through certificates by the trust. Following the securitization, the
purchasers of the pass-through certificates receive the principal collected and
the investor pass-through interest rate on the certificate balance, while the
Company receives the Excess Spread. The Excess Spread is either a contractual
right or a certificated security generally in the form of an interest-only or
residual certificate.
The purchasers of the pass-through certificates receive a credit-enhanced
security. Credit enhancement is generally achieved through two sources: (i)
subordination of an amount of Excess Spread retained by the Company; and (ii) an
insurance policy provided by an AAA/Aaa-rated monoline insurance company. As a
result, each offering of senior REMIC pass-through certificates receives ratings
of AAA from Standard & Poor's Ratings Services and Aaa from Moody's Investors
Service.
The pooling and servicing agreements that govern the distribution of cash
flows from the loans included in the REMIC require either (i) the establishment
of a reserve account that may be funded by cash or a letter of credit deposited
by the Company or (ii) the overcollateralization of the REMIC, which is intended
to result in receipts and collections on the loans exceeding the amounts
required to be distributed to the holders of the senior REMIC pass-through
certificates. If payment defaults exceed the amount in the reserve account or
the amount of overcollateralization, as applicable, the monoline insurance
company policy will pay any losses thereafter experienced by holders of the
senior interests in the related REMIC. To date, there have been no claims on any
monoline insurance company policy obtained in any of the Company's
securitizations.
45
<PAGE>
Hedging. A fixed rate loan inventory held for sale will have a smaller
Excess Spread if interest rates rise before the loans are sold. Conversely,
falling rates expand the Excess Spread. As such, it is the Company's policy to
actively monitor its exposure to interest rates and hedge this exposure through
the use of United States Treasury securities and futures contracts.
Pre-Funding. In connection with its securitizations, the Company often
enters into an agreement pursuant to which it agrees to sell loans to the trust
in the future at an agreed-upon price (the "Pre-funding"). The Pre-funding locks
in the price agreed upon with investors on the pricing date (typically five days
prior to the closing date of the securitization) for a period of up to 90 days.
In a Pre-funding arrangement, ContiMortgage typically delivers 75% of the loans
sold at the closing and the remaining 25% up to 90 days after the closing. See
"Risk Factors -- Ability to Service Debt; Negative Cashflows and Capital Needs."
Whole Loan Sales. From time to time, the Company will sell loans on a whole
loan basis when and where pricing is more attractive than that available through
securitization. For the years ended March 31, 1995 and 1996 whole loan sales
accounted for less than 3% of ContiMortgage's total volume of loan sales and
securitizations. Because cash is received when the loans are sold, the full gain
on sale is recorded at the time of sale.
Loan Servicing
Overview. The Company generally retains the right to service the home equity
loans it originates or purchases. Servicing includes collecting payments from
borrowers, remitting payments to investors who have purchased the loans,
investor reporting, accounting for principal and interest, contacting delinquent
borrowers, conducting foreclosure proceedings and disposing of foreclosed
properties. As of March 31, 1996, ContiMortgage was servicing 65,121 loans in 44
states and the District of Columbia with an outstanding balance of $3.9 billion,
an increase in outstanding balance of 76% from March 31, 1995. As of June 30,
1996, ContiMortgage's servicing portfolio has increased to 71,082 loans with an
outstanding balance of $4.3 billion. As the servicing portfolio grows, the
Company expects to recognize increasing economies of scale and cash flow. As of
June 30, 1996, ContiMortgage's $4.3 billion servicing portfolio was earning a
servicing fee of approximately 50 basis points per annum.
ContiMortgage has developed a sophisticated computer-based mortgage
servicing operation that enables the Company to provide effective and efficient
processing of home equity loans. The key elements of any servicing operation are
the quality and experience of the staff and the effectiveness of the computer
software.
The servicing system is an on-line real time system. It provides
payment-processing and cashiering functions, automated payoff statements,
on-line collections, hazard insurance and tax monitoring and a full range of
investor-reporting requirements for both fixed rate and adjustable rate loans.
The monthly investor-reporting package includes a trial balance, accrued
interest report, remittance report and delinquency reports.
Formal written procedures have been established for payment processing, new
loan set-up, customer service, tax and insurance monitoring. The servicing
system is documented by vendor-supplied instructional material, as well as by
in-house instructional documentation.
ContiMortgage is a Fannie Mae/Freddie Mac approved seller/servicer. As such,
ContiMortgage is subject to thorough scrutiny of its policies, procedures and
business, and is qualified to underwrite, sell and service loans on behalf of
both Fannie Mae and Freddie Mac. This designation is typically a prerequisite
for loan securitization.
The pooling and servicing agreements which govern the distribution of cash
flows within the REMIC trusts generally require that ContiMortgage, as servicer,
advance interest (but not principal) on any delinquent loans to the holders of
the senior interests in the related REMIC trust until satisfaction of the note,
liquidation of the mortgaged property or charge-off of the loan to the extent
46
<PAGE>
ContiMortgage deems such advances of interest to be ultimately recoverable. To
the extent there are any realized losses on loans, such losses are paid out of
the related reserve account, out of principal and interest payments on
overcollateralized amounts or, if necessary, from the related monoline insurance
company policy.
Collections. The ContiMortgage collection department, which consists of 110
employees, is organized into three divisions (two collection divisions and one
default division), each led by a collection supervisor. The collection divisions
are each comprised of six teams, consisting of one team leader and seven loan
counselors, whose responsibilities include contacting first payment defaults
that are one to ten days delinquent and post-30 day delinquent accounts. In
March 1996, each collection division was restructured to include an auto-dial
team of collectors to handle pre-30 day delinquent accounts. In addition, there
is a loss mitigation team which generally contacts mortgagors who are three
payments in arrears to determine if a special forbearance repayment agreement
can be arranged or if legal action needs to be initiated. In certain cases,
delinquent loans are forwarded to the default division for legal action by a
foreclosure or bankruptcy team. If a property is acquired through foreclosure,
the Company will market the property for liquidation of the asset and recovery.
Generally, collection activity will commence once a loan has not paid within
ten days of the due date. Once a loan becomes 30 days past due, a collection
supervisor generally analyzes the account to determine the appropriate course of
action. On or about the 45th day of delinquency, each property is typically
inspected. The inspection indicates if the property is occupied or vacant, the
general condition of the property, whether the condition is deteriorating, and a
recommendation for securing, repair or maintenance. Borrowers usually will be
contacted by telephone at least four times and also by written correspondence
before the loan becomes more than 60 days delinquent. Collection activity on
accounts 60 days or more delinquent typically emphasize curing the delinquency,
including the use of formal forbearance, refinance and voluntary liquidation and
other means directed at completely curing the delinquency. In most cases,
accounts that cannot be cured by reasonable means will be moved to foreclosure
as soon as all legal documentation permits.
Depending upon the circumstances surrounding the delinquent account, a
temporary suspension of payments or a repayment plan to return the account to an
up-to-date status may be authorized by the collection supervisor. In any event,
it is the Company's policy to work with the delinquent customer to resolve the
past due balance before legal action is initiated.
Mortgaged properties securing loans that are more than 60 days delinquent,
including loans in foreclosure, are typically inspected on a monthly basis. In
most cases, the cost of these inspections will be advanced by ContiMortgage and
charged to the individual escrow accounts of the borrowers. The Company expects
that the cost of inspections generally will be recovered through reinstatement,
liquidation or payoff. The collection supervisor generally reviews each
inspection report and takes whatever corrective action is necessary. The cost to
secure, winterize or maintain a property are typically charged to the borrower's
escrow account. If and when a property moves to foreclosure status, a
foreclosure coordinator will review all previous inspection reports, evaluate
the lien and equity position and obtain any additional information as necessary.
The ultimate decision to foreclose, after all necessary information is obtained,
is made by an officer of ContiMortgage.
Foreclosure regulations and practices and the rights of the owner in default
vary from state to state, but generally formal legal action may be initiated if:
(i) the loan is 90 days or more delinquent; (ii) a notice of default on a senior
lien is received; or (iii) ContiMortgage discovers circumstances indicating
potential loss exposure.
47
<PAGE>
Credit Quality of Home Equity Loan Servicing Portfolio. The following table
illustrates ContiMortgage's delinquency and charge-off experience with respect
to its home equity loan portfolio:
DELINQUENCY AND DEFAULT EXPERIENCE OF
CONTIMORTGAGE'S SERVICING PORTFOLIO
OF HOME EQUITY LOANS
<TABLE>
<CAPTION>
AT MARCH 31,
---------------------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
-------------------- -------------------- --------------------- --------------------- ---------------------
NUMBER OF PRINCIPAL NUMBER OF PRINCIPAL NUMBER OF PRINCIPAL NUMBER OF PRINCIPAL NUMBER OF PRINCIPAL
LOANS BALANCE LOANS BALANCE LOANS BALANCE LOANS BALANCE LOANS BALANCE
--------- --------- --------- --------- --------- ---------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio......... 8,788 $ 314,260 11,093 $ 484,857 20,146 $1,105,393 38,740 $2,192,190 65,121 $3,863,575
Delinquency
percentage (a)
30-59 days....... 1.82% 2.08% 0.54% 0.49% 0.57% 0.51% 0.89% 0.83% 2.01% 1.81%
60-89 days....... 0.59% 0.77% 0.29% 0.27% 0.18% 0.19% 0.30% 0.36% 0.48% 0.47%
90 days and
over.............. 0.54% 0.83% 0.42% 0.44% 0.30% 0.27% 0.44% 0.45% 0.15% 0.23%
Total
delinquency....... 2.95% 3.68% 1.25% 1.20% 1.05% 0.97% 1.63% 1.64% 2.64% 2.51%
Total
delinquency
amount............ 260 $11,596 139 $5,794 199 $10,036 633 $35,980 1,721 $97,082
Default
percentage (b)
Foreclosure...... 0.66% 1.14% 0.68% 0.83% 0.50% 0.53% 0.42% 0.46% 2.30% 2.42%
Bankruptcy....... 0.51% 0.89% 0.54% 0.69% 0.26% 0.23% 0.39% 0.41% 0.78% 0.74%
Real estate
owned............. 0.18% 0.43% 0.15% 0.18% 0.05% 0.05% 0.09% 0.09% 0.11% 0.13%
Forbearance...... N/A N/A N/A N/A N/A N/A 0.20% 0.20% 0.24% 0.25%
Total
default........... 1.35% 2.46% 1.37% 1.70% 0.81% 0.81% 1.10% 1.16% 3.43% 3.54%
Total default
amount............ 119 $7,755 152 $8,263 177 $9,615 426 $25,486 2,232 $136,796
<CAPTION>
AT JUNE 30,
---------------------
1996
---------------------
NUMBER OF PRINCIPAL
LOANS BALANCE
--------- ----------
<S> <C> <C>
Portfolio......... 71,082 $4,256,949
Delinquency
percentage (a)
30-59 days....... 3.50% 3.18%
60-89 days....... 0.76% 0.68%
90 days and
over.............. 0.23% 0.19%
Total
delinquency....... 4.49% 4.05%
Total
delinquency
amount............ 3,192 $172,491
Default
percentage (b)
Foreclosure...... 2.36% 2.60%
Bankruptcy....... 0.96% 0.91%
Real estate
owned............. 0.19% 0.20%
Forbearance...... 0.25% 0.27%
Total
default........... 3.76% 3.98%
Total default
amount............ 2,673 $169,626
</TABLE>
- ------------
(a) The delinquency percentage represents, as a percentage of the total number
and aggregate principal balance of loans as of the relevant date, the number
and outstanding principal balance of home equity loans for which payments
are contractually past due, exclusive of home equity loans in foreclosure,
bankruptcy, real estate owned or forbearance.
(b) The default percentage represents, as a percentage of the total number and
aggregate principal balance of loans as of the relevant date, the number and
dollar value of delinquent payments on home equity loans in foreclosure,
bankruptcy, real estate owned or forbearance.
The following table illustrates ContiMortgage's loan loss experience with
respect to its home equity loan portfolio:
LOAN LOSS EXPERIENCE ON
CONTIMORTGAGE'S SERVICING PORTFOLIO
OF HOME EQUITY LOANS
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED MARCH 31, ENDED JUNE 30,
------------------------------------------------------------ --------------
1992 1993 1994 1995 1996 1996
-------- -------- -------- ---------- ---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Average Amount Outstanding
(a)....................... $237,979 $396,910 $745,351 $1,663,865 $2,858,790 $3,879,131
Net Losses (b)............ $ 911 $ 1,076 $ 1,108 $ 1,313 $ 3,781 $ 2,043
Net Losses after
Recoveries (c)............ $ 647 $ 1,036 $ 1,108 $ 1,308 $ 3,686 $ 2,004
Net Losses as a Percentage
of Average Amount
Outstanding............... 0.27% 0.26% 0.15% 0.08% 0.13% 0.05%
</TABLE>
- ------------
(a) The average of the principal balances of the home equity loans outstanding
on the last business day of each month during the period.
(b) Actual losses incurred on liquidated properties for each respective period.
Losses include all principal, foreclosure costs and all accrued interest.
(c) Net losses after recoveries from deficiency judgments (net of expenses).
48
<PAGE>
In fiscal 1994, the Company made a strategic decision to increase its mix of
higher yielding, lower loan-to-value B, C and D grade loans. The ratings are
those employed by the Company in its grading system, which the Company believes
is similar to grading systems used in the non-conforming home equity loan
industry. As a result of this strategic decision, delinquency levels have
increased as anticipated and are expected to continue to increase as the loan
mix shifts toward more B, C and D loans and such types of loans in the portfolio
become more seasoned. The Company believes that this increase in delinquency
levels is more than offset by the higher yields associated with B, C and D loans
and the lower loan-to-value ratios which provide a larger equity cushion against
loss in the event of foreclosure. The Company will closely monitor the expected
increase in delinquency rates.
The following chart generally outlines certain parameters of the credit
grades of ContiMortgage's current underwriting guidelines:
DESCRIPTION OF CREDIT GRADES
<TABLE>
<CAPTION>
"A" CREDIT GRADE "B" CREDIT GRADE "C" CREDIT GRADE "D" CREDIT GRADE
<S> <C> <C> <C> <C>
GENERAL REPAYMENT Has good credit Pays the majority Marginal credit Designed to
but might have of accounts on history which is provide a
some minor time but has some offset by other borrower with
delinquency. 30- and/or 60-day positive poor credit
delinquency. attributes. history an
opportunity to
correct past
credit problems
through lower
monthly payments.
EXISTING MORTGAGE Current at Current at Cannot exceed Must be paid in
LOANS application time application time four 30-day full from loan
and a maximum of and a maximum of delinquent or one proceeds and no
two 30-day three 30-day 60-day more than 119
delinquencies in delinquencies in delinquencies in days delinquency.
the past 12 the past 12 the past 12
months. months. months.
NON-MORTGAGE Major credit and Major credit and Major credit and Major and minor
CREDIT installment debt installment debt installment debt credit
should be current can exhibit some can exhibit some delinquency is
but may exhibit minor 30- and/or minor 60- and/or acceptable, but
some minor 30-day 60-day 90-day must demonstrate
delinquency. delinquency. delinquency. some payment
Minor credit may Minor credit may Minor credit may regularity.
exhibit some exhibit up to exhibit more
minor 90-day serious
delinquency. delinquency. delinquency.
BANKRUPTCY Charge-offs, Discharged more Discharged more Discharged prior
FILINGS judgments, liens, than two years than two years to closing.
and former with with
bankruptcies are reestablished reestablished
unacceptable. credit. credit.
DEBT SERVICE-TO- Generally not to Generally not to Generally not to Generally not to
INCOME RATIO exceed 45% exceed 45% exceed 45% exceed 50%
MAXIMUM LOAN-TO-
VALUE RATIO:
OWNER OCCUPIED Generally 80% (or Generally 80% (or Generally 75% (or Generally 65% (or
90%) for a 1 to 4 85%) for a 1 to 4 80%) for a 1 to 4 70%) for a 1 to 4
family dwelling family dwelling family dwelling family dwelling.
residence; 70% residence; 65% residence; 65%
for a for a for a
condominium. condominium. condominium.
NON-OWNER Generally 70% for Generally 65% for Generally 65% for N/A
OCCUPIED a 1 to 2 family a 1 to 2 family a 1 to 2 family
dwelling, 65% for dwelling, 60% for dwelling, 60% for
a 3 to 4 family. a 3 to 4 family. a 3 to 4 family.
</TABLE>
49
<PAGE>
The following table illustrates the mix of credit grades of loans in the
Company's servicing portfolio as of March 31, 1996:
CONTIMORTGAGE SERVICING PORTFOLIO AS OF MARCH 31, 1996
<TABLE>
<CAPTION>
TOTAL WEIGHTED WEIGHTED
(DOLLARS IN % OF AVERAGE AVERAGE
CREDIT GRADE THOUSANDS) TOTAL COUPON LOAN-TO-VALUE
- -------------------------------------------------- ----------- ----- -------- -------------
<S> <C> <C> <C> <C>
"A" Loan.......................................... $ 2,054,985 53.2% 10.28% 73.9%
"B" Loan.......................................... 1,104,117 28.6 11.47 73.2
"C" Loan.......................................... 509,839 13.2 12.85 69.1
"D" Loan.......................................... 157,540 4.1 14.56 55.2
Other............................................. 37,094 0.9 13.60 57.2
----------- ----- -------- ---
Total....................................... $ 3,863,575 100.0% 11.16% 72.1%
</TABLE>
The following tables show how the mix of credit grades of loans that the
Company originated has changed for the years ended 1994, 1995 and 1996:
CONTIMORTGAGE LOAN ORIGINATIONS BY CREDIT GRADE
FOR YEAR ENDED MARCH 31, 1994
<TABLE>
<CAPTION>
TOTAL WEIGHTED WEIGHTED
(DOLLARS IN % OF AVERAGE AVERAGE
CREDIT GRADE THOUSANDS) TOTAL COUPON LOAN-TO-VALUE
- --------------------------------------------------- ----------- ----- -------- -------------
<S> <C> <C> <C> <C>
"A" Loan........................................... $ 487,216 61.9% 9.45% 71.8%
"B" Loan........................................... 217,684 27.7 10.83 69.4
"C" Loan........................................... 68,531 8.7 12.72 63.7
"D" Loan........................................... 9,380 1.2 14.74 50.2
Other.............................................. 3,999 0.5 14.92 53.1
----------- ----- -------- ---
Total........................................ $ 786,810 100.0% 10.21% 70.9%
</TABLE>
FOR YEAR ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
TOTAL WEIGHTED WEIGHTED
(DOLLARS IN % OF AVERAGE AVERAGE
CREDIT GRADE THOUSANDS) TOTAL COUPON LOAN-TO-VALUE
- -------------------------------------------------- ----------- ----- -------- -------------
<S> <C> <C> <C> <C>
"A" Loan.......................................... $ 675,823 50.8% 11.01% 73.0%
"B" Loan.......................................... 417,741 31.4 12.00 72.7
"C" Loan.......................................... 169,578 12.8 13.70 64.3
"D" Loan.......................................... 45,244 3.4 15.44 55.2
Other............................................. 20,974 1.6 14.61 55.5
----------- ----- -------- ---
Total....................................... $ 1,329,360 100.0% 11.87% 70.7%
</TABLE>
FOR YEAR ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
TOTAL WEIGHTED WEIGHTED
(DOLLARS IN % OF AVERAGE AVERAGE
CREDIT GRADE THOUSANDS) TOTAL COUPON LOAN-TO-VALUE
- --------------------------------------------------- ----------- ----- -------- -------------
<S> <C> <C> <C> <C>
"A" Loan........................................... $ 1,101,261 47.7% 10.65% 76.0%
"B" Loan........................................... 682,568 29.5 11.49 74.2
"C" Loan........................................... 363,399 15.7 12.69 70.9
"D" Loan........................................... 136,354 5.9 14.41 55.1
Other.............................................. 27,889 1.2 13.29 55.2
----------- ----- -------- ---
Total........................................ $ 2,311,471 100.0% 11.47% 73.2%
</TABLE>
50
<PAGE>
Computer Systems
ContiMortgage believes that the continued development of systems technology
will lead to greater servicing efficiencies and economies of scale, thus
reducing costs and increasing overall profitability. ContiMortgage uses an IBM
AS/400 computer system to serve as the hardware platform for its production
software. This system provides an in-house, integrated solution to meet
ContiMortgage's three production system requirements: automated originations
processing, loan servicing and corporate reporting.
The mortgage origination system used by ContiMortgage provides database
management and automated document production necessary for loan origination and
processing. The system provides distributed processing to ContiMortgage's
regional offices, centralized management over its databases, and automatically
produces all necessary mortgage documents on laser printers.
The Company's computer system provides all the standard processing functions
necessary to service a loan. The system also provides an on-line collections
system that automatically prompts collectors to make collection calls and can
log and display on screen the results of previous conversations with borrowers
regarding their delinquency history.
ContiMortgage's corporate reporting functions are facilitated by a system
developed in-house called HomeBase. This system consists of both a database
repository and a library of several thousand custom programs written by the
ContiMortgage data processing staff. HomeBase provides reporting on mortgage
originations and pipeline processing, funding and wiring of funds to closing
agents, and automated loan delivery including REMIC processing and reporting.
HomeBase also provides a quality control facility for review of a sample of
monthly production, as well as a loan servicing sub-system that includes reports
used by loan servicing personnel.
FINANCING AND ASSET SECURITIZATION SERVICES
General
The Company provides financing and asset securitization structuring and
placement services to originators of a broad range of consumer and commercial
loans, leases and receivables. Through the activities of its other two principal
operating entities -- ContiTrade and ContiFinancial Services -- the Company
focuses on providing financing and asset securitization services to both
ContiMortgage and Strategic Alliance clients. ContiTrade provides financing,
hedging and structuring of asset-backed securities. ContiFinancial Services, an
NASD member and broker-dealer, privately places or underwrites offerings of
asset-backed securities on behalf of the Company and its Strategic Alliance
clients.
History
In 1988, the Company structured and placed the first home equity loan
asset-backed security utilizing a third party AAA/Aaa-rated financial guarantor.
This transaction, executed on behalf of Advanta Mortgage, became the industry
standard for the securitization of home equity loans. Subsequently, the Company
structured a number of home equity loan securitizations for other third parties
and earned fees for placing the securities. The fees for placing securities,
however, were far less significant than the gain on sale recognized by the
issuers of the asset-backed securities. Therefore, in 1990, the Company decided
to pursue the acquisition of a mortgage company in order to recognize the full
financial benefits of securitization. In October 1990, the Company acquired
ContiMortgage. Since 1991, on behalf of ContiMortgage and the Company's clients,
the Company has structured and placed $10.4 billion of asset-backed securities
representing 90 transactions.
Targeting Opportunities
As described above, the Company seeks to identify consumer and commercial
loans, leases or receivables that have the potential to be more efficiently
financed through securitization and to form
51
<PAGE>
Strategic Alliances with the originators of such assets. Identifying such assets
involves a thorough analysis and due diligence of: (i) the asset (loan, lease,
or receivable); (ii) the management team of the potential Strategic Alliance
client; and (iii) the servicing systems of the potential Strategic Alliance
client. The credit review process of the Company seeks to determine whether or
not a new asset is securitizable to investment grade and whether there exists a
ready and interested investor base for the new product.
Asset. The asset is analyzed by the Company from a cash flow perspective to
ascertain the means by which it can be structured into an asset-backed security
providing timely principal and interest payments to an investor. Rating agencies
and financial guarantors are brought into the process early and prior to any
commitment from the Company to ensure that the asset can earn an investment
grade rating in a structure that is economically attractive to the issuer and
investor. Under certain circumstances, potential investors in the new product
are also consulted to determine market interest and acceptance. A significant
component of the analysis is the review of the assets' delinquency and loss
performance to date and the comparison of those levels to industry standards.
Management. The Company conducts extensive due diligence on the asset
originator and its management. The Company seeks to ensure that the management
team has (i) the depth, resources, infrastructure and ability to grow its
business prudently and (ii) the ability to manage the credit quality of its loan
portfolio and maintain a prudent risk/reward relationship. The Company will not
enter into a Strategic Alliance unless the Company and its potential Strategic
Alliance client have a similar management philosophy.
Servicing Systems. The examination of a potential client's servicing systems
is a critical component of the Company's due diligence effort. The ability to
track payment performance by borrowers, and the distribution of payments when
received, is essential to securitization. The Company seeks to ensure that the
servicing and management reporting systems are of high quality and efficiency
and can be easily upgraded to accommodate growth in volume. Further, prior to
the advance of any funds by the Company and prior to any securitization, the
Company requires that a back-up servicer exist in the event of a loss of
servicing quality or capability.
Approval Process. The due diligence process and its results are outlined in
a risk memorandum which serves as the basis for the decision to pursue a
Strategic Alliance or other purchase of assets. The preparation of the risk
memorandum is an intensive process, managed by the Company's Chief Credit
Officer, and focuses on four areas: (i) background on company, management, asset
and industry; (ii) risks and mitigating factors; (iii) projected profitability;
and (iv) balance sheet and cash impact. Once the risk memorandum is completed,
the decision to securitize a new class of assets with a new client is subject to
approval by a credit committee consisting of senior executive officers of the
Company. After the credit process is completed for a new client, each subsequent
securitization transaction by that client will be subject to an abridged credit
review process.
Client Services
Through ContiTrade, the Company provides warehouse financing, whole loan
purchasing, hedging, credit enhancement and Excess Spread Receivables financing
services to both ContiMortgage and the Company's Strategic Alliance clients.
Warehouse Financing. The Company makes financing available to its
securitization clients through secured loans or purchase commitments to
facilitate the accumulation of securitizable assets prior to securitization
("warehouse financing"). As of March 31, 1996 and June 30, 1996, through
ContiTrade, the Company had committed $982 million and $1,185 million,
respectively, of financing to its third party clients, of which $425 million and
$357 million, respectively, was drawn. Warehouse financing commitments are
typically for a term of one year or less and are designed to fund only
securitizable assets. Assets from a particular client typically remain in the
warehouse for a period of 30 to 120 days at which point they are securitized and
sold to institutional investors, in most cases, through
52
<PAGE>
ContiFinancial Services, the Company's NASD broker-dealer. The Company utilizes
its Purchase and Sale Facilities to finance this warehouse financing. See
"-- Home Equity Loan Origination and Servicing -- Purchase and Sale Facilities."
Whole Loan Purchasing. The Company seeks opportunities to purchase assets
for sale into securitized trusts and to recognize gain on sale. The Company's
Strategic Alliance clients often seek to raise additional cash to cover the
expenses and the negative cash flow associated with securitization. Therefore,
whole loan pools of assets may be purchased by the Company from a Strategic
Alliance client and then securitized under the Company's name or the name of its
Strategic Alliance client. The Company will typically invest its capital in the
transaction through the purchase of loans at a premium and the assumption of
certain costs of securitization.
Conduits. The Company also executes its loan purchase strategy through loan
conduits. Conduits are stand-alone securitization vehicles where the
originator(s), underwriter(s), servicer(s) and seller(s) may all be different
parties coming together to generate loans to be serviced and securitized.
Conduits allow smaller originators to sell their product into a single
securitizable pool, thus benefitting from the economies of scale and the ability
to share the fixed transaction costs associated with securitization. The Company
has established conduits for adjustable rate mortgages and commercial/
multi-family mortgages. The Company's role is to provide capital through
warehouse financing and/or the purchase of loans at a premium and to ensure
that the loans are underwritten to the conduit's underwriting guidelines
and are thus securitizable. In addition, the Company also manages the ultimate
sale or securitization of the loans originated through its conduits.
Hedging. As certain assets are accumulated for securitization, they are
exposed to fluctuations in interest rates. This is because the securitization of
each asset class is priced to the investor utilizing the United States Treasury
Security with a maturity most closely matching the assets' average lives.
Therefore, at the client's discretion, the Company will hedge the specific
United States Treasury Security in the cash market.
Credit Enhancement. To the extent that the securitization of a particular
asset class requires credit enhancement in addition to the Excess Spread, the
Company will consider providing that additional support in the form of (i) an
initial deposit to be reimbursed from the cash flow of the assets securitized or
(ii) the purchase of a mezzanine security.
Excess Spread Receivables Financing. In certain cases, the Company finances
a client's Excess Spread Receivables in order to provide the client with cash to
cover the expenses and negative cash flow associated with securitization. The
financing is typically in the form of a secured loan. The Company commits to
provide such financing only to its Strategic Alliance clients. In each case, in
return for the financing, the Company typically receives ownership
participations either in the Strategic Alliance clients or in the portfolio of
loans securitized. As of March 31, 1996 and June 30, 1996, the total committed
amount of such financings was $57.6 million and $81.1 million, respectively, and
the amount outstanding of such financing was $32.4 million and $29.0 million,
respectively.
ContiFinancial Services
Through ContiFinancial Services, the Company's registered NASD
broker-dealer, the Company provides placement services. Since 1991, the Company
has structured or placed $10.4 billion of securitized assets representing 90
transactions both for ContiMortgage and other clients. According to
Asset-Backed Alert rankings for privately placed asset-backed securities, for
the year ended December 31, 1995, ContiFinancial Services ranked fourth in terms
of dollar volume with $997 million.
ContiFinancial Services' placement capabilities accomplish two objectives:
(i) generating fee income; and (ii) providing a controlled exit strategy for
assets purchased or financed by allowing the Company and its Strategic Alliance
clients to manage more effectively when and how transactions are brought to
market. While ContiFinancial Services' placement capabilities have been
primarily focused
53
<PAGE>
on private placements, to the extent opportunities exist in the public market,
ContiFinancial Services will bid out the public underwriting business to other
investment banks and manage the process on behalf of itself and its clients. The
Company has filed a shelf registration statement with the Securities and
Exchange Commission for up to $3.5 billion of certain asset-backed securities,
of which $2.8 billion was available as of June 30, 1996.
If the Company is successful in a Strategic Alliance (earning fees for
warehousing, gain on sale for whole loan purchases and sales, and fees for the
placement of asset-backed securities) while its client experiences significant
growth and profitability, the Strategic Alliance client will ultimately need the
services of a larger full service investment bank. The Company's strategy,
however, contemplates this evolution through: (i) continuing to purchase whole
loans from the Strategic Alliance client; (ii) creating new loan conduits; (iii)
recognizing the value of any Strategic Alliance Equity Interests, and, most
importantly; (iv) continuing to develop new securitizable assets and Strategic
Alliances.
Asset Classes
Since 1991, the Company has expanded the scope of its products to include
adjustable rate mortgages, equipment leases, Title I home improvement loans,
franchise loans, commercial/multi-family loans, sub-prime auto loans and leases,
small business loans and timeshare loans.
The following table illustrates the Company's securitization volume
(excluding ContiMortgage whole loan sales) and the addition of its new asset
classes:
THE COMPANY'S SECURITIZATION VOLUME
BY ASSET CLASSES
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED MARCH 31, ENDED JUNE 30,
---------------------------------------------- -------------- TOTAL BY
1992 1993 1994 1995 1996 1996 ASSET CLASS
------ ------ ------ ------ ------ -------------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Home equity loans:
ContiMortgage.......... $ 142 $ 194 $ 733 $1,259 $2,030 $ 505 $ 4,863
Other.................. 519 148 60 340 755 200 2,022
------ ------ ------ ------ ------ ----- -----------
Total.................. 661 342 793 1,599 2,785 705 6,885
ARMs..................... -- -- 36 101 505 -- 642
Equipment leasing........ 402 278 178 179 190 101 1,328
Title I home improvement
loans.................... -- -- 96 149 -- -- 245
Franchise loans.......... -- -- 48 98 145 -- 291
Commercial/multi-family
loans(a)................. -- -- -- 89 186 -- 275
Sub-prime auto........... -- -- -- 39 162 -- 201
Small business loans..... -- -- -- -- 20 -- 20
------ ------ ------ ------ ------ ----- -----------
Total securitization
volume................... $1,063 $ 620 $1,151 $2,254 $3,993 $ 806 $ 9,887
------ ------ ------ ------ ------ ----- -----------
------ ------ ------ ------ ------ ----- -----------
</TABLE>
- ------------
(a) Represents two whole loan sales.
Home Equity Loans. The home equity loan product is the flagship business for
the Company. Having set the standard for the securitization of home equity loans
at the inception of the market in 1988, the Company leveraged its financing
capabilities and structured finance expertise by acquiring ContiMortgage in 1990
and establishing Strategic Alliances with other clients in the home equity loan
industry. In addition to providing its financing, hedging and securitization
services to ContiMortgage, resulting in 23 securitizations for $4.9 billion from
April 1, 1991 through June 30, 1996, the Company
54
<PAGE>
also provided its services to other clients, resulting in 26 securitizations for
$2.1 billion since 1991 through June 30, 1996.
In the home equity loan market, the Company's Strategic Alliance
relationships vary in terms of products and services offered. Certain of these
Strategic Alliances include the provision of warehouse financing and hedging in
return for a committed flow of securitizable product for which it earns
placement fees and gains on sale. Other Strategic Alliances include the
provision of warehouse financing and hedging in return for a guaranteed flow of
securitizable product as well as minority ownership in the form of warrants or
warrant-like instruments.
Adjustable Rate Mortgages. The Company established its Adjustable Rate
Mortgage Conduit ("ARM Conduit") in 1994 in order to: (i) leverage its expertise
in the closely related fixed-rate home equity loan market and the relationships
it developed in building that business; (ii) establish a more significant
presence in the western United States; and (iii) offer its current Strategic
Alliance clients an outlet for a new product to offer its borrowers. The Company
believes that it enjoys a significant competitive advantage by being able to
offer its Strategic Alliance clients the financing, purchasing, hedging,
structuring, and placement of both fixed-rate and adjustable rate home equity
loans. The Company's ARM Conduit allows smaller originators to sell their loan
product into a single securitizable pool and to benefit from the economies of
scale not otherwise available to them on a stand-alone basis.
The Company's strategy is to grow its ARM Conduit volume by continuing to
bring additional qualified participants into the ARM Conduit and by providing
attractive financing and pricing to existing participants. As particular ARM
Conduit participants grow their origination capabilities, the Company may seek
to establish Strategic Alliances with one or more such participants.
Equipment Leasing. The equipment leasing industry is a highly fragmented
industry which leases a wide array of equipment to predominately commercial
users. The typical leasing company provides a specialized service to a
relatively specific asset class (e.g., office equipment or medical equipment).
The Company has financed various assets for several equipment lease company
clients ranging from $300 fax machines to $3 million MRI machines.
As of June 30, 1996, the equipment lease business line had resulted in the
Company structuring and placing 17 securitizations on behalf of 11 issuers
representing over $1.3 billion in volume. While these relationships historically
have been transaction oriented, the Company is actively pursuing Strategic
Alliance opportunities to leverage its capabilities, product and market
knowledge and establish a long-term, equity participation.
Title I Home Improvement Loans. Title I home improvement loans represent
loans to homeowners, a portion of which is guaranteed by the U.S. Government,
for the purpose of certain pre-qualified home improvements. The Company decided
to pursue this business line, which was a natural extension of its home equity
loan business, because of its highly fragmented nature and the higher cost of
funds through which these assets are typically being financed.
The Company executed its first securitization in October 1993 in the form of
a conduit where it financed and placed the Title I home improvement loans on
behalf of conduit participants. In addition to executing several additional
conduit transactions, the Company established a Strategic Alliance with one of
the conduit participants. Including three securitizations for its Strategic
Alliance client, the Company had executed seven Title I home improvement loan
securitizations for $245 million through June 30, 1996, including the first such
securitization to be rated AAA/Aaa utilizing a third party financial guarantor.
The Company's strategy is to facilitate the growth of its Strategic Alliance
client through securitization, expanding its presence nationwide, building
economies of scale and helping to create a low cost, high volume producer in an
otherwise fragmented industry.
Franchise Loans. Franchise loans represent loans to franchisees of top tier
national restaurant chains and other franchise chains. In the Company's
securitization of franchise loans, the underwriting
55
<PAGE>
process focuses on the franchisee borrower's ability to generate cash flow from
the particular restaurant as opposed to more traditional financing, which is
based upon hard collateral values or the credit rating of the franchisor.
In 1993, the Company identified this niche opportunity and developed this
business line in conjunction with a Strategic Alliance client. The Company
believes that its warehouse financing, hedging, structured finance and placement
capabilities combined with its unique approach to underwriting and credit
analysis, will provide it with a competitive advantage. Since 1993 through June
30, 1996, the Company has financed over $291 million of franchise loans. The
Company's first securitization of this asset class was in January 1994 for $48
million and was rated A- by Duff and Phelps. The three subsequent deals were
rated AAA/Aaa and represented the first securitizations of franchise loans to
utilize a third party financial guarantor. Since 1993, the $291 million of
franchise loans financed, securitized and placed by the Company have experienced
no delinquencies or losses.
Commercial/Multi-Family Loans. In 1993, the Company established a Commercial
Real Estate Conduit ("CRE Conduit") to satisfy a financing need in the
marketplace -- the financing of $0.5 to $10 million loans secured by commercial
properties including loans on multi-family dwellings, self storage facilities,
assisted living and other health related facilities, retail and industrial
buildings.
The CRE Conduit purchases commercial real estate loans suitable for
securitization and sale into the capital markets. The Company manages the
aggregation and underwriting of the loans through Strategic Alliances with
established lending companies. The Company structured and placed these loans in
two whole loan sales which at the time of sale provided more favorable pricing
than securitization. The Company's strategy is to grow the CRE Conduit by
continuing to add additional qualified commercial lenders and by continuing to
enhance its product offerings.
Sub-Prime Auto Loans and Leases. Sub-prime automobile lending represents
loans to credit-impaired borrowers. Like the home equity loan market, the
Company believes that prudent loan underwriting and pricing, coupled with strong
servicing and collections, mitigates the risk of the sub-prime credit borrower.
In November 1993, the Company established a Strategic Alliance with an auto
finance company with extensive management experience in originating,
underwriting and servicing securitized sub-prime auto loans. The Company helped
finance the start-up by providing an attractively priced warehouse line and
access to capital to credit enhance this client's first securitization. In
return, the Company received a warrant and participated in the client's first
auto loan securitization of $39 million in September 1994.
The Company believes that significant opportunities still exist in the
sub-prime auto loan and lease market due to: (i) the higher cost of funds
through which these assets are typically being financed; (ii) the early stages
of development of securitization in this industry; and (iii) the Company's
ability to identify strong management teams and provide its unique mix of
products and services.
Small Business Loans. Small business loans represent loans to small
businesses collateralized by accounts receivable that are not guaranteed by the
Small Business Administration or any other government agency. The small business
loan industry is highly fragmented and is currently serviced by both large and
small finance companies and commercial banks. While the commercial banks and
larger finance companies are well capitalized, they typically focus on loan
sizes in excess of $1.5 million due to efficiencies and economies of scale.
Smaller finance companies focus on loan sizes up to $1.5 million but are
typically capital constrained and/or do not have efficient systems capable of
tracking the cash flows on the underlying collateral and collecting this data as
a management tool to analyze and support portfolio performance over time -- a
critical capability to satisfy rating agencies and investors in accessing the
securitization market.
In March 1995, the Company established a Strategic Alliance with a finance
company that originates, underwrites and services small business loans in the
$0.5 million to $1.5 million range for
56
<PAGE>
itself and institutional investors. The Company believes that this Strategic
Alliance client has the management expertise, track record, capital and systems
sophistication to be able to access the securitization market. The Company has
provided a $50 million warehouse line and brought its first securitization of
small business loans to market during the last quarter of fiscal 1996 for $20
million.
Timeshare Loans. Timeshare loans are made to borrowers for the purchase of a
real property interest in specific units at vacation resort properties. A number
of major corporations have become involved in the industry in recent years, and
through their advertising and marketing efforts, are increasing the public's
awareness of the benefits of timesharing. Because timeshare financing is still a
relatively new and fragmented industry, the Company believes that it provides
significant growth potential to the extent that (i) the credit analysis and cash
flow characteristics are similar to traditional home equity loans and (ii) the
lower cost of funds and greater operating leverage from securitization can be
applied successfully.
The Company has a Strategic Alliance client that develops resort properties
for timeshare sales, finances ownership interests in such properties and manages
the operations of the resort properties and their related homeowner's
associations. The Company has provided a warehouse facility in return for a
committed flow of securitizable timeshare loans and anticipates bringing its
first transaction to market in 1996.
Warrants and Stock Ownership
In certain of its Strategic Alliances, the Company may receive Strategic
Alliance Equity Interests. All Strategic Alliance Equity Interests existing
prior to the consummation of the IPO were retained by Continental Grain, and
therefore, these assets are not reflected in the Company's Consolidated
Financial Statements included herein. The Company currently holds one Strategic
Alliance Equity Interest. Based on its prior experience, the Company does not
anticipate that any Strategic Alliance Equity Interest that it may acquire in
the future will have any effect on the Company's financial position or results
of operations until the business of the Strategic Alliance client matures, which
typically takes several years. In addition, the Company may, from time to time,
make a direct cash equity or subordinated debt investment in a Strategic
Alliance client.
COMPETITION
The home equity loan market is highly competitive. The Company faces
competition from other consumer finance lenders, mortgage lenders, mortgage
brokers, commercial banks, mortgage banks, large securities firms, smaller
boutique securities firms, credit unions, thrift institutions, credit card
issuers and finance companies. Many of these competitors are substantially
larger and have more capital and other resources than the Company. Competition
can take many forms, including convenience in obtaining a loan, customer
service, marketing and distribution channels and interest rates charged to
borrowers. In addition, the current level of gains realized by the Company and
its competitors on the sale of their home equity loans could attract additional
competitors into this market with the possible effect of lowering gains that may
be realized on the Company's future loan sales. The principal competitive
factors influencing the Company's business are its professional staff, the
Company's reputation in the marketplace, its existing client relationships, the
ability to commit capital to client transactions and its mix of market
capabilities.
Currently, some traditional financial institutions are aggressively
promoting and pricing home equity loans. The Company does not believe that this
trend has had a material impact on its competitive position because the
Company's success is tied to its emphasis on timely customer service, on
attracting borrowers whose needs are not met by traditional financial
institutions and on the equity value of the property securing various types of
loans. Nevertheless, there can be no assurance that the Company will not face
increased competition from traditional financial institutions attempting to
enter into the Company's market.
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<PAGE>
In fiscal 1996, 75% of the total home equity loans purchased and originated
by ContiMortgage were wholesale loans. Wholesale loans are expected to remain a
significant part of the Company's home equity loans production program. As a
purchaser of wholesale loans, the Company is exposed to fluctuations in the
volume and cost of wholesale loans resulting from competition from other
purchasers of such loans, market conditions and other factors.
EMPLOYEES
At June 30, 1996 the Company had an aggregate of 515 employees. None of the
Company's employees is represented by a labor union. The Company believes that
its relations with its employees are good.
PROPERTIES
The Company's principal executive offices and the offices of ContiTrade and
ContiFinancial Services are presently located at 277 Park Avenue, New York, New
York 10172 and occupy approximately 18,000 square feet under a sublease with
Continental Grain. See "Certain Transactions -- Current Relationships with
Continental Grain--Sublease." In Horsham, Pennsylvania, ContiMortgage's
headquarters and regional office occupy approximately 58,800 square feet under
leases with third parties that expire in April 2001. ContiMortgage's regional
offices in Atlanta, Georgia, Phoenix, Arizona, Oakbrook, Illinois and
Pleasanton, California are occupied under leases with third parties that expire
in September 1999, January 1998, January 2000 and December 1999, respectively.
ContiFinancial Services and ContiTrade also occupy office space in Santa Monica,
California under a lease with a third party that expires in September 1999. The
Company believes that its present facilities are adequate for its current needs.
LEGAL PROCEEDINGS
On April 14, 1996, a class action lawsuit was filed against ContiMortgage in
the United States District Court for the District of Massachusetts. The
complaint alleges certain violations by ContiMortgage of state and Federal law
in connection with the alleged payment of certain fees. On May 29, 1996, the
plaintiffs filed an amended complaint in this case. No discovery in this action
has been initiated as of the date of this Prospectus. The Company does not
believe that the lawsuit is likely to have a materially adverse effect on the
consolidated financial position or results of operations of the Company.
In July 1995, Wellington Funding & Business Consultants, Inc. ("Wellington")
commenced an action against Continental Grain, ContiTrade Services Corporation
and ContiFinancial Services in the Supreme Court of the State of New York,
County of New York (the "Wellington Litigation"). This action involved a
previously discontinued business. Wellington asserted claims for breach of
contract and defamation. On July 3, 1996, after a two week trial, the jury
returned a verdict in favor of Wellington for $11 million in compensatory and
$30 million in punitive damages. The defendants believe the verdict is against
the weight of the evidence and contrary to law and intend to seek to have the
verdict overturned by the trial court or on appeal.
Under an indemnity from Continental Grain to ContiFinancial, Continental
Grain is obligated to indemnify ContiFinancial for any loss arising from the
Wellington Litigation. Based on the indemnity from Continental Grain and after
consultation with legal counsel, the Company believes that the Wellington
Litigation will not have a material adverse effect on the consolidated financial
position or results of operations of the Company.
In addition, the Company has been named as a defendant in various legal
actions arising from the conduct of its normal business activities. Although the
amount of any liability that could arise with respect to these actions cannot be
accurately predicted, in the opinion of the Company, any such liability will not
have a material adverse effect on the consolidated financial position or results
of operation of the Company.
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<PAGE>
REGULATION
General. The Company's businesses are subject to extensive regulation in the
U.S. at both the Federal and state level. In the Company's home equity loan and
financing businesses, regulated matters include loan origination, credit
activities, maximum interest rates and finance and other charges, disclosure to
customers, the terms of secured transactions, the collection, repossession and
claims-handling procedures utilized by the Company, multiple qualification and
licensing requirements for doing business in various jurisdictions and other
trade practices. As part of the Company's financing and asset securitization
business, ContiFinancial Services is required to register as a broker-dealer
with certain Federal and state securities regulatory agencies and is a member of
the NASD.
Truth in Lending. The Truth in Lending Act ("TILA") and Regulation Z
promulgated thereunder contain disclosure requirements designed to provide
consumers with uniform, understandable information with respect to the terms and
conditions of loans and credit transactions in order to give them the ability to
compare credit terms. TILA also guarantees consumers a three day right to cancel
certain credit transactions including loans of the type originated by the
Company. Management of the Company believes that it is in compliance with TILA
in all material respects. If the Company were found not to be in compliance with
TILA, aggrieved borrowers could have the right to rescind their mortgage loan
transactions and to demand the return of finance charges paid to the Company.
In September 1994, the Riegle Community Development and Regulatory
Improvement Act of 1994 (the "Riegle Act") was enacted. Among other things, the
Riegle Act makes certain amendments to TILA. The Riegle Act generally applies to
mortgage loans (other than mortgage loans to finance the acquisition or initial
construction of a dwelling) with (i) total points and fees upon origination
exceeding eight percent of the loan amount (as adjusted for changes in the
Consumer Price Index) or (ii) an annual percentage rate of more than ten
percentage points higher than comparably maturing United States Treasury
securities ("Covered Loans"). The Company estimates that approximately 15% of
the loans originated or purchased by the Company are Covered Loans.
The Riegle Act imposes additional disclosure requirements on lenders
originating Covered Loans and prohibits lenders from 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. The Company believes that
only a small portion of loans originated in fiscal 1996 were of the type that,
unless modified, are prohibited by the Riegle Act. The Company is currently
applying underwriting criteria to all Covered Loans that take into consideration
the borrower's ability to repay.
The Riegle Act also prohibits lenders from 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 Company reported $0.2 million, $0.4 million and $1.4 million in prepayment
fee revenue in fiscal 1994, 1995 and 1996, respectively. The Company will
continue to collect prepayment fees on loans originated prior to the October
1995 effectiveness of the Riegle Act and on non-Covered Loans as well as on
Covered Loans in permitted circumstances. Because the Riegle Act did not become
effective until October 1995, the level of prepayment fee revenue was not
substantially affected in fiscal 1996, but the level of prepayment fee revenue
may decline in future years. The Riegle Act imposes other restrictions on
Covered Loans, including restrictions on balloon payments and negative
amortization features, which the Company does not believe will have a material
impact on its operations.
Other Lending Laws. The Company is also required to comply with the Equal
Credit Opportunity Act of 1974, as amended ("ECOA"), which prohibits creditors
from discriminating against applicants on the basis of race, color, sex, age or
marital status. Regulation B promulgated under ECOA restricts creditors from
obtaining certain types of information from loan applicants. It also requires
certain disclosures by the lender regarding consumer rights and requires lenders
to advise applicants of the
59
<PAGE>
reasons for any credit denial. In instances where the applicant is denied credit
or the rate or charge for loans increases as a result of information obtained
from a consumer credit agency, another statute, the Fair Credit Reporting Act of
1970, as amended, requires lenders to supply the applicant with the name and
address of the reporting agency. The Company is also subject to the Real Estate
Settlement Procedures Act of 1974, as amended, and is required to file an annual
report with the Department of Housing and Urban Development pursuant to the Home
Mortgage Disclosure Act.
In addition, the Company is subject to various other federal and state laws,
rules and regulations governing, among other things, the licensing of, and
procedures which must be followed by, mortgage lenders and servicers, and
disclosures which must be made to consumer borrowers. Failure to comply with
such laws may result in civil and criminal liability and may, in some cases,
give consumer borrowers the right to rescind their mortgage loan transactions
and to demand the return of finance charges paid to the Company.
In addition, certain of the loans purchased by the Company, such as Title I
home improvement loans, are insured by an agency of the federal government. Such
loans are subject to extensive government regulation.
Environmental Liability. 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.
Broker/Dealer. In the Company's capital management services business,
ContiFinancial Services acts as a placement agent and underwriter for public and
private offerings of asset-backed securities. As a result, ContiFinancial
Services is registered as a broker-dealer with the Commission, the State of
California and the State of New York and is a member of the NASD. ContiFinancial
Services is subject to regulation by the Commission, by the NASD and by state
securities administrators in matters relating to the conduct of its securities
business, including record keeping and reporting requirements, supervision and
licensing of employees and obligations to customers. Additional legislation and
regulations, including those relating to the activities of affiliates of
broker-dealers, changes in rules promulgated by the Commission or other
regulatory authorities and the NASD, changes in the interpretation or
enforcement of existing laws and rules or changes in the special exemption of
ContiFinancial Services may adversely affect the manner of operation and
profitability of the Company.
As a registered broker-dealer, ContiFinancial Services is subject to the
Commission's net capital rules. These rules, which specify minimum net capital
requirements for registered broker-dealers, are designed to ensure that
broker-dealers maintain adequate regulatory capital in relation to their
liabilities and the size of their customer business and have the effect of
requiring that a substantial portion of their assets be kept in cash or highly
liquid investments. Because it acts primarily as a private placement agent in
asset-backed securities offerings, ContiFinancial Services operates under a less
restrictive net capital standard. To the extent that the Company elects to
expand its public underwriting capacity, it would be required to substantially
increase the net capital of ContiFinancial Services. Under such circumstances,
there can be no assurance that the Company will have the capital necessary to
increase such net capital.
Department of Justice Investigation of Continental Grain. The U.S.
Department of Justice is engaged in an investigation into Continental Grain's
practices with respect to its participation in U.S. government-sponsored
programs that encouraged the export of U.S. agricultural commodities to Iraq
during the period prior to Iraq's invasion of Kuwait. The activities that are
the subject of the investigation do not involve the Company, its business or its
employees, officers or directors. While Continental Grain believes that it and
its employees have been in material compliance with the government program
requirements, it is currently in settlement discussions with the Department of
Justice regarding the claims asserted in the grand jury investigation and
companion civil claims. The
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<PAGE>
settlement currently under discussion would likely include a plea of guilty by a
foreign affiliate of Continental Grain to certain charges and the payment of
fines and other payments to the government that, in Continental Grain's opinion,
while material in amount, would not have a material adverse effect on the
relationship between Continental Grain and the Company or require Continental
Grain to sell any of its interest in the Company. If these discussions do not
result in a settlement, Continental Grain expects that criminal and civil
charges will be brought in connection with these claims. Continental Grain
believes it has meritorious defenses in this matter and would vigorously defend
its position in the event the matter is not settled. The Company does not
believe that the Department of Justice investigation of Continental Grain is
likely to materially adversely affect the Company or its business. See "Certain
Transactions -- Department of Justice Investigation of Continental Grain."
Future Laws. Because each of the Company's businesses is highly regulated,
the laws, rules and regulations applicable to the Company are subject to regular
modification and change. There are currently proposed various laws, rules and
regulations which, if adopted, could impact the Company. There can be no
assurance that these proposed laws, rules and regulations, or other such laws,
rules or regulations, will not be adopted in the future which could make
compliance much more difficult or expensive, restrict the Company's ability to
originate, broker, purchase or sell loans, further limit or restrict the amount
of commissions, interest and other charges earned on loans originated, brokered,
purchased or sold by the Company, or otherwise adversely affect the business or
prospects of the Company.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officers of the Company and their respective
ages and positions are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------- --- -------------------------------------------------------
<S> <C> <C>
James E. Moore............... 49 President, Chief Executive Officer and Director and
Nominee for Director
Robert A. Major.............. 50 Executive Vice President of the Company and President
and Chief Executive Officer of ContiMortgage
Peter Abeles................. 41 Senior Vice President of the Company and Managing
Director of ContiFinancial Services
Robert J. Babjak............. 53 Senior Vice President of the Company and Senior Vice
President and Chief Operating Officer of ContiMortgage
A. John Banu................. 41 Senior Vice President of the Company and Managing
Director of ContiFinancial Services
Daniel J. Egan............... 41 Senior Vice President of the Company and Senior Vice
President of ContiMortgage
Glenn S. Goldman............. 34 Senior Vice President of the Company and Managing
Director of ContiFinancial Services
Scott M. Mannes.............. 37 Senior Vice President of the Company and Managing
Director of ContiFinancial Services
James E. Pedrick............. 49 Senior Vice President of the Company and Vice President
of ContiMortgage
Jerome M. Perelson........... 57 Senior Vice President and Chief Financial Officer
Michael J. Festo............. 44 Vice President, Human Resources
Alan L. Langus............... 49 Vice President, Chief Counsel and Secretary
Susan E. O'Donovan........... 35 Vice President and Controller
James J. Bigham.............. 58 Director and Chairman of the Board
Paul J. Fribourg............. 42 Director
John W. Spiegel.............. 55 Director
Donald L. Staheli............ 64 Director and Nominee for Director
John P. Tierney.............. 64 Director
Lawrence G. Weppler.......... 51 Director
Daniel J. Willett............ 46 Director
</TABLE>
James E. Moore. Mr. Moore has been President, Chief Executive Officer and a
Director of the Company since October 1995. He has been President and Managing
Director of ContiFinancial Services since 1988 and Chairman of ContiMortgage
since 1990. Mr. Moore joined ContiFinancial Services in 1983 as an investment
banker. He is also a Director of Student Loan Marketing Association (a non-bank
finance company).
Robert A. Major. Mr. Major has been Executive Vice President of the Company
since October 1995, President and a Director of ContiMortgage since July 1995
and Chief Executive Officer of ContiMortgage since June 1996. Prior to becoming
Chief Executive Officer, Mr. Major was the Chief Operating Officer, a position
he had held since July 1995. From February 1993 to July 1995, Mr. Major was
Chief Operating Officer for NationsCredit Corporation (a diversified financial
services company). From April 1990 to February 1993, Mr. Major was Chief
Executive Officer of Chrysler First (a consumer finance company acquired by
NationsBank Corporation in February 1993).
Peter Abeles. Mr. Abeles has been Senior Vice President of the Company since
October 1995. He joined ContiFinancial Services in 1989 and was appointed
Managing Director of ContiFinancial
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<PAGE>
Services in August 1992 after serving as Vice President, Corporate Finance from
October 1989 to August 1992.
Robert J. Babjak. Mr. Babjak has been Senior Vice President of the Company
since October 1995. He was appointed Chief Operating Officer of ContiMortgage in
June 1996 prior to which he was Senior Vice President, Chief Credit Officer, a
position he had held since October 1995 when he was also appointed as a Director
of ContiMortgage. Prior to October 1995 he was Vice President, Chief Credit
Officer of ContiMortgage, a position he had held since April 1992. Mr. Babjak
joined ContiMortgage in June 1991 as Chief Credit Officer. From 1989 to June
1991, Mr. Babjak was a Senior Loan Officer of Mutual Mortgages Services, Inc.
A. John Banu. Mr. Banu has been Senior Vice President of the Company since
October 1995. He joined ContiFinancial Services in 1984 as Vice President, Debt
Placement and was appointed Managing Director of ContiFinancial Services in
August 1992.
Daniel J. Egan. Mr. Egan has been Senior Vice President of the Company since
October 1995. He was appointed Senior Vice President, Chief Financial Officer
and a Director of ContiMortgage in 1995, prior to which he was Vice President,
Chief Financial Officer of ContiMortgage, a position he had held since April
1991. From October 1990 to April 1991, Mr. Egan was Controller of ContiMortgage.
Glenn S. Goldman. Mr. Goldman has been Senior Vice President of the Company
since October 1995. He joined ContiFinancial Services in April 1990 and was
appointed Managing Director of ContiFinancial Services in August 1992 after
holding the position of Vice President, Corporate Finance. From 1986 to 1990,
Mr. Goldman was an Assistant Vice President of Merrill Lynch & Company.
Scott M. Mannes. Mr. Mannes has been Senior Vice President of the Company
since October 1995. He joined ContiFinancial Services in September 1990 and was
appointed Managing Director of ContiFinancial Services in August 1992 after
holding the position of Vice President, Corporate Finance. Prior to joining
ContiFinancial Services, Mr. Mannes was associated with the Financial Guarantee
Insurance Company.
James E. Pedrick. Mr. Pedrick has been Senior Vice President of the Company
since October 1995. He has been Vice President, Production of ContiMortgage
since October 1990. Mr. Pedrick has resigned from these positions effective as
of August 1996.
Jerome M. Perelson. Mr. Perelson has been Senior Vice President and Chief
Financial Officer of the Company since October 1995. Mr. Perelson joined
Continental Grain in 1971. He was appointed Managing Director and Chief Credit
Officer of ContiTrade Services Corporation in August 1989 and President in
November 1993, after serving as Corporate Deputy Treasurer of Continental Grain.
Mr. Perelson also is a Director of ContiMortgage and ContiFinancial Services.
Michael J. Festo. Mr. Festo has been Vice President, Human Resources of the
Company since October 1995. He was appointed Vice President, Human Resources of
ContiTrade Services Corporation in July 1990. Mr. Festo held a number of staff
and executive human resource positions within Continental Grain since joining
Continental Grain in 1974.
Alan L. Langus. Mr. Langus has been Vice President, Chief Counsel and
Secretary of the Company since October 1995. He was Vice President and Chief
Counsel of ContiTrade Services Corporation between December 1989 and October
1995.
Susan E. O'Donovan. Ms. O'Donovan has been Vice President and Controller of
the Company since October 1995. She joined ContiFinancial Services as Controller
in April 1991. From August 1983 until March 1991, Ms. O'Donovan was an auditor
at Price Waterhouse LLP.
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<PAGE>
James J. Bigham. Mr. Bigham has been a Director of the Company since October
1995. He also has been a Director, Executive Vice President and Chief Financial
Officer of Continental Grain since August 1989 and a Director of ContiMortgage
since 1990.
Paul J. Fribourg. Mr. Fribourg has been a Director of the Company since
October 1995. He has been President and Chief Operating Officer of Continental
Grain since June 1994. From April 1990 to June 1994, Mr. Fribourg served as
Executive Vice President of the Bulk Commodities Group of Continental Grain. Mr.
Fribourg is the son of Michel Fribourg. See "Principal Stockholders."
John W. Spiegel. Mr. Spiegel has been a Director of the Company and Chairman
of the Audit Committee since February 1996. Mr. Spiegel has been Executive Vice
President and Chief Financial Officer of SunTrust Banks, Inc. since 1985 and
Treasurer of Trust Company of Georgia since 1978. Mr. Spiegel also is currently
a member of the Boards of Directors of Rock-Tenn Company (a manufacturer of
paperboard products) and Student Loan Marketing Association (a non-bank finance
company).
Donald L. Staheli. Mr. Staheli has been a Director of the Company since
October 1995 and Chairman of the Compensation Committee since February 1996. He
has been Chairman of the Board of Directors of Continental Grain since June 1994
and Chief Executive Officer of Continental Grain since 1988. From 1988 until
June 1994, Mr. Staheli served as President and a Director of Continental Grain.
Mr. Staheli serves as a Director of Prudential Life Insurance Company of America
and Bankers Trust Company.
John P. Tierney. Mr. Tierney has been a Director of the Company and Chairman
of the Independent Directors' Committee since February 1996. From 1987 until his
retirement in December 1994, Mr. Tierney was the Chairman of the Board and Chief
Executive Officer of Chrysler Financial Corporation (a non-bank finance
company). Mr. Tierney serves as a Director of RCSB Financial, Inc. (a holding
company for Rochester Community Savings Bank).
Lawrence G. Weppler. Mr. Weppler has been a Director of the Company since
October 1995. He also has been Vice President and General Counsel-Corporate of
Continental Grain since April 1993. From 1980 to April 1993, Mr. Weppler served
as Deputy General Counsel of Continental Grain.
Daniel J. Willett. Mr. Willett has been a Director of the Company since
October 1995. Mr. Willett also has been Vice President and Treasurer of
Continental Grain since March 1990.
The Company has formed an Audit Committee, a Compensation Committee, an
Independent Directors' Committee and a 1995 Stock Plan Committee. The Audit
Committee monitors the internal and external auditing processes of the Company.
The Compensation Committee reviews the compensation of the executive officers of
the Company. The Independent Directors' Committee is comprised of independent
directors who review and pass on the fairness of all material agreements and
material transactions between Continental Grain and the Company. See "Certain
Transactions -- Current Relationships with Continental Grain." The 1995 Stock
Plan Committee will administer the 1995 Stock Plan.
DIRECTOR COMPENSATION
The Company's policy is not to pay any additional compensation to directors
who are also employees of the Company and its subsidiaries. Non-employee
directors of the Company (including officers of Continental Grain) receive a
$23,000 annual fee for serving as a member of the Board of Directors, a $9,000
annual fee for attending all meetings of the Board of Directors in any fiscal
year and a $3,000 annual fee for acting as a chairperson of a committee of the
Board of Directors. All non-employee directors who are employees of Continental
Grain transfer any fees paid to them to Continental Grain in accordance with
Continental Grain's corporate policy.
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<PAGE>
Under the Company's Directors Retainer Fee Plan (the "Directors Plan"), a
director who is not an employee of the Company or an affiliate (an "Eligible
Director") may elect to receive payment of all or any portion of his annual cash
retainer and meeting fees (including fees for chairing committees) either
currently, in cash or shares of Common Stock, or may elect to defer receipt of
any such payment.
Deferrals are invested, at the election of the Eligible Director, in (i) a
Stock Unit Account, to which earnings are credited based on dividends payable
with respect to shares of Common Stock, or (ii) a Cash Account, to which
interest is credited annually at the prime rate as published in The Wall Street
Journal prior to the beginning of each fiscal year of the Company. As elected by
the Eligible Director, distributions are made on the first day of the month
following the director's: (i) death; (ii) disability; (iii) termination of
service or retirement; (iv) a fixed date in the future; or (v) the earliest to
occur of the foregoing. Distributions made from an Eligible Director's Stock
Unit Account will be paid in a single payment in the form of shares of Common
Stock (and cash representing any fractional share); distributions from an
Eligible Director's Cash Account will be paid in a single cash payment or in up
to 15 annual installments, at the election of the Eligible Director.
EXECUTIVE COMPENSATION
The information set forth below describes the components of the total
compensation of the Chief Executive Officer and the four most highly compensated
executive officers of the Company, based on fiscal 1996 salary and annual
bonuses (the "Named Executive Officers"). The principal components of such
individuals' current cash compensation are the annual base salary and annual
bonus included in the Summary Compensation Table. Also described below is the
future compensation such individuals can receive under the Company's retirement
plans.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
AWARDS PAYOUTS
-------------------- ----------
RESTRICTED STOCK LTIP
NAME FISCAL YEAR SALARY BONUS(A)(B) STOCK(C) OPTIONS PAYOUTS(D) OTHER(E)
- ------------------------------ ----------- -------- ----------- ---------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
James E. Moore................ 1996 $243,333 $ 2,400,000 $7,683,768 479,420 $ -- $354,500
Chief Executive Officer 1995 230,000 1,000,000 -- -- 80,000 4,500
Robert A. Major............... 1996 141,666 2,000,000 -- 319,615 -- --
Executive Vice President/ 1995 -- -- -- -- -- --
Chief Executive Officer,
ContiMortgage
Robert J. Babjak.............. 1996 111,400 1,750,000 2,008,256 159,805 -- --
Senior Vice President/ 1995 102,800 795,865 -- -- -- --
Chief Operating Officer,
ContiMortgage
A. John Banu.................. 1996 140,000 1,395,000 3,318,000 157,145 -- 254,200
Senior Vice President/ 1995 130,000 710,000 -- -- -- 3,900
Managing Director,
ContiFinancial Services
Daniel J. Egan................ 1996 93,425 1,500,000 2,008,256 159,805 -- 2,802
Senior Vice President 1995 86,850 580,500 -- -- -- 2,467
</TABLE>
- ------------
<TABLE>
<C> <S>
(a) Includes bonuses paid or accrued and amounts deferred by the Named Executive Officers
pursuant to the Continental Grain Deferred Compensation Plan.
(b) Includes amounts paid or accrued for bonuses pursuant to the ContiFinancial Services
Incentive Compensation Plan or the ContiMortgage Incentive Compensation Plan.
</TABLE>
65
<PAGE>
<TABLE>
<C> <S>
(c) Restricted stock awards are shown at market value on date of grant. The number and
value of the aggregate restricted stock holdings at March 31, 1996 for each person
named is as follows: Mr. Moore, 292,715 shares with a market value of $9,147,343, Mr.
Babjak, 76,505 shares with a market value of $2,390,781, Mr. Banu, 126,400 shares with
a market value of $3,950,000 and Mr. Egan, 76,505 shares with a market value of
$2,390,781. Pursuant to the 1995 Stock Plan, certain employees of the Company were
granted an aggregate of 1,330,532 shares of "restricted" Common Stock. The restricted
shares will, subject to the reporting person's continued employment with the Company,
vest as follows: 15% as of the date of grant; 25% as of March 31, 1997; 20% as of March
31, 1998; 20% as of March 31, 1999; and 20% as of March 31, 2000. In addition, the
restricted shares will vest upon a change of control, as defined in the 1995 Long Term
Stock Incentive Plan and are subject to accelerated vesting in the event of termination
of the reporting person's employment for certain reasons.
(d) Includes payments made pursuant to awards granted under the Continental Grain
Performance Incentive Plan, which has been terminated. The Continental Grain
Performance Incentive Plan granted annual performance units with a value of $1,000 per
unit tied to the profitability of ContiFinancial Services and Continental Grain over
three-year periods. Awards were paid in cash at the end of each three-year performance
cycle for attainment of at least 91% of the cumulative targeted earnings for the cycle.
Award values range from $100 per unit at 91% goal attainment to $2,000 per unit at 150%
goal attainment.
(e) Represents the Company match under the Continental Grain Savings Plan, a defined
contribution plan established under section 401(k) of the Internal Revenue Code of
1986, as amended, in 1996 for Messrs. Moore, $4,500; Banu, $4,200 and Egan, $2,802 and
payments made pursuant to the ContiFinancial Services Long Term Incentive Compensation
Plan for Messrs. Moore, $350,000 and Banu, $250,000. The ContiFinancial Services Long
Term Incentive Compensation Plan provides for the creation of a pool funded with
one-third of the value realized by the sale or deemed sale of certain shares of stock,
warrants, rights or other equity participation arrangements obtained by subsidiaries of
the Company which are owned by Continental Grain and paid by Continental Grain to
participants.
</TABLE>
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<PAGE>
CONTINENTAL GRAIN SALARIED EMPLOYEE RETIREMENT PLAN
The following table shows the estimated annual retirement benefits payable
at normal retirement age (65) to a person retiring with the indicated highest
consecutive five year average direct base salary and years of credited service,
on a straight life annuity basis, under the Continental Grain Salaried Employee
Retirement Plan (the "Salaried Retirement Plan"), as supplemented by the
Continental Grain Supplemental Employee Retirement Plan (the "Supplemental
Plan"), each as described below:
<TABLE>
<CAPTION>
ESTIMATED ANNUAL BENEFITS AT RETIREMENT WITH
INDICATED YEARS OF CREDITED SERVICE (A)(B)
---------------------------------------------------------
HIGHEST CONSECUTIVE YEARS OF SERVICE
FIVE YEAR AVERAGE ---------------------------------------------------------
DIRECT BASE SALARY 5 10 15 20 25
- ------------------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
$100,000....... $ 7,102 $14,204 $21,306 $ 28,408 $ 35,510
$150,000....... $10,977 $21,954 $32,931 $ 43,908 $ 54,885
$200,000....... $14,852 $29,704 $44,556 $ 59,408 $ 74,260
$250,000....... $18,727 $37,454 $56,181 $ 74,908 $ 93,635
$300,000....... $22,602 $45,204 $67,806 $ 90,408 $113,010
$350,000....... $26,477 $52,954 $79,431 $105,908 $132,385
$400,000....... $30,352 $60,704 $91,056 $121,408 $151,760
</TABLE>
- ------------
<TABLE>
<C> <S>
(a) Estimated retirement benefits described above include benefits under Continental Grain's
tax-qualified retirement plan and under the related non-qualified excess benefit plan
but do not include a refund of (pre-1974) employee contributions, if any, and any cost
of living adjustments provided under the plans.
(b) Estimated benefits assume retirement at age 65.
</TABLE>
The Company participates in the Salaried Retirement Plan covering salaried
employees of Continental Grain and participating subsidiaries (including the
Company and its subsidiaries) which is intended to meet the requirements of
section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code").
Generally, under the Salaried Retirement Plan participants with five years of
service become entitled to receive a basic retirement benefit upon retirement at
age 65 equal to a percentage of final average earnings (both above and below the
social security wage base) multiplied by years of service with the employers
participating in the plan. Compensation under the plan generally includes base
salary and deferrals under any Code section 401(k) savings plan or Code section
125 cafeteria plan, and is subject to limits imposed by the Code, including Code
section 401(a)(17) (generally, limiting compensation to $150,000 per year, as
indexed). Payments are made in the form of a joint and survivor annuity or
single life annuity, unless otherwise elected by the participant in accordance
with the terms of the plan. The plan contains provisions for early retirement
payments, payments upon disability, cost-of-living adjustments for benefits
earned prior to September 1985 and spousal death benefits. As permitted by
ERISA, Continental Grain Company adopted the Supplemental Plan which provides
payments by Continental Grain of certain amounts which eligible employees would
have received under the Salaried Retirement Plan, if eligible compensation were
not limited to $150,000 in 1996 and there were no restrictions under the Code.
The estimated annual benefits payable under the Salaried Retirement Plan would
be based on average compensation of $216,750, $200,000, $88,148, $118,550 and
$77,224 as of March 31, 1996, and 12.6 years, N/A, 3.7 years, 10.5 years and 4.4
years of service as of March 31, 1996 for each of Messrs. Moore, Major, Babjak,
Banu and Egan, respectively.
67
<PAGE>
OPTION GRANTS IN FISCAL YEAR 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT
OPTIONS ASSUMED ANNUAL RATES OF
GRANTED STOCK PRICE APPRECIATION
NUMBER OF TO EMPLOYEES IN FOR OPTION TERM(B)
OPTIONS FISCAL EXERCISE PRICE EXPIRATION ------------------------
NAME GRANTED(A) YEAR 1996 ($ PER SHARE) DATE 5% 10%
- ------------------------- ------------ --------------- --------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
James E. Moore........... 468,945 18.2% $21.00 2/09/06 $6,190,074 $15,690,899
10,475 18.2% $26.25 2/14/06 172,837 446,339
Robert A. Major.......... 312,632 12.1% $21.00 2/09/06 4,126,742 10,460,666
6,983 12.1% $26.25 2/14/06 115,219 297,545
Robert J. Babjak......... 156,314 6.1% $21.00 2/09/06 2,063,344 5,230,266
3,491 6.1% $26.25 2/14/06 57,601 148,751
A. John Banu............. 153,712 6.0% $21.00 2/09/06 2,028,998 5,143,203
3,433 6.0% $26.25 2/14/06 56,644 146,280
Daniel J. Egan........... 156,314 6.1% $21.00 2/09/06 2,063,344 5,230,266
3,491 6.1% $26.25 2/14/06 57,601 148,751
</TABLE>
- ------------
<TABLE>
<C> <S>
(a) Granted on February 14, 1996. These options have a ten-year term and will be subject to
the reporting person's continued employment with the Company and vest as follows: 50%
upon the earlier to occur of any subsequent public offering by the Company of the
Company's equity securities and March 31, 2000; 7.5% as of the date of grant; 12.5% as
of March 31, 1997; 10% as of March 31, 1998; 10% as of March 31, 1999; and 10% as of
March 31, 2000. In addition, the options will vest upon a change of control, as defined
in the 1995 Long Term Stock Incentive Plan.
(b) These values were calculated assuming a 5% and 10% annual appreciation of the price of
the security at the time of the grant over the ten-year term of the option. The initial
grant was made at $21.00 per share and a subsequent grant was made effective with the
closing of the IPO as a result of the underwriters' full exercise of their over
allotment option and exercise price of $26.25 per share.
</TABLE>
AGGREGATED OPTION EXERCISES IN THE FISCAL YEAR 1996
AND FISCAL YEAR 1996 OPTION VALUE
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN
OPTIONS THE MONEY OPTIONS AT FISCAL
AT FISCAL YEAR END YEAR END(A)
--------------------------- ---------------------------
SHARES
ACQUIRED VALUE
IN EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James E. Moore................... -- -- 35,955 443,465 $ 364,417 $ 4,494,643
Robert A. Major.................. -- -- 23,970 295,645 242,946 2,996,446
Robert J. Babjak................. -- -- 11,984 147,821 121,465 1,498,207
A. John Banu..................... -- -- 11,785 145,360 119,447 1,473,266
Daniel J. Egan................... -- -- 11,984 147,821 121,465 1,498,207
</TABLE>
- ------------
(a) The 1996 year end value of the Company's Common Stock was $31.25. The dollar
value shown in the table is calculated by determining the difference between
the year end value of the Company's Common Stock and the exercise price of
the option exercisable at year end.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of the date of this Prospectus by:
(i) each director and each Named Executive Officer of the Company; (ii) each
person known to the Company to be the beneficial owner of more than 5% of the
Common Stock; and (iii) all directors and executive officers of the Company as a
group. Except as may be indicated in the footnotes to the table, each of such
persons has the sole voting and investment power with respect to the shares
owned. The address of each person listed is in care of the Company, 277 Park
Avenue, New York, New York 10172.
<TABLE>
<CAPTION>
SHARES OF
NAME OF BENEFICIAL OWNER COMMON STOCK PERCENTAGE
- -------------------------------------------------------------------- ------------ ----------
<S> <C> <C>
Continental Grain(a)................................................ 35,918,421 81.0%
James E. Moore(b)................................................... 382,677 (c)
Robert A. Major(b).................................................. 26,970 (c)
Robert J. Babjak(b)................................................. 88,489 (c)
A. John Banu(b)..................................................... 139,185 (c)
Daniel J. Egan(b)................................................... 91,489 (c)
James J. Bigham(d).................................................. 5,000 (c)
Paul J. Fribourg(a)(d)(e)........................................... 5,000 (c)
John W. Spiegel..................................................... 5,000 (c)
Donald L. Staheli(d)(e)............................................. 20,000 (c)
John P. Tierney..................................................... 3,000 (c)
Lawrence G. Weppler(d).............................................. 1,000 (c)
Daniel J. Willett(d)................................................ 1,500 (c)
All Directors and Executive Officers as a Group (20 persons) (f).... 1,309,984 3.0%
</TABLE>
- ------------
(a) Michel Fribourg, members of his family and trusts for their benefit
beneficially own substantially all of the issued and outstanding voting
stock of Continental Grain. Paul J. Fribourg is the son of Michel Fribourg.
(b) Includes for Messrs. Moore, 292,715 shares; Babjak, 76,505 shares; Banu,
126,400 shares; and Egan, 76,505 shares of "restricted" Common Stock and for
Messrs. Moore, 35,955 shares; Major, 23,970 shares; Babjak, 11,984 shares;
Banu, 11,785 shares and Egan, 11,984 shares of Common Stock issuable upon
exercise of options. Does not include 1,180,112 shares of Common Stock
issuable upon the exercise of options not exercisable within 60 days of the
closing of the Offering.
(c) Represents less than 1% of the Common Stock outstanding at March 31, 1996
fiscal year end.
(d) Messrs. Bigham, Fribourg, Staheli, Weppler and Willett are officers of
Continental Grain.
(e) By virtue of their positions as executive officers of Continental Grain,
Messrs. Fribourg and Staheli may be deemed to have beneficial ownership of
the shares of the Company owned by Continental Grain. Messrs. Fribourg and
Staheli disclaim beneficial ownership of such shares.
(f) Includes 1,057,765 shares of "restricted" Common Stock and 142,412 shares of
Common Stock issuable upon the exercise of options. Does not include
1,756,633 shares of Common Stock issuable upon the exercise of options not
exercisable within 60 days of the closing of the Offering.
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<PAGE>
CERTAIN TRANSACTIONS
Continental Grain is the Company's largest stockholder, owning approximately
81% of the Company's outstanding Common Stock. Continental Grain has advised the
Company that its current intention is to continue to hold all the shares of
Common Stock beneficially owned by it. Continental Grain effectively has voting
control on all matters submitted to stockholders, including the election of
directors and the approval of extraordinary corporate transactions. Five of the
directors of the Company are officers of Continental Grain and such directors
constitute a majority of the Board of Directors. See "Principal Stockholders."
Prior to the IPO, Continental Grain directly or indirectly owned the shares
or members' interests of ContiMortgage, ContiTrade, ContiFinancial Services,
CSAF, ContiSecurities Asset Funding II, L.L.C. and ContiFunding Corporation (the
"Subsidiaries"). The Company was formed as a Delaware corporation on September
29, 1995.
In the reorganization that occurred on February 14, 1996: (i) ContiTrade
Services transferred certain of its assets (excluding those related to its trade
finance business) to ContiTrade; (ii) ContiTrade Services transferred the common
stock of its subsidiaries, ContiMortgage and ContiFinancial Services, and its
Excess Spread Receivables to Continental Grain; and (iii) Continental Grain
transferred all of the common stock of, or its members' interests in, the
Subsidiaries and the Excess Spread Receivables, to the Company in exchange for
35,917,421 shares of Common Stock. As a result, the Company owns all of the
common stock or members' interests of the Subsidiaries. Continental Grain
retained all Strategic Alliance Equity Interests that were acquired prior to the
IPO, which do not appear in the Company's Consolidated Financial Statements.
PAST TRANSACTIONS WITH CONTINENTAL GRAIN
CSAF, a subsidiary of the Company (and prior to the IPO a direct subsidiary
of Continental Grain), paid dividends to Continental Grain in fiscal year 1995
of $30 million. Immediately prior to the IPO, the Company paid a $305,000
dividend to Continental Grain to reduce the Company's stockholder's equity to
$129.1 million.
The Company's subsidiaries had intercompany borrowings from Continental
Grain (including borrowings that were deemed equity by Continental Grain) of
$114.9 million at March 31, 1995, $49.8 million at March 31, 1994 and $12.5
million at March 31, 1993.
ContiTrade occupies approximately one floor of space leased by Continental
Grain. ContiTrade Services was allocated a proportionate amount of the lease
rental for this space aggregating $876,000, $832,000 and $579,000 in fiscal
years 1996, 1995 and 1994. ContiMortgage's leasehold obligations for its
national and regional office in Horsham, Pennsylvania are guaranteed by
Continental Grain. This guarantee will continue for the term of the lease.
In sales of Excess Spread Receivables by a subsidiary of the Company,
Continental Grain guaranteed the performance obligations of such subsidiary.
This guarantee will continue for the term of the sale agreements. See Note 11 to
the Consolidated Financial Statements of the Company.
In addition, from time to time, Continental Grain has guaranteed certain
indemnification obligations of the Company's subsidiaries in connection with its
asset securitization business and otherwise.
Prior to the IPO, Continental Grain provided various corporate services to
ContiTrade including tax and personnel administration, communications,
insurance, treasury, legal, internal audit, accounting, audit and other
corporate services. The allocated costs for these services were $700,000, $1.1
million and $950,000 in fiscal 1996, 1995 and 1994, respectively. Personnel of
ContiTrade participated in Continental Grain pension, savings, medical and
dental, disability, life, deferred compensation and other employee benefit
plans.
70
<PAGE>
Simultaneously with the completion of the IPO, the Company transferred
certain of its Excess Spread Receivables, with a book value of $60.7 million to
Continental Grain in order to reduce the amount of the Intercompany Debt to $324
million. In the Excess Spread Receivable transfer, the consideration received by
the Company equaled the book value of the Excess Spread Receivables transferred.
Based upon the Company's valuation of these Excess Spread Receivables and other
sales transactions with unrelated third parties, the Company believes that the
book value of such Excess Spread Receivables represented the fair value of such
Excess Spread Receivables.
DEPARTMENT OF JUSTICE INVESTIGATION OF CONTINENTAL GRAIN
In the ordinary course of its business as an exporter of United States
agricultural commodities, Continental Grain participated in U.S.
government-sponsored programs that encouraged the export of U.S. agricultural
commodities to Iraq during the period prior to Iraq's invasion of Kuwait. The
U.S. Department of Justice is engaged in an investigation into Continental
Grain's practices with regard to these export programs, and Continental Grain
has been cooperating in the inquiry. A federal grand jury has been impaneled to
consider whether violations of law were committed by Continental Grain and
several of its employees in connection with these sales to Iraq. While
Continental Grain believes that it and its employees have been in material
compliance with the government program requirements, it is currently in
settlement discussions with the Department of Justice regarding the claims
asserted in the grand jury investigation and companion civil claims. The
settlement currently under discussion would likely include a plea of guilty by a
foreign affiliate of Continental Grain to certain charges and the payment of
fines and other payments to the government that, in Continental Grain's opinion,
while material in amount, would not have a material adverse effect on the
relationship between Continental Grain and the Company or require Continental
Grain to sell any of its interest in the Company. If these discussions do not
result in a settlement, Continental Grain expects that criminal and civil
charges will be brought in connection with these claims. Continental Grain
believes it has meritorious defenses in this matter and would vigorously defend
its position in the event the matter is not settled. While Continental Grain has
no present intention of selling any shares of Common Stock or any of the
Intercompany Debt, it might be required to sell some portion of its interest in
the Company in order to fund a resolution of the investigation if the matter is
not settled or otherwise resolved satisfactorily.
The activities that are the subject of the grand jury investigation do not
involve the Company, its business or its employees, officers or directors.
Nevertheless, because the Company operates under various federal and state
licenses and permits, the Company will be obliged in certain cases to report any
guilty plea by or conviction of its majority shareholder or an affiliate to, and
may be subject to inquiry (and perhaps revocation proceedings) by, the
government agencies that issued the applicable license or permit. In view of the
fact that the matters under investigation by the Department of Justice did not
involve the Company, its employees, officers or directors, the Company does not
believe that the results of the investigation are, or any related settlement or
any such regulatory inquiry is, likely to materially adversely affect the
Company or its business.
CURRENT RELATIONSHIPS WITH CONTINENTAL GRAIN
The following are summaries of the various agreements between the Company
(or one of its wholly-owned subsidiaries) and Continental Grain (or one of its
subsidiaries), which summaries are qualified in their entirety by reference to
such agreements, each of which is filed or incorporated by reference as an
exhibit to the Registration Statement of which this Prospectus forms a part.
The Company has adopted a policy that all future material agreements between
the Company and Continental Grain and its affiliates will be reviewed and passed
on for fairness by a committee of the Board of Directors comprised of
independent directors.
71
<PAGE>
Indemnification Agreement
Continental Grain and the Company have entered into an agreement (the
"Indemnification Agreement"). Subject to certain exceptions, the Indemnification
Agreement places financial responsibility for the liabilities related to the
business of the Company and its subsidiaries with the Company and financial
responsibility for the liabilities related to the business of Continental Grain
and its other subsidiaries with Continental Grain. Under the Indemnification
Agreement, each of Continental Grain and the Company indemnifies the other in
the event of certain liabilities, including liabilities under the Securities Act
or the Exchange Act. The Company is not aware of any material payments that it
will be required to make, or that it may be entitled to receive, under the
Indemnification Agreement. No amounts were paid under the Indemnification
Agreement in fiscal 1996.
Tax Sharing Agreement
The Company is a member of the Continental Grain Group (the "CGC Group")
which files a consolidated Federal income tax return and combined state tax
returns in certain states. The Company and Continental Grain have entered into a
Tax Sharing Agreement which (i) defines their respective rights and obligations
with respect to Federal, state, local and all other taxes for all taxable
periods both prior to and after the IPO and (ii) governs the conduct of all
audits and other tax controversies relating to the Company. Prior to the IPO,
the Company had an informal tax sharing arrangement.
Pursuant to the Tax Sharing Agreement, the Company is charged or credited,
as the case may be, for its Federal income tax liability or refund that would
have been payable or received by the Company for such year, or portion thereof,
determined as if the Company had filed a separate Federal income tax return
computed in accordance with prevailing Federal income tax laws and regulations
as applied to the Company as if it were a separate taxpayer. The Company paid or
accrued $42.0 million in Federal taxes to Continental Grain under its formal and
informal tax sharing arrangements in fiscal 1996.
Employee Benefit Allocation Agreement
Employees of the Company are eligible to participate in Continental Grain
employee benefit plans. Pursuant to the Employee Benefit Allocation Agreement,
the cost of the Company's employees' participation in these programs is
allocated to the Company based on the actual cost incurred by its employees plus
an allocated cost of administration of the plans and overhead. Prior to the IPO,
the Company had an informal employee benefit allocation arrangement. Under the
Employee Benefit Allocation Agreement, Continental Grain provides payroll and
compensation administration, including access to Continental Grain's licensed
personnel software, to the Company and its subsidiaries. The Company reimburses
Continental Grain for all actual costs and administrative expenses incurred by
Continental Grain for the benefit of employees of the Company. The Company
reimburses Continental Grain for all costs incurred in connection with pension
benefits to employees on a stand-alone company basis. The Company paid $2.1
million to Continental Grain under its formal and informal employee benefit
allocation arrangements in fiscal 1996.
Services Agreement
Pursuant to an agreement between Continental Grain and the Company (the
"Services Agreement"), Continental Grain provides the Company certain corporate
services, including treasury administration, risk management, internal audit,
Federal and state tax (including payroll) administration, management information
and communications support services, public affairs, and facilities management
through March 31, 1999 and from year to year thereafter unless terminated by
either party upon 90 days' prior written notice. Prior to the IPO, the Company
had an informal services arrangement. With 90 days prior written notice, the
Company is permitted to terminate the Services Agreement at March 31, 1998. The
costs for services provided pursuant to the Services Agreement are determined at
the beginning of each fiscal year of the Company, based on Continental Grain's
estimate of the
72
<PAGE>
percentage of its annual overall costs for providing such services attributable
to the Company. The Company paid or accrued $1.9 million for such services
(which does not include the guarantee fees described in the next paragraph) in
fiscal 1996.
The Services Agreement also provides that Continental Grain may, but is not
obligated to, provide guarantees of obligations due third parties. Prior to the
IPO, the Company had an informal guarantee fee arrangement. For these
guarantees, the Company will pay Continental Grain annual fees of: (i) 0.05% of
the daily average of the utilized sale capacity under any loan or Purchase and
Sale Facility guaranteed by Continental Grain; (ii) 0.25% of the (x) daily
average amount at risk to Continental Grain under any Excess Spread Receivables
or similar structured sale of Excess Spread Receivables guaranteed by
Continental Grain; (y) daily average amount of the outstanding debt under any
loan agreements or other debt instruments guaranteed by Continental Grain; and
(z) annual average amount remaining to be paid by the Company under any leases
and other payment obligations guaranteed by Continental Grain and not described
in clauses (x) and (y) of this sub-clause (ii); (iii) 0.005% of the amount of
proceeds received by the Company in any underwriting agreement guaranteed by
Continental Grain; and (iv) with respect to any other indemnification and
performance obligations guaranteed by Continental Grain, 0.25% of the lesser of
(a) the daily average of the maximum amount payable by the Company under such
indemnity or performance obligation and (b) the amount of proceeds received by
the Company in the related transaction. Any guarantee fee ceases to be payable
when the Company is no longer legally required to make any such indemnification
or performance payment. The Company paid or accrued $35,600 in guarantee fees
for such services in fiscal 1996.
Pursuant to the Services Agreement, the Company has agreed that if, and at
such time when, Continental Grain owns less than 20% of the voting stock of the
Company, the Company will, at the request of Continental Grain, change the names
of the Company and its subsidiaries to names that are not the same as, or
confusingly similar to, Continental Grain's current corporate name, including
eliminating the term "Conti" from such names.
Finally, the Services Agreement provides that the Company may request
Continental Grain to provide such other corporate services as it routinely
provides to other subsidiaries and divisions.
Sublease
The Company and Continental Grain have entered into a sublease agreement
(the "Sublease") pursuant to which the Company subleases from Continental Grain
approximately 18,000 square feet of office space at 277 Park Avenue, New York,
New York. Prior to the IPO, the Company had an informal sublease arrangement.
Under the terms of the Sublease, the Company pays $42.25 per square foot in base
rent and $3.12 per square foot in electric costs. As a subtenant, the Company
assumes its proportionate share (16.2%) of the additional rental expenses paid
by Continental Grain as a lessee under the terms of its lease. The term of the
Sublease extends through February 28, 2000. The Company paid $876,000 under the
Sublease to Continental Grain under its formal and informal sublease
arrangements in fiscal 1996.
Intercompany Debt
The Company has intercompany financing provided by Continental Grain in the
form of the Intercompany Debt. Prior to the IPO, the Company had an informal
intercompany financing arrangement. The Intercompany Debt is described in
"Description of Certain Indebtedness and Financing Arrangements -- Certain
Indebtedness." From April 1, 1995 through February 13, 1996, the Company paid
$19.6 million of interest under the informal intercompany financing and from
February 14, 1996 through March 31, 1996, the Company paid or accrued $3.1
million of interest under the Intercompany Debt.
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<PAGE>
Registration Rights
Under a Common Stock Registration Rights Agreement (the "Common Stock
Registration Rights Agreement") between the Company and Continental Grain, the
Company has granted Continental Grain the right to require the Company to
register shares of Common Stock held by Continental Grain for sale in accordance
with Continental Grain's intended method of disposition thereof (a "demand
registration"). Continental Grain may require up to six such demand
registrations, with no more than one every six months. Additionally, the Company
has granted to Continental Grain the right, subject to certain exceptions, to
participate in registrations of Common Stock initiated by the Company on its own
behalf or on behalf of its stockholders (a "piggy-back registration"). The
Company is required to pay expenses (other than underwriting discounts and
commissions) incurred by Continental Grain in connection with the demand and
piggy-back registrations. Subject to certain limitations specified in the Common
Stock Registration Rights Agreement, Continental Grain's registration rights are
assignable to third parties. The Common Stock Registration Rights Agreement
contains indemnification and contribution provisions by the Company for the
benefit of Continental Grain and permitted assigns and their related persons.
Under an Indenture Note Registration Rights Agreement (the "Indenture Note
Registration Rights Agreement") between the Company and Continental Grain for
its assignees, the Company has granted Continental Grain the right to demand one
registration with respect to the Indenture Note (or a portion thereof). The
Company is required to pay expenses (other than underwriting discounts and
commissions) incurred by Continental Grain in connection with the demand
registration. Subject to certain limitations specified in the Indenture Note
Registration Rights Agreement, Continental Grain's registration rights are
assignable to third parties. The Indenture Note Registration Rights Agreement
contains indemnification and contribution provisions by the Company for the
benefit of Continental Grain and permitted assigns and their related persons.
Continental Grain assigned the Indenture Note Registration Rights Agreement to a
wholly-owned subsidiary in March 1996.
DESCRIPTION OF CERTAIN INDEBTEDNESS AND FINANCING ARRANGEMENTS
CERTAIN INDEBTEDNESS
The Intercompany Debt consists of a $125 million five-year note issued
pursuant to the Indenture Note, the $74 million Four Year Note and the $125
million Term Note maturing September 30, 1997. The Indenture Note will mature on
February 14, 2001 and bears interest at a rate of 7.96% per annum. The principal
of the Indenture Note is required to be repaid in four equal annual installments
commencing on February 14, 1998. The Four Year Note will mature on February 14,
2000 and bears interest semi-annually at a rate of 8.02% per annum. Until
February 14, 1998, interest on the Four Year Note will not be paid in cash but
will accrue and be added to the principal amount of the Four Year Note. After
February 14, 1998, interest on the Four Year Note will be payable in cash. The
Term Note will mature on September 30, 1997 and bears interest at a variable
rate equal to one month LIBOR plus 125 basis points, adjusted monthly. The
Intercompany Debt may be prepaid in whole or in part at any time without premium
or penalty. Continental Grain assigned all of the Intercompany Debt to one of
its wholly-owned subsidiaries in March 1996.
The Intercompany Debt contains a number of significant covenants that, among
other things, require that the Company and its subsidiaries on a consolidated
basis maintain a minimum current ratio (current assets to current liabilities)
of 1.1:1, a maximum "Consolidated Total Liabilities" to "Consolidated Net Worth"
ratio of 3:1, a maximum ratio of "Consolidated Long Term Debt" (excluding the
Intercompany Debt) to "Consolidated Adjusted Net Worth" of 1.1:1 at any time
prior to September 30, 1997 and 1:1 at any time thereafter, a minimum tangible
net worth of $225 million, a limitation on incurring certain liens, and a
limitation on acquisitions, investments or capital expenditures of the Company
in excess of $10 million per fiscal year. The Intercompany Debt also contains
customary
74
<PAGE>
events of default relating to the Company and its subsidiaries, including but
not limited to, the failure of the Company to pay principal and interest when
due, covenant defaults and bankruptcy event defaults.
FINANCING ARRANGEMENTS
Through ContiTrade, as of June 30, 1996 the Company had $1.45 billion of
committed (and an additional $1.05 billion of uncommitted) sale capacity under
its Purchase and Sale Facilities. The Purchase and Sale Facilities allow
ContiTrade to sell, with limited recourse, interests in designated pools of
loans and other assets. Under these agreements, ContiTrade submits a purchase
request to the financial institution specifying the assets to be sold and the
terms of the proposed sale (including the sale price for the loans and other
assets). If the proposed terms and assets are accepted, the financial
institution is obligated to purchase the assets as long as the aggregate amount
of assets bought and not yet resold by the financial institution has not
exceeded the committed sale capacity under the Purchase and Sale Facility. The
parties may agree to exceed the committed sale capacity under the Purchase and
Sale Facility. A portion of the purchase price for any assets (typically 5% to
10%) is typically deposited by ContiTrade into an account held by the financial
institution on behalf of ContiTrade, against which the financial institution may
set off any losses incurred in a resale of assets, up to the recourse amount
described below. If any assets purchased by the financial institution should
decrease in value beyond an agreed-upon allowance, the financial institution may
resell the assets, with limited recourse to ContiTrade for any losses incurred
as a result up to an agreed-upon amount (5% to 10% of such assets held by the
financial institution on the date the assets may first be resold as a result of
a decrease in value). In each Purchase and Sale Facility, the financial
institution has granted ContiTrade a right of first refusal to repurchase the
loans and other assets purchased by the financial institution under the
facility. In the past, ContiTrade has exercised this right and repurchased such
loans. The Purchase and Sale Facilities generally have one-year renewable terms
(one Purchase and Sale Facility has a two-year term), all of which will expire
between July 1996 and June 1998. The Company has guaranteed ContiTrade's
obligations under the Purchase and Sale Facilities. Unless waived, each Purchase
and Sale Facility will terminate upon the occurrence of certain events, which
include: (i) failure of ContiTrade or the Company (as guarantor) to perform
under the terms and covenants of the Purchase and Sale Facility (including
payment obligations), to make true representations and warranties regarding the
assets sold and certain other matters, to make material scheduled payments under
any indebtedness or to perform under any other agreement with the financial
institution; (ii) any material adverse change in the financial condition of
ContiTrade or the Company (as guarantor); and (iii) certain bankruptcy events of
ContiTrade or the Company (as guarantor). The Company utilized the facilities to
sell assets totaling $1.2 billion, $2.5 billion and $5.7 billion in fiscal years
1994, 1995 and 1996, respectively. On March 31, 1996, the Company had utilized
$565 million (including Purchase and Sale Facilities utilized beyond their
committed sale capacities) of the loan or asset sale capacity under the Purchase
and Sale Facilities. See "Risk Factors -- Ability to Service Debt; Negative
Cashflows and Capital Needs -- Dependence on Purchase and Sale Facilities,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 11 to Consolidated
Financial Statements.
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DESCRIPTION OF THE NOTES
GENERAL
The Notes are to be issued under an Indenture, to be dated as of ,
1996 (the "Indenture"), between the Company and The Chase Manhattan Bank, as
Trustee (the "Trustee").
A copy of the form of the Indenture is filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The following summary
of certain provisions of the Indenture does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, all the provisions
of the Indenture, including the definitions of certain terms therein and those
terms made a part thereof by the Trust Indenture Act of 1939, as amended.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, The City of New York (which initially shall
be the corporate trust office of the Trustee, at 450 West 33rd Street, New York,
New York 10001), except that, at the option of the Company, payment of interest
may be made by check mailed to the address of the Holders as such address
appears in the Note register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
shall be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
TERMS OF THE NOTES
The Notes will be unsecured senior obligations of the Company, limited to
$300 million aggregate principal amount, and will mature on , 2003. The
Notes will bear interest at the rate per annum shown on the cover page hereof
from , or from the most recent date to which interest has been paid
or provided for, payable semiannually to Holders of record at the close of
business on the or immediately preceding the interest payment date
on and of each year, commencing , 1997. The Company
will pay interest on overdue principal at 1% per annum in excess of such rate,
and it will pay interest on overdue installments of interest at such higher rate
to the extent lawful. Interest on the Notes will be computed on the basis of a
360-day year of twelve 30-day months.
OPTIONAL REDEMPTION
The Notes will be redeemable as a whole or in part, at the option of the
Company at any time, at a redemption price equal to the greater of (i) 100% of
their principal amount and (ii) the sum of the present values of the remaining
scheduled payments of principal and interest thereon discounted to the date of
redemption on a semiannual basis (assuming a 360-day year consisting of twelve
30-day months) at the Treasury Yield plus 50 basis points, plus in each case
accrued interest to the date of redemption.
"Treasury Yield" means, with respect to any redemption date, the rate per
annum equal to the semiannual equivalent yield to maturity of the Comparable
Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as
a percentage of its principal amount) equal to the Comparable Treasury Price for
such redemption date.
"Comparable Treasury Issue" means the United States Treasury security
selected by Independent Investment Bankers as having a maturity comparable to
the remaining term of the Notes that would be utilized, at the time of selection
and in accordance with customary financial practice, in pricing new issues of
corporate debt securities of comparable maturity to the remaining term of the
Notes. "Independent Investment Bankers" means Bear, Stearns & Co. Inc. and CS
First Boston Corporation or, if such firms are unwilling or unable to select the
Comparable Treasury Issue, an independent investment banking institution of
national standing appointed by the Trustee.
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"Comparable Treasury Price" means, with respect to any redemption date, (i)
the average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) on the third
business day preceding such redemption date, as set forth in the daily
statistical release (or any successor release) published by the Federal Reserve
Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S.
Government Securities" or (ii) if such release (or any successor release) is not
published or does not contain such prices on such business day, (A) the average
of the Reference Treasury Dealer Quotations for such redemption date, after
excluding the highest and lowest such Reference Treasury Dealer Quotations, or
(B) if the Trustee obtains fewer than four such Reference Treasury Dealer
Quotations, the average of all such Quotations. "Reference Treasury Dealer
Quotations" means, with respect to each Reference Treasury Dealer and any
redemption date, the average, as determined by the Trustee, of the bid and asked
prices for the Comparable Treasury Issue (expressed in each case as a percentage
of its principal amount) quoted in writing to the Trustee by such Reference
Treasury Dealer at 5:00 p.m. on the third business day preceding such redemption
date.
"Reference Treasury Dealer" means each of Bear, Stearns & Co. Inc., CS First
Boston Corporation and UBS Securities LLC, and their respective successors;
provided, however, that if any of the foregoing shall cease to be a primary U.S.
Government securities dealer in New York City (a "Primary Treasury Dealer"), the
Company shall substitute therefore another Primary Treasury Dealer.
Holders of Notes to be redeemed will receive notice thereof by first-class
mail at least 30 and not more than 60 days prior to the date fixed for
redemption.
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee on a pro rata basis, by lot or by such other method
as the Trustee in its sole discretion shall deem to be fair and appropriate,
although no Note of $1,000 in original principal amount or less shall be
redeemed in part. If any Note is to be redeemed in part only, the notice of
redemption relating to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note.
RANKING
The indebtedness evidenced by the Notes will be senior unsecured obligations
of the Company, will rank pari passu in right of payment with all existing and
future Senior Indebtedness of the Company and will be senior in right of payment
to all future subordinated indebtedness of the Company. As of June 30, 1996,
after giving effect to the issuance of the Notes and the application of the
proceeds therefrom, the Company's other Senior Indebtedness outstanding would
have been approximately $203 million.
Substantially all the operations of the Company are conducted through its
Subsidiaries. Claims of creditors of the Company's Subsidiaries, the
counterparties under Purchase and Sale Facilities, the purchasers of Excess
Spread Receivables, trade creditors, secured creditors and creditors holding
indebtedness and guarantees issued by such Subsidiaries, and claims of preferred
stockholders (if any) of such Subsidiaries generally will have priority with
respect to the assets and earnings of such Subsidiaries over the claims of
creditors of the Company, including Holders of the Notes. The Notes, therefore,
will be effectively subordinated to creditors (including trade creditors) and
preferred stockholders (if any) of Subsidiaries of the Company. At June 30,
1996, the total indebtedness of the Company's Subsidiaries was approximately
$248 million. In addition, at June 30, 1996, the Restricted Subsidiaries had
approximately $178 million of contingent recourse obligations with respect to
the sale of Excess Spread Receivables and had utilized $597 million in aggregate
committed sale capacity pursuant to their Purchase and Sale Facilities. Although
the Indenture limits the incurrence of Indebtedness and preferred stock of the
Company and certain of the Company's Subsidiaries, such limitation is subject to
a number of significant qualifications. Moreover, the Indenture does not impose
any limitation on the incurrence of liabilities that are not considered
Indebtedness under the Indenture. See "--Certain Covenants--Limitation on
Indebtedness."
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CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder shall have the right to require that the Company
repurchase such Holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase (subject to the right of Holders of record on the relevant record
date to receive interest due on the relevant interest payment date):
(i) Any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than the Permitted Holders, is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act, except that such person shall be deemed to have "beneficial ownership"
of all shares that any such person has the right to acquire, whether such
right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 35% of the total voting power of the
Voting Stock of the Company; provided, however, that the Permitted Holders
beneficially own (as defined in Rule 13d-3 and Rule 13d-5 under the Exchange
Act), directly or indirectly, in the aggregate a lesser percentage of the
total voting power of the Voting Stock of the Company than such other person
and do not have the right or ability by voting power, contract or otherwise
to elect or designate for election a majority of the Board of Directors (for
the purposes of this clause (i), such other person shall be deemed to
beneficially own any Voting Stock of a corporation held by another
corporation (a "parent corporation"), if such other person is the beneficial
owner (as defined above for such person), directly or indirectly, of more
than 35% of the voting power of the Voting Stock of such parent corporation
and the Permitted Holders beneficially own (as defined above for the
Permitted Holders), directly or indirectly, in the aggregate a lesser
percentage of the voting power of the Voting Stock of such parent
corporation and do not have the right or ability by voting power, contract
or otherwise to elect or designate for election a majority of the board of
directors of such parent corporation);
(ii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (together with
any new directors whose election by such Board of Directors or whose
nomination for election by the shareholders of the Company was approved by a
vote of 66 2/3% of the directors of the Company then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors then in office; or
(iii) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company, or the sale
of all or substantially all the assets of the Company to another Person
(other than a Person that is controlled by the Permitted Holders), and, in
the case of any such merger or consolidation, the securities of the Company
that are outstanding immediately prior to such transaction and which
represent 100% of the aggregate voting power of the Voting Stock of the
Company are changed into or exchanged for cash, securities or property,
unless pursuant to such transaction such securities are changed into or
exchanged for, in addition to any other consideration, securities of the
surviving corporation that represent immediately after such transaction, at
least a majority of the aggregate voting power of the Voting Stock of the
surviving corporation; provided, however, that the sale by the Company or
its Restricted Subsidiaries from time to time of Receivables to a trust for
the purpose solely of effecting one or more securitizations shall not be
treated hereunder as a sale of all or substantially all the assets of the
Company.
Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee stating: (1) that a Change of
Control has occurred and that such Holder has the right to require the Company
to purchase such Holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase (subject to the right of Holders of record on the relevant record
date to receive interest on the relevant interest payment date); (2) the
circumstances and relevant facts regarding such Change of Control
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(including information with respect to pro forma results of operations, cash
flow and capitalization after giving effect to such Change of Control); (3) the
repurchase date (which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed); and (4) the instructions determined by the
Company, consistent with the covenant described hereunder, that a Holder must
follow in order to have its Notes purchased.
The Company shall comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to the covenant described
hereunder. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
the Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the covenant
described hereunder by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Underwriters. Management has no present intention to engage
in a transaction involving a Change of Control, although it is possible that the
Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of indebtedness outstanding at such time or otherwise
affect the Company's capital structure or credit ratings. Restrictions on the
ability of the Company and its Subsidiaries to incur additional Indebtedness are
contained in the covenants described under "--Certain Covenants--Limitation on
Indebtedness", "--Limitation on Liens" and "--Limitation on Indebtedness and
Preferred Stock of Restricted Subsidiaries". Such restrictions can only be
waived with the consent of the Holders of a majority in principal amount of the
Notes then outstanding. Except for the limitations contained in such covenants,
however, the Indenture will not contain any covenants or provisions that may
afford Holders of the Notes protection in the event of a highly leveraged
transaction.
Future indebtedness of the Company may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require such indebtedness to be repurchased upon a Change of Control. Moreover,
the exercise by the Holders of their right to require the Company to repurchase
the Notes could cause a default under such indebtedness, even if the Change of
Control itself does not, due to the financial effect of such repurchase on the
Company. Finally, the Company's ability to pay cash to the Holders of Notes
following the occurrence of a Change of Control may be limited by the Company's
then existing financial resources. There can be no assurance that sufficient
funds will be available when necessary to make any required repurchases. The
provisions under the Indenture relative to the Company's obligation to make an
offer to repurchase the Notes as a result of a Change of Control may be waived
or modified with the written consent of the Holders of a majority in principal
amount of the Notes.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made in immediately available funds. All
payments of principal and interest will be made by the Company in immediately
available funds. The Notes will trade in the Same-Day Funds Settlement System of
The Depository Trust Company ("DTC") until maturity, and secondary market
trading activity for the Notes will therefore settle in immediately available
funds.
CERTAIN COVENANTS
Set forth below are descriptions of certain covenants set forth in the
Indenture. In the event that at any time (i) the ratings assigned to the Notes
by both of the Rating Agencies are Investment Grade Ratings and (ii) no Default
has occurred and is continuing under the Indenture, the Company and its
Restricted Subsidiaries will no longer be subject to the provisions of the
Indenture described below under "--Limitation on Indebtedness", "--Limitation on
Indebtedness and Preferred Stock of Restricted Subsidiaries", "--Limitation on
Restricted Payments", "--Limitation on Restrictions on Distributions from
Restricted Subsidiaries", "--Limitation on Sale of Assets and Subsidiary Stock",
"--Limitation on Affiliate Transactions" and clause (iii) of "--Merger and
Consolidation" (the termination of such provisions being herein called the
"Covenant Termination").
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Limitation on Indebtedness. (a) The Company shall not Incur, directly or
indirectly, any Indebtedness if, on the date of such Incurrence and after giving
effect thereto, the Consolidated Leverage Ratio exceeds 2.5 to 1.0.
(b) Notwithstanding the foregoing paragraph (a), the Company may Incur
any or all of the following Indebtedness:
(1) Permitted Warehouse Indebtedness;
(2) Indebtedness owed to and held by the Company or a Consolidated
Restricted Subsidiary; provided, however, that any subsequent issuance or
transfer of any Capital Stock which results in any such Consolidated
Restricted Subsidiary ceasing to be a Consolidated Restricted Subsidiary
or any subsequent transfer of such Indebtedness (other than to the
Company or another Consolidated Restricted Subsidiary) shall be deemed,
in each case, to constitute the Incurrence of such Indebtedness by the
Company;
(3) the Notes;
(4) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2) or (3) of this covenant);
(5) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to paragraph (a) or pursuant to clause (3) or (4) or this clause
(5);
(6) Hedging Obligations directly related to: (i) Indebtedness
Incurred (or reasonably expected to be Incurred) and permitted to be
Incurred by the Company or the Restricted Subsidiaries pursuant to the
Indenture; (ii) Receivables held by the Company or its Restricted
Subsidiaries pending sale or securitization; (iii) Receivables of the
Company or its Restricted Subsidiaries that have been sold pursuant to a
Warehouse Facility; (iv) Receivables with respect to which the Company
reasonably expects to purchase or commit to purchase, finance or accept
as collateral; or (v) Excess Spread Receivables and other assets owned or
financed by the Company or its Restricted Subsidiaries in the ordinary
course of business; provided, however, that such Hedging Obligations are
eligible to receive hedge accounting treatment in accordance with GAAP as
applied by the Company as of the Issue Date; and
(7) Indebtedness in an aggregate principal amount which, together
with the principal amount of all other Indebtedness of the Company
outstanding on the date of such Incurrence (other than Indebtedness
permitted by clauses (1) through (6) above or paragraph (a)) does not
exceed $40.0 million.
(c) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness if the proceeds thereof are used, directly or indirectly, to
Refinance any Subordinated Obligations unless such Indebtedness shall be
subordinated to the Notes to at least the same extent as such Subordinated
Obligations.
(d) For purposes of determining compliance with the foregoing covenant,
(i) in the event that an item of Indebtedness meets the criteria of more
than one of the types of Indebtedness described above, the Company, in its
sole discretion, will classify such item of Indebtedness and only be
required to include the amount and type of such Indebtedness in one of the
above clauses and (ii) an item of Indebtedness may be divided and classified
in more than one of the types of Indebtedness described above.
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Limitation on Indebtedness and Preferred Stock of Restricted
Subsidiaries. The Company shall not permit any Restricted Subsidiary to Incur,
directly or indirectly, any Indebtedness or Preferred Stock except:
(a) Permitted Warehouse Indebtedness;
(b) Indebtedness or Preferred Stock issued to and held by the Company or
a Consolidated Restricted Subsidiary: provided, however, that any subsequent
issuance or transfer of any Capital Stock which results in any such
Consolidated Restricted Subsidiary ceasing to be a Consolidated Restricted
Subsidiary or any subsequent transfer of such Indebtedness or Preferred
Stock (other than to the Company or a Consolidated Restricted Subsidiary)
shall be deemed, in each case, to constitute the issuance of such
Indebtedness or Preferred Stock by the issuer thereof;
(c) Indebtedness or Preferred Stock of a Subsidiary Incurred and
outstanding on or prior to the date on which such Subsidiary was acquired by
the Company (other than Indebtedness or Preferred Stock Incurred in
connection with, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Subsidiary became a Subsidiary or was
acquired by the Company); provided, however, that on the date of such
acquisition and after giving effect thereto, the Company would have been
able to Incur at least $1.00 of Indebtedness pursuant to paragraph (a) of
the covenant described under "--Limitation on Indebtedness";
(d) Indebtedness or Preferred Stock outstanding on the Issue Date (other
than Indebtedness described in clause (a), (b) or (c) of this covenant); and
(e) Refinancing Indebtedness Incurred in respect of Indebtedness or
Preferred Stock referred to in clause (c) or (d) above or this clause (e);
provided, however, that to the extent such Refinancing Indebtedness directly
or indirectly Refinances Indebtedness or Preferred Stock of a Subsidiary
described in clause (c) above, such Refinancing Indebtedness shall be
Incurred only by such Subsidiary.
Limitation on Liens. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any
Lien of any nature whatsoever on any of its properties (including Capital Stock
of a Restricted Subsidiary), whether owned at the Issue Date or thereafter
acquired, other than Permitted Liens, without effectively providing that the
Notes shall be secured equally and ratably with (or prior to) the obligations so
secured for so long as such obligations are so secured.
Limitation on Restricted Payments. (a) The Company shall not, and shall not
permit any Restricted Subsidiary, directly or indirectly, to make a Restricted
Payment if at the time the Company or such Restricted Subsidiary makes such
Restricted Payment: (1) a Default shall have occurred and be continuing (or
would result therefrom); (2) the Company is not able to Incur an additional
$1.00 of Indebtedness pursuant to paragraph (a) of the covenant described under
"--Limitation on Indebtedness"; or (3) the aggregate amount of such Restricted
Payment and all other Restricted Payments since the Issue Date would exceed the
sum of: (A) 25% of the Consolidated Net Income accrued during the period
(treated as one accounting period) from the beginning of the fiscal quarter
during which the Issue Date occurs to the end of the most recent fiscal quarter
prior to the date of such Restricted Payment for which financial statements are
available (or, in case such Consolidated Net Income shall be a deficit, minus
100% of such deficit); (B) the aggregate Net Cash Proceeds received by the
Company from the issuance or sale of its Capital Stock (other than Disqualified
Stock) subsequent to the Issue Date (other than an issuance or sale to a
Subsidiary of the Company and other than an issuance or sale to an employee
stock ownership plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees); (C) the amount by which
Indebtedness of the Company is reduced on the Company's balance sheet upon the
conversion or exchange (other than by a Subsidiary of the Company) subsequent to
the Issue Date, of any Indebtedness of the Company
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convertible or exchangeable for Capital Stock (other than Disqualified Stock) of
the Company (less the amount of any cash, or the fair value of any other
property, distributed by the Company upon such conversion or exchange); (D) an
amount equal to the sum of (i) the net reduction in Investments in any Person
resulting from dividends or repayments of loans or advances, in each case to the
Company or any Restricted Subsidiary from such Person, and (ii) the portion
(proportionate to the Company's equity interest in such Subsidiary) of the fair
market value of the net assets of an Unrestricted Subsidiary at the time such
Unrestricted Subsidiary is designated a Restricted Subsidiary; provided,
however, that the foregoing sum in this clause (D) shall not exceed, in the case
of any Person, the amount of Investments made since the Issue Date by the
Company or any Restricted Subsidiary in such Person and treated as a Restricted
Payment; and (E) $15 million.
(b) The provisions of the foregoing paragraph (a) shall not prohibit: (i)
any purchase or redemption of Capital Stock or Subordinated Obligations of the
Company made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Company (other than Disqualified Stock
and other than Capital Stock issued or sold to a Subsidiary of the Company or an
employee stock ownership plan or to a trust established by the Company or any of
its Subsidiaries for the benefit of their employees); provided, however, that
(A) such purchase or redemption shall be excluded in the calculation of the
amount of Restricted Payments and (B) the Net Cash Proceeds from such sale shall
be excluded from the calculation of amounts under clause (3)(B) of paragraph (a)
above; (ii) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations made by exchange
for, or out of the proceeds of the substantially concurrent sale of,
Indebtedness of the Company which is permitted to be Incurred pursuant to the
covenant described under "--Limitation on Indebtedness"; provided, however, that
such purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value shall be excluded in the calculation of the amount of
Restricted Payments; (iii) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend would have
complied with the covenant described hereunder; provided, however, that at the
time of payment of such dividend, no other Default shall have occurred and be
continuing (or result therefrom); provided further, however, that such dividend
shall be included in the calculation of the amount of Restricted Payments; (iv)
any purchase of Capital Stock of the Company made from time to time to meet the
Company's obligations under its employee stock ownership and option plans;
provided, however, that such purchase shall be excluded in the calculation of
the amount of Restricted Payments; (v) the exercise or conversion of an option,
warrant or other security convertible or exchangeable for an equity security of
a Strategic Alliance Client in connection with a substantially simultaneous sale
or other disposition by the Company or a Restricted Subsidiary of such equity
security; provided, however, that the exercise price or other consideration paid
by the Company or a Restricted Subsidiary in connection with such exercise or
conversion shall be excluded from the calculation of the amount of Restricted
Payments.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company shall not, and shall not permit any Restricted
Subsidiary to, directly or indirectly, create or otherwise cause or permit to
exist or become effective any consensual encumbrance or restriction on the
ability of any Restricted Subsidiary (a) to pay dividends or make any other
distributions on its Capital Stock to the Company or a Restricted Subsidiary or
pay any Indebtedness owed to the Company, (b) to make any loans or advances to
the Company or (c) transfer any of its property or assets to the Company,
except: (i) any encumbrance or restriction pursuant to an agreement in effect at
or entered into on the Issue Date; (ii) any encumbrance or restriction with
respect to a Restricted Subsidiary pursuant to an agreement applicable to such
Restricted Subsidiary on or prior to the date on which such Restricted
Subsidiary was acquired by the Company (other than an agreement entered into in
connection with, or in anticipation of, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Company) and outstanding on such date; (iii)
any encumbrance or restriction with respect to a Restricted Subsidiary pursuant
to any other agreement contained in any amendment to an agreement referred to in
clause (i) or (ii) of this covenant or this clause (iii); provided, however,
that the encumbrances and restrictions with respect to such
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Restricted Subsidiary contained in any such agreement or amendment are no less
favorable to the Noteholders than encumbrances and restrictions with respect to
such Restricted Subsidiary contained in the agreements referred to in clauses
(i) or (ii) of the covenant described hereunder, as the case may be; (iv) any
such encumbrance or restriction consisting of customary non assignment
provisions in leases governing leasehold interests to the extent such provisions
restrict the transfer of the lease or the property leased thereunder; (v) in the
case of clause (c) above, restrictions contained in security agreements or
mortgages securing Indebtedness of a Restricted Subsidiary to the extent such
restrictions restrict the transfer of the property subject to such security
agreements or mortgages; and (vi) any restriction with respect to a Restricted
Subsidiary imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the Capital Stock or assets of such
Restricted Subsidiary pending the closing of such sale or disposition.
Limitation on Sales of Assets and Subsidiary Stock. (a) The Company shall
not, and shall not permit any Restricted Subsidiary to, directly or indirectly,
consummate any Asset Disposition unless (i) the Company or such Restricted
Subsidiary receives consideration at the time of such Asset Disposition at least
equal to the fair market value (including as to the value of all non-cash
consideration), as determined in good faith by the Board of Directors, of the
shares and assets subject to such Asset Disposition and at least 85% of the
consideration thereof received by the Company or such Restricted Subsidiary is
in the form of cash or cash equivalents and (ii) an amount equal to 100% of the
Net Available Cash from such Asset Disposition is applied by the Company (or
such Restricted Subsidiary, as the case may be) (A) first, to the extent the
Company elects, either to (x) acquire Additional Assets, either directly or
through a Restricted Subsidiary, or (y) prepay, repay, redeem or purchase Senior
Indebtedness of the Company or any Indebtedness of a Restricted Subsidiary, as
the case may be (other than in either case Indebtedness owed to the Company or
an Affiliate of the Company), in either case within 180 days from the later of
the date of such Asset Disposition or the receipt of such Net Available Cash;
(B) second, to the extent of the balance of such Net Available Cash after
application in accordance with clause (A), to make an offer to the holders of
the Notes (and to holders of other Senior Indebtedness designated by the
Company) to purchase Notes (and such other Senior Indebtedness) pursuant to and
subject to the conditions contained in the Indenture; and (C) third, to the
extent of the balance of such Net Available Cash after application in accordance
with clauses (A) and (B) to (x) the acquisition by the Company or any Restricted
Subsidiary of Additional Assets or (y) the prepayment, repayment or purchase of
Indebtedness (other than any Disqualified Stock) of the Company (other than
Indebtedness owed to an Affiliate of the Company), in either case within 180
days from the later of the receipt of such Net Available Cash and the date the
offer described in clause (b) below is consummated; provided, however, that in
connection with any prepayment, repayment or purchase of Indebtedness pursuant
to clause (A), (B) or (C) above, the Company or such Restricted Subsidiary shall
retire such Indebtedness and shall cause the related loan commitment (if any) to
be permanently reduced in an amount equal to the principal amount so prepaid,
repaid or purchased, and (iii) at the time of such Asset Disposition no Default
shall have occurred and be continuing (or would result therefrom).
Notwithstanding the foregoing provisions of this paragraph, the Company and the
Restricted Subsidiaries shall not be required to apply any Net Available Cash in
accordance with this paragraph except to the extent that the aggregate Net
Available Cash from all Asset Dispositions which are not applied in accordance
with this paragraph exceeds $10 million. Pending application of Net Available
Cash pursuant to this covenant, such Net Available Cash shall be invested in
Temporary Cash Investments.
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents: (x) the assumption of Indebtedness of the Company or any
Restricted Subsidiary, and the release of the Company or such Restricted
Subsidiary from all liability on such Indebtedness, in connection with such
Asset Disposition and (y) securities received by the Company or any Restricted
Subsidiary from the transferee that are promptly converted by the Company or
such Restricted Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase of the
Notes (and other Senior Indebtedness) pursuant to clause (a)(ii)(B) above, the
Company will be required to purchase Notes
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tendered pursuant to an offer by the Company for the Notes (and other Senior
Indebtedness) at a purchase price of 100% of their principal amount (without
premium) plus accrued but unpaid interest (or, in respect of such other Senior
Indebtedness, such lesser price, if any, as may be provided for by the terms of
such Senior Indebtedness) in accordance with the procedures (including prorating
in the event of oversubscription) set forth in the Indenture. If the aggregate
purchase price of Notes (and any other Senior Indebtedness) tendered pursuant to
such offer is less than the Net Available Cash allotted to the purchase thereof,
the Company will be required to apply the remaining Net Available Cash in
accordance with clause (a)(ii)(C) above. The Company shall not be required to
make such an offer to purchase Notes (and other Senior Indebtedness) pursuant to
this covenant if the Net Available Cash available therefor is less than $10
million (which lesser amount shall be carried forward for purposes of
determining whether such an offer is required with respect to any subsequent
Asset Disposition).
(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to the
covenant described hereunder. To the extent that the provisions of any
securities laws or regulations conflict with provisions of the covenant
described hereunder, the Company shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its obligations
under this clause by virtue thereof.
Limitation on Affiliate Transactions. (a) The Company shall not, and shall
not permit any Restricted Subsidiary to, enter into or permit to exist any
transaction (including the purchase, sale, lease or exchange of any property,
employee compensation arrangements or the rendering of any service) with any
Affiliate of the Company (an "Affiliate Transaction") unless the terms thereof
(1) are no less favorable to the Company or such Restricted Subsidiary than
those that could be obtained at the time of such transaction in arm's-length
dealings with a Person who is not such an Affiliate, (2) if such Affiliate
Transaction involves an amount in excess of $2.0 million, (i) are set forth in
writing and (ii) have been approved by a majority of the members of the Board of
Directors having no personal stake in such Affiliate Transaction and (3) if such
Affiliate Transaction involves an amount in excess of $10.0 million, have been
determined by a nationally recognized investment banking firm to be fair, from a
financial standpoint, to the Company and its Restricted Subsidiaries.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i) any
Restricted Payment permitted to be made pursuant to the covenant described under
"--Limitation on Restricted Payments" or any Permitted Investment, (ii) any
issuance of securities, or other payments, awards or grants in cash, securities
or otherwise pursuant to, or the funding of, employment arrangements, stock
options and stock ownership plans approved by the Board of Directors, (iii) the
grant of stock options or similar rights to employees and directors of the
Company pursuant to plans approved by the Board of Directors, (iv) loans or
advances to employees in the ordinary course of business in accordance with the
past practices of the Company or its Restricted Subsidiaries, but in any event
not to exceed $10 million in aggregate principal amount outstanding at any one
time, (v) the payment of reasonable fees to directors of the Company and its
Restricted Subsidiaries who are not employees of the Company or its Restricted
Subsidiaries, (vi) any Affiliate Transaction between the Company and a
Consolidated Restricted Subsidiary or between Consolidated Restricted
Subsidiaries and (vii) transactions pursuant to any agreement as in existence as
of the Issue Date between the Company or its Restricted Subsidiaries and
Continental Grain or one of its Subsidiaries.
Merger and Consolidation. The Company shall not consolidate with or merge
with or into, or convey, transfer or lease, in one transaction or a series of
related transactions, all or substantially all its assets to, any Person,
unless: (i) the resulting, surviving or transferee Person (the "Successor
Company") shall be a Person organized and existing under the laws of the United
States of America, any State thereof or the District of Columbia and the
Successor Company (if not the Company) shall expressly assume, by an indenture
supplemental thereto, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under the Notes
and the Indenture; (ii) immediately after giving effect to such transaction (and
treating any Indebtedness which becomes an
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obligation of the Successor Company or any Subsidiary as a result of such
transaction as having been Incurred by such Successor Company or such Subsidiary
at the time of such transaction), no Default shall have occurred and be
continuing, (iii) immediately after giving effect to such transaction, the
Successor Company would be able to Incur an additional $1.00 of Indebtedness
pursuant to paragraph (a) of the covenant described under "--Limitation on
Indebtedness", (iv) immediately after giving effect to such transaction, the
Successor Company shall have Consolidated Net Worth in an amount that is not
less than the Consolidated Net Worth of the Company prior to such transaction;
and (v) the Company shall have delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that such consolidation, merger or
transfer and such supplemental indenture (if any) comply with the Indenture.
The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, but the predecessor Company, in the case of a
lease, shall not be released from the obligation to pay the principal of and
interest on the Notes.
Limitation on Investment Company Status. The Company shall not take any
action, or otherwise permit to exist any circumstance, that would require the
Company to register as an "investment company" under the Investment Company Act
of 1940, as amended.
SEC Reports. Notwithstanding that the Company may not be required to remain
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company shall file with the SEC and provide the Trustee and Noteholders
with such annual reports and such information, documents and other reports as
are specified in Sections 13 and 15(d) of the Exchange Act and applicable to a
U.S. corporation subject to such Sections, such information, documents and other
reports to be so filed and provided at the times specified for the filing of
such information, documents and reports under such Sections.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in the
payment of interest on the Notes when due, continued for 30 days, (ii) a default
in the payment of principal of any Note when due at its Stated Maturity, upon
optional redemption, upon required repurchase, upon declaration or otherwise,
(iii) the failure by the Company to comply with its obligations under "--Certain
Covenants--Merger and Consolidation" above, (iv) the failure by the Company to
comply for 30 days after notice with any of its obligations in the covenants
described above under "Change of Control" (other than a failure to purchase
Notes) or under "--Certain Covenants" under "--Limitation on Indebtedness",
"--Limitation on Indebtedness and Preferred Stock of Restricted Subsidiaries",
"--Limitation on Liens", "--Limitation on Restricted Payments", "--Limitation on
Restrictions on Distributions from Restricted Subsidiaries", "--Limitation on
Sales of Assets and Subsidiary Stock" (other than a failure to purchase Notes),
"--Limitation on Affiliate Transactions", "--Limitation on Investment Company
Status" or "--SEC Reports", (v) the failure by the Company to comply for 60 days
after notice with its other agreements contained in the Indenture, (vi)
Indebtedness of the Company or any Significant Subsidiary is not paid within any
applicable grace period after final maturity or is accelerated by the holders
thereof because of a default and the total amount of such Indebtedness unpaid or
accelerated exceeds $10 million (the "cross acceleration provision"), (vii)
certain events of bankruptcy, insolvency or reorganization of the Company or a
Significant Subsidiary (the "bankruptcy provisions") or (viii) except for the
Wellington Litigation, any judgment or decree for the payment of money in excess
of $10 million is entered against the Company or a Significant Subsidiary,
remains outstanding for a period of 60 days following such judgment and is not
discharged, satisfied, waived or stayed within 10 days after notice (the
"judgment default provision"). However, a default under clauses (iv), (v) and
(viii) will not constitute an Event of Default until the Trustee or the holders
of 25% in principal amount of the outstanding Notes notify the Company of the
default and the Company does not cure such default within the time specified
after receipt of such notice.
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If an Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the outstanding Notes may declare the
principal of and accrued but unpaid interest on all the Notes to be due and
payable. Upon such a declaration, such principal and interest shall be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and interest on all the Notes will ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any holders of the Notes. Under certain
circumstances, the Holders of a majority in principal amount of the outstanding
Notes may rescind any such acceleration with respect to the Notes and its
consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders of the Notes unless
such Holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium (if any) or interest when due, no Holder of a Note
may pursue any remedy with respect to the Indenture or the Notes unless (i) such
Holder has previously given the Trustee notice that an Event of Default is
continuing, (ii) Holders of at least 25% in principal amount of the outstanding
Notes have requested the Trustee to pursue the remedy, (iii) such Holders have
offered the Trustee reasonable security or indemnity against any loss, liability
or expense, (iv) the Trustee has not complied with such request within 60 days
after the receipt thereof and the offer of security or indemnity and (v) the
Holders of a majority in principal amount of the outstanding Notes have not
given the Trustee a direction inconsistent with such request within such 60-day
period. Subject to certain restrictions, the Holders of a majority in principal
amount of the outstanding Notes are given the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or of exercising any trust or power conferred on the Trustee. The Trustee,
however, may refuse to follow any direction that conflicts with law or the
Indenture or that the Trustee determines is unduly prejudicial to the rights of
any other Holder of a Note or that would involve the Trustee in personal
liability.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder of the Notes notice
of the Default within 90 days after it occurs. Except in the case of a Default
in the payment of principal of or interest on any Note, the Trustee may withhold
notice if and so long as a committee of its trust officers determines that
withholding notice is not opposed to the interest of the Holders of the Notes.
In addition, the Company is required to deliver to the Trustee, within 120 days
after the end of each fiscal year, a certificate indicating whether the signers
thereof know of any Default that occurred during the previous year. The Company
also is required to deliver to the Trustee, within 30 days after the occurrence
thereof, written notice of any event which would constitute certain Defaults,
their status and what action the Company is taking or proposes to take in
respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the Holders of a majority in principal amount of the Notes then outstanding
(including consents obtained in connection with a tender offer or exchange for
the Notes) and any past default or compliance with any provisions may also be
waived with the consent of the Holders of a majority in principal amount of the
Notes then outstanding. However, without the consent of each Holder of an
outstanding Note affected thereby, no amendment may, among other things, (i)
reduce the amount of Notes whose Holders must consent to an amendment, (ii)
reduce the rate of or extend the time for payment of interest on any Note, (iii)
reduce the principal of or extend the Stated Maturity of any Note, (iv) reduce
the premium payable upon the redemption of any Note or change the time at which
any Note may be redeemed as described under "--Optional Redemption" above, (v)
make any Note payable in money other than that stated in the Note, (vi) impair
the right of any Holder of the Notes to receive payment of principal of and
interest on
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such Holder's Notes on or after the due dates therefor or to institute suit for
the enforcement of any payment on or with respect to such Holder's Notes or
(vii) make any change in the amendment provisions which require each Holder's
consent or in the waiver provisions.
Without the consent of any Holder of the Notes, the Company and Trustee may
amend the Indenture to cure any ambiguity, omission, defect or inconsistency, to
provide for the assumption by a successor corporation of the obligations of the
Company under the Indenture, to provide for uncertificated Notes in addition to
or in place of certificated Notes (provided that the uncertificated Notes are
issued in registered form for purposes of Section 163(f) of the Code, or in a
manner such that the uncertificated Notes are described in Section 163(f)(2)(B)
of the Code), to add guarantees with respect to the Notes, to secure the Notes,
to add to the covenants of the Company for the benefit of the Holders of the
Notes or to surrender any right or power conferred upon the Company, to make any
change that does not adversely affect the rights of any Holder of the Notes or
to comply with any requirement of the SEC in connection with the qualification
of the Indenture under the Trust Indenture Act.
The consent of the Holders of the Notes is not necessary under the Indenture
to approve the particular form of any proposed amendment. It is sufficient if
such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to Holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all Holders of the Notes,
or any defect therein, will not impair or affect the validity of the amendment.
TRANSFER
The Notes will be issued in registered form and will be transferable only
upon the surrender of the Notes being transferred for registration of transfer.
The Company may require payment of a sum sufficient to cover any tax, assessment
or other governmental charge payable in connection with certain transfers and
exchanges.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Company at any time may terminate its obligations under "--Change of
Control" and under the covenants described under "--Certain Covenants" (other
than the covenant described under "--Merger and Consolidation"), the operation
of the cross acceleration provision, the bankruptcy provisions with respect to
Significant Subsidiaries and the judgment default provision described under
"--Defaults" above and the limitations contained in clauses (iii) and (iv) under
"--Certain Covenants--Merger and Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iv), (vi), (vii) (with respect only to
Significant Subsidiaries) or (viii) under "--Defaults" above or because of the
failure of the Company to comply with clause (iii) or (iv) under "--Certain
Covenants--Merger and Consolidation" above.
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In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal and interest on the Notes to
redemption or maturity, as the case may be, and must comply with certain other
conditions, including delivery to the Trustee of an Opinion of Counsel to the
effect that Holders of the Notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance and will
be subject to Federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law).
CONCERNING THE TRUSTEE
The Chase Manhattan Bank is to be the Trustee under the Indenture and has
been appointed by the Company as Registrar and Paying Agent with regard to the
Notes.
The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. The Indenture provides that if an Event of Default occurs (and is
not cured), the Trustee will be required, in the exercise of its power, to use
the degree of care of a prudent man in the conduct of his own affairs. Subject
to such provisions, the Trustee will be under no obligation to exercise any of
its rights or powers under the Indenture at the request of any Holder of Notes,
unless such Holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense and then only to the
extent required by the terms of the Indenture.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) used or useful in a Related Business, (ii) the
Capital Stock of a Person that becomes a Restricted Subsidiary as a result of
the acquisition of such Capital Stock by the Company or another Restricted
Subsidiary, (iii) Capital Stock constituting a minority interest in any Person
that at such time is a Restricted Subsidiary; provided, however, that any such
Restricted Subsidiary described in clause (ii) or (iii) above is primarily
engaged in a Related Business or (iv) the Capital Stock or Indebtedness of a
Strategic Alliance Client.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the provisions described under "--Certain Covenants-- Limitation on
Affiliate Transactions" and "--Certain Covenants--Limitations on Sales of Assets
and Subsidiary Stock" only, "Affiliate" shall also mean any beneficial owner of
Capital Stock representing 5% or more of the total voting power of the Voting
Stock (on a fully diluted basis) of the Company or of rights or warrants to
purchase such Capital Stock (whether or not currently exercisable) and any
Person who would be an Affiliate of any such beneficial owner pursuant to the
first sentence hereof.
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"Asset Disposition" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) by the Company or
any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of (i) any shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares or shares
required by applicable law to be held by a Person other than the Company or a
Restricted Subsidiary), (ii) all or substantially all the assets of any division
or line of business of the Company or any Restricted Subsidiary, (iii) any other
assets of the Company or any Restricted Subsidiary outside of the ordinary
course of business of the Company or such Restricted Subsidiary, (iv) any
Investment in a Strategic Alliance Client or (v) any Excess Spread Receivables
(other than, in the case of (i), (ii), (iii), (iv) and (v) above, (x) a
disposition by a Restricted Subsidiary to the Company or by the Company or a
Restricted Subsidiary to a Consolidated Restricted Subsidiary, (y) for purposes
of the covenant described under "--Certain Covenants--Limitation on Sales of
Assets and Subsidiary Stock" only, a disposition that constitutes a Restricted
Payment permitted by the covenant described under "--Certain
Covenants--Limitation on Restricted Payments" or (z) a disposition of assets
(including related assets) for an aggregate consideration of $1.0 million or
less).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of numbers of years from the date of determination to the dates
of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
or membership interests in (however designated) equity of such Person, including
any Preferred Stock, but excluding any debt securities convertible into such
equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Leverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of all Indebtedness of the Company and its
Restricted Subsidiaries on a consolidated basis, excluding (A) Permitted
Warehouse Indebtedness and (B) Hedging Obligations permitted to be Incurred
pursuant to clause (b)(6) of the covenant described under "--Limitation on
Indebtedness" to (ii) the Consolidated Net Worth of the Company.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income: (i) any net income of any
Person if such Person is not a Restricted Subsidiary, except that (A) subject to
the exclusion contained in clause (iv) below, the Company's equity in the net
income of any such Person for such period shall be included in such Consolidated
Net Income up to the aggregate amount of cash actually distributed by such
Person during such period to the Company or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or other
distribution
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paid to a Restricted Subsidiary, to the limitations contained in clause (iii)
below) and (B) the Company's equity in a net loss of any such Person for such
period shall be included in determining such Consolidated Net Income; (ii) any
net income (or loss) of any Person acquired by the Company or a Subsidiary in a
pooling of interests transaction for any period prior to the date of such
acquisition; (iii) any net income of any Restricted Subsidiary if such
Restricted Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that (A) subject to
the exclusion contained in clause (iv) below, the Company's equity in the net
income of any such Restricted Subsidiary for such period shall be included in
such Consolidated Net Income to the extent that cash could have been distributed
by such Restricted Subsidiary during such period to the Company or another
Restricted Subsidiary as a dividend or other distribution (subject, in the case
of a dividend or other distribution paid to another Restricted Subsidiary, to
the limitation contained in this clause) and (B) the Company's equity in a net
loss of any such Restricted Subsidiary for such period shall be included in
determining such Consolidated Net Income; (iv) any gain (but not loss) realized
upon the sale or other disposition of any asset (excluding any equity Investment
in a Strategic Alliance Client) of the Company or its consolidated Subsidiaries
(including pursuant to any sale-and-leaseback arrangement) which is not sold or
otherwise disposed of in the ordinary course of business and any gain (but not
loss) realized upon the sale or other disposition of any Capital Stock of any
Person (excluding Capital Stock in a Strategic Alliance Client); (v)
extraordinary gains or losses; and (vi) the cumulative effect of a change in
accounting principles. Notwithstanding the foregoing, for the purposes of the
covenant described under "Certain Covenants--Limitation on Restricted Payments"
only, there shall be excluded from Consolidated Net Income any dividends,
repayments of loans or advances or other transfers of assets from any Person to
the Company or a Restricted Subsidiary to the extent such dividends, repayments
or transfers increase the amount of Restricted Payments permitted under such
covenant pursuant to clause (a)(3)(D) thereof.
"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of the Company and its Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company for which financial statements are available, as
(i) the par or stated value of all outstanding Capital Stock of the Company plus
(ii) paid-in capital or capital surplus relating to such Capital Stock plus
(iii) any retained earnings or earned surplus less (A) any accumulated deficit,
(B) any amounts attributable to Disqualified Stock and (C) any amounts
attributable to deferred compensation appropriately classified as net worth in
accordance with GAAP.
"Consolidated Restricted Subsidiary" means a Restricted Subsidiary (i) 80%
of the Capital Stock and 80% of the Voting Stock of which is owned by the
Company or one or more Consolidated Restricted Subsidiaries and (ii) which is
treated as a consolidated subsidiary for the purpose of the Company's U.S.
Federal income tax reporting.
"Continental Grain" means Continental Grain Company, a Delaware corporation.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness or Disqualified Stock or
(iii) is redeemable at the option of the holder thereof, in each case in whole
or in part on or prior to the first anniversary of the Stated Maturity of the
Notes; provided, however, that any Capital Stock that would
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not constitute Disqualified Stock but for provisions thereof giving holders
thereof the right to require such Person to repurchase or redeem such Capital
Stock upon the occurrence of an "asset sale" or "change of control" occurring
prior to the first anniversary of the Stated Maturity of the Notes shall not
constitute Disqualified Stock if the "asset sale" or "change of control"
provisions applicable to such Capital Stock are not more favorable to the
holders of such Capital Stock than the provisions described under "--Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock" and "Change of
Control".
"Eligible Excess Spread Receivables" means Excess Spread Receivables created
after April 2, 1996; provided, however, that Eligible Excess Spread Receivables
shall not include any Excess Spread Receivables created as the result of the
securitization or sale of other Excess Spread Receivables.
"Excess Spread" means, over the life of a "pool" of Receivables that have
been sold by a Person to a trust or other Person in a securitization or sale,
the rights retained by such Person or its Restricted Subsidiaries at or
subsequent to the closing of such securitization or sale to receive cash flows
attributable to such "pool".
"Excess Spread Receivables" of a Person means the contractual or
certificated right to Excess Spread capitalized on such Person's consolidated
balance sheet (the amount of which shall be the present value of the Excess
Spread, calculated in accordance with GAAP).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth (i) in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) in the statements and
pronouncements of the Financial Accounting Standards Board, (iii) in such other
statements by such other entity as approved by a significant segment of the
accounting profession, and (iv) in the rules and regulations of the SEC
governing the inclusion of financial statements (including pro forma financial
statements) in periodic reports required to be filed pursuant to Section 13 of
the Exchange Act, including opinions and pronouncements in staff accounting
bulletins and similar written statements from the accounting staff of the SEC
and releases of the Emerging Issues Task Force.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
Person and any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other obligation of such Person (whether
arising by virtue of partnership arrangements, or by agreements to keep-well, to
purchase assets, goods, securities or services, to take-or-pay or to maintain
financial statement conditions or otherwise) or (ii) entered into for the
purpose of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); provided, however, that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning. The term "Guarantor" shall mean any Person Guaranteeing
any obligation.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement, Currency Agreement or such other
agreement designed to mitigate risks of fluctuations in value of assets owned,
financed or sold, or of liabilities incurred or assumed, in either case in the
ordinary course of business of the Company or its Restricted Subsidiaries.
"Holder" or "Noteholder" means the Person in whose name a Note is registered
on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a
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Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be
deemed to be Incurred by such Subsidiary at the time it becomes a Subsidiary.
The term "Incurrence" when used as a noun shall have a correlative meaning. The
accretion of principal of a non-interest bearing or other discount security
shall be deemed the Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable; (ii) all Capital
Lease Obligations of such Person; (iii) all obligations of such Person issued or
assumed as the deferred purchase price of property, all conditional sale
obligations of such Person and all obligations of such Person under any title
retention agreement (but excluding trade accounts payable and expense accruals
arising in the ordinary course of business); (iv) all obligations of such Person
for the reimbursement of any obligor on any letter of credit, banker's
acceptance or similar credit transaction (other than obligations with respect to
letters of credit securing obligations (other than obligations described in (i)
through (iii) above) entered into in the ordinary course of business of such
Person to the extent such letters of credit are not drawn upon or, if and to the
extent drawn upon, such drawing is reimbursed no later than the tenth Business
Day following receipt by such Person of a demand for reimbursement following
payment on the letter of credit); (v) the amount of all obligations of such
Person with respect to the redemption, repayment or other repurchase of any
Disqualified Stock (but excluding any accrued dividends); (vi) Warehouse
Indebtedness; (vii) in connection with each sale by such Person of any Excess
Spread Receivables, the maximum aggregate contractual claim (if any) that the
purchaser thereof could have as of such date against such Person if the amounts
anticipated at the time of such sale to be received by such purchaser in
connection with such Excess Spread Receivables are not received by such
purchaser; (viii) all obligations of the type referred to in clauses (i) through
(vii) of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee; (ix) all obligations of the type referred to in clauses (i) through
(viii) of other Persons secured by any Lien on any property or asset of such
Person (whether or not such obligation is assumed by such Person), the amount of
such obligation being deemed to be the lesser of the value of such property or
assets or the amount of the obligation so secured and (x) to the extent not
otherwise included in this definition, Hedging Obligations of such Person. The
amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date. Notwithstanding the
foregoing, any securities issued in a securitization by a special purpose owner
trust or similar entity formed by or on behalf of a Person and to which
Receivables or Excess Spread Receivables have been sold or otherwise transferred
by or on behalf of such Person or its Subsidiaries shall not be treated as
Indebtedness of such Person or its Subsidiaries under the Indenture, regardless
of whether such securities are treated as indebtedness for tax purposes.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement, repurchase agreement, futures contract or other financial
agreement or arrangement designed to protect the Company or any Restricted
Subsidiary against fluctuations in interest rates.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as trade accounts on the balance sheet of the lender) or other extensions of
credit (including by way of Guarantee or similar arrangement) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, Indebtedness or other similar
instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary", the definition of "Restricted Payment" and the
covenant described under "--Certain Covenants--Limitation on Restricted
Payments", (i) "Investment" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of
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the net assets of any Subsidiary of the Company at the time that such Subsidiary
is designated an Unrestricted Subsidiary; provided, however, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall
be deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary equal to an amount (if positive) equal to (x) the Company's
"Investment" in such Subsidiary at the time of such redesignation less (y) the
portion (proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of such Subsidiary at the time of such
redesignation; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors.
"Investment Grade Rating" means a rating equal to or higher than Baa3 (or
the equivalent) and BBB- (or the equivalent) by Moody's Investors Service, Inc.
(or any successor to the rating agency business thereof) and Standard & Poor's
Ratings Group (or any successor to the rating agency business thereof),
respectively.
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means (i) any mortgage, pledge, security interest, encumbrance, lien
or charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof) and (ii) any claim (whether direct or
indirect through subordination or other structural encumbrance) against any
Excess Spread Receivables sold unless the seller is not liable for any losses
thereon.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only as
and when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to such properties or assets or received in any other noncash form) in each case
net of (i) all legal, title and recording tax expenses, commissions and other
fees and expenses incurred, and all Federal, state, provincial, foreign and
local taxes required to be accrued as a liability under GAAP, as a consequence
of such Asset Disposition, (ii) all payments made on any Indebtedness which is
secured by any assets subject to such Asset Disposition, in accordance with the
terms of any Lien upon or other security agreement of any kind with respect to
such assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law be, repaid out of the
proceeds from such Asset Disposition, (iii) all distributions and other payments
required to be made to minority interest holders in Subsidiaries or joint
ventures as a result of such Asset Disposition and (iv) the deduction of
appropriate amounts provided by the seller as a reserve, in accordance with
GAAP, against any liabilities associated with the property or other assets
disposed in such Asset Disposition and retained by the Company or any Restricted
Subsidiary after such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Permitted Holders" means lineal descendants of Jules Fribourg, including
any individual legally adopted; spouses of such descendants; trusts, the
beneficiaries of which are any of the foregoing; partnerships, corporations, or
other entities in which any of the foregoing (individually or collectively) has
a controlling interest; and charitable organizations established by any of the
foregoing.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) a Restricted Subsidiary or a Person that will, upon the making
of such Investment, become a Restricted Subsidiary; provided, however, that the
primary business of such Restricted Subsidiary is a Related Business; (ii) a
Strategic Alliance Client to the extent such Investment consists of options,
warrants or other securities that are convertible or exchangeable for equity
securities of such Strategic Alliance Client and is received by the Company or a
Restricted Subsidiary without the payment of any
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consideration other than the concurrent provision by the Company or such
Restricted Subsidiary to such Strategic Alliance Client of financing or asset
securitization expertise on terms determined by the Company to be fair and
reasonable to the Company or such Restricted Subsidiary from a financial point
of view without taking into consideration any value that may inhere in such
option, warrant or convertible or exchangeable security; (iii) another Person if
as a result of such Investment such other Person is merged or consolidated with
or into, or transfers or conveys all or substantially all its assets to, the
Company or a Restricted Subsidiary; provided, however, that such Person's
primary business is a Related Business; (iv) Temporary Cash Investments; (v)
receivables owing to the Company or any Restricted Subsidiary if created or
acquired in the ordinary course of business and payable or dischargeable in
accordance with customary trade terms; (vi) payroll, travel and similar advances
to cover matters that are expected at the time of such advances ultimately to be
treated as expenses for accounting purposes and that are made in the ordinary
course of business; (vii) loans or advances to employees made in the ordinary
course of business consistent with past practices of the Company or such
Restricted Subsidiary; (viii) stock, obligations or securities received in
settlement of debts created in the ordinary course of business and owing to the
Company or any Restricted Subsidiary or in satisfaction of judgments; (ix) any
Person to the extent such Investment represents the non-cash portion of the
consideration received for an Asset Disposition as permitted pursuant to the
covenant described under "--Certain Covenants--Limitation on Sales of Assets and
Subsidiary Stock"; (x) Receivables; (xi) a Strategic Alliance Client to the
extent such Investment consists of (A) Indebtedness of such Strategic Alliance
Client that is secured by Receivables owned by such Strategic Alliance Client in
an aggregate principal amount at any time outstanding not to exceed 100% of the
aggregate market value of such Receivables; provided, however, that such
Receivables are eligible to be characterized under GAAP as held for sale on the
balance sheet of such Strategic Alliance Client and such Indebtedness has not
been outstanding in excess of 364 days; and (B) Indebtedness of such Strategic
Alliance Client that is secured by Excess Spread Receivables owned by such
Strategic Alliance Client; provided, however, that such Excess Spread
Receivables are attributed solely to one or more "pools" of Receivables that
were securitized in one or more transactions in which the Company or its
Restricted Subsidiaries either acted as underwriters or placement agent or
provided all or a portion of the financing for such "pool" prior to such
securitization; and (xii) Excess Spread Receivables; provided, however, that
such Excess Spread Receivables represent interests in one or more "pools" of
Receivables that were securitized in one or more transactions in which the
Company or its Restricted Subsidiaries acted as sponsor, underwriter or
placement agent or provided all or a portion of the financing for such "pool"
prior to such securitization.
"Permitted Liens" means, with respect to any Person, (a) pledges or deposits
by such Person under worker's compensation laws, unemployment insurance laws or
similar legislation, or good faith deposits in connection with bids, tenders,
contracts (other than for the payment of Indebtedness) or leases to which such
Person is a party, or deposits to secure public or statutory obligations of such
Person or deposits of cash or United States government bonds to secure surety or
appeal bonds to which such Person is a party, or deposits as security for
contested taxes or import duties or for the payment of rent, in each case
Incurred in the ordinary course of business; (b) Liens imposed by law, such as
carriers', warehousemen's and mechanics' Liens, in each case for sums not yet
due or being contested in good faith by appropriate proceedings or other Liens
arising out of judgments or awards against such Person with respect to which
such Person shall then be proceeding with an appeal or other proceedings for
review; (c) Liens for property taxes not yet subject to penalties for
non-payment or which are being contested in good faith and by appropriate
proceedings; (d) Liens in favor of issuers of surety bonds or letters of credit
issued pursuant to the request of and for the account of such Person in the
ordinary course of its business; provided, however, that such letters of credit
do not constitute Indebtedness; (e) minor survey exceptions, minor encumbrances,
easements or reservations of, or rights of others for, licenses, rights of way,
sewers, electric lines, telegraph and telephone lines and other similar
purposes, or zoning or other restrictions as to the use of real property or
Liens incidental to the conduct of the business of such Person or to the
ownership of its properties which were not Incurred in connection with
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Indebtedness and which do not in the aggregate materially adversely affect the
value of said properties or materially impair their use in the operation of the
business of such Person; (f) Liens securing Indebtedness Incurred to finance the
construction, purchase or lease of, or repairs, improvements or additions to,
property of such Person (but excluding Capital Stock of another Person);
provided, however, that the Lien may not extend to any other property owned by
such Person or any of its Subsidiaries at the time the Lien is Incurred, and the
Indebtedness secured by the Lien may not be Incurred more than 180 days after
the later of the acquisition, completion of construction, repair, improvement,
addition or commencement of full operation of the property subject to the Lien;
(g) Liens on Receivables owned by the Company or a Restricted Subsidiary, as the
case may be, to secure Indebtedness permitted under the provisions described in
clause (b)(1) under "--Certain Covenants-- Limitation on Indebtedness" or clause
(a) under "--Certain Covenants--Limitation on Indebtedness and Preferred Stock
of Restricted Subsidiaries"; (h) Liens on Excess Spread Receivables (or on the
Capital Stock of any Subsidiary of such Person substantially all the assets of
which are Excess Spread Receivables); provided, however, that, unless the
Covenant Termination has occurred, (A) any such Liens shall not pertain to any
Excess Spread Receivable existing on April 2, 1996 which, if created thereafter,
would have been an Eligible Excess Spread Receivable unless such Excess Spread
Receivable was subject to a Lien on such date created by the Company in respect
of the financing thereof (a "predecessor Lien"); provided further, however, that
in the case of any such Liens (a "subsequent Lien") on Excess Spread Receivables
which were subject to predecessor Liens, the sum of (x) the aggregate book value
of subordinated interests created and retained by the Company or its Restricted
Subsidiaries as a result of the sale or financing associated with such
subsequent Liens and (y) the aggregate book value of any Excess Spread
Receivables which were subject to predecessor Liens but which are then no longer
subject to any Lien (other than Permitted Liens described under another clause
of this definition) shall equal at least the aggregate book value at such time
of all such Excess Spread Receivables which are then subject to subsequent
Liens, as calculated immediately prior to the creation of each such subsequent
Lien, multiplied by a fraction the numerator of which is the aggregate book
value of the subordinated interests associated with all predecessor Liens on
April 2, 1996 and the denominator of which is the sum of (A) such aggregate book
value of such subordinated interests and (B) the outstanding balance on April 2,
1996 of the related senior interests; and (B) any such Lien on any Eligible
Excess Spread Receivables shall extend to Eligible Excess Spread Receivables
representing no more than 50% of the amount of Eligible Excess Spread
Receivables shown on the balance sheet of the Company and its consolidated
Restricted Subsidiaries, determined on a consolidated basis in accordance with
GAAP, as of the later of (x) the Issue Date and (y) the end of the most recent
fiscal quarter of the Company prior to the creation of such Lien for which
financial statements are available; provided, however, that for purposes of this
clause (h), any Lien on the Capital Stock of any Person substantially all the
assets of which are Excess Spread Receivables shall be treated as a Lien on the
Excess Spread Receivables of such Person; (i) Liens existing on the Issue Date;
(j) Liens on property or shares of Capital Stock of another Person at the time
such other Person becomes a Subsidiary of such Person; provided, however, that
such Liens are not created, incurred or assumed in connection with, or in
contemplation of, such other Person becoming such a Subsidiary; provided
further, however, that such Lien may not extend to any other property owned by
such Person or any of its Subsidiaries; (k) Liens on property at the time such
Person or any of its Subsidiaries acquires the property, including any
acquisition by means of a merger or consolidation with or into such Person or a
Subsidiary of such Person; provided, however, that such Liens are not created,
incurred or assumed in connection with, or in contemplation of, such
acquisition; provided further, however, that the Liens may not extend to any
other property owned by such Person or any of its Subsidiaries; (l) Liens
securing Indebtedness or other obligations of a Subsidiary of such Person owing
to such Person or a Consolidated Restricted Subsidiary of such Person; (m) Liens
(other than on any Excess Spread Receivables) securing Hedging Obligations; (n)
Liens on cash or other assets (other than Excess Spread Receivables) securing
Warehouse Indebtedness of the Company or its Restricted Subsidiaries; and (o)
Liens to secure any Refinancing (or successive Refinancings) as a whole, or in
part, of any Indebtedness secured by any Lien referred to in the foregoing
clauses (f), (i), (j) and (k); provided, however, that (x) such new Lien shall
be limited to
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all or part of the same property that secured the original Lien (plus
improvements to or on such property) and (y) the Indebtedness secured by such
Lien at such time is not increased to any amount greater than the sum of (A) the
outstanding principal amount or, if greater, committed amount of the
Indebtedness described under clauses (f), (i), (j) or (k), as the case may be,
at the time the original Lien became a Permitted Lien and (B) an amount
necessary to pay any fees and expenses, including premiums, related to such
refinancing, refunding, extension, renewal or replacement. Notwithstanding the
foregoing, "Permitted Liens" will not include any Lien described in clauses (f),
(j) or (k) above to the extent such Lien applies to any Additional Assets
acquired directly or indirectly from Net Available Cash pursuant to the covenant
described under "--Certain Covenants--Limitation on Sale of Assets and
Subsidiary Stock".
"Permitted Warehouse Indebtedness" means Warehouse Indebtedness in
connection with a Warehouse Facility; provided, however, that (i) the assets as
to which such Warehouse Indebtedness relates are or, prior to any funding under
the related Warehouse Facility with respect to such assets, were eligible to be
recorded as held for sale on the consolidated balance sheet of the Company in
accordance with GAAP, (ii) such Warehouse Indebtedness will be deemed to be
Permitted Warehouse Indebtedness except to the extent the holders of such
Warehouse Indebtedness have contractual recourse to the Company or its
Restricted Subsidiaries to satisfy claims in respect of such Warehouse
Indebtedness in excess of (A) the realizable value of the assets as to which
such Warehouse Indebtedness relates and (B) any assets securing such Warehouse
Indebtedness, and (iii) any such Indebtedness has not been outstanding in excess
of 364 days.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over shares
of Capital Stock of any other class of such Person.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Public Equity Offering" means an underwritten primary public offering of
common stock of the Company pursuant to an effective registration statement
under the Securities Act.
"Rating Agencies" mean Standard & Poor's Ratings Group, a division of McGraw
Hill, Inc., and Moody's Investors Service, Inc. or any successor to the
respective rating agency businesses thereof.
"Receivables" means consumer and commercial loans, leases and receivables
purchased or originated by the Company, any Restricted Subsidiary or a Strategic
Alliance Client in the ordinary course of business; provided, however, that for
purposes of determining the amount of a Receivable at any time, such amount
shall be determined in accordance with GAAP, consistently applied, as of the
most recent practicable date.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the
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Indebtedness being Refinanced and (iii) such Refinancing Indebtedness has an
aggregate principal amount (or if Incurred with original issue discount, an
aggregate issue price) that is equal to or less than the aggregate principal
amount (or if Incurred with original issue discount, the aggregate accreted
value) then outstanding or committed (plus fees and expenses, including any
premium and defeasance costs) under the Indebtedness being Refinanced; provided
further, however, that Refinancing Indebtedness shall not include (x)
Indebtedness of a Subsidiary that Refinances Indebtedness of the Company or
another Subsidiary or (y) Indebtedness of the Company or a Restricted Subsidiary
that Refinances Indebtedness of an Unrestricted Subsidiary.
"Related Business" means any consumer or commercial finance business or any
financial service business.
"Restricted Payment" with respect to any Person means (i) the declaration or
payment of any dividends or any other distributions of any sort in respect of
its Capital Stock (including any payment in connection with any merger or
consolidation involving such Person) or similar payment to the direct or
indirect holders of its Capital Stock (other than (A) dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock), (B)
dividends or distributions payable solely to the Company or a Restricted
Subsidiary and (C) pro rata dividends or other distributions made by a
Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders (or
owners of an equivalent interest in the case of a Subsidiary that is an entity
other than a corporation)), (ii) the purchase, redemption or other acquisition
or retirement for value of any Capital Stock of the Company held by any Person
or of any Capital Stock of a Restricted Subsidiary held by any Affiliate of the
Company (other than a Restricted Subsidiary), including the exercise of any
option to exchange any Capital Stock (other than into Capital Stock of the
Company that is not Disqualified Stock), (iii) the purchase, repurchase,
redemption, defeasance or other acquisition or retirement for value, prior to
scheduled maturity, scheduled repayment or scheduled sinking fund payment of any
Subordinated Obligations (other than the purchase, repurchase or other
acquisition of Subordinated Obligations purchased in anticipation of satisfying
a sinking fund obligation, principal installment or final maturity, in each case
due within one year of the date of acquisition) or (iv) the making of any
Investment (other than a Permitted Investment) in any Person.
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"SEC" means the Securities and Exchange Commission.
"Senior Indebtedness" means (i) Indebtedness of any Person, whether
outstanding on the Issue Date or thereafter Incurred and (ii) accrued and unpaid
interest (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company to the extent post-
filing interest is allowed in such proceeding) in respect of (A) indebtedness of
such Person for money borrowed and (B) indebtedness evidenced by notes,
debentures, bonds or other similar instruments for the payment of which such
Person is responsible or liable unless, in the case of either clause (i) or
(ii), in the instrument creating or evidencing the same or pursuant to which the
same is outstanding, it is provided that such obligations are subordinate in
right of payment to the Notes; provided, however, that Senior Indebtedness shall
not include (1) any obligation of such Person to any Subsidiary of such Person,
(2) any liability for Federal, state, local or other taxes owed or owing by such
Person, (3) any accounts payable or other liability to trade creditors arising
in the ordinary course of business (including guarantees thereof or instruments
evidencing such liabilities), (4) any obligation in respect of Capital Stock of
such Person or (5) that portion of any Indebtedness which at the time of
Incurrence is Incurred in violation of the Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
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"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the final payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Strategic Alliance Client" means any Person (other than a Restricted
Subsidiary) engaged in a Related Business to which the Company provides, or
reasonably expects to provide, financing or asset securitization expertise in
return for asset-backed underwriting or placement agent commitments.
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement to that
effect.
"Subsidiary" means, in respect of any Person, any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of Capital Stock or other interests (including partnership
interests) entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by (i) such Person, (ii) such
Person and one or more Subsidiaries of such Person or (iii) one or more
Subsidiaries of such Person.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company that is not an Affiliate of the Company and
which is organized under the laws of the United States of America, any state
thereof or any foreign country recognized by the United States, and which bank
or trust company has capital, surplus and undivided profits aggregating in
excess of $50,000,000 (or the foreign currency equivalent thereof) and has
outstanding debt which is rated "A" (or such similar equivalent rating) or
higher by at least one nationally recognized statistical rating organization (as
defined in Rule 436 under the Securities Act) or any money-market fund sponsored
by a registered broker dealer or mutual fund distributor, (iii) repurchase
obligations with a term of not more than 30 days for underlying securities of
the types described in clause (i) above entered into with a bank meeting the
qualifications described in clause (ii) above, (iv) investments in commercial
paper, maturing not more than 90 days after the date of acquisition, issued by a
corporation (other than an Affiliate of the Company) organized and in existence
under the laws of the United States of America or any foreign country recognized
by the United States of America with a rating at the time as of which any
investment therein is made of "P-1" (or higher) according to Moody's Investors
Service, Inc. or "A-1" (or higher) according to Standard and Poor's Ratings
Group, and (v) investments in securities with maturities of six months or less
from the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by Standard &
Poor's Ratings Group or "A" by Moody's Investors Service, Inc.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns
any Capital Stock or Indebtedness of, or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; provided, however, that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, such designation would be permitted
under the covenant described under "--Certain Covenants--Limitation on
Restricted Payments". The Board of Directors may designate
98
<PAGE>
any Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however,
that immediately after giving effect to such designation (x) the Company could
Incur $1.00 of additional Indebtedness under paragraph (a) of the covenant
described under "--Certain Covenants--Limitation on Indebtedness" and (y) no
Default shall have occurred and be continuing. Any such designation by the Board
of Directors shall be evidenced by the Company to the Trustee by promptly filing
with the Trustee a copy of the board resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests or membership interests) of such
Person then outstanding and normally entitled (without regard to the occurrence
of any contingency) to vote in the election of directors, managers or trustees
thereof.
"Warehouse Facility" means any funding arrangement with a financial
institution or other lender or purchaser exclusively to finance the purchase or
origination of Receivables by the Company, a Subsidiary of the Company or a
Strategic Alliance Client for the purpose of pooling such Receivables prior to
securitization or sale in the ordinary course of business, including purchase
and sale facilities pursuant to which the Company or a Subsidiary of the Company
sells Receivables or debt of a Strategic Alliance Client secured by Receivables
owned or financed by such Strategic Alliance Client to a financial institution
and retains a right of first refusal upon the subsequent resale of such
Receivables or debt by such financial institution.
"Warehouse Indebtedness" means the greater of (x) the consideration received
by the Company or its Restricted Subsidiaries under a Warehouse Facility and (y)
the book value of the assets financed under a Warehouse Facility with respect to
Receivables or debt of a Strategic Alliance Client secured by Receivables owned
or financed by such Strategic Alliance Client until such time such Receivables
or debt are (i) securitized, (ii) repurchased by the Company or its Restricted
Subsidiaries or (iii) sold by the counterparty under the Warehouse Facility to a
Person who is not an Affiliate of the Company.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares and shares held by other
Persons to the extent such shares are required by applicable law to be held by a
Person other than the Company or a Restricted Subsidiary) is owned by the
Company or one or more Wholly Owned Subsidiaries.
99
<PAGE>
BOOK-ENTRY FORM OF THE NOTES
The Notes will initially be issued in the form of one or more Global
Securities (as defined in the Indenture) held in book-entry form. Accordingly,
DTC or its nominee will initially be the sole registered holder of the Notes for
all purposes under the Indenture.
Upon the issuance of a Global Security, DTC or it nominee will credit the
accounts of persons holding through it with the respective principal amounts of
the Notes represented by such Global Security purchased by such persons in the
Offering. Such accounts shall be designated by the Underwriters with respect to
Notes placed by the Underwriters for the Company. Ownership of beneficial
interests in a Global Security will be limited to persons that have accounts
with DTC ("participants") or persons that may hold interests through
participants. Ownership of beneficial interests by participants in a Global
Security will be shown on, and the transfer of that ownership interest will be
effected only through, records maintained by DTC for such Global Security.
Ownership of beneficial interests in such Global Security by persons that hold
through participants will be shown on, and the transfer of that ownership
interest within such participant will be effected only through, records
maintained by such participant. The laws of some jurisdictions require that
certain purchasers of securities take physical delivery of such securities in
definitive form. Such limits and such laws may impair the ability to transfer
beneficial interests in a Global Security.
Payment of principal and interest on the Notes represented by any such
Global Security will be made to DTC or its nominee, as the case may be, as the
sole registered owner and the sole holder of the Notes represented thereby for
all purposes under the Indenture. None of the Company, the Trustee, any agent of
the Company, or the Underwriters will have any responsibility or liability for
any aspect of DTC's records relating to or payments made on account of
beneficial ownership interests in a Global Security representing any Notes or
for maintaining, supervising, or reviewing any of DTC's records relating to such
beneficial ownership interests.
The Company has been advised by DTC that upon receipt of any payment of
principal of, or interest on, any Global Security, DTC will immediately credit,
on its book-entry registration and transfer system, the accounts of participants
with payments in amounts proportionate to their respective beneficial interests
in the principal or face amount of such Global Security as shown on the records
of DTC. Payments by participants to owners of beneficial interests in a Global
Security held through such participants will be governed by standing
instructions and customary practices as is known as the case with securities
held for customer accounts registered in "street name" and will be the sole
responsibility of such participants.
A Global Security may not be transferred except as a whole by DTC to a
nominee of DTC or by a nominee of DTC to DTC. A Global Security is exchangeable
for certificated Notes only if: (i) DTC notifies the Company that it is
unwilling or unable to continue as a Depositary (as defined in the Indenture)
for such Global Security or if at any time DTC ceases to be a clearing agency
registered under the Exchange Act; (ii) the Company executes and delivers to the
Trustee a notice that such Global Security shall be so transferable,
registrable, and exchangeable, and such transfers shall be registrable; or (iii)
there shall have occurred and be continuing an Event of Default or an event
which, with the giving of notice or lapse of time or both, would constitute an
Event of Default with respect to the Notes represented by such Global Security.
Any Global Security that is exchangeable for certificated Notes pursuant to the
preceding sentence will be transferred to, and registered and exchanged for,
certificated Notes in authorized denominations and registered in such names as
the Depositary holding such Global Security may direct. Subject to the
foregoing, a Global Security is not exchangeable, except for a Global Security
of like denomination to be registered in the name of the Depositary or its
nominee. In the event that a Global Security becomes exchangeable for
certificated Notes: (i) certificated Notes will be issued only in fully
registered form in denominations of $1,000 or integral multiples thereof; (ii)
payment of principal, any repurchase price, and interest on the certificated
Notes will be payable, and the transfer of the certificated Notes will be
registerable, at the office or agency of the Company maintained for such
purposes; and (iii) no service charge will be made for any registration
100
<PAGE>
of transfer or exchange of the certificated Notes, although the Company may
require payment of a sum sufficient to cover any tax or governmental charge in
connection therewith.
So long as the Depositary for a Global Security, or its nominee, is the
registered owner of such Global Security, such Depositary or such nominee, as
the case may be, will be considered the sole owner or holder of the Notes
represented by such Global Security for the purposes of receiving payment on the
Notes, receiving notices, and for all other purposes under the Indenture and the
Notes. Beneficial interests in Notes will be evidenced only by, and transfers
thereof will be effected only through, records maintained by the Depositary and
its participants. Cede & Co. has been appointed as the nominee of DTC. Except as
provided above, owners of beneficial interests in a Global Security will not be
entitled to and will not be considered the holders thereof for any purposes
under the Indenture. Accordingly, each person owning a beneficial interest in a
Global Security must rely on the procedures of the Depositary, and, if such
person is not a participant, on the procedures of the participant through which
such person owns its interest, to exercise any rights of a holder under the
Indenture. The Company understands that under existing industry practices, in
the event that the Company requests any action of holders or that an owner of a
beneficial interest in a Global Security desires to give or take any action
which a holder is entitled to give or take under the Indenture, the Depositary
would authorize the participants holding the relevant beneficial interest to
give or take such action and such participants would authorize beneficial owners
owning through such participants to give or take such action or would otherwise
act upon the instructions of beneficial owners owning through them.
DTC has advised the Company that DTC is a limited-purpose trust company
organized under the Banking Law of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code, and a "clearing agency" registered under the
Exchange Act. DTC was created to hold the securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers (including the Underwriters), banks, trust companies, clearing
corporations, and certain other organizations some of whom (and/or their
representatives) own DTC. Access to DTC's book-entry system is also available to
others, such as banks, brokers, dealers, and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax consequences
under the Internal Revenue Code of 1986, as amended (the "Code"), of holding and
disposing of the Notes. The summary is based upon laws, regulations, rulings and
judicial decisions now in effect, all of which are subject to change (possibly
on a retroactive basis). The summary applies only to a beneficial owner of a
Note that is (i) a citizen or resident of the United States, (ii) a corporation
created or organized under the laws of the United States or any State thereof
(including the District of Columbia) or (iii) a person otherwise subject to
United States federal income taxation on its worldwide income (a "U.S. holder").
Except as expressly indicated, this summary deals only with Notes held as
capital assets and addresses only initial purchasers. This summary does not
discuss all aspects of federal income taxation that may be relevant to investors
in light of their personal investment circumstances or to certain types of
holder subject to special treatment under the federal income tax laws (for
example, dealers in securities, tax-exempt organizations, insurance companies,
banks, purchasers that hold Notes as a hedge against currency risks or as part
of a straddle with other investments or as part of a "synthetic security" or
other integrated investment comprised of a Note and one or more other
investments, or purchasers that have a "functional currency" other than the U.S.
Dollar), and does not discuss the consequences to a holder under state, local or
foreign tax laws. The Company has not sought a formal legal opinion from its tax
counsel regarding the material federal income tax consequences under the Code of
holding and disposing of the Notes. Prospective investors are advised to consult
their own tax advisors regarding the federal, state, local and other tax
considerations of holding and disposing of the Notes.
101
<PAGE>
STATED INTEREST
A U.S. holder of a Note will generally be required to report as ordinary
income for federal income tax purposes interest received or accrued on the Note
in accordance with the holder's method of tax accounting.
SALE, EXCHANGE OR RETIREMENT OF NOTES
Upon the sale, exchange or retirement (including redemption) of a Note, a
U.S. holder of a Note generally will recognize gain or loss in an amount equal
to the difference between the amount of cash and the fair market value of any
property received on the sale, exchange or retirement of the Note (other than in
respect of accrued and unpaid interest on the Note) and such U.S. holder's
adjusted tax basis in the Note. If a U.S. holder holds the Note as a capital
asset, such gain or loss will be capital gain or loss, except to the extent of
any accrued market discount (see "Market Discount" below), and will be long-term
capital gain or loss if the Note has been held for more than one year at the
time of sale, exchange or retirement.
MARKET DISCOUNT
"Market discount" is generally defined as the excess of the stated
redemption price at maturity of a Note over the tax basis of the Note in the
hands of the U.S. holder immediately after its acquisition. In general, a Note
in the hands of an original U.S. holder is not a market discount bond. In
addition, under a de minimis exception, there is no market discount if the
excess of the stated redemption price at maturity of the Note over the U.S.
holder's tax basis therein is less than 0.25% of the stated redemption price at
maturity of the Note multiplied by the number of complete years after the
acquisition date to the maturity date of the Note. Market discount generally
will accrue ratably during the period from the date of acquisition to the
maturity date of the Note, unless the U.S. holder elects to accrue such discount
on the basis of the constant interest method.
A U.S. holder in whose hands a Note is a market discount bond generally will
be required to treat as ordinary income any gain recognized on the sale,
exchange, redemption or other disposition of the Note to the extent of accrued
market discount. A U.S. holder of a Note acquired at market discount also may be
required to defer the deduction of all or a portion of the interest on any
indebtedness incurred or maintained to purchase or carry the Note until it is
disposed of in a taxable transaction.
A U.S. holder of a Note acquired at a market discount may elect to include
market discount in income as it accrues, in which case the foregoing rules would
not apply. The election would apply to all market discount bonds acquired by the
electing U.S. holder on or after the first day of the first taxable year to
which the election applies. The election may be revoked only with the consent of
the Internal Revenue Service.
INFORMATION REPORTING AND BACKUP WITHHOLDING
For each calendar year in which the Notes are outstanding, the Company is
required to provide the IRS with certain information, including the U.S.
holder's name, address and taxpayer identification number, the aggregate amount
of principal and interest paid during the calendar year and the amount of tax
withheld, if any. This obligation, however, does not apply with respect to a
U.S. holder that is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact.
A U.S. holder of a Note subject to the reporting requirements described
above may be subject to backup withholding at the rate of 31% with respect to
interest and principal paid on the Notes, unless such U.S. holder provides a
correct taxpayer identification number, certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable requirements of
the backup withholding rules. A U.S. holder of a Note who does not provide the
Company with his correct taxpayer identification number may be subject to
penalties imposed by the Internal Revenue Service. Any amount paid as backup
withholding will be creditable against the U.S. holder's income tax liability,
provided that the required information is furnished to the IRS.
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<PAGE>
UNDERWRITING
Under the terms and subject to the conditions of the Underwriting Agreement
dated , 1996 (the "Underwriting Agreement"), the Company has agreed to sell
to the Underwriters and each of the Underwriters has severally but not jointly
agreed to purchase from the Company the following respective principal amount of
the Notes:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
UNDERWRITER OF THE NOTES
- --------------------------------------------------------------- ------------
<S> <C>
Bear, Stearns & Co. Inc. ...................................... $
CS First Boston Corporation....................................
UBS Securities LLC.............................................
------------
Total.................................................... $
------------
------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will be
obligated to purchase all of the Notes, if any are purchased. The Underwriting
Agreement provides that, in the event of default by an Underwriter, in certain
circumstances, the purchase commitment of the non-defaulting Underwriter may be
increased or the Underwriting Agreement may be terminated.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the Notes to the public initially at the public offering price
set forth on the cover page of this Prospectus and to certain dealers at such
price less a concession of . % of the principal amount per Note, and the
Underwriters and such dealers may allow a discount of . % of the principal
amount per Note on sales to certain other dealers. After the initial public
offering, the public offering price and concession and discount to dealers may
be changed by the Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments which the Underwriters may be required to make in respect thereof.
The Notes are a new issue of securities with no established trading market
and the Company does not intend to apply for listing of the Notes on any
national securities exchange. The Underwriters have advised the Company that
they presently intend to act as market makers for the Notes. The Underwriters,
however, are not obligated to make a market in the Notes and any such market
making may be discontinued at any time without notice. No assurance can be given
as to the liquidity of the trading market for the Notes or that an active
trading market for the Notes will develop. If an active market does not develop,
the market price and liquidity of the Notes may be adversely affected.
The Underwriters have informed the Company that they do not expect
discretionary sales by the Underwriters to exceed 5% of the principal amount of
Notes being offered hereby.
Certain of the Underwriters have in the past and each of the Underwriters
may in the future (i) provide underwriting, financial advisory or other services
to the Company or Continental Grain or (ii) purchase from or sell to the Company
loans, securities, Excess Spread Receivables or other assets. In addition, an
affiliate of each of Bear, Stearns & Co. Inc. and CS First Boston Corporation
is a purchaser under Purchase and Sale Facilities with the Company. In addition,
an affiliate of each of CS First Boston Corporation and UBS Securities LLC has
a corporate lending relationship with Continental Grain.
103
<PAGE>
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Notes in Canada is being made only on a private
placement basis exempt from the requirement that the Company prepare and file a
prospectus with the securities' regulatory authorities in each province where
trades of the Notes are effected. Accordingly, any resale of the Notes in Canada
must be made in accordance with applicable securities laws which will vary
depending on the relevant jurisdiction, and which may require resales to be made
in accordance with available statutory exemptions or pursuant to a discretionary
exemption granted by the applicable Canadian securities regulatory authority.
Purchasers are advised to seek legal advice prior to any resale of the Notes.
REPRESENTATIONS OF PURCHASERS
Each purchaser of the Notes in Canada who receives a purchase confirmation
will be deemed to represent to the Company and the dealer from whom such
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such the Notes without the
benefit of a prospectus qualified under such securities laws; (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent; and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."
RIGHTS OF ACTION AND ENFORCEMENT
The Notes being offered are those of a foreign issuer and Ontario purchasers
will not receive the contractual right of action prescribed by section 32 of the
Regulation under the Securities Act (Ontario). As a result, Ontario purchasers
must rely on other remedies that may be available, including common law rights
of action for damages or rescission or rights of action under the civil
liability provisions of the U.S. federal securities laws.
All of the Company's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Ontario purchasers to effect service of process within Canada upon the
Company or such persons. All or a substantial portion of the assets of the
Company and such persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the Company or such persons in
Canada or to enforce a judgment obtained in Canadian courts against such Company
or persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of the Notes to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any of
the Notes acquired by such purchaser pursuant to this offering. Such report must
be in the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17 a copy of which may be obtained from the Company. Only one such
report must be filed in respect of the Notes acquired on the same date and under
the same prospectus exemption.
LEGAL MATTERS
The validity of the Notes offered hereby and certain other legal matters in
connection with the Offering will be passed upon for the Company by Dewey
Ballantine, New York, New York. The Underwriters have been represented by
Cravath, Swaine & Moore, New York, New York.
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EXPERTS
The Consolidated Financial Statements included in this prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
105
<PAGE>
CONTIFINANCIAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Consolidated Balance Sheets as of March 31, 1995 and 1996 and June 30, 1996
(unaudited)........................................................................... F-3
Consolidated Statements of Income for the years ended March 31, 1994, 1995 and 1996
and the three months ended June 30, 1995 and 1996 (unaudited)......................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended March
31, 1994, 1995 and 1996 and the three months ended June 30, 1995 and 1996
(unaudited)........................................................................... F-5
Consolidated Statements of Cash Flows for the years ended March 31, 1994, 1995 and
1996 and the three months ended June 30, 1995 and 1996 (unaudited).................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of ContiFinancial Corporation:
We have audited the accompanying consolidated balance sheets of
ContiFinancial Corporation (a Delaware corporation) and subsidiaries as of March
31, 1995 and 1996, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 financial statements referred to above present fairly,
in all material respects, the financial position of ContiFinancial Corporation
and subsidiaries as of March 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1996, in conformity with generally accepted accounting principles.
New York, New York
May 17, 1996
F-2
<PAGE>
CONTIFINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1995 AND 1996 AND JUNE 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
------------------- -----------
1995 1996 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents....................................... $ 2,822 $ 32,479 $ 24,919
Restricted cash................................................. 760 620 620
Securities purchased under agreements to resell................. 84,698 179,875 183,152
Interest-only and residual certificates......................... 143,031 293,218 223,802
Capitalized servicing fees receivable........................... -- 11,689 14,816
Trade receivables:
Receivables held for sale..................................... 77,312 296,206 364,159
Other receivables............................................. 16,546 57,943 56,517
Allowance for loan losses..................................... (1,808) (1,824) (1,893)
-------- -------- -----------
Total trade receivables, net.................................. 92,050 352,325 418,783
-------- -------- -----------
Premises and equipment, net of accumulated depreciation of
$1,185, $2,497 and $2,773 (unaudited) as of March 31, 1995 and
1996 and June 30, 1996, respectively.......................... 2,482 3,906 3,687
Cost in excess of minority interest equity...................... -- 14,573 14,422
Other assets.................................................... 1,899 3,855 7,471
-------- -------- -----------
Total assets.............................................. $327,742 $892,540 $ 891,672
-------- -------- -----------
-------- -------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses........................... $ 41,551 $ 73,459 $ 49,700
Securities sold but not yet purchased........................... 81,665 180,729 184,546
Payables to affiliates:
Due to affiliates............................................. 114,907 13,734 10,448
Notes payable................................................. -- 324,000 324,000
-------- -------- -----------
Total payables to affiliates.................................. 114,907 337,734 334,448
-------- -------- -----------
Other liabilities............................................... 5,456 5,799 7,170
-------- -------- -----------
Total liabilities......................................... 243,579 597,721 575,864
-------- -------- -----------
Commitments and contingencies
Minority interest of subsidiary................................. 16,248 -- --
Stockholders' equity:
Preferred stock (par value $0.01 per share; 25,000,000 shares
authorized; none issued or outstanding at March 31 and June
30, 1996)..................................................... -- -- --
Common stock (par value $0.01 per share; 250,000,000 shares
authorized; 44,378,953 shares issued and outstanding at March
31, 1996 and June 30, 1996)................................... 1 444 444
Paid-in capital................................................. 34,000 294,701 294,701
Retained earnings............................................... 33,914 22,648 42,081
Deferred compensation........................................... -- (22,974) (21,418)
-------- -------- -----------
Total stockholders' equity................................ 67,915 294,819 315,808
-------- -------- -----------
Total liabilities and stockholders' equity................ $327,742 $892,540 $ 891,672
-------- -------- -----------
-------- -------- -----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-3
<PAGE>
CONTIFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996
AND THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED MARCH 31, JUNE 30,
--------------------------------- ---------------------
1994 1995 1996 1995 1996
------- -------- ---------- ------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
GROSS INCOME
Gain on sale of receivables............. $49,671 $ 67,512 $ 146,529 $22,555 $ 31,166
Interest................................ 20,707 42,929 91,737 17,883 28,515
Net servicing income.................... 3,989 9,304 29,298 4,766 9,073
Other income............................ 162 2,252 4,252 968 1,009
------- -------- ---------- ------- ----------
Total gross income.................. 74,529 121,997 271,816 46,172 69,763
------- -------- ---------- ------- ----------
EXPENSES
Compensation and benefits............... 14,674 23,812 52,203 7,840 12,408
Interest (includes $5,140, $10,234 and
$22,635 for the years ended March 31,
1994, 1995 and 1996 and $3,271
(unaudited) and $6,226 (unaudited) for
the three months ended June 30, 1995
and 1996, respectively, to affiliates) 12,124 29,635 74,770 15,245 19,662
Provision for loan losses............... 4,499 1,935 285 148 219
General and administrative.............. 7,946 9,627 18,022 3,257 4,779
------- -------- ---------- ------- ----------
Total expenses...................... 39,243 65,009 145,280 26,490 37,068
------- -------- ---------- ------- ----------
Income before income taxes and minority
interest................................ 35,286 56,988 126,536 19,682 32,695
Income taxes............................ 13,726 22,168 49,096 7,656 13,262
------- -------- ---------- ------- ----------
Income before minority interest......... 21,560 34,820 77,440 12,026 19,433
Minority interest of subsidiary......... 5,076 8,728 3,310 3,310 --
------- -------- ---------- ------- ----------
Net income.......................... $16,484 $ 26,092 $ 74,130 $ 8,716 $ 19,433
------- -------- ---------- ------- ----------
------- -------- ---------- ------- ----------
Primary and fully diluted earnings per
common share (pro forma at March 31,
1996)................................... $ 2.00 $ 0.44
---------- ----------
---------- ----------
Fully diluted weighted average number of
shares outstanding (pro forma at March
31, 1996)............................. 37,050,165 44,043,368
---------- ----------
---------- ----------
Primary weighted average number of
shares outstanding (pro forma at March
31, 1996)............................... 36,995,631 43,898,281
---------- ----------
---------- ----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-4
<PAGE>
CONTIFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996
AND THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------- TOTAL
NUMBER PAID-IN RETAINED DEFERRED STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL EARNINGS COMPENSATION EQUITY
---------- ------ -------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1993......... 3,100 $ 1 $ 34,000 $ 21,338 $ -- $ 55,339
Net income........................ -- -- -- 16,484 -- 16,484
---------- ------ -------- -------- ------------ -------------
Balance at March 31, 1994......... 3,100 1 34,000 37,822 -- 71,823
Net income........................ -- -- -- 26,092 -- 26,092
Cash dividend paid................ -- -- -- (30,000) -- (30,000)
---------- ------ -------- -------- ------------ -------------
Balance at March 31, 1995......... 3,100 1 34,000 33,914 -- 67,915
Capital contribution.............. -- -- 10,000 -- -- 10,000
Net income for the period from
April 1, 1995 to February 8,
1996.............................. -- -- -- 51,482 -- 51,482
Cash dividend paid................ -- -- -- (305) -- (305)
---------- ------ -------- -------- ------------ -------------
Balance at February 8, 1996....... 3,100 1 44,000 85,091 -- 129,092
Reorganization:
Transfer of stock............... (3,100) (1) -- -- -- (1)
Common stock issued............. 35,918,421 359 84,732 (85,091) -- --
Common stock issued in public
offering.......................... 7,130,000 72 138,041 -- -- 138,113
Issuance of restricted stock...... 1,330,532 13 27,928 -- (27,941) --
Net income for the period from
February 9, 1996 to March 31,
1996.............................. -- -- -- 22,648 -- 22,648
Amortization of deferred
compensation...................... -- -- -- -- 4,967 4,967
---------- ------ -------- -------- ------------ -------------
Balance at March 31, 1996......... 44,378,953 444 294,701 22,648 (22,974) 294,819
Net income (unaudited)............ -- -- -- 19,433 -- 19,433
Amortization of deferred
compensation (unaudited).......... -- -- -- -- 1,556 1,556
---------- ------ -------- -------- ------------ -------------
Balance at June 30, 1996
(unaudited)....................... 44,378,953 $444 $294,701 $ 42,081 $(21,418) $ 315,808
---------- ------ -------- -------- ------------ -------------
---------- ------ -------- -------- ------------ -------------
Balance at March 31, 1995......... 3,100 $ 1 $ 34,000 $ 33,914 -- $ 67,915
Net income (unaudited)............ -- -- -- 8,716 -- 8,716
---------- ------ -------- -------- ------------ -------------
Balance at June 30, 1995
(unaudited)....................... 3,100 $ 1 $ 34,000 $ 42,630 -- $ 76,631
---------- ------ -------- -------- ------------ -------------
---------- ------ -------- -------- ------------ -------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-5
<PAGE>
CONTIFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996
AND THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE><CAPTION>
THREE MONTHS ENDED JUNE
YEARS ENDED MARCH 31, 30,
---------------------------------------- -------------------------
1994 1995 1996 1995 1996
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $ 16,484 $ 26,092 $ 74,130 $ 8,716 $ 19,433
Adjustments to reconcile net income to
net cash used in operating
activities:
Amortization of deferred
compensation........................... -- -- 4,967 -- 1,556
Depreciation and amortization....... 358 555 1,690 315 427
Provision (benefit) for deferred
taxes.................................. 2,745 (3,080) 3,830 433 2,269
Provision for loan losses........... 4,499 1,935 285 148 219
Net changes in operating assets and
liabilities:
(Increase) decrease in restricted
cash................................... (314) 164 140 32 --
(Increase) decrease in interest-only
and residual certificates......... (43,221) (48,540) (150,187) (29,827) 69,416
(Increase) in capitalized servicing
fees receivable................... -- -- (11,689) (1,928) (3,127)
(Increase) decrease in receivables
held for sale:
Originations and purchases........ (3,365,666) (4,986,561) (12,524,578) (1,834,708) (1,595,640)
Sales and principal repayments.... 3,344,050 4,951,227 12,304,078 1,771,104 1,527,687
(Increase) decrease in other
receivables............................ (6,576) (8,499) (41,397) (14,173) 1,426
(Increase) decrease in securities
purchased under agreements to
resell and securities sold but not
yet purchased.......................... 1,756 (4,789) 3,887 1,834 540
Increase (decrease) in accounts
payable and accrued expenses...... 11,126 24,207 31,356 12,268 (23,759)
Increase in minority interest of
subsidiary............................. 5,076 8,728 3,310 3,310 --
Other, net.......................... (2,677) 3,225 (279) (6,544) (2,395)
----------- ----------- ------------ ----------- -----------
Net cash used in operating
activities............................. (32,360) (35,336) (300,457) (89,020) (1,948)
----------- ----------- ------------ ----------- -----------
Cash flows from investing activities:
Acquisition of minority interest of
subsidiary............................. -- -- (34,600) -- --
Purchase of property and equipment.... (615) (1,816) (2,643) (494) (57)
----------- ----------- ------------ ----------- -----------
Cash used in investing activities... (615) (1,816) (37,243) (494) (57)
----------- ----------- ------------ ----------- -----------
Cash flows from financing activities:
Net increase (decrease) in due to
affiliates............................. 35,061 67,666 (94,451) 91,074 (5,555)
Net increase in notes payable to
affiliates............................. -- -- 324,000 -- --
Net proceeds from initial public
common stock offering............... -- -- 138,113 -- --
Cash dividends paid................... -- (30,000) (305) -- --
----------- ----------- ------------ ----------- -----------
Net cash provided by (used in)
financing activities................... 35,061 37,666 367,357 91,074 (5,555)
----------- ----------- ------------ ----------- -----------
Net increase (decrease) in cash and
cash equivalents....................... 2,086 514 29,657 1,560 (7,560)
Cash and cash equivalents at beginning
of period............................. 222 2,308 2,822 2,822 32,479
----------- ----------- ------------ ----------- -----------
Cash and cash equivalents at end of
period................................. $ 2,308 $ 2,822 $ 32,479 $ 4,382 $ 24,919
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
</TABLE>
Supplemental schedule of noncash financing activities:
For the year ended March 31, 1996, Continental Grain Company forgave
intercompany debt of $10,000 and such amount was capitalized as a capital
contribution.
In June 1995, the acquisition of the minority interest in ContiMortgage was
deemed effective with payment in September 1995.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-6
<PAGE>
CONTIFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1994, 1995 AND 1996
THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED FOR JUNE 30, 1995 AND 1996)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
1. BACKGROUND AND BASIS OF PRESENTATION
The consolidated financial statements present the financial condition and
results of operations of ContiFinancial Corporation ("ContiFinancial" or the
"Company") which includes its directly wholly-owned subsidiaries:
ContiSecurities Asset Funding Corp. ("CSAF"), ContiSecurities Asset Funding
Corp. II, ContiSecurities Asset Funding II, L.L.C. ("CSAF II"), ContiFunding
Corporation ("CFC"), ContiTrade Services L.L.C. ("CTS"), ContiMortgage
Corporation ("CMC") (all Delaware corporations or limited liability companies)
and ContiFinancial Services Corporation ("CSC"), a New York corporation.
ContiFinancial was incorporated as a Delaware corporation on September 29, 1995.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Reorganization
On February 14, 1996, ContiFinancial closed an initial public offering in
the United States and internationally (the "IPO") of approximately 16% of its
common stock. In the reorganization that occurred in December 1995, (the
"Reorganization"), (i) ContiTrade Services Corporation ("CTSC") transferred
certain of its businesses (excluding its trade finance business) to CTS and the
common stock of its subsidiaries, CMC and CSC, and its interest-only and
residual certificates to Continental Grain Company ("Continental Grain") and
(ii) Continental Grain transferred all of the common stock of CMC, CSC, CSAF and
CFC, all of the members' interest held by it in CTS and CSAF II and the
transferred interest-only and residual certificates (See Note 7) to
ContiFinancial. As a result, ContiFinancial owns all of the common stock or
members' interests in CTS, CMC, CSC, CFC, CSAF, and CSAF II (collectively, the
"Previous Companies"). Prior to the IPO, both ContiFinancial and the Previous
Companies (exclusive of CMC) were direct or indirect wholly-owned subsidiaries
of Continental Grain. As described in Note 6, on June 19, 1995, CTSC effectively
acquired control of the remaining 20% minority interest in CMC, which became a
wholly-owned subsidiary of CTSC.
As a result of the Reorganization, the Company issued 35,918,421 shares of
common stock to Continental Grain. Additionally, the Company converted $84,732
of the Previous Companies' retained earnings to paid-in capital.
The consolidated financial statements for the periods prior to the IPO have
been combined to reflect the Reorganization accounted for similar to a pooling
of interests method. All material intercompany transactions have been eliminated
in the combination. The consolidated financial statements include additional
charges and liabilities related to expenses incurred by Continental Grain for
the Previous Companies, which historically had not been allocated to the
Previous Companies. These charges include corporate service charges from
Continental Grain and income taxes (See Note 7).
2. NATURE OF BUSINESS
The Company engages in the consumer and commercial finance business by
originating and servicing home equity loans and providing financing and asset
securitization expertise to originators of a broad range of loans, leases and
receivables. Securitization provides significant benefits, including greater
operating leverage and reduced costs of funds, in the financing of assets, such
as non-conforming home equity loans, equipment leases, home improvement loans,
franchise loans, commercial/multi-
F-7
<PAGE>
CONTIFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1994, 1995 AND 1996
THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED FOR JUNE 30, 1995 AND 1996)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
2. NATURE OF BUSINESS--(CONTINUED)
family loans, sub-prime auto loans and leases, small business loans and
timeshare loans. The Company considers this business to be one operating
segment.
Through CMC, the Company is an originator, purchaser and servicer of home
equity loans made to borrowers who may not otherwise qualify for conventional
loans. The loans are then sold to whole-loan investors or securitized in the
form of Real Estate Mortgage Investment Conduits ("REMICs"), owner trusts or
grantor trusts. All of the mortgages are sold on a servicing-retained basis.
Through CTS and CSC, the Company provides complete balance sheet liability
management, including warehouse financing, interest rate hedging services and
the structuring and placement of asset portfolios in the form of asset-backed
securities to CMC and other originators ("Strategic Alliances") of consumer and
commercial loans, leases and receivables (collectively, the "Receivables"). The
Strategic Alliances provide ContiFinancial with a consistent flow of
securitizable Receivables. In certain of the Strategic Alliances, CTSC received
warrants or warrant-like equity participations ("Strategic Alliance Equity
Interests") in the Strategic Alliance client. The Strategic Alliance Equity
Interests in existence prior to the IPO were transferred to and are held by
Continental Grain and as such are not reflected in ContiFinancial's consolidated
financial statements. Strategic Alliance Equity Interests received from
Strategic Alliance clients subsequent to the IPO have been granted to
ContiFinancial. If such Strategic Alliance Equity Interests develop a readily
determinable fair value, the Strategic Alliance Equity Interests will be
recorded at fair value. If such value is not determinable, the Strategic
Alliance Equity Interests will be recorded at lower of cost or market.
The Company's business may be affected by many factors including real estate
and other asset values, the level of and fluctuations in interest rates, changes
in the securitization market and competition. In addition, the Company's
operations require continued access to short and long term sources of cash.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of reserves and expenses during the
reporting period. Actual results could differ from these estimates.
Income Recognition
Gain on sale of Receivables is recognized upon delivery and acceptance of
mortgage loans by whole-loan investors or upon the securitization of the
Receivables in the form of REMICs, owner trusts or grantor trusts, as
applicable. Gains from sales of whole-loans are calculated based upon the
difference between the net sales proceeds and the net carrying amount of the
loans sold. Gains on sales of Receivables from securitizations represent the
present value of the differential between the interest rate earned on the
Receivables sold and the pass-through rate paid to the securitization investors,
after
F-8
<PAGE>
CONTIFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1994, 1995 AND 1996
THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED FOR JUNE 30, 1995 AND 1996)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
considering the effects of estimated prepayments, defaults and other costs,
including normal servicing fees, less the costs of originating such Receivables.
Interest income is recorded as earned. Interest income represents the
interest earned on the loans and leases during the warehousing period (the
period prior to their securitization) and the recognition of interest income on
the interest-only and residual certificates, which is the recognition of the
increased time value of the discounted interest-only and residual certificates
over time. Receivables are placed on non-accrual status when the loans become
sixty days past due. When a mortgage loan is classified as non-accrual, the
accrual of interest income ceases, and all interest income previously accrued
and unpaid on such mortgage loans is reversed.
Income Taxes
The Company is included in the consolidated Federal income tax return of
Continental Grain. The Company has a tax sharing arrangement with Continental
Grain whereby Federal income taxes are computed on a separate company basis.
Federal income taxes are settled through the due to affiliates accounts.
Effective April 1, 1993, the Company implemented the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 utilizes the balance sheet method and deferred
taxes are determined based on the estimated future tax effects of differences
between the financial statement and tax basis of assets and liabilities given
the provision of the enacted tax laws. The adoption of SFAS 109 did not have a
material impact on the financial position or results of operations.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of no more than three months to be cash equivalents.
Restricted Cash
As of March 31, 1995 and 1996 and June 30, 1996, the Company had restricted
cash of $760, $620 and $620, respectively, related to the sale of mortgage loans
with limited recourse to a counterparty. The amount of cash required to be
restricted is based on a percentage of the outstanding balance of the loans
sold.
Securities Purchased Under Agreements to Resell and Securities Sold But Not Yet
Purchased
In order to hedge the interest rate risk on loan purchases and commitments,
the Company sells short United States Treasury securities which match the
duration of the Receivables and borrows the securities under agreements to
resell.
F-9
<PAGE>
CONTIFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1994, 1995 AND 1996
THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED FOR JUNE 30, 1995 AND 1996)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Securities sold but not yet purchased are recorded on a trade date basis and
are carried at their sale amount. The unrealized gain or loss on these
instruments is deferred and recognized upon securitization as an adjustment to
the carrying value of the hedged asset. Interest expense on the securities sold
but not yet purchased is recorded as incurred.
Securities purchased under agreements to resell are recorded on a trade date
basis and are carried at the amounts at which the securities will be
subsequently resold, plus accrued interest. The agreements mature through July
1996 and have interest rates ranging from 4.5% to 4.9%.
Interest-only and Residual Certificates
The Company purchases Receivables for the purpose of securitization and
sale. The Company securitizes the Receivables primarily into the form of a
REMIC. A REMIC is a multi-class security structure with certain tax advantages
which derives its monthly principal paydowns from a pool of underlying
mortgages. The senior classes of the REMICs are sold, with the subordinated
class retained by the Company. The subordinated classes are in the form of
interest-only and residual certificates. These subordinated classes of REMICs
represent an interest in the REMIC, or in other minor cases an owner trust or a
grantor trust, as compared to the right to receive funds under the form of
retained or capitalized excess servicing assets.
In 1994, the Company adopted SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115") which requires fair
value accounting for these securities. In accordance with the provisions of SFAS
115, the Company classifies subordinated classes of REMICs, owner trusts and
grantor trusts as "trading securities" and, as such, they are recorded at fair
value with the resultant unrealized gain or loss recorded in the results of
operations in the period of the change in fair value. The Company determines
fair value based on a discounted cash flow analysis. The cash flows are
estimated as the excess of the weighted average coupon on each pool of
Receivables sold over the sum of the pass-through interest rate plus a normal
servicing fee, a trustee fee, an insurance fee and an estimate of annual future
credit losses related to the Receivables securitized, over the life of the
Receivables. These cash flows are projected over the life of the Receivables
using prepayment, default, and interest rate assumptions that market
participants would use for similar financial instruments subject to prepayment,
credit and interest rate risk and are discounted using an interest rate that a
purchaser unrelated to the seller of such a financial instrument would demand.
The fair valuation includes consideration of the following characteristics: loan
type, size, interest rate, date of origination, term and geographic location.
The Company also uses other available information such as externally prepared
reports on prepayment rates, interest rates, collateral value, economic
forecasts and historical default and prepayment rates of the portfolio under
review.
Capitalized Servicing Fees Receivable
Effective April 1, 1995, the Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights" ("SFAS 122") which requires that upon sale or
securitization of servicing-retained mortgages, companies capitalize the cost
associated with the right to service mortgage loans based on
F-10
<PAGE>
CONTIFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1994, 1995 AND 1996
THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED FOR JUNE 30, 1995 AND 1996)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
their relative fair values. The Company determines fair value based on the
present value of estimated net future cash flows related to servicing income.
The cost allocated to the servicing rights is amortized in proportion to and
over the period of estimated net future servicing fee income.
Prior to the adoption of SFAS 122, servicing rights acquired through loan
origination activities were recorded in the period the loans were serviced.
Under SFAS 122, the Company capitalized, at fair value, $13,828 of such costs
during the year ended March 31, 1996. During the same period, amortization of
capitalized servicing rights was $2,139. For the three months ended June 30,
1995 and 1996, capitalized servicing rights were $1,995 and $4,399,
respectively, while amortization of such capitalized costs was $67 and $1,272,
respectively. At March 31, 1996 and June 30, 1996, the capitalized servicing
rights approximated fair value. The Company periodically reviews capitalized
servicing fees receivable for valuation impairment. This review is performed on
a disaggregated basis for the predominant risk characteristics of the underlying
loans, which are loan type, term and credit quality. The Company generally makes
loans to credit impaired borrowers whose borrowing needs may not be met by
traditional financial institutions due to credit exceptions. The Company has
found that credit impaired borrowers are payment sensitive rather than interest
rate sensitive. As such the Company does not consider interest rates a
predominant risk characteristic for purposes of valuation impairment. Impairment
is recognized in a valuation allowance for each disaggregated stratum in the
period of impairment.
Receivables Held for Sale
Receivables held for sale are mortgages, loans, leases and other assets the
Company plans to sell or securitize and other related assets including deposits
made with financial institutions. Receivables held for sale are stated at the
lower of cost, the origination costs plus accrued interest, or market. Market
value is determined by outstanding commitments from investors or current
investor yield requirements plus any deferred hedging gain less any deferred
hedging loss calculated on the aggregate loan basis.
The carrying amount of mortgage loans held for sale is a reasonable estimate
of fair value based on current pricing of whole-loan transactions.
Other Receivables
Other receivables consist primarily of amounts relating to the origination
and execution of securitization transactions which include advances made to
Strategic Alliances to finance their purchase of interest-only and residual
certificates, servicing advances and accrued interest on loans and other
receivables.
Allowance for Loan Losses
The allowance for loan losses represents an amount considered by management
to be adequate to cover estimated losses and valuation adjustments related to
the balance of mortgage loans held for sale and mortgage loans sold with limited
recourse. The allowance for loan losses is based upon periodic
F-11
<PAGE>
CONTIFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1994, 1995 AND 1996
THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED FOR JUNE 30, 1995 AND 1996)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
analysis of the portfolio, economic conditions and trends, historical credit
loss experience, borrowers' ability to repay and collateral values. The
Company's charge-off policy is based on a review of each individual receivable.
Premises and Equipment, Net of Accumulated Depreciation
Property and equipment are carried at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets. Leasehold
improvements are amortized over the lesser of the useful lives of the
improvements or term of the leases. The estimated useful lives of property and
equipment and leasehold improvements are between two to twelve years.
Other Assets
Other assets is comprised of prepaid expenses, margin deposits and other
real estate owned. Other real estate owned is property acquired for foreclosure
or in settlement of a mortgage, and is carried at the lower of cost or the
estimated net realizable value of the property.
Recent Accounting Pronouncements
Effective April 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114") and SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan -- Income Recognition and Disclosures"
("SFAS 118"). The Company's adoption of SFAS 114 and SFAS 118 did not have a
material effect on the financial position or results of operations.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123") which is effective
beginning in fiscal 1997. SFAS 123 allows companies either to continue to
account for stock-based employee compensation plans under existing accounting
standards or adopt a fair value-based method of accounting for stock options as
compensation expense over the service period (generally the vesting period) as
defined in the new standard. SFAS 123 requires that if a company continues to
account for stock options under Accounting Principles Board ("APB") Opinion No.
25, it must provide pro forma net income and earnings per share information "as
if" the new fair value approach had been adopted. The Company will continue to
account for stock-based compensation under APB Opinion No. 25 and will make the
required disclosures at March 31, 1997. As a result, the adoption of this
Standard did not have an impact on the Company's financial position or results
of operations.
Consolidated Statement of Cash Flows -- Supplemental Disclosures
Total interest paid was $12,124, $29,635 and $71,539 for the years ended
March 31, 1994, 1995 and 1996, respectively. Total interest paid was $11,974 and
$13,782 for the three months ended June 30, 1995 and 1996, respectively.
Total income taxes paid were $776, $441 and $896 for the years ended March
31, 1994, 1995 and 1996, respectively. Total income taxes paid were $99 and $440
for the three months ended June 30, 1995 and 1996, respectively.
F-12
<PAGE>
CONTIFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1994, 1995 AND 1996
THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED FOR JUNE 30, 1995 AND 1996)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Pro Forma Earnings Per Common Share
Due to the Reorganization and the issuance of common stock in the IPO, net
earnings per share have been computed on a pro forma basis, assuming the
Reorganization occurred at the beginning of fiscal 1996, and includes the number
of common shares issued by the Company in the IPO from the date of issuance plus
the effect of common stock equivalent shares under the restricted stock awards
and stock options plans (See Note 8) from that same date. Because of the
Company's Reorganization and changes in capital structure, per share data for
the years ended March 31, 1994 and 1995 are not meaningful.
Interim Financial Data
The consolidated unaudited financial information included herein for the
three months ended June 30, 1995 and 1996 has been prepared in conformity with
the accounting principles and practices used in the audited consolidated
financial statements included herein for the years ended March 31, 1994, 1995,
and 1996. The accompanying interim consolidated financial statements contained
herein are unaudited. However, in the opinion of the Company's management, all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of results of operations, financial position and cash flows for
each of the periods shown, have been made. The results of operations for the
three months ended June 30, 1996 may not be indicative of operating results for
the year ending March 31, 1997.
Reclassifications
Certain reclassifications of 1994 and 1995 amounts have been made to conform
to the current year presentation.
4. STOCKHOLDERS' EQUITY
The stockholders' equity as of March 31, 1995 reflects the combined common
stock, paid-in capital and retained earnings of the Previous Companies.
CMC is subject to minimum capital requirements imposed by the states in
which it operates, with the highest being $250. In addition, CMC is required by
the U.S. Department of Housing and Urban Development to maintain minimum capital
of $250 plus an amount based on the volume of Federal Housing Authority
business. Furthermore, CMC is required by the Federal National Mortgage
Association ("FNMA") to maintain minimum capital of $250 plus .20% of the
principal balance of the portfolio being serviced for FNMA.
CSC is registered as a broker/dealer with the Securities and Exchange
Commission and is subject to the SEC's Uniform Net Capital Rule 15c3-1, under
which the ratio of aggregate indebtedness to net capital, as those are defined,
may not exceed 15 to 1.
F-13
<PAGE>
CONTIFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1994, 1995 AND 1996
THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED FOR JUNE 30, 1995 AND 1996)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
5. ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses and related additions and deductions to the
allowance for the years ended March 31, 1994, 1995 and 1996 and the three months
ended June 30, 1996, were as follows:
<TABLE>
<CAPTION>
YEARS ENDED BALANCE AT BEGINNING ADDITIONS CHARGED DEDUCTIONS BALANCE AT END
MARCH 31, OF YEAR TO COSTS AND EXPENSE AND REVERSALS OF YEAR
- ------------------------------ -------------------- -------------------- ------------- --------------
<S> <C> <C> <C> <C>
1994......................... $1,582 $4,499 $(3,680) $2,401
1995......................... 2,401 1,935 (2,528) 1,808
1996......................... 1,808 285 (269) 1,824
<CAPTION>
THREE MONTHS ENDED BALANCE AT BEGINNING ADDITIONS CHARGED DEDUCTIONS BALANCE AT END
JUNE 30, OF PERIOD TO COSTS AND EXPENSE AND REVERSALS OF PERIOD
- ------------------------------ -------------------- -------------------- ------------- --------------
<S> <C> <C> <C> <C>
1996......................... $1,824 $ 219 $ (150) $1,893
</TABLE>
The deductions in the allowance for loan losses for the years ended March
31, 1994, 1995 and 1996 and the three months ended June 30, 1996 relate to the
reversal of reserves and net loan charge-offs.
6. ACQUISITION
On June 19, 1995, CTSC effectively acquired control of the remaining 20%
minority interest of CMC for $34,600. The acquisition has been accounted for by
the purchase method of accounting. Associated cost in excess of minority
interest equity is being amortized over 25 years on a straight-line basis. The
Company assesses the future useful life of this asset whenever events or changes
in circumstances indicate that the current useful life has diminished. The
Company considers the future undiscounted cash flows of the acquired business in
assessing the recoverability of this asset. If the fair value of the estimated
future undiscounted cash flows from this business is lower than the carrying
value of this asset, and the decline is deemed to be other than temporary, the
Company will write down the asset to fair value.
The consolidated statement of income for the year ended March 31, 1996 of
the Company reflects the entire results of the operations of CMC for the period
from June 19, 1995 to March 31, 1996.
The pro forma results of operations of the Company for the year ended March
31, 1995 would be as follows to reflect the acquisition of the minority interest
as if the acquisition occurred as of April 1, 1994: Gross income of $121,997 and
Net income of $34,200.
The pro forma results of operations of the Company for the year ended March
31, 1996 would be as follows to reflect the acquisition of the minority interest
as if the acquisition occurred as of April 1, 1995: Gross income of $271,816,
Net income of $77,319 and Pro forma primary and fully dilutive earnings per
common share of $2.09.
F-14
<PAGE>
CONTIFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1994, 1995 AND 1996
THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED FOR JUNE 30, 1995 AND 1996)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
7. RELATED PARTY TRANSACTIONS
Notes Payable
In connection with the IPO (See Note 1), the Company entered into a note
purchase agreement with Continental Grain, pursuant to which Continental Grain
purchased from the Company a $125,000 five-year note issued under an indenture
(the "Indenture Note"), a $74,000 four-year note (the "Four Year Note") and a
$125,000 term note (the "Term Note") for $324,000 in the aggregate
(collectively, the "Notes"). The Indenture Note matures on February 14, 2001
with interest payable quarterly at a fixed rate of 7.96%. The principal amount
of the Indenture Note is required to be repaid in four equal annual installments
commencing on February 14, 1998. The Four Year Note matures on February 14, 2000
and pays interest semi-annually at a fixed rate of 8.02%. During the first two
years after its issuance, interest on the Four Year Note will not be paid in
cash but will accrue and be added to the principal amount of the Four Near Note.
After February 14, 1998, interest on the Four Year Note will be payable in cash.
The Term Note matures on September 30, 1997 with interest payable monthly at a
variable rate equal to one month LIBOR plus 125 basis points, adjusted monthly.
Interest expense on the Notes was $3,051 for the period from February 14, 1996
to March 31, 1996, and $6,226 for the three months ended June 30, 1996.
The Notes include the following financial covenants for the Company: a
minimum current ratio (current assets to current liabilities), a maximum total
liabilities to equity ratio, a maximum long term debt to equity ratio, a minimum
net worth requirement, a limitation on incurring indebtedness and certain liens,
and a limitation on acquisitions, investment or capital expenditures of the
Company. The most restrictive covenant is a $40,000 limitation on incurring term
financing from sources other than Continental Grain, which can be waived at
Continental Grain's discretion.
The Company is indirectly subject to the financial covenants of Continental
Grain's debt agreements which restrict dividends by less than wholly-owned
subsidiaries. If these covenants are still in place at the time the Company
decides to declare a dividend, a waiver from the related lenders would have to
be obtained.
Due to Affiliates
Due to affiliates at March 31, 1995, represents interest bearing and
non-interest bearing funds provided by Continental Grain to support operations
of the Company. On February 14, 1996, this support of operations was replaced by
the Notes. The non-interest bearing portion of such funds was $14,000 and
$31,000 for fiscal year 1994 and 1995, respectively, representing both average
and year-end balances. The interest bearing funds ("Interest Bearing Funds")
provided by Continental Grain were subject to interest charges which represent
Continental Grain's all-inclusive weighted average cost of short term funds (the
"FMA Rate"). Interest expense incurred at the FMA Rate was $5,140, $10,234,
$19,584 and $3,271 for the years ended March 31, 1994, 1995 and 1996 and for the
three months ended June 30, 1995, respectively.
The average Interest Bearing Funds for the years ended March 31, 1994, 1995
and 1996 and for the three months ended June 30, 1995 were $112,967, $160,659,
$325,355 and $182,483, respectively.
F-15
<PAGE>
CONTIFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1994, 1995 AND 1996
THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED FOR JUNE 30, 1995 AND 1996)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
7. RELATED PARTY TRANSACTIONS--(CONTINUED)
The weighted average interest rates charged on the Interest Bearing Funds for
the years ended March 31, 1994, 1995 and 1996 and for the three months ended
June 30, 1995 were 4.55%, 6.37%, 6.88% and 7.17%, respectively.
The March 31, 1996 due to affiliates balance represented accrued interest
due to Continental Grain under the terms of the Notes and payments due on the
Services Agreement, the Tax Sharing Agreement, the Employee Benefits Allocation
Agreement and the Sublease Agreement, as defined below.
Affiliate Charges
Continental Grain incurs certain general and administrative expenses that
support the Company's operations. Expenses directly attributable to the Company,
such as occupancy and communication charges, are directly charged to the
Company. Other general and administrative expenses, indirectly charged, relate
to support services such as treasury functions, tax services, human resource
management, information technology, internal audit functions, insurance
management, legal services and others. The amount of such expenses was $2,253,
$2,848, $1,907, $820 and $697 for the years ended March 31, 1994, 1995 and 1996
and for the three months ended June 30, 1995 and 1996, respectively.
The determination of expenses incurred by Continental Grain applicable to
the Company is based first, on identifying specific expenses that are directly
attributable to its operations and second, on estimating that portion of general
and administrative expenses of Continental Grain used to support the operations
of the Company based on the service hours attributable to the Company and the
asset base of the Company. Management believes that the method of allocation of
general and administrative expenses is reasonable.
On February 14, 1996, the Company entered into an agreement with Continental
Grain (the "Services Agreement") under which Continental Grain agrees to
continue to provide the Company certain corporate services, including treasury
administration, risk management, internal audit, Federal and state tax
(including payroll) administration, management information and communication
support services, public affairs, and facilities management through March 31,
1999 and from year-to-year thereafter.
Interest-only and Residual Certificates Transfer
On February 14, 1996, the Company entered into an agreement with Continental
Grain to transfer $60,701 of its interest-only and residual certificates at book
value to Continental Grain in order to reduce the amount of due to affiliates to
$324,000 on such date. Based upon management's valuation of these interest-only
and residual certificates and other sales transactions with unrelated third
parties, the Company believes that the book value of such interest-only and
residual certificates represented the fair value of such interest-only and
residual certificates.
F-16
<PAGE>
CONTIFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1994, 1995 AND 1996
THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED FOR JUNE 30, 1995 AND 1996)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
7. RELATED PARTY TRANSACTIONS--(CONTINUED)
Tax Sharing Agreement
On February 14, 1996, Continental Grain and the Company entered into a tax
sharing agreement (the "Tax Sharing Agreement") which (i) defines their
respective rights and obligations with respect to Federal, state, local and all
other taxes for all taxable periods both prior to and after the IPO and (ii)
governs the conduct of all audits and other tax controversies relating to the
Company. Pursuant to the Tax Sharing Agreement, the Company will be charged or
credited, as the case may be, for its Federal income tax liability or refund
that would have been payable or received by the Company for such year, or
portion thereof, determined as if the Company had filed a separate Federal
income tax return computed in accordance with prevailing Federal income tax laws
and regulations as applied to the Company as if it were a separate taxpayer.
Employee Benefits Allocation Agreement
On February 14, 1996, Continental Grain and the Company entered into an
employee benefits allocation agreement (the "Employee Benefits Allocation
Agreement") which permits the Company's employees to continue to participate in
the Continental Grain employee benefit plans. The cost of the Company's
employees' participation in these programs will be allocated to the Company
based on the actual cost of benefit accruals and an allocated cost of
administration of the plans and overhead (See Note 8).
Sublease Agreement
On February 14, 1996, Continental Grain and the Company entered into a
sublease agreement (the "Sublease Agreement") for the utilization of the
facilities leased from Continental Grain. The Sublease Agreement will require an
annual payment of approximately $761 through the year 2000.
Other Matters
Continental Grain is the subject of an investigation by Federal government
agencies, the results of which may require disclosure to regulatory bodies
issuing licenses to the Company. This investigation does not involve activities
of the Company, its directors, officers or employees. In the opinion of
management, based on consultation with legal counsel, the disposition of this
investigation will not likely have a material adverse effect on the financial
position or results of operations of the Company.
8. EMPLOYEE BENEFITS
The Company's employees are included in Continental Grain's employee
benefits programs, and the Company reimburses Continental Grain for the actual
cost of benefit accruals and an allocable cost of administration and overhead.
Continental Grain has a number of noncontributory pension plans covering
substantially all United States employees. The pension plan covering salaried
employees provides benefits that are generally
F-17
<PAGE>
CONTIFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1994, 1995 AND 1996
THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED FOR JUNE 30, 1995 AND 1996)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
8. EMPLOYEE BENEFITS--(CONTINUED)
based on a percentage of the employee's salary during the five years before
retirement. Continental Grain's funding policy for these plans is generally to
make the minimum annual contribution required by applicable regulations. Pension
costs charged to the Company by Continental Grain were $78, $91, $118, $22 and
$90 for the years ended March 31, 1994, 1995 and 1996 and for the three months
ended June 30, 1995 and 1996, respectively.
Post-retirement health care coverage under Continental Grain's Salaried
Health Care Plan is available on a cost sharing basis to retired employees. Life
insurance coverage is provided on a noncontributory basis to substantially all
retirees. Post-retirement health care costs charged to the Company by
Continental Grain were $273, $394, $680, $113 and $154 for the years ended March
31, 1994, 1995 and 1996 and for the three months ended June 30, 1995 and 1996,
respectively.
The Company has in effect an incentive compensation program which is a
formula plan based on pre-tax income. Incentive compensation for the years ended
March 31, 1994, 1995 and 1996 and for the three months ended June 30, 1995 and
1996, was $7,600, $12,400, $27,986, $3,982 and $3,864, respectively.
1995 Long-Term Stock Incentive Plan
On February 9, 1996, the Company awarded restricted shares and options under
the 1995 Long-Term Stock Incentive Plan (the "Plan"). Awards under the Plan in
the form of restricted stock representing an aggregate of 1,330,532 shares (the
"Restricted Shares") and awards under the Plan in the form of nonqualified stock
options, representing the right to acquire an aggregate of 2,566,181 and 57,319
shares at an exercise price equal to the IPO price of $21.00 per share and
$26.25 per share, respectively (the "Options"), were granted to select key
employees of the Company.
The Restricted Shares granted to such employees are subject to the
employee's continued employment with the Company. In connection with the
Restricted Shares issuance, the Company recorded deferred compensation of
$27,941, which is included in stockholders' equity. This amount will be
amortized over the vesting period which is as follows: 15% as of February 14,
1996; 25% as of March 31, 1997; 20% as of March 31, 1998; 20% as of March 31,
1999; and 20% as of March 31, 2000.
Subject to an optionee's continued employment with the Company, one half of
the Options granted to such optionee will vest upon the earlier to occur of (i)
any subsequent public offering of the Company's equity securities pursuant to an
effective registration statement under the Securities Act of 1933 and (ii) March
31, 2000; and that the balance of the Options granted to the optionee will vest
as follows: 15% as of February 14, 1996; 25% as of March 31, 1997; 20% as of
March 31, 1998; 20% as of March 31, 1999; and 20% as of March 31, 2000. The
options will expire on February 14, 2006 unless certain conditions as outlined
in the Plan occur. As of March 31, 1996, none of the 196,763 vested options had
been exercised. In connection with the Plan, $4,967 and $1,556 of compensation
expense was recorded for the year ended March 31, 1996 and for the three months
ended June 30, 1996, respectively.
F-18
<PAGE>
CONTIFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1994, 1995 AND 1996
THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED FOR JUNE 30, 1995 AND 1996)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
9. INCOME TAXES
Income taxes included in the consolidated statements of income represent the
following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -------
<S> <C> <C> <C>
Year ended March 31, 1994
Federal...................................................... $ 9,287 $ 2,322 $11,609
State and local.............................................. 1,694 423 2,117
------- -------- -------
$10,981 $ 2,745 $13,726
------- -------- -------
------- -------- -------
Year ended March 31, 1995
Federal...................................................... $21,354 $ (2,605) $18,749
State and local.............................................. 3,894 (475) 3,419
------- -------- -------
$25,248 $ (3,080) $22,168
------- -------- -------
------- -------- -------
Year ended March 31, 1996
Federal...................................................... $38,762 $ 3,278 $42,040
State and local.............................................. 6,504 552 7,056
------- -------- -------
$45,266 $ 3,830 $49,096
------- -------- -------
------- -------- -------
Three months ended June 30, 1995
Federal...................................................... $ 6,109 $ 366 $ 6,475
State and local.............................................. 1,114 67 1,181
------- -------- -------
$ 7,223 $ 433 $ 7,656
------- -------- -------
------- -------- -------
Three months ended June 30, 1996
Federal...................................................... $ 9,348 $ 1,282 $10,630
State and local.............................................. 1,645 987 2,632
------- -------- -------
$10,993 $ 2,269 $13,262
------- -------- -------
------- -------- -------
</TABLE>
The difference between the "expected" Federal tax rate and expense computed
by applying the statutory tax rate to income before provision for income taxes
and the effective tax rate and expense is as follows:
<TABLE>
<CAPTION>
MARCH 31, 1994 MARCH 31, 1995 MARCH 31, 1996
-------------------- -------------------- --------------------
PERCENT OF PERCENT OF PERCENT OF
PRE-TAX PRE-TAX PRE-TAX
AMOUNT EARNINGS AMOUNT EARNINGS AMOUNT EARNINGS
------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" tax provision........ $12,350 35.0% $19,946 35.0% $44,288 35.0%
State and local taxes, net of related
Federal benefit........................ 1,376 3.9 2,222 3.9 4,808 3.8
------- --- ------- --- ------- ---
$13,726 38.9% $22,168 38.9% $49,096 38.8%
------- --- ------- --- ------- ---
------- --- ------- --- ------- ---
</TABLE>
F-19
<PAGE>
CONTIFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1994, 1995 AND 1996
THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED FOR JUNE 30, 1995 AND 1996)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
9. INCOME TAXES--(CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, 1995 JUNE 30, 1996
------------------- --------------------
PERCENT OF PERCENT OF
PRE-TAX PRE-TAX
AMOUNT EARNINGS AMOUNT EARNINGS
------ ---------- ------- ----------
<S> <C> <C> <C> <C>
Computed "expected" tax provision.......................... $]6,889 35.0% $11,443 35.0%
State and local taxes, net of related Federal benefit...... 767 3.9 1,819 5.6
------ --- ------- ---
$7,656 38.9% $13,262 40.6%
------ --- ------- ---
------ --- ------- ---
</TABLE>
The effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1994 MARCH 31, 1995 MARCH 31, 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Deferred Tax Assets:
Net servicing income........................... $ 416 $ 605 $ 982
Restricted stock awards........................ -- -- 1,927
Other.......................................... 42 42 377
Deferred Tax Liabilities:
Interest-only and residual certificates........ (10,774) (7,881) (14,348)
Other.......................................... (14) (16) (18)
-------------- ------- --------------
Net Deferred Tax Liability....................... $(10,330) $ (7,250) $(11,080)
-------------- ------- --------------
-------------- ------- --------------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1995 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Deferred Tax Assets:
Net servicing income............................................ $ 747 $ 1,069
Restricted stock awards......................................... -- 1,996
Other........................................................... 42 425
Deferred Tax Liabilities:
Interest-only and residual certificates......................... (8,457) (16,814)
Other........................................................... (16) (25)
------------- -------------
Net Deferred Tax Liability........................................ $(7,684) $ (13,349)
------------- -------------
------------- -------------
</TABLE>
F-20
<PAGE>
CONTIFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1994, 1995 AND 1996
THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED FOR JUNE 30, 1995 AND 1996)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
10. COMMITMENTS AND CONTINGENCIES
In addition to utilizing facilities leased by Continental Grain, the
Company's operations are conducted from leased facilities located in various
areas of the United States. These leases have clauses which provide for
increases in rent in the event of increases in real estate taxes and maintenance
costs. Rental expense for the years ended March 31, 1994, 1995 and 1996 and for
the three months ended June 30, 1995 and 1996 was $263, $564, $1,884, $210 and
$602, respectively. The future minimum lease payments under operating leases,
all of which expire by 2002, are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR TOTAL
- --------------------------------------------------------------- ------
<S> <C>
1997.......................................................... $1,933
1998.......................................................... 1,933
1999.......................................................... 1,888
2000.......................................................... 1,539
2001.......................................................... 799
2002.......................................................... 61
------
$8,153
------
------
</TABLE>
Litigation
The Company is involved in certain litigation arising in the normal course
of business. The Company believes that any liability with respect to such legal
actions, individually or in the aggregate, is not likely to be material to the
Company's consolidated financial position or results of operations.
11. FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET ACTIVITIES
Sales of Assets with Recourse
During 1994, 1995 and 1996, the Company utilized agreements with financial
institutions (the "Purchasers") to sell, with limited recourse, interests in
designated pools of securitized and whole loans receivables. Under the
agreements, the Purchasers have given the Company a right of first refusal to
repurchase such loans prior to third-party sales. Pursuant to the recourse
provisions of these agreements, the Company is responsible for losses incurred
by the Purchasers on third-party sales of the loans up to either 5% or 10% of
the sale amounts. The agreements are guaranteed by the Company. The Company
monitors its exposure associated with these agreements and records recourse
provisions, as necessary, to address this potential exposure. During 1994, 1995
and 1996 and the three months ended June 30, 1995 and 1996, the Company utilized
these facilities to sell loans totaling approximately $1,148,000, $2,510,000,
$5,671,000, $525,000 and $974,000, respectively. At March 31, 1995 and 1996 and
June 30, 1996, approximately $355,000, $565,000 and $597,000, respectively, was
outstanding.
During 1995, the Company sold, with limited recourse, an interest in certain
interest-only and residual certificates for $50,000 which was outstanding at
March 31, 1995. During the year ended March 31, 1996, the Company sold an
additional $54,500 of certain interest-only and residual
F-21
<PAGE>
CONTIFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1994, 1995 AND 1996
THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED FOR JUNE 30, 1995 AND 1996)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
11. FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET ACTIVITIES--(CONTINUED)
certificates with limited recourse. At March 31, 1996, $90,985 of these
aforementioned sales were outstanding. During the three months ended June 30,
1996, the Company sold an additional $96,545 of certain interest-only and
residual certificates with limited recourse. At June 30, 1996, $177,569 of these
aforementioned sales were outstanding. Under the recourse provisions of the
agreements, the Company is responsible for losses incurred by the purchaser
within an agreed-upon range. The agreements are guaranteed by Continental Grain
for an agreed-upon fee.
Financial Instruments
SFAS No. 105 "Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk" and SFAS No. 119, "Disclosure about Derivative Financial Instruments and
Fair Value of Financial Instruments" requires the disclosure of the notional
amount or contractual amounts of financial instruments.
The Company regularly securitizes and sells fixed and variable rate mortgage
loan receivables. As part of its interest rate risk management strategy, the
Company may choose to hedge its interest rate risk related to its mortgage
portfolio and purchase commitments by utilizing financial futures. The Company
classifies these futures as hedges of specific loan receivables and purchase
commitments. The gains and losses derived from these financial futures are
deferred and included in the carrying amounts of the related hedged items and
ultimately recognized in income. Deferred gains (losses) on the futures used to
hedge the anticipated transactions amounted to $97, $359, $1,968, $128 and
$(1,454) at March 31, 1994, 1995 and 1996 and for the three months ended June
30, 1995 and 1996, respectively.
The following table identifies the contract and market values of financial
instruments as of March 31, 1994, 1995 and 1996 and June 30, 1995 and 1996.
Futures Contracts:
<TABLE>
<CAPTION>
CONTRACT VALUE MARKET VALUE
SHORT SHORT
-------------- ------------
<S> <C> <C>
March 31, 1994................................... $ 21,000 $ 22,030
March 31, 1995................................... 58,500 60,068
March 31, 1996................................... 219,800 231,739
June 30, 1995.................................... 121,800 129,475
June 30, 1996.................................... 258,000 269,483
</TABLE>
Market Risk
In the normal course of business the Company enters into various contractual
commitments involving forward settlement. These include financial futures
contracts and short sales. Commitments involving future settlement give rise to
market risk, which represents the potential loss that can be caused by a change
in the market value of a particular financial instrument.
F-22
<PAGE>
CONTIFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1994, 1995 AND 1996
THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED FOR JUNE 30, 1995 AND 1996)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
11. FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET ACTIVITIES--(CONTINUED)
The Company is also exposed to market interest rate risk. A decline in
interest rates will typically increase the amount of loan prepayments and
decrease the value of the interest-only and residual certificates and
capitalized servicing fees receivable. An increase in interest rates may
decrease the demand for consumer and commercial credit.
Periods of economic slowdown or recession may be accompanied by decreased
demand for the market for Receivables or declines in real estate values. These
factors will influence the Company's ability to obtain and securitize
Receivables. During these periods the Company's cost of servicing loans may
increase as rates of delinquency and foreclosure increase.
Fair Value of Financial Instruments
The Company's financial instruments recorded at contractual amounts that
approximate market or fair value primarily consist of securities purchased under
agreements to resell, loan and lease receivables, accounts payable and accrued
expenses and securities sold but not yet purchased. As these amounts are short
term in nature and/or generally bear market rates of interest, the carrying
amounts of these instruments are reasonable estimates of their fair values.
Since a portion of the amounts due to affiliates are non-interest bearing, the
fair value of these instruments is $48,538 and $112,010 at March 31, 1994 and
1995, respectively.
Credit Risk
The Company is exposed to on-balance sheet credit risk related to its
Receivables and interest-only and residual certificates. The Company is exposed
to off-balance sheet credit risk related to loans which the Company has
committed to originate or buy and loans sold with limited recourse.
The Company utilizes securities purchased under agreements to resell as part
of its interest rate management strategy. These instruments expose the Company
to credit risk which is measured as the loss the Company would record if
counterparties failed to perform pursuant to terms of their contractual
obligations and the value of the collateral held, if any, was not adequate to
cover such losses. The Company's policy is to take possession of securities
purchased under agreements to resell. The Company monitors the market value of
the assets acquired to ensure their adequacy as compared to the amount at which
the securities will be resold. The Company may require the counterparty to
deposit additional collateral or reduce the loan balance when necessary. The
interest rate on these instruments depends upon, among other things, the
underlying collateral, the term of the agreement and the credit quality of the
counterparty. At March 31, 1995 and 1996 and June 30, 1996, these instruments
had a weighted average interest rate of 5.6%, 4.7% and 4.8%, respectively. The
Company transacts these resale agreements primarily with two institutional
broker/dealers.
The Company is a party to financial instruments with off-balance sheet
credit risk in the normal course of business. These financial instruments
include commitments to extend credit to borrowers, commitments to purchase loans
from correspondents, and recourse provided on loans sold to investors in prior
years. The Company has a first or second lien position on all of its loans, and
the combined loan-to-value ratio ("CLTV") permitted by the Company's
underwriting guidelines generally may not exceed
F-23
<PAGE>
CONTIFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1994, 1995 AND 1996
THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED FOR JUNE 30, 1995 AND 1996)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
11. FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET ACTIVITIES--(CONTINUED)
85%. The CLTV represents the combined first and second mortgage balances as a
percentage of the appraised value of the mortgaged property, with the appraised
value determined by an appraiser with appropriate professional designations. A
title insurance policy is required for all loans.
As of March 31, 1995 and 1996 and June 30, 1996, the Company had outstanding
commitments to extend credit or purchase loans in the amount of $126,217,
$206,314 and $272,011, respectively.
Commitments to extend credit or to purchase a loan are granted for a period
of thirty days and are contingent upon the borrower and the borrower's
collateral satisfying the Company's underwriting guidelines. Since many of the
commitments are expected to expire without being exercised, the total commitment
amount does not necessarily represent future cash requirements or future credit
risk.
The Company monitors concentrations of credit risk associated with business
conducted with financial institutions and minimizes credit risk by avoiding a
concentration with any single financial institution. As of March 31, 1995 and
1996 and June 30, 1996, the majority of loans with on-balance sheet and
off-balance sheet risks were collateralized by properties located in the Eastern
United States.
Warehousing Exposure
The Company makes warehouse financing available to its securitization
clients to facilitate the accumulation of securitizable products prior to
securitization. As of March 31, 1995 and 1996 and June 30, 1996, the Company had
$851,000, $981,600 and $1,184,800 of committed warehousing available to its
third party clients, of which $308,000, $425,378 and $357,049, respectively, was
drawn down. Warehouse commitments are typically for a term of one year or less
and are designated to fund only securitizable assets. Assets from a particular
client remain in the warehouse for a period of 90-120 days at which point they
are securitized and sold to institutional investors.
F-24
<PAGE>
GLOSSARY
<TABLE>
<S> <C>
Adjustable Rate Mortgages or ARMs... Mortgages with a variable interest rate which
typically adjust off LIBOR or U.S. treasury rates.
"A", "B", "C" and "D" Credit
Grades.............................. A grading system used in the home equity loan
industry to reflect a borrower's overall credit
quality. The grade assigned by a lender to each
borrower is a function of the borrower's historical
payment performance on his or her outstanding
consumer debt. Such debt may include credit cards and
automobile loans. The Company establishes the prices
it will pay for loans based on the borrower's credit
profile, prevailing market conditions and other
factors.
</TABLE>
<TABLE>
<S> <C>
Broker Loans........................ Loans referred to the Company by brokers.
Commercial/Multi-family
Loans............................. Loans secured by commercial properties including
multi-family dwellings, self-storage facilities,
assisted living and other health-related facilities,
and retail and industrial buildings.
Conduits............................ Stand-alone securitization vehicles where the
originator(s), underwriter(s), servicer(s) and
seller(s) may all be different parties coming
together to generate loans or other assets to be
serviced and securitized. Conduits allow smaller
originators to sell their assets into a single
securitizable pool, thus benefitting from economies
of scale and the ability to share the fixed
transaction costs associated with securitization.
Covered Loans....................... Mortgage loans (other than mortgage loans to finance
the acquisition or initial construction of a
dwelling) with (i) total points and fees upon
origination in excess of eight percent of the loan
amount or (ii) an annual percentage rate of more than
ten percentage points higher than comparably maturing
U.S. Treasury Securities. The Riegle Act generally
applies to such loans. See "Regulation."
Debt-to-Income Ratio................ The ratio of a borrower's monthly debt service
requirements to his or her monthly income.
Equipment Leases.................... Leases of assets primarily to commercial users.
Leased assets may include office equipment and
medical equipment.
</TABLE>
<TABLE>
<S> <C>
Excess Spread....................... In a securitization, generally, the excess of the
weighted average coupon on each pool of loans or
other assets sold over the sum of the investor
pass-through rate plus a normal servicing fee, a
trustee fee, an insurance fee, if any, and an
estimate of annual future credit losses related to
the loans or other assets sold over the life of the
loans or other assets. The Excess Spread is either a
contractual right or a certificated security.
Excess Spread Receivables........... The present value of the Excess Spread. When the
Company completes a securitization, it recognizes a
gain on sale of the loans or other assets sold equal
to the amount of
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
the Excess Spread Receivable less the origination and
underwriting costs in the related securitization and
records the Excess Spread Receivable as an asset on
its balance sheet. On the Company's consolidated
balance sheet, the Excess Spread Receivable is
reduced as cash distributions are received over the
actual life of the loans or other assets securitized.
The Excess Spread Receivables represent interest-only
and residual certificates.
Franchise Loans..................... Loans to franchisees of national restaurant chains or
other service chains. The loans are secured by
fixtures, equipment and cash flows.
Gain on Sale of Receivables......... The gross income from the structuring and sale of
loans and other assets into REMICs, owner trusts and
grantor trusts. Gain on sale of receivables
represents the Excess Spread Receivables less cost of
originating and structuring the loans and other
assets.
Ginnie Mae ("GNMA"),
Fannie Mae ("FNMA"),
Freddie Mac ("FHLMC")............. Government National Mortgage Association, Federal
National Mortgage Association and Federal Home Loan
Mortgage Corporation.
Home Equity Loans................... Loans made to borrowers typically for debt
consolidation, home improvements, education or
refinancing and secured by a first or second mortgage
on one- to four-family residential properties.
Interest-only Certificate........... Represents Excess Spread Receivables which represent
the right to receive interest payments on a
securitization trust's underlying assets and is
subject to changes in value due to changes in
prepayment rates. Generally, the Interest-Only
Certificate is senior to the Residual Certificate(s).
Non-conforming Home Equity Loans.... Home equity loans made to borrowers whose financing
needs cannot be met by traditional financial
institutions due to credit exceptions or other
factors and cannot be marketed to agencies such as
Ginnie Mae, Fannie Mae and Freddie Mac.
Overcollateralization............... The amount by which the outstanding principal balance
of assets which have been securitized exceeds the
outstanding principal balance of the certificates
issued by the related trust. The surplus principal of
the assets is available to absorb losses. The amount
of overcollateralization required for a
securitization is specified for each issuance.
Overcollateralization is developed by applying Excess
Spread as an accelerated payment of principal on the
certificates. Once the required level of
overcollateralization is reached, and for so long as
such level is maintained, the Excess Spread flows
through to the Company.
Purchase and Sale Facilities........ Agreements pursuant to which the Company sells
certain of its qualifying securitizable assets with
limited recourse to certain financial institutions
subject to rights of first refusal for the Company to
repurchase the assets.
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Purchase Premium Refunds............ That portion of the premium paid by the Company to a
wholesale originator upon purchase of a loan which is
required to be repaid by the originator if the loan
prepays before a contractually set time.
REMIC............................... Real Estate Mortgage Investment Conduit.
REMICs, Owner Trusts and Grantor
Trusts.............................. Trusts formed to purchase securitizable assets, issue
pass-through certificates and make distributions to
investors. Such trusts are organized in accordance
with the Internal Revenue Code so as to not be
subject to corporate tax at the entity level.
Reserve Account..................... A reserve account serves the same purpose as
Overcollateralization. However, instead of applying
Excess Spread as a payment of principal on the
certificates, it is accumulated in an account until a
required amount is reached. Funds from this account
are available to cover losses realized on loans or
other assets held by a trust.
Residual Certificates............... Represent Excess Spread Receivables which are subject
to change in value due to prepayment rates and credit
losses. The Residual Certificates are subordinate
certificates and are in a first loss position.
Securitization...................... The sale by the Company of loans or other assets it
has originated or purchased to a trust (or other
special purpose entity). Concurrently, the trust
issues securities (usually pass-through certificates)
to investors in a private placement or a public
offering. The Company is paid a purchase price
consisting of cash from the proceeds of the sale of
the securities and an interest in the loans or other
assets securitized generally in the form of
Interest-only Certificates and/or Residual
Certificates (i.e., the Excess Spread Receivable).
Small Business Loans................ Loans to small businesses collateralized primarily by
accounts receivable. Such loans are not guaranteed by
the Small Business Administration or any other
government agency.
Strategic Alliance.................. A relationship between the Company and an originator
of consumer and commercial loans, leases and
receivables. In the relationship, the Company
provides financing and asset securitization expertise
(including warehouse financing, interest rate hedging
services and the structuring and placement of the
asset portfolio in the form of asset-backed
securities) to the asset originator and the asset
originator provides a consistent flow of
securitizable assets to the Company. In certain of
its Strategic Alliances, the Company may receive
warrants or warrant-like equity participations in
Strategic Alliance clients or may otherwise seek to
make equity investments in its Strategic Alliance
clients.
Strategic Alliance Equity
Interests........................... Warrants, warrant-like equity participations or other
equity investments in Strategic Alliance clients.
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
Structured Finance Transactions..... The securitization of consumer and commercial loans,
leases and other receivables, including home equity
loans, which are sold through REMICs or other trust
structures or in whole loan sales.
Sub-prime Auto Loans and Leases..... Automobile loans or leases made to credit impaired
borrowers.
Timeshare Loans..................... Loans made to purchase a real property interest in
specific units at vacation resort properties.
Typically, the borrowers' rights to use and occupy
the real property are subject to limitations.
Title I Home Improvement Loans...... Loans to homeowners, a portion of which is guaranteed
by the U.S. government, for the purpose of certain
pre-qualified home improvements.
Warehouse Financing................. Secured loan facilities or purchase commitments
provided to asset originators to facilitate the
accumulation of securitizable assets prior to
securitization. Commitments are typically for one
year or less and are designed to fund only
securitizable assets.
Wholesale Loans..................... Loans purchased by the Company in bulk sales from
mortgage bankers and commercial banks.
</TABLE>
iv
<PAGE>
- ---------------------------------------- --------------------------------------
- ---------------------------------------- --------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE ANY $300,000,000
INFORMATION OR MAKE ANY REPRESENTATIONS
OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE
OFFERING DESCRIBED HEREIN, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR CONTIFINANCIAL
A SOLICITATION OF AN OFFER TO BUY, ANY CORPORATION
SECURITIES OTHER THAN THOSE SPECIFICALLY
OFFERED HEREBY OR OF ANY SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY % SENIOR
CIRCUMSTANCES, CREATE AN IMPLICATION NOTES DUE 2003
THAT THERE HAS NOT BEEN ANY CHANGE IN
THE FACTS SET FORTH IN THIS PROSPECTUS
OR IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF.
-------------------
TABLE OF CONTENTS
PAGE
----
Available Information...............2
Prospectus Summary..................3
Risk Factors........................9
Use of Proceeds....................19 ----------------
Capitalization.....................20 PROSPECTUS
Selected Financial Data............21 ----------------
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........23
Industry Overview..................38
Business...........................40
Regulation.........................59
Management.........................62 Joint Book-Running Managers
Principal Stockholders.............69
Certain Transactions...............70 BEAR, STEARNS & CO. INC.
Description of Certain
Indebtedness and
Financing Arrangements...........74 CS FIRST BOSTON
Description of the Notes...........76
Book-Entry Form of the Notes......100
Certain Federal Income Tax UBS SECURITIES
Consequences......................101
Underwriting......................103
Notice to Canadian Residents......104
Legal Matters.....................104
Experts...........................105
Index to Consolidated Financial
Statements........................F-1 , 1996
- ---------------------------------------- --------------------------------------
- ---------------------------------------- --------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCES AND DISTRIBUTION
The following table sets forth the fees and expenses payable by the Company
in connection with the issuance and distribution of the securities other than
underwriting discounts and commissions. All of such expenses except the
Securities and Exchange Commission (the "Commission") registration fee and the
NASD filing fee are estimated:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 103,448.28
NASD filing fee............................................. 30,500.00
Blue Sky fees and expenses.................................. 4,050.00
Trustee's fees and expenses................................. 5,000.00
Printing expense............................................ 80,000.00
Accounting fees and expenses................................ 150,000.00
Legal fees and expenses..................................... 250,000.00
Miscellaneous............................................... 77,001.72
-------------
Total....................................................... $ 700,000.00
-------------
-------------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145(a) of the General Corporation Law of the State of Delaware (the
"DGCL") provides that a Delaware corporation may indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise,
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.
Section 145(b) of the DGCL provides that a Delaware corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses actually
and reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted under similar standards, except that no
indemnification may be made in respect of any claim, issue or matter as to which
such person shall have been adjudged to be liable to the corporation unless and
only to the extent that the Court of Chancery or the court in which such action
or suit was brought shall determine that despite the adjudication of liability,
such person is fairly and reasonably entitled to be indemnified for such
expenses which the court shall deem proper.
Section 145 of the DGCL further provides that to the extent a director or
officer of a corporation has been successful in the defense of any action, suit
or proceeding referred to in subsections (a) and (b) or in the defense of any
claim, issue, or matter therein, he shall be indemnified against expenses
actually and reasonably incurred by him in connection therewith; that
indemnification provided for by Section 145 shall not be deemed exclusive of any
other rights to which the indemnified party may be entitled; and that the
corporation may purchase and maintain insurance on behalf of a director or
officer of the corporation against any liability asserted against him or
incurred by him in any such capacity or arising
II-1
<PAGE>
out of his status as such whether or not the corporation would have the power to
indemnify him against such liabilities under such Section 145.
Section 102(b)(7) of the DGCL provides that a corporation in its original
certificate of incorporation or an amendment thereto validly approved by
stockholders may eliminate or limit personal liability of members of its board
of directors or governing body for breach of a director's fiduciary duty.
However, no such provision may eliminate or limit the liability of a director
for breaching his duty of loyalty, failing to act in good faith, engaging in
intentional misconduct or knowingly violating a law, paying a dividend or
approving a stock repurchase which was illegal, or obtaining an improper
personal benefit. A provision of this type has no effect on the availability of
equitable remedies, such as injunction or rescission, for breach of fiduciary
duty. The Company's Restated Certificate of Incorporation contains such a
provision.
The Company's Restated Certificate of Incorporation provides that, to the
extent not prohibited by law, the Company shall indemnify any person who is or
was made, or threatened to be made, a party to any threatened, pending or
completed action, suit or proceeding (a "Proceeding"), whether civil, criminal,
administrative or investigative, including, without limitation, an action by or
in the right of the Company to procure a judgment in its favor, by reason of the
fact that such person, or a person of whom such person is the legal
representative, is or was a director or officer of the Company, or is or was
serving as a director, officer, employee or agent or in any other capacity at
the request of the Company for any other company, partnership, joint venture,
trust, employee benefit plan or other enterprise (an "Other Entity") while
serving as a director or officer of the Company, against judgments, fines,
penalties, excise taxes, amounts paid in settlement and costs, charges and
expenses (including attorneys' fees and disbursements) actually and reasonably
incurred by such person in connection with such Proceeding if such person acted
in good faith and in a manner such person believed to be in or not opposed to
the best interests of the Company and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
To the extent specified by the Board of Directors of the Company at any time and
to the extent not prohibited by law, the Company may indemnify any person who is
or was made, or threatened to be made, a party to any threatened, pending or
completed Proceeding, whether civil, criminal, administrative or investigative,
including, without limitation, an action by or in the right of the Company to
procure a judgment in its favor, by reason of the fact that such person is or
was an employee or agent of the Company, or is or was serving as a director,
officer, employee or agent or in any other capacity at the request of the
Company for any Other Entity, against judgment, fines, penalties, excise taxes,
amounts paid in settlement and costs, charges and expenses (including attorneys'
fees and disbursements) actually and reasonably incurred by such person in
connection with such Proceeding if such person acted in good faith and in a
manner such person believed to be in or not opposed to the best interests of the
Company and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. In addition, the
Restated Certificate of Incorporation also permits the Board of Directors to
authorize the Company to purchase and maintain insurance against any liability
asserted against any director, officer, employee or agent of the Company arising
out of his capacity as such.
Pursuant to the Registration Rights Agreement between Continental Grain and
the Company, in connection with any future registration of the shares of Common
Stock held by Continental Grain, Continental Grain has agreed to indemnify,
under certain conditions, the Company, its officers, directors, employees,
agents and each person, if any, who controls the Company within the meaning of
the Securities Act, against certain liabilities.
Pursuant to the Indemnification Agreement between Continental Grain and the
Company, each of Continental Grain and the Company has agreed to indemnify the
other in the event of certain liabilities, including liabilities under the
Securities Act or the Exchange Act.
II-2
<PAGE>
The form of underwriting agreement, filed as Exhibit 1.1 hereto, contains
provisions by which each of the Underwriters agrees to indemnify the Company,
its officers and directors and each person who controls the Company within the
meaning of the Securities Act against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In October 1995 the Registrant issued 1,000 shares of its Common Stock, no
par value, to Continental Grain for $1,000 in cash in connection with the
formation of the Registrant. Such transaction was exempt from registration under
the Securities Act by virtue of Section 4(2) thereof.
In February 1996, the Registrant issued to Continental Grain, 35,917,421
additional shares of its Common Stock, $.01 par value per share, in exchange for
all of the issued and outstanding shares of the Subsidiaries. Such transaction
was exempt from registration under the Securities Act by virtue of Section 4(2)
thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
A. Exhibits
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------------------- ------------
<C> <S> <C>
1.1.... Form of Underwriting Agreement*
3.1.... Restated Certificate of Incorporation of Registrant +
3.2.... Restated By-laws of Registrant+
4.1.... Indenture between the Company and with form of Indenture Note+
4.2.... Form of Term Note to be issued by the Company to Continental Grain+
4.3.... Form of Four Year Note+
4.4.... Form of Indenture between the Company and The Chase Manhattan Bank, as
trustee*
5.1.... Opinion of Dewey Ballantine+
10.1... Amended and Restated Indemnification Agreement between the Company and
Continental Grain+
10.2... Tax Sharing Agreement between the Company and Continental Grain+
10.3... Employee Benefit Allocation Agreement between the Company and Continental
Grain+
10.4... Services Agreement between the Company and Continental Grain+
10.5... Note Purchase Agreement between the Company and Continental Grain+
10.6... Common Stock Registration Rights Agreement between the Company and
Continental Grain+
10.7... Indenture Note Registration Rights Agreement between the Company and
Continental Grain+
10.8... Sublease Agreement between the Company and Continental Grain+
10.9... ContiFinancial Corporation 1995 Long-Term Stock Incentive Plan+
10.10.. ContiFinancial Services Long-Term Incentive Compensation Plan+
10.11.. 1996 ContiFinancial Services Division Incentive Compensation Plan+
10.12.. 1996 ContiMortgage Corporation Incentive Compensation Plan+
10.13.. Stock Option Agreement+
10.14.. Form of Restricted Stock Award Agreement+
10.15.. Agreement of Lease between LC/N Keith Valley Limited Partnership I and
ContiTrade Services Corporation and amendments thereto+
10.16.. ContiFinancial Corporation Directors Retainer Fee Plan+
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------------------- ------------
<C> <S> <C>
10.17.. Assignment and Transfer of Excess Spread Receivables between Continental
Grain and certain subsidiaries of the Company+
10.18.. First Amendment to Note Purchase Agreement between the Company and
Continental Grain *
11.1... Computation of the Company's pro forma earnings per common share+
12.1... Computation of ratios*
21.1... Subsidiaries of the Registrant+
23.1... Consent of Dewey Ballantine (included in Exhibit 5.1)+
23.2... Consent of Arthur Andersen LLP*
24.1... Power of Attorney+
25.1... Statement of eligibility of trustee+
</TABLE>
- ------------
* Filed herewith.
+ Previously filed.
+ Incorporated by reference to the exhibit of the same number from the Company's
Registration Statement on Form S-1, File No. 33-98016.
B. Financial Statement Schedules
None.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
New York, on the 13th day of August, 1996.
CONTIFINANCIAL CORPORATION
By: /s/ JAMES E. MOORE
..................................
Name: James E. Moore
Title: President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------- --------------------------------- ----------------
<S> <C> <C>
/s/ JAMES E. MOORE President, Chief Executive August 13, 1996
...................................... Officer and Director (Principal
James E. Moore Executive Officer)
* Senior Vice President and Chief August 13, 1996
...................................... Financial Officer (Principal
Jerome M. Perelson Financial Officer)
* Vice President and Controller August 13, 1996
...................................... (Principal Accounting Officer)
Susan E. O'Donovan
* Director and Chairman of the August 13, 1996
...................................... Board
James J. Bigham
* Director August 13, 1996
......................................
Paul J. Fribourg
* Director August 13, 1996
......................................
Donald L. Staheli
* Director August 13, 1996
......................................
John W. Spiegel
* Director August 13, 1996
......................................
John P. Tierney
* Director August 13, 1996
......................................
Lawrence G. Weppler
* Director August 13, 1996
......................................
Daniel J. Willett
*By: /s/ JAMES E. MOORE
..................................
James E. Moore
Attorney-In-Fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION NUMBERED PAGE
- ------- ---------------------------------------------------------------------- -------------
<C> <S> <C>
1.1 Form of Underwriting Agreement*.......................................
3.1 Restated Certificate of Incorporation of Registrant+
3.2 Restated By-laws of Registrant+.......................................
4.1 Indenture between the Company and with form of Indenture Note+........
4.2 Form of Term Note to be issued by the Company to Continental Grain+...
4.3 Form of Four Year Note+...............................................
4.4 Form of Indenture between the Company and The Chase Manhattan Bank, as
trustee*..............................................................
5.1 Opinion of Dewey Ballantine+..........................................
10.1 Amended and Restated Indemnification Agreement between the Company and
Continental Grain+....................................................
10.2 Tax Sharing Agreement between the Company and Continental Grain+......
10.3 Employee Benefit Allocation Agreement between the Company and
Continental Grain+....................................................
10.4 Services Agreement between the Company and Continental Grain+.........
10.5 Note Purchase Agreement between the Company and Continental Grain+....
10.6 Common Stock Registration Rights Agreement between the Company and
Continental Grain+....................................................
10.7 Indenture Note Registration Rights Agreement between the Company and
Continental Grain+....................................................
10.8 Sublease Agreement between the Company and Continental Grain+.........
10.9 ContiFinancial Corporation 1995 Long-Term Stock Incentive Plan+.......
10.10 ContiFinancial Services Long-Term Incentive Compensation Plan+........
10.11 1996 ContiFinancial Services Division Incentive Compensation Plan+....
10.12 1996 ContiMortgage Corporation Incentive Compensation Plan+...........
10.13 Stock Option Agreement+...............................................
10.14 Form of Restricted Stock Award Agreement+.............................
10.15 Agreement of Lease between LC/N Keith Valley Limited Partnership I and
ContiTrade Services Corporation and amendments thereto+...............
10.16 ContiFinancial Corporation Directors Retainer Fee Plan+...............
10.17 Assignment and Transfer of Excess Spread Receivables between
Continental Grain and certain subsidiaries of the Company+............
10.18 First Amendment to Note Purchase Agreement between the Company and
Continental Grain*....................................................
11.1 Computation of the Company's pro forma earnings per common share+.....
12.1 Computation of ratios*................................................
21.1 Subsidiaries of the Registrant+.......................................
23.1 Consent of Dewey Ballantine (included in Exhibit 5.1)+................
23.2 Consent of Arthur Andersen LLP*.......................................
24.1 Power of Attorney+....................................................
25.1 Statement of eligibility of trustee+..................................
</TABLE>
- ------------
* Filed herewith.
+ Previously filed.
+ Incorporated by reference to the exhibit of the same number from the Company's
Registration Statement on Form S-1, File No. 33-98016.
EXHIBIT 1.1
$300,000,000
ContiFinancial Corporation
% Senior Notes Due 2003
UNDERWRITING AGREEMENT
----------------------
August , 1996
BEAR, STEARNS & CO. INC.,
CS FIRST BOSTON CORPORATION,
As Joint Book-Running Managers, and
UBS SECURITIES LLC,
As CoManager,
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, NY 10167
and
- ----
c/o CS First Boston Corporation,
Park Avenue Plaza,
New York, NY 10055
Dear Sirs:
1. Introductory. ContiFinancial Corporation, a Delaware corporation
-------------
("Company"), a majority-owned consolidated subsidiary of Continental Grain
Company, a Delaware corporation ("Parent"), proposes to issue and sell
$300,000,000 principal amount of its % Senior Notes Due 2003 ("Offered
Securities") to be issued under an indenture, dated as of August , 1996
("Indenture"), between the Company and The Chase Manhattan Bank, as Trustee.
The Company hereby agrees with the several Underwriters named in Schedule A
hereto ("Underwriters") as follows:
2. Representations and Warranties of the Company. The Company
----------------------------------------------
represents and warrants to, and agrees with, the several Underwriters that:
(a) A registration statement (No. 333-7703) relating to the Offered
Securities, including a form of prospectus, has been filed with the Securities
and Exchange Commission ("Commission") and either (i) has been declared
effective
<PAGE>
2
under the Securities Act of 1933 ("Act") and is not proposed to be amended or
(ii) is proposed to be amended by amendment or post-effective amendment. If
such registration statement ("initial registration statement") has been declared
effective, either (i) an additional registration statement ("additional
registration statement") relating to the Offered Securities may have been filed
with the Commission pursuant to Rule 462(b) ("Rule 462(b)") under the Act and,
if so filed, has become effective upon filing pursuant to such Rule and the
Offered Securities all have been duly registered under the Act pursuant to the
initial registration statement and, if applicable, the additional registration
statement or (ii) such an additional registration statement is proposed to be
filed with the Commission pursuant to Rule 462(b) and will become effective upon
filing pursuant to such Rule and upon such filing the Offered Securities will
all have been duly registered under the Act pursuant to the initial registration
statement and such additional registration statement. If the Company does not
propose to amend the initial registration statement or if an additional
registration statement has been filed and the Company does not propose to amend
it, and if any post-effective amendment to either such registration statement
has been filed with the Commission prior to the execution and delivery of this
Agreement, the most recent amendment (if any) to each such registration
statement has been declared effective by the Commission or has become effective
upon filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act or, in the
case of the additional registration statement, Rule 462(b). For purposes of
this Agreement, "Effective Time" with respect to the initial registration
statement or, if filed prior to the execution and delivery of this Agreement,
the additional registration statement means (i) if the Company has advised the
Underwriters that it does not propose to amend such registration statement, the
date and time as of which such registration statement, or the most recent post-
effective amendment thereto (if any) filed prior to the execution and delivery
of this Agreement, was declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c), or (ii) if the Company has
advised the Underwriters that it proposes to file an amendment or post-effective
amendment to such registration statement, the date and time as of which such
registration statement, as amended by such amendment or post-effective
amendment, as the case may be, is declared effective by the Commission. If an
additional registration statement has not been filed prior to the execution and
delivery of this Agreement but the Company has advised the Underwriters that it
proposes to file one, "Effective Time" with respect to such additional
registration statement means the date and time as of which such registration
statement is filed and becomes effective pursuant to Rule 462(b). "Effective
Date" with respect to the initial registration statement or the additional
registration statement (if any) means the date of the Effective Time thereof.
The initial registration statement, as amended at its Effective Time, including
all
<PAGE>
3
information contained in the additional registration statement (if any) and
deemed to be a part of the initial registration statement as of the Effective
Time of the additional registration statement pursuant to the General
Instructions of the Form on which it is filed and including all information (if
any) deemed to be a part of the initial registration statement as of its
Effective Time pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is
hereinafter referred to as the "Initial Registration Statement". The additional
registration statement, as amended at its Effective Time, including the contents
of the initial registration statement incorporated by reference therein and
including all information (if any) deemed to be a part of the additional
registration statement as of its Effective Time pursuant to Rule 430A(b), is
hereinafter referred to as the "Additional Registration Statement". The Initial
Registration Statement and the Additional Registration Statement are herein
referred to collectively as the "Registration Statements" and individually as a
"Registration Statement". The form of prospectus relating to the Offered
Securities, as first filed with the Commission pursuant to and in accordance
with Rule 424(b) ("Rule 424(b)") under the Act or (if no such filing is
required) as included in a Registration Statement, is hereinafter referred to as
the "Prospectus". No document has been or will be prepared or distributed in
reliance on Rule 434 under the Act.
(b) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (i) on the Effective
Date of the Initial Registration Statement, the Initial Registration Statement
conformed in all material respects to the requirements of the Act, the Trust
Indenture Act of 1939 ("Trust Indenture Act") and the rules and regulations of
the Commission ("Rules and Regulations") and did not include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading,
(ii) on the Effective Date of the Additional Registration Statement (if any),
each Registration Statement conformed, or will conform, in all respects to the
requirements of the Act, the Trust Indenture Act and the Rules and Regulations
and did not include, or will not include, any untrue statement of a material
fact and did not omit, or will not omit, to state any material fact required to
be stated therein or necessary to make the statements therein not misleading and
(iii) on the date of this Agreement, the Initial Registration Statement and, if
the Effective Time of the Additional Registration Statement is prior to the
execution and delivery of this Agreement, the Additional Registration Statement
each conforms, and at the time of filing of the Prospectus pursuant to
Rule 424(b) or (if no such filing is required) at the Effective Date of the
Additional Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform, in all material respects
to the requirements of the Act, the Trust Indenture Act and the Rules and
Regulations, and neither of such documents includes, or will include, any untrue
statement of a material fact or omits, or will omit, to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading. If the Effective Time of the Initial Registration Statement is
subsequent to the execution and delivery of this Agreement: on the Effective
Date of the Initial Registration Statement, the Initial Registration Statement
and the Prospectus will conform in all material respects to the requirements of
the Act, the Trust
<PAGE>
4
Indenture Act and the Rules and Regulations, neither of such documents will
include any untrue statement of a material fact or will omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and no Additional Registration Statement has been or
will be filed. The two preceding sentences do not apply to statements in or
omissions from a Registration Statement or the Prospectus based upon written
information furnished to the Company by any Underwriter through the Joint Book-
Running Managers specifically for use therein, it being understood and agreed
that the only such information is that described as such in Section 7(b) herein.
(c) The Company has been duly incorporated and is a validly existing
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own its properties and conduct its business as
described in the Prospectus; and the Company is duly qualified to do business as
a foreign corporation in good standing in all other jurisdictions in which its
ownership or lease of property or the conduct of its business requires such
qualification, except where the failure to so qualify would not result in a
material adverse change in the condition, financial or otherwise, or in the
properties, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise (a "Material Adverse Effect").
(d) Each subsidiary of the Company has been duly incorporated or
organized and is a validly existing corporation or limited liability company in
good standing under the laws of the jurisdiction of its incorporation or
organization, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus; and each
subsidiary of the Company is duly qualified to do business as a foreign
corporation or limited liability company in good standing in all other
jurisdictions in which its ownership or lease of property or the conduct of its
business requires such qualification, except where the failure to so qualify
would not result in a Material Adverse Effect; all the issued and outstanding
capital stock or membership interests of each subsidiary of the Company has been
duly authorized and validly issued and is fully paid and nonassessable; and the
capital stock
<PAGE>
5
or membership interests of each subsidiary owned by the Company, directly or
through subsidiaries, is, except as disclosed in the Prospectus, owned free from
liens, encumbrances and defects.
(e) The Indenture has been duly authorized and, if the Effective Time
of a Registration Statement is prior to the execution and delivery of this
Agreement, has been or otherwise upon such Effective Time will be duly qualified
under the Trust Indenture Act with respect to the Offered Securities registered
thereby; the Offered Securities have been duly authorized; and when the Offered
Securities are delivered and paid for pursuant to this Agreement on the Closing
Date (as defined below), the Indenture will have been duly executed and
delivered, such Offered Securities will have been duly executed, authenticated,
issued and delivered, will be entitled to the benefits of the Indenture and will
conform to the description thereof contained in the Prospectus and the Indenture
and such Offered Securities will constitute valid and legally binding
obligations of the Company, enforceable in accordance with their terms, subject
to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
and to general equity principles.
(f) Neither the Company nor any of its subsidiaries is (i) in
violation of its respective charter or by-laws or limited liability company
agreement or (ii) in default in the performance of any obligation, agreement or
condition contained in any bond, debenture, note or any other evidence of
indebtedness or in any other agreement, indenture or instrument material to the
conduct of the business of the Company and its subsidiaries, taken as a whole,
to which the Company or any of its subsidiaries is a party or by which it or any
of its subsidiaries or their respective property is bound.
(g) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings in connection with the Offering between the Company
and any person that would give rise to a valid claim against the Company or any
Underwriter for a brokerage commission, finder's fee or other like payment.
(h) No consent, approval, authorization, or order of, or filing with,
any governmental agency or body or any court is required for the consummation of
the transactions contemplated by this Agreement in connection with the issuance
and sale of the Offered Securities by the Company, except such as have been
obtained and made under the Act and the Trust Indenture Act and such as may be
required under state securities laws.
<PAGE>
6
(i) The execution, delivery and performance of the Indenture and this
Agreement, and the issuance and sale of the Offered Securities and compliance by
the Company with the terms and provisions hereof and thereof will not result in
a breach or violation of any of the terms and provisions of, or constitute a
default under, any statute, any rule, regulation or order of any governmental
agency or body or any court, domestic or foreign, having jurisdiction over the
Company or any subsidiary of the Company or any of their properties, or any
agreement or instrument to which the Company or any such subsidiary is a party
or by which the Company or any such subsidiary is bound or to which any of the
properties of the Company or any such subsidiary is subject, or the charter or
by-laws or limited liability company agreement of the Company or any such
subsidiary, and the Company has full power and authority to authorize, issue and
sell the Offered Securities as contemplated by this Agreement, except for such
breach, violation or default that would not result in a Material Adverse Effect.
(j) This Agreement has been duly authorized, executed and delivered
by the Company and is a valid and binding agreement of the Company enforceable
in accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium, receivership and similar laws affecting creditors'
rights and remedies generally, and to general principles of equity (regardless
of whether enforcement is sought in a proceeding at law or in equity), except as
rights to indemnity and contribution hereunder may be limited by law.
(k) Except as disclosed in the Prospectus, each of the Company and
its subsidiaries has good and marketable title to all real properties and all
other properties and assets owned by it, in each case free from liens,
encumbrances and defects that would materially affect the value thereof or
materially interfere with the use made or to be made thereof by them; and except
as disclosed in the Prospectus, the Company and its subsidiaries hold any leased
real or personal property under valid and enforceable leases with no exceptions
that would materially interfere with the use made or to be made thereof by them.
(l) The Company and its subsidiaries possess adequate certificates,
authorities or permits issued by appropriate governmental agencies or bodies
necessary to conduct the business now operated by them and have not received any
notice of proceedings relating to the revocation or modification of any such
certificate, authority or permit that, if determined adversely to the Company or
any of its subsidiaries, would individually or in the aggregate have a material
adverse effect on the Company and its subsidiaries taken as a whole.
<PAGE>
7
(m) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that might
have a material adverse effect on the Company and its subsidiaries taken as a
whole.
(n) The Company and its subsidiaries own, possess or can acquire on
reasonable terms, adequate trademarks, trade names and other rights to
inventions, know-how, patents, copyrights, confidential information and other
intellectual property (collectively, "intellectual property rights") necessary
to conduct the business now operated by them, or presently employed by them, the
failure of which to own or possess would not result in a Material Adverse
Effect, and have not received any notice of infringement of or conflict with
asserted rights of others with respect to any intellectual property rights that,
if determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a material adverse effect on the Company
and its subsidiaries taken as a whole.
(o) The Company and each of its subsidiaries maintains reasonably
adequate insurance.
(p) Except as disclosed in the Prospectus, neither the Company nor
any of its subsidiaries is in violation of any statute, any rule, regulation,
decision or order of any governmental agency or body or any court, domestic or
foreign, relating to the use, disposal or release of hazardous or toxic
substances or relating to the protection or restoration of the environment or
human exposure to hazardous or toxic substances (collectively, "environmental
laws"), to its knowledge, owns or operates any real property contaminated with
any substance that is subject to any environmental laws, is liable for any off-
site disposal or contamination pursuant to any environmental laws, or is subject
to any claim relating to any environmental laws, which violation, contamination,
liability or claim would individually or in the aggregate result in a Material
Adverse Effect; and the Company is not aware of any pending investigation which
might lead to such a claim.
(q) Except as disclosed in the Prospectus, to the knowledge of the
Company, there are no pending actions, suits or proceedings against or affecting
the Company, any of its subsidiaries or any of their respective properties that,
if determined adversely to the Company or any of its subsidiaries, would result
individually or in the aggregate in a material adverse change in the condition
(financial or other), business, properties, business prospects or results of
operations of the Company and its subsidiaries taken as a whole, or would
materially and adversely affect the ability of the Company to perform its
obligations under the Indenture or this
<PAGE>
8
Agreement, or which are otherwise material in the context of the sale of the
Offered Securities; and, to the Company's knowledge, no such actions, suits or
proceedings are threatened or contemplated.
(r) Arthur Andersen LLP are independent public accountants with
respect to the Company as required by the Act; the financial statements included
in each Registration Statement and the Prospectus present fairly the financial
position of the Company and its consolidated subsidiaries as of the dates shown
and their results of operations and cash flows for the periods shown, and such
financial statements have been prepared in conformity with the generally
accepted accounting principles in the United States applied on a consistent
basis; and the schedules included in each Registration Statement present fairly
the information required to be stated therein.
(s) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there has been no
material adverse change, nor any development or event involving a prospective
material adverse change, in the condition (financial or other), business,
properties, business prospects or results of operations of the Company and its
subsidiaries taken as a whole, and, except as disclosed in or contemplated by
the Prospectus, there has been no dividend or distribution of any kind declared,
paid or made by the Company on any class of its capital stock.
(t) The Company is not and, after giving effect to the offering and
sale of the Offered Securities and the application of the proceeds thereof as
described in the Prospectus, will not be an "investment company" as defined in
the Investment Company Act of 1940.
(u) No relationship, direct or indirect, exists between or among any
of the Company or any affiliate of the Company, on the one hand, and any
director, officer, stockholder, customer or supplier of any of them, on the
other hand, which is required by the Act or by the Rules and Regulations
thereunder to be described in the Registration Statement or the Prospectus which
is not so described or is not described as required.
(v) The information provided separately to the Underwriters and
disclosed in the Prospectus regarding delinquencies and foreclosures, loan
losses, the value of the servicing portfolios and Excess Spread Receivables (as
such term is defined in the Registration Statement), the sale of Excess Spread
Receivables and
<PAGE>
9
Purchase and Sale Facilities (as such term is defined in the Registration
Statement) is accurate and complete in all material respects.
3. Purchase, Sale and Delivery of Offered Securities. On the basis
--------------------------------------------------
of the representations, warranties and agreements herein contained, but subject
to the terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and the Underwriters agree, severally and not jointly, to purchase
from the Company, at a purchase price of % of the principal amount thereof
plus accrued interest from to the Closing Date (as hereinafter
defined), the respective principal amounts of Offered Securities set forth
opposite the names of the Underwriters in Schedule A hereto.
The Company will deliver against payment of the purchase price the
Offered Securities in the form of one or more permanent global Securities in
definitive form (the "Global Securities") deposited with the Trustee as
custodian for The Depository Trust Company ("DTC") and registered in the name of
Cede & Co., as nominee for DTC. Payment for the Offered Securities shall be
made by the Underwriters in Federal (same day) funds by official check or checks
or wire transfer to an account previously designated to the Joint Book-Running
Managers by the Company at a bank acceptable to the Joint Book-Running Managers
drawn to the order of at the office of Cravath, Swaine & Moore
at 10:00 a.m. (New York time), on August , 1996 , or at such other time not
later than seven full business days thereafter as the Joint Book-Running
Managers and the Company determine, such time being herein referred to as the
"Closing Date", against delivery to the Trustee as custodian for DTC of the
Global Securities representing all the Offered Securities. The Global
Securities will be made available for checking at the above office of
at least 24 hours prior to the Closing Date.
4. Offering by Underwriters. It is understood that the several
-------------------------
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company. The Company agrees with the
----------------------------------
several Underwriters that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will file the
Prospectus with the Commission pursuant to and in accordance with
subparagraph (1) (or, if applicable and if consented to by the Joint Book-
Running Managers, subparagraph (4))
<PAGE>
10
of Rule 424(b) not later than the earlier of (A) the second business day
following the execution and delivery of this Agreement or (B) the fifteenth
business day after the Effective Date of the Initial Registration Statement.
The Company will advise the Joint Book-Running Managers promptly of
any such filing pursuant to Rule 424(b). If the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this Agreement
and an additional registration statement is necessary to register a portion of
the Offered Securities under the Act but the Effective Time thereof has not
occurred as of such execution and delivery, the Company will file the additional
registration statement or, if filed, will file a post-effective amendment
thereto with the Commission pursuant to and in accordance with Rule 462(b) on or
prior to 10:00 p.m., New York time, on the date of this Agreement or, if
earlier, on or prior to the time the Prospectus is printed and distributed to
any Underwriter, or will make such filing at such later date as shall have been
consented to by the Joint Book-Running Managers.
(b) The Company will advise the Joint Book-Running Managers promptly
of any proposal to amend or supplement the initial or any additional
registration statement as filed or the related prospectus or the Initial
Registration Statement, the Additional Registration Statement (if any) or the
Prospectus and will not effect such amendment or supplementation without the
Joint Book-Running Managers' consent; and the Company will also advise the Joint
Book-Running Managers promptly of the effectiveness of each Registration
Statement (if its Effective Time is subsequent to the execution and delivery of
this Agreement) and of any amendment or supplementation of a Registration
Statement or the Prospectus and of the institution by the Commission of any stop
order proceedings in respect of a Registration Statement and will use its best
efforts to prevent the issuance of any such stop order and to obtain as soon as
possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with sales by
any Underwriter or dealer, any event occurs as a result of which the Prospectus
as then amended or supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, or if it is necessary at any time to amend the Prospectus to comply
with the Act, the Company will promptly notify the Joint Book-Running Managers
of such event and will promptly prepare and file with the Commission, at its own
expense, an amendment or supplement which will correct such statement or
omission or an amendment which will effect such
<PAGE>
11
compliance. Neither the Joint Book-Running Managers' consent to, nor the
Underwriters' delivery of, any such amendment or supplement shall constitute a
waiver of any of the conditions set forth in Section 6.
(d) As soon as practicable, but not later than the Availability Date
(as defined below), the Company will make generally available to its
securityholders an earnings statement covering a period of at least 12 months
beginning after the Effective Date of the Initial Registration Statement (or, if
later, the Effective Date of the Additional Registration Statement) which will
satisfy the provisions of Section 11(a) of the Act. For the purpose of the
preceding sentence, "Availability Date" means the 45th day after the end of the
fourth fiscal quarter following the fiscal quarter that includes such Effective
Date, except that, if such fourth fiscal quarter is the last quarter of the
Company's fiscal year, "Availability Date" means the 90th day after the end of
such fourth fiscal quarter.
(e) The Company will furnish to the Underwriters copies of each
Registration Statement (four of which will be signed and will include all
exhibits), each related preliminary prospectus, and, so long as delivery of a
prospectus relating to the Offered Securities is required to be delivered under
the Act in connection with sales by any Underwriter or dealer, the Prospectus
and all amendments and supplements to such documents, in each case in such
quantities as the Joint Book-Running Managers request. The Prospectus shall be
so furnished on or prior to 3:00 p.m., New York time, on the business day
following the later of the execution and delivery of this Agreement or the
Effective Time of the Initial Registration Statement. All other documents shall
be so furnished as soon as available. The Company will pay the expenses of
printing and distributing to the Underwriters all such documents.
(f) The Company will use its best efforts to arrange for the
qualification of the Offered Securities for sale under the laws of such
jurisdictions as the Joint Book-Running Managers designate and will continue
such qualifications in effect so long as required for the distribution;
provided, however, that the Company shall not be obligated to file any general
- -------- --------
consent to service of process or to qualify as a foreign corporation or as a
dealer in securities in any jurisdiction in which it is not so qualified or to
subject itself to taxation in respect of doing business in any jurisdiction in
which it is not otherwise so subject.
(g) During the period of two years hereafter, the Company will
furnish to the Underwriters a copy of its annual report to stockholders for such
year; and the
<PAGE>
12
Company will furnish to the Underwriters (i) as soon as available, a copy of
each report and any definitive proxy statement of the Company filed with the
Commission under the Securities Exchange Act of 1934 or mailed to stockholders.
(h) The Company will pay all expenses incident to the performance of
its obligations under this Agreement and will reimburse the Underwriters (if and
to the extent incurred by them) for any filing fees and other reasonable
expenses (including fees and disbursements of counsel) incurred by them in
connection with qualification of the Offered Securities for sale under the laws
of such jurisdictions as the Joint Book- Running Managers designate and the
printing of memoranda relating thereto for any fees charged by investment rating
agencies for the rating of the Offered Securities, for the reasonable fees and
disbursements of counsel to the Underwriters in connection with the review by
the National Association of Securities Dealers, Inc. of the Offered Securities,
for any travel expenses of the Company's officers and employees and any other
expenses of the Company in connection with attending or hosting meetings with
prospective purchasers of the Offered Securities and for reasonable expenses
incurred in distributing preliminary prospectuses and the Prospectus (including
any amendments and supplements thereto) to the Underwriters.
(i) For a period commencing on the date hereof through the Closing
Date, the Company will not offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, or file with the Commission a registration
statement under the Act relating to, any debt securities substantially similar
to the Offered Securities, or publicly disclose the intention to make any such
offer, sale, pledge, disposal or filing, without the prior written consent of
the Joint Book-Running Managers.
(j) The Company shall use its best efforts to do and perform all
things required or necessary to be done and performed under this Agreement by
the Company prior to the Closing Date and to satisfy all conditions precedent to
the delivery of the Offered Securities.
6. Conditions of the Obligations of the Underwriters. The several
--------------------------------------------------
obligations of the Underwriters to purchase and pay for the Offered Securities
on the Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company herein, to the accuracy of the statements
of Company officers
<PAGE>
13
made pursuant to the provisions hereof, to the performance by the Company of its
obligations hereunder and to the following additional conditions precedent:
(a) The Underwriters shall have received a letter, dated the date of
delivery thereof (which, if the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, shall be on
or prior to the date of this Agreement or, if the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement, shall be prior to the filing of the amendment or post-effective
amendment to the registration statement to be filed shortly prior to such
Effective Time), of Arthur Andersen LLP confirming that they are independent
public accountants within the meaning of the Act and the applicable published
Rules and Regulations thereunder and stating to the effect that:
(i) in their opinion the financial statements and schedules examined
by them and included in the Registration Statements comply as to form in
all material respects with the applicable accounting requirements of the
Act and the related published Rules and Regulations;
(ii) they have performed the procedures specified by the American
Institute of Certified Public Accountants for a review of interim financial
information as described in Statement of Auditing Standards No. 71, Interim
Financial Information, on the unaudited financial statements included in
the Registration Statement;
(iii) on the basis of the review referred to in clause (ii) above, a
reading of the latest available interim financial statements of the
Company, inquiries of officials of the Company who have responsibility for
financial and accounting matters and other specified procedures, nothing
came to their attention that caused them to believe that:
(A) the unaudited financial statements included in the
Registration Statement do not comply in form in all material respects
with the applicable accounting requirements of the Act and the related
published Rules and Regulations or any material modifications should
be made to such unaudited financial statements for them to be in
conformity with generally accepted accounting principles;
(B) at the date of the latest available balance sheet read by
such accountants, or at a subsequent specified date not more than
three
<PAGE>
14
business days prior to the date of this Agreement, there was any
change in the capital stock or any increase in short-term indebtedness
or long-term indebtedness of the Company and its consolidated
subsidiaries or, at the date of the latest available balance sheet
read by such accountants, there was any decrease in consolidated net
assets or consolidated net worth, as compared with amounts shown on
the latest balance sheet included in the Prospectus; or
(C) for the period from the closing date of the latest income
statement included in the Prospectus to the closing date of the latest
available income statement read by such accountants there were any
decreases, as compared with the corresponding period of the previous
year and with the period of corresponding length ended the date of the
latest income statement included in the Prospectus, in consolidated
net sales, or net operating income, or consolidated net income or in
the ratio of earnings to fixed charges, pre-tax interest coverage
ratio and percentage of indebtedness to total capitalization,
except in all cases set forth in clauses (B) and (C) above for changes,
increases or decreases which are specifically described in such letter; and
(iv) they have compared specified dollar amounts (or percentages
derived from such dollar amounts) and other financial information contained
in the Registration Statements (in each case to the extent that such dollar
amounts, percentages and other financial information are derived from the
general accounting records of the Company and its subsidiaries subject to
the internal controls of the Company's accounting system or are derived
directly from such records by analysis or computation) with the results
obtained from inquiries, a reading of such general accounting records and
other procedures specified in such letter and have found such dollar
amounts, percentages and other financial information to be in agreement
with such results, except as otherwise specified in such letter. For
purposes of this subsection, (i) if the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement, "Registration Statements" shall mean the initial registration
statement as proposed to be amended by the amendment or post-effective
amendment to be filed shortly prior to its Effective Time; (ii) if the
Effective Time of the Initial Registration Statement is prior to the
execution and delivery of this Agreement but the Effective Time of the
Additional Registration is subsequent to such execution and delivery,
"Registration Statements" shall mean the Initial Registration
<PAGE>
15
Statement and the additional registration statement as proposed to be filed
or as proposed to be amended by the post-effective amendment to be filed
shortly prior to its Effective Time; and (iii) "Prospectus" shall mean the
prospectus included in the Registration Statements.
(b) If the Effective Time of the Initial Registration Statement is
not prior to the execution and delivery of this Agreement, such Effective Time
shall have occurred not later than 10:00 p.m., New York time, on the date of
this Agreement or such later date as shall have been consented to by the Joint
Book-Running Managers. If the Effective Time of the Additional Registration
Statement (if any) is not prior to the execution and delivery of this Agreement,
such Effective Time shall have occurred not later than 10:00 p.m., New York
time, on the date of this Agreement or, if earlier, the time the Prospectus is
printed and distributed to any Underwriter, or shall have occurred at such later
date as shall have been consented to by the Joint Book Running Managers. If the
Effective Time of the Initial Registration Statement is prior to the execution
and delivery of this Agreement, the Prospectus shall have been filed with the
Commission in accordance with the Rules and Regulations and Section 5(a) of this
Agreement. Prior to such Closing Date, no stop order suspending the
effectiveness of a Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or, to the knowledge of
the Company or the Joint Book-Running Managers, shall be contemplated by the
Commission.
(c) (I) Subsequent to the execution and delivery of this Agreement,
there shall not have occurred (i) any downgrading in the rating of any debt
securities of the Company by any "nationally recognized statistical rating
organization" (as defined for purposes of Rule 436(g) under the Act), or
any public announcement that any such organization has under surveillance
or review its rating of any debt securities of the Company (other than an
announcement with positive implications of a possible upgrading, and no
implication of a possible downgrading, of such rating); (ii) any suspension
or limitation of trading in securities generally on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq Stock Market's National
Market, or any setting of minimum prices for trading on such exchange, or
any suspension of trading of any securities of the Company on any such
exchange or in the over-the-counter market; (iii) any banking moratorium
declared by U.S. Federal or New York authorities; (iv) any outbreak or
escalation of hostilities in which the United States is involved, any
declaration of war by Congress or any other national or international
calamity or emergency or change in economic conditions or in the financial
markets of the United States or elsewhere if, in the judgment of a majority
in interest of the Underwriters, the
<PAGE>
16
effect of any such outbreak, escalation, declaration, calamity, emergency
or change makes it impractical or inadvisable to proceed with completion of
the public offering or the sale of and payment for the Offered Securities;
(v) the enactment, publication, decree or other promulgation of any federal
or state statute, regulation, rule or order of any court or other
governmental authority which in the opinion of a majority in interest of
the Underwriters materially and adversely affects, or will materially and
adversely affect, the business or operations of the Company or its
Subsidiaries; or (vi) the taking of any action by any federal, state or
local government or agency in respect of its monetary or fiscal affairs
which in the opinion of a majority in interest of the Underwriters has a
material adverse effect on the financial markets in the United States.
(II) Since the date of the latest balance sheet date included in the
Registration Statement, there shall not have occurred any change, or any
development or event involving a prospective change, in the condition
(financial or other), business, properties, business prospects or results
of operations of the Company or its subsidiaries, whether or not arising in
the ordinary course of business, which, in the judgment of a majority in
interest of the Underwriters, is material and adverse and makes it
impractical or inadvisable to proceed with completion of the public
offering or the sale of and payment for the Offered Securities;
(d) The Underwriters shall have received an opinion, dated such
Closing Date, of Dewey Ballantine, counsel for the Company, to the effect that:
(i) Each of the Company and its subsidiaries has been duly
incorporated or organized and is a validly existing corporation or limited
liability company in good standing under the laws of the jurisdiction of
incorporation or organization, with corporate power and authority to own
its properties and conduct its business as described in the Prospectus; and
all the issued and outstanding capital stock of each subsidiary of the
Company has been duly authorized and validly issued and is fully paid and
nonassessable;
(ii) The Indenture has been duly authorized, executed and delivered
and has been duly qualified under the Trust Indenture Act; the Offered
Securities have been duly authorized, executed, authenticated, issued and
delivered, are entitled to the benefits of the Indenture and conform to the
description thereof contained in the Prospectus; and the Indenture and the
Offered Securities constitute valid and legally binding obligations of the
Company enforceable in accordance with their
<PAGE>
17
terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles;
(iii) The Company is not and, after giving effect to the offering and
sale of the Offered Securities and the application of the proceeds thereof
as described in the Prospectus, will not be an "investment company" as
defined in the Investment Company Act of 1940.
(iv) No consent, approval, authorization or order of, or filing with,
any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in
connection with the issuance or sale of the Offered Securities by the
Company, except such as have been obtained and made under the Act and the
Trust Indenture Act and such as may be required under state securities
laws;
(v) The execution, delivery and performance of the Indenture and this
Agreement and the issuance and sale of the Offered Securities and
compliance by the Company with the terms and provisions hereof and thereof
will not result in a breach or violation of any of the terms and provisions
of, or constitute a default under, any statute, any rule, regulation or
order of any governmental agency or body or any court having jurisdiction
over the Company or any subsidiary of the Company or any of their
properties, or any agreement or instrument to which the Company or any such
subsidiary is a party or by which the Company or any such subsidiary is
bound or to which any of the properties of the Company or any such
subsidiary is subject, or the charter or by-laws or limited liability
company agreement of the Company or any such subsidiary, and the Company
has full power and authority to authorize, issue and sell the Offered
Securities as contemplated by this Agreement, except for such breach,
violation or default which would not result in a Material Adverse Effect;
(vi) The statements under the caption "Description of the Notes" and
"Underwriting" in the Prospectus, as amended or supplemented, and Items 14
and 15 of Part II of the Registration Statement, insofar as such statements
constitute a summary of legal matters or documents referred to therein,
fairly present the information called for with respect to such legal
matters or documents in all material respects;
<PAGE>
18
(vii) The Initial Registration Statement was declared effective under
the Act as of the date and time specified in such opinion, the Additional
Registration Statement (if any) was filed and became effective under the
Act as of the date and time (if determinable) specified in such opinion,
the Prospectus either was filed with the Commission pursuant to the
subparagraph of Rule 424(b) specified in such opinion on the date specified
therein or was included in the Initial Registration Statement or the
Additional Registration Statement (as the case may be), and, to the best of
the knowledge of such counsel, no stop order suspending the effectiveness
of a Registration Statement or any part thereof has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the Act, and each Registration Statement and the
Prospectus, and each amendment or supplement thereto, as of their
respective effective or issue dates, complied as to form in all material
respects with the requirements of the Act, the Trust Indenture Act and the
Rules and Regulations; it being understood that such counsel need express
no opinion as to the financial statements or other financial data contained
in the Registration Statements or the Prospectus;
(viii) This Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement of the
Company enforceable in accordance with its terms, subject to applicable
bankruptcy, insolvency, reorganization, moratorium, receivership and
similar laws affecting creditors' rights and remedies generally, and to
general principles of equity (regardless of whether enforcement is sought
in a proceeding at law or in equity), except as rights to indemnity and
contribution hereunder may be limited by law; and
(ix) To their knowledge, except for the Parent, no holder of any
security of the Company has any right to require registration of shares of
common stock or any other security of the Company.
In addition such counsel shall state that such counsel has
participated in conferences with representatives of the Underwriters,
officers and other representatives of the Company and representatives of
the independent certified public accountants of the Company, at which
conferences the contents of the Registration Statement and the Prospectus
and related matters were discussed, and although such counsel does not pass
upon and does not assume any responsibility for the accuracy, completeness
or fairness of the statements contained in the Registration Statement and
the Prospectus (except and only to the extent as set forth in clause
(vi) above), on the basis of the foregoing [(relying as to materiality to a
large extent upon the discussions with and representations and opinions of
<PAGE>
19
officers and other representatives of the Company)], no facts have come to
the attention of such counsel which lead such counsel to believe that the
Registration Statement or any amendment thereto, at the time it became
effective or as of the Closing Date, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that
the Prospectus or any amendment or supplement thereto, as of its issue date
or as of the Closing Date, included an untrue statement of a material fact
or omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, that such counsel does not express any
-------
comment with respect to (i) Form T-1 and (ii) the financial statements
including the notes thereto and supporting schedules, or any other
financial and statistical data set forth or referred to in the Registration
Statement or Prospectus.
In rendering such opinions, such counsel (A) need not express any
opinion with regard to the application of laws of any jurisdiction other
than the federal law of the United States, the laws of the State of
New York and the General Corporation Law of the State of Delaware and
(B) may rely, as to matters of fact, to the extent they deem proper, on
representations or certificates of responsible officers of the Company and
certificates of public officials.
(e) The Underwriters shall have received on opinion, dated such
Closing Date, of Alan Langus, Chief Counsel of the Company, to the effect that:
(i) Each of the Company and its subsidiaries is duly qualified to do
business as a foreign corporation or limited liability company in good
standing in all jurisdictions in which its ownership or lease of
property or the conduct of its business requires such qualification,
except where the failure to so qualify would not result in a Material
Adverse Effect; all of the issued and outstanding capital stock of
each subsidiary owned by the Company, directly or though subsidiaries,
has been duly authorized and validly issued, is fully paid and
non-assessable and, to such counsel's knowledge, except or disclosed
in the Prospectus, owned free from liens, encumbrances and defects;
(ii) The statements under the captions "Business-Legal Proceedings",
"Regulation-Truth in Lending", "Regulation-Other Lending Laws",
"Regulation-Broker/Dealer", "Certain Transactions-Current
Relationships with Continental Grain" and "Description of Certain
Indebtedness and
<PAGE>
20
Financing Arrangements" in the Prospectus, as amended or supplemented,
insofar as such statements constitute a summary of legal matters,
documents or proceedings referred to therein, fairly present the
information called for with respect to such legal matters, documents
and proceedings in all material respects; and
(iii) The Company and each of its subsidiaries has such permits,
licenses, franchises and authorizations of governmental or regulatory
authorities ("permits"), as are necessary to own, lease and operate
its respective properties and to conduct its business in the manner
described in the Prospectus; to the best of such counsel's knowledge,
after due inquiry, the Company and each of its subsidiaries has
fulfilled and performed all of its material obligations with respect
to such permits and no event has occurred which allows, or after
notice or lapse of time would allow, revocation or termination thereof
or results in any other material impairment of the rights of the
holder of any such permit, subject in each case to such qualification
as may be set forth in the Prospectus, such permits contain no
restrictions that are materially burdensome to the Company or any of
its subsidiaries.
(f) The Underwriters shall have received an opinion, dated such
Closing Date, of Lawrence G. Weppler, Esq., General Counsel - Corporate for the
Parent, to the effect that:
(i) The execution, delivery and performance of the Indenture and this
Agreement and the issuance and sale of the Offered Securities by the
Company and compliance with the terms and provisions hereof and thereof
will not, whether with or without the giving of notice or passage of time
or both, conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan or credit agreement, note, lease or other
agreement or instrument known to such counsel after due inquiry to which
the Parent is a party or by which the Parent is bound, or to which any of
the property or assets of the Parent is subject, except for such conflicts,
breaches or violations which would not result in a material adverse change
in the condition, (financial or other), business, properties, business
prospects or results of operations of the Parent or the Company.
(g) The Underwriters shall have received from Cravath, Swaine &
Moore, counsel for the Underwriters, such opinion or opinions, dated the Closing
Date, with respect to the incorporation of the Company, the validity of the
Offered Securities, the
<PAGE>
21
Registration Statements, the Prospectus and other related matters as the
Underwriters may require, and the Company shall have furnished to such counsel
such documents as they request for the purpose of enabling them to pass upon
such matters.
(h) The Underwriters shall have received a certificate, dated such
Closing Date, of the President or any Vice-President and a principal financial
or accounting officer of:
(i) the Company in which such officers, to the best of their
knowledge after reasonable investigation, shall state that: the
representations and warranties of the Company in this Agreement are true
and correct; the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied hereunder at or prior
to such Closing Date; no stop order suspending the effectiveness of any
Registration Statement has been issued and no proceedings for that purpose
have been instituted or are contemplated by the Commission; the Additional
Registration Statement (if any) satisfying the requirements of
subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to Rule 462(b),
including payment of the applicable filing fee in accordance with
Rule 111(a) or (b) under the Act, prior to the time the Prospectus was
printed and distributed to any Underwriter; and, subsequent to the latest
balance sheet included in the Prospectus, there has been no material
adverse change, nor any development or event involving a prospective
material adverse change, in the condition (financial or other), business,
properties, business prospects or results of operations of the Company and
its subsidiaries taken as a whole except as set forth in or contemplated by
the Prospectus or as described in such certificate; and
(ii) the Parent in which such officers, to the best of their
knowledge after reasonable investigation, shall represent and warrant to,
and agree with, the several Underwriters that:
(a) All material consents, approvals, authorizations and orders
necessary for the consummation of the transactions contemplated herein
have been obtained; and
(b) The consummation of the transactions contemplated herein
will not, whether with or without the giving of notice or passage of
time or both, conflict with or result in a breach or violation of any
of the terms or provisions of, or constitute a default under, (i) any
indenture, mortgage, deed of trust, loan or credit agreement, note,
lease or other agreement or
<PAGE>
22
instrument to which the Parent is a party or by which the Parent is
bound, or to which any of the property or assets of the Parent is
subject, or (ii) the provisions of the articles of incorporation or
by-laws of the Parent or (iii) any statute or any order, rule or
regulation of any court or governmental agency or body having
jurisdiction over the Parent or the property of the Parent except, in
the case of (i), for such conflicts, breach or violations which would
not result in a material adverse change in the condition (financial or
other), business, properties, business prospects or results of
operations of the Parent or the Company.
(i) The Underwriters shall have received a letter, dated such Closing
Date, of Arthur Andersen LLP which meets the requirements of subsection (a) of
this Section, except that the specified date referred to in such subsection will
be a date not more than three business days prior to such Closing Date for the
purposes of this subsection. The Company will furnish the Underwriters with
such conformed copies of such opinions, certificates, letters and documents as
the Underwriters reasonably request.
7. Indemnification and Contribution. (a) The Company will indemnify
---------------------------------
and hold harmless each Underwriter and each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") from and
against any and all losses, claims, damages, judgements or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages, judgements or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any
Registration Statement, the Prospectus, or any amendment or supplement thereto,
or any related preliminary prospectus, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
will reimburse each Underwriter and each such person for any legal or other
expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such loss, claim, damage, liability or action as
such expenses are incurred; provided, however, that the Company will not be
-------- -------
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement in or omission or alleged omission from any of such documents in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter through the Joint Book- Running Managers specifically
for use therein, it being understood and agreed that the only such information
furnished by any Underwriter consists of the information described as such in
subsection (b) below; provided, however, that the foregoing indemnity
-------- -------
<PAGE>
23
agreement with respect to any preliminary prospectus shall not enure to the
benefit of any Underwriter from whom the person asserting any such losses,
claims, damages and liabilities and judgments purchased Securities, or any
person controlling such Underwriter, if a copy of the Prospectus (as then
amended or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Securities to such person, and if the
Prospectus (as so amended and supplemented) would have cured the defect giving
rise to such loss, claim, damage, liability or judgment.
(b) Each Underwriter will severally and not jointly indemnify and
hold harmless each of the Company, its directors, its officers who sign the
Registration Statement and any person controlling the Company within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act, against any losses,
claims, damages or liabilities to which the Company may become subject, under
the Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in any Registration
Statement, the Prospectus, or any amendment or supplement thereto, or any
related preliminary prospectus, or arise out of or are based upon the omission
or the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in reliance upon and
in conformity with written information furnished to the Company by such
Underwriter through the Joint Book- Running Managers specifically for use
therein, and will reimburse any legal or other expenses reasonably incurred by
the Company or any such person in connection with investigating or defending any
such loss, claim, damage, liability or action as such expenses are incurred, it
being understood and agreed that the only such information furnished by any
Underwriter consists of the following information in the Prospectus furnished on
behalf of each Underwriter: the last paragraph at the bottom of the cover page
concerning the terms of the offering by the Underwriters, the legends concerning
over-allotments and stabilizing and passive market making on the inside front
cover page, the concession and reallowance figures appearing in the
3rd paragraph under the caption "Underwriting" and the information contained in
the 2nd sentence of the 5th paragraph and the 6th and 7th paragraphs under the
caption "Underwriting".
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under
subsection (a) or (b)
<PAGE>
24
above, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under
subsection (a) or (b) above. In case any such action is brought against any
indemnified party and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel reasonably satisfactory to
such indemnified party (who shall not, except with the consent of the
indemnified party, be counsel to the indemnifying party). Any indemnified
person shall have the right to employ separate counsel in any such action and
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such indemnified person unless (i) the employment of
such counsel shall have been specifically authorized in writing by the
indemnifying person, (ii) the indemnifying person shall have failed to assume
the defense and employ counsel or (iii) the named parties to any such action
(including any impleaded parties) include both such indemnified person and the
indemnifying person and such indemnified person shall have been advised by such
counsel that there may be one or more legal defenses available to it which are
different from or additional to those available to the indemnifying person (it
being understood, however, that the indemnifying person shall not, in connection
with any one such action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the fees and expenses of more than one separate
firm of attorneys (in addition to any local counsel) for all such indemnified
person). If in any case where the fees and expenses of separate counsel for an
indemnified person are at the expense of the indemnifying party and an
indemnified party shall have requested the indemnifying party to reimburse the
indemnified party for such fees and expenses of counsel as incurred, such
indemnifying party agrees that it shall be liable for any settlement of any
action effected without its written consent if (i) such settlement is entered
into more than 45 days after the receipt by such indemnifying party of the
aforesaid request (ii) such indemnifying party shall have received notice of the
terms of such settlement at least 30 days prior to such settlement being entered
into and (iii) such indemnifying party shall have failed to reimburse the
indemnified party in accordance with such request for reimbursement prior to the
date of such settlement, other than such fees and expenses of counsel which are
being contested in good faith by an indemnifying party. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened action in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party unless such settlement includes an
unconditional release of such indemnified party from all liability on any claims
that are the subject matter of such action.
<PAGE>
25
(d) If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of the losses,
claims, damages, judgements or liabilities referred to in subsection (a) or (b)
above (i) in such proportion as is appropriate to reflect the relative benefits
received by the Company on the one hand and the Underwriters on the other from
the offering of the Offered Securities or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages, judgments or liabilities as well as
any other relevant equitable considerations. The relative benefits received by
the Company on the one hand and the Underwriters on the other shall be deemed to
be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company on the one hand, and the total
underwriting discounts and commissions received by the Underwriters on the other
hand, bear to the total price to the public of the Offered Securities, in each
case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company or the Underwriters and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such untrue statement or
omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the two immediately preceding sentences.
The amount paid by an indemnified party as a result of the losses, claims,
damages, judgments or liabilities referred to in the first sentence of this
subsection (d) shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or defending
any action or claim which is the subject of this subsection (d).
Notwithstanding the provisions of this subsection (d), no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not
<PAGE>
26
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The obligations of the Company under this Section shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section shall be in addition to any liability which the
respective Underwriters may otherwise have and shall extend, upon the same terms
and conditions, to each director of the Company, to each officer of the Company
who has signed a Registration Statement and to each person, if any, who controls
the Company within the meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters
------------------------
default in their obligations to purchase Offered Securities hereunder and the
aggregate principal amount of Offered Securities that such defaulting
Underwriter or Underwriters agreed but failed to purchase does not exceed 10% of
the total principal amount of Offered Securities that the Underwriters are
obligated to purchase on such Closing Date, the Joint Book-Running Managers may
make arrangements satisfactory to the Company for the purchase of such Offered
Securities by other persons, including any of the Underwriters, but if no such
arrangements are made by such Closing Date, each non-defaulting Underwriter
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the Offered Securities that such defaulting Underwriters
agreed but failed to purchase on such Closing Date. If any Underwriter or
Underwriters so default and the aggregate principal amount of Offered Securities
with respect to which such default or defaults occur exceeds 10% of the total
principal amount of Offered Securities that the Underwriters are obligated to
purchase on such Closing Date and arrangements reasonably satisfactory to the
Joint Book-Running Managers and the Company for the purchase of such Offered
Securities by other persons are not made within 36 hours after such default,
this Agreement will terminate without liability on the part of any non-
defaulting Underwriter or the Company, except as provided in Section 9. In any
such case which does not result in termination of this Agreement, either the
Underwriters or the Company shall have the right to postpone the Closing Date,
but in no event for longer than seven days, in order that the required changes,
if any, in the Registration Statement and the Prospectus or any other documents
or arrangements may be effected. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section. Nothing herein will relieve a defaulting Underwriter from liability
for its default.
<PAGE>
27
9. Survival of Certain Representations and Obligations. The
----------------------------------------------------
respective indemnities, agreements, representations, warranties and other
statements of the Company or the Parent or their officers and of the several
Underwriters set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation, or statement as to the
results thereof, made by or on behalf of any Underwriter, the Company, the
Parent or any of their respective representatives, officers or directors or any
controlling person, and will survive delivery of and payment for the Offered
Securities. If this Agreement is terminated pursuant to Section 8 or if for any
reason the purchase of the Offered Securities by the Underwriters is not
consummated, the Company shall remain responsible for the expenses to be paid or
reimbursed by it pursuant to Section 5 and the respective obligations of the
Company and the Underwriters pursuant to Section 7 shall remain in effect. If
the purchase of the Offered Securities by the Underwriters is not consummated
for any reason other than solely because of the termination of this Agreement
pursuant to Section 8 or the occurrence of any event specified in clause (ii),
(iii), (iv) of Section 6(c)(I), the Company will reimburse the Underwriters for
all out-of-pocket expenses (including fees and disbursements of counsel)
reasonably incurred by them in connection with the offering of the Offered
Securities.
10. Notices. All communications hereunder will be in writing and, if
--------
sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed
to the Underwriters, Bear, Stearns & Co. Inc., 245 Park Avenue, New York, NY
10167, Attention: Syndicate Department and c/o CS First Boston Corporation,
Park Avenue Plaza, New York, NY 10055, Attention: Investment Banking
Department-Transactions Advisory Group, or, if sent to the Company, will be
mailed, delivered or telegraphed and confirmed to it at 277 Park Avenue,
38th Floor, New York, NY 10172, Attention: Chief Counsel; provided, however,
-------- -------
that any notice to an Underwriter pursuant to Section 7 will be mailed,
delivered or telegraphed and confirmed to such Underwriter.
11. Successors. This Agreement will enure to the benefit of and be
-----------
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 7, and no other
person will have any right or obligation hereunder.
12. Counterparts. This Agreement may be executed in any number of
-------------
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
<PAGE>
28
13. Applicable Law. This Agreement shall be governed by, and
---------------
construed in accordance with, the laws of the State of New York, without regard
to principles of conflicts of laws.
The Company hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in The City of New York in
any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
If the foregoing is in accordance with the Underwriters' understanding
of our agreement, kindly sign and return to the Company one of the counterparts
hereof, whereupon it will become a binding agreement between the Company and the
several Underwriters in accordance with its terms.
Very truly yours,
CONTIFINANCIAL CORPORATION
By:
------------------------------
Name:
Title:
By:
------------------------------
Name:
Title:
<PAGE>
29
The foregoing Underwriting Agreement is hereby confirmed and accepted
as of the date first above written.
Acting on behalf of themselves and as the Joint Book-
Running Managers of the several Underwriters.
BEAR, STEARNS & CO. INC.
By:
------------------------------
Name:
Title:
CS FIRST BOSTON CORPORATION
By:
------------------------------
Name:
Title:
<PAGE>
SCHEDULE A
Underwriter Principal Amount of Offered
- ----------- ---------------------------
Securities
----------
Bear, Stearns & Co. Inc. $
CS First Boston Corporation
UBS Securities LLC
Total $
==================
EXHIBIT 4.4
___________________________________________________________
___________________________________________________________
CONTIFINANCIAL CORPORATION
% Senior Notes Due 2003
------------------------
INDENTURE
Dated as of August , 1996
------------------------
THE CHASE MANHATTAN BANK,
Trustee
___________________________________________________________
___________________________________________________________
<PAGE>
CROSS-REFERENCE TABLE
TIA Indenture
Section Section
- ------- ---------
310(a)(1) .............................. 7.10
(a)(2) .............................. 7.10
(a)(3) .............................. N.A.
(a)(4) .............................. N.A.
(b) .............................. 7.08; 7.10
(c) .............................. N.A.
311(a) .............................. 7.11
(b) .............................. 7.11
(c) .............................. N.A.
312(a) .............................. 2.05
(b) .............................. 10.03
(c) .............................. 10.03
313(a) .............................. 7.06
(b)(1) .............................. N.A.
(b)(2) .............................. 7.06
(c) .............................. 10.02
(d) .............................. 7.06
314(a) .............................. 4.02;
4.12; 10.02
(b) .............................. N.A.
(c)(1) .............................. 10.04
(c)(2) .............................. 10.04
(c)(3) .............................. N.A.
(d) .............................. N.A.
(e) .............................. 10.05
(f) .............................. 4.12
315(a) .............................. 7.01
(b) .............................. 7.05; 10.02
(c) .............................. 7.01
(d) .............................. 7.01
(e) .............................. 6.11
316(a)(last sentence) ....................... 10.06
(a)(1)(A) .............................. 6.05
(a)(1)(B) .............................. 6.04
(a)(2) .............................. N.A.
(b) .............................. 6.07
317(a)(1) .............................. 6.08
(a)(2) .............................. 6.09
(b) .............................. 2.04
318(a) .............................. 10.01
N.A. means Not Applicable.
- ---------------------
Note: This Cross-Reference Table shall not, for any purpose, be deemed to be
part of the Indenture.
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE 1
Definitions and Incorporation by Reference
------------------------------------------
SECTION 1.01. Definitions ............................ 1
SECTION 1.02. Other Definitions ...................... 24
SECTION 1.03. Incorporation by Reference of Trust
Indenture Act ........................ 24
SECTION 1.04. Rules of Construction .................. 25
ARTICLE 2
The Securities
--------------
SECTION 2.01. Form and Dating ........................ 25
SECTION 2.02. Execution and Authentication ........... 26
SECTION 2.03. Registrar and Paying Agent ............. 27
SECTION 2.04. Paying Agent To Hold Money in Trust..... 27
SECTION 2.05. Securityholder Lists ................... 28
SECTION 2.06. Transfer and Exchange .................. 28
SECTION 2.07. Replacement Securities ................. 29
SECTION 2.08. Outstanding Securities ................. 29
SECTION 2.09. Temporary Securities ................... 30
SECTION 2.10. Cancellation ........................... 30
SECTION 2.11. Defaulted Interest ..................... 30
SECTION 2.12. CUSIP Numbers ........................... 30
ARTICLE 3
Redemption
----------
SECTION 3.01. Notices to Trustee ..................... 31
SECTION 3.02. Selection of Securities To Be
Redeemed ............................. 31
SECTION 3.03. Notice of Redemption ................... 31
SECTION 3.04. Effect of Notice of Redemption ......... 32
SECTION 3.05. Deposit of Redemption Price ............ 32
SECTION 3.06. Securities Redeemed in Part ............ 33
<PAGE>
2
ARTICLE 4
Covenants
---------
SECTION 4.01. Payment of Securities .................. 33
SECTION 4.02. SEC Reports ............................ 33
SECTION 4.03. Limitation on Indebtedness ............. 33
SECTION 4.04. Limitation on Indebtedness and Preferred
Stock of Restricted Subsidiaries ..... 35
SECTION 4.05. Limitation on Restricted Payments ...... 36
SECTION 4.06. Limitation on Restrictions on Dis-
tributions from Restricted
Subsidiaries ........................... 38
SECTION 4.07. Limitation on Sales of Assets and
Subsidiary Stock ..................... 39
SECTION 4.08. Limitation on Affiliate Transactions ... 43
SECTION 4.09. Change of Control ...................... 44
SECTION 4.10. Limitation on Liens .................... 46
SECTION 4.11. Limitation on Investment Company
Status ............................... 46
SECTION 4.12. Compliance Certificates ................ 46
SECTION 4.13. Further Instruments and Acts ........... 46
SECTION 4.14. Certain Covenants Suspended ............ 46
ARTICLE 5
Successor Company
-----------------
SECTION 5.01. When Company May Merge or Transfer
Assets ............................... 47
ARTICLE 6
Defaults and Remedies
---------------------
SECTION 6.01. Events of Default ...................... 48
SECTION 6.02. Acceleration ........................... 51
SECTION 6.03. Other Remedies ......................... 51
SECTION 6.04. Waiver of Past Defaults ................ 51
SECTION 6.05. Control by Majority .................... 52
SECTION 6.06. Limitation on Suits .................... 52
SECTION 6.07. Rights of Holders To Receive Payment ... 53
SECTION 6.08. Collection Suit by Trustee ............. 53
SECTION 6.09. Trustee May File Proofs of Claim ....... 53
SECTION 6.10. Priorities ............................. 53
<PAGE>
3
SECTION 6.11. Undertaking for Costs .................. 54
SECTION 6.12. Waiver of Stay or Extension Laws ....... 54
ARTICLE 7
Trustee
-------
SECTION 7.01. Duties of Trustee ...................... 54
SECTION 7.02. Rights of Trustee ...................... 56
SECTION 7.03. Individual Rights of Trustee ........... 57
SECTION 7.04. Trustee's Disclaimer ................... 57
SECTION 7.05. Notice of Defaults ..................... 57
SECTION 7.06. Reports by Trustee to Holders .......... 57
SECTION 7.07. Compensation and Indemnity ............. 58
SECTION 7.08. Replacement of Trustee ................. 58
SECTION 7.09. Successor Trustee by Merger ............ 60
SECTION 7.10. Eligibility; Disqualification .......... 60
SECTION 7.11. Preferential Collection of Claims
Against Company ...................... 60
ARTICLE 8
Discharge of Indenture; Defeasance
----------------------------------
SECTION 8.01. Discharge of Liability on Securities;
Defeasance ........................... 61
SECTION 8.02. Conditions to Defeasance ............... 62
SECTION 8.03. Application of Trust Money ............. 63
SECTION 8.04. Repayment to Company ................... 63
SECTION 8.05. Indemnity for Government
Obligations .......................... 64
SECTION 8.06. Reinstatement .......................... 64
ARTICLE 9
Amendments
----------
SECTION 9.01. Without Consent of Holders ............. 65
SECTION 9.02. With Consent of Holders ................ 65
SECTION 9.03. Compliance with Trust Indenture ........ 66
SECTION 9.04. Revocation and Effect of Consents
and Waivers .......................... 66
SECTION 9.05. Notation on or Exchange of
Securities ........................... 67
<PAGE>
4
SECTION 9.06. Trustee To Sign Amendments ............. 67
SECTION 9.07. Payment for Consent .................... 68
ARTICLE 10
Miscellaneous
-------------
SECTION 10.01. Trust Indenture Act Controls .......... 68
SECTION 10.02. Notices ............................... 68
SECTION 10.03. Communication by Holders with Other
Holders ............................. 69
SECTION 10.04. Certificate and Opinion as to
Conditions Precedent ................ 69
SECTION 10.05. Statements Required in Certificate
or Opinion .......................... 70
SECTION 10.06. When Securities Disregarded ........... 70
SECTION 10.07. Rules by Trustee, Paying Agent and
Registrar ........................... 70
SECTION 10.08. Legal Holidays ........................ 70
SECTION 10.09. Governing Law ......................... 71
SECTION 10.10. No Recourse Against Others ............ 71
SECTION 10.11. Successors ............................ 71
SECTION 10.12. Multiple Originals .................... 71
SECTION 10.13. Table of Contents; Headings ........... 71
Exhibit A - Form of Security
<PAGE>
INDENTURE dated as of August , 1996, between
CONTIFINANCIAL CORPORATION, a Delaware corporation (the
"Company"), and THE CHASE MANHATTAN BANK, a New York banking
corporation (the "Trustee").
Each party agrees as follows for the benefit of the other party and
for the equal and ratable benefit of the Holders of the Company's % Senior
Notes Due 2003 (the "Securities"):
ARTICLE 1
Definitions and Incorporation by Reference
------------------------------------------
SECTION 1.01. Definitions.
------------
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) used or useful in a Related Business, (ii) the
Capital Stock of a Person that becomes a Restricted Subsidiary as a result of
the acquisition of such Capital Stock by the Company or another Restricted
Subsidiary, (iii) Capital Stock constituting a minority interest in any Person
that at such time is a Restricted Subsidiary; provided, however, that any such
-------- -------
Restricted Subsidiary described in clause (ii) or (iii) above is primarily
engaged in a Related Business or (iv) the Capital Stock or Indebtedness of a
Strategic Alliance Client.
"Affiliate" of any specified Person means any other Person, directly
or indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of Sections 4.07 and 4.08 only, "Affiliate" shall also mean any
beneficial owner of Capital Stock representing 5% or more of the total voting
power of the Voting Stock (on a fully diluted basis) of the Company or of rights
or warrants to purchase such
<PAGE>
2
Capital Stock (whether or not currently exercisable) and any Person who would be
an Affiliate of any such beneficial owner pursuant to the first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions) by
the Company or any Restricted Subsidiary, including any disposition by means of
a merger, consolidation or similar transaction (each referred to for the
purposes of this definition as a "disposition"), of (i) any shares of Capital
Stock of a Restricted Subsidiary (other than directors' qualifying shares or
shares required by applicable law to be held by a Person other than the Company
or a Restricted Subsidiary), (ii) all or substantially all the assets of any
division or line of business of the Company or any Restricted Subsidiary, (iii)
any other assets of the Company or any Restricted Subsidiary outside of the
ordinary course of business of the Company or such Restricted Subsidiary, (iv)
any Investment in a Strategic Alliance Client or (v) any Excess Spread
Receivables (other than, in the case of (i), (ii), (iii), (iv) and (v) above,
(x) a disposition by a Restricted Subsidiary to the Company or by the Company or
a Restricted Subsidiary to a Consolidated Restricted Subsidiary, (y) for
purposes of Section 4.07 only, a disposition that constitutes a Restricted
Payment permitted by Section 4.05 or (z) a disposition of assets (including
related assets) for an aggregate consideration of $1.0 million or less).
"Average Life" means, as of the date of determination, with respect to
any Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the
sum of the products of numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Board of Directors" means the Board of Directors of the Company or
any committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
<PAGE>
3
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests,
membership interests, rights to purchase, warrants, options, participations or
other equivalents of or interests in (however designated) equity of such Person,
including any Preferred Stock, but excluding any debt securities convertible
into such equity.
"Change of Control" means the occurrence of any of the following
events:
(i) Any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act), other than the Permitted Holders, is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that such person shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 35% of the total voting power
of the Voting Stock of the Company; provided, however, that the Permitted
-------- -------
Holders beneficially own (as defined in Rule 13d-3 and Rule 13d-5 under the
Exchange Act), directly or indirectly, in the aggregate a lesser percentage
of the total voting power of the Voting Stock of the Company than such
other person and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority of the
Board of Directors (for the purposes of this clause (i), such other person
shall be deemed to beneficially own any Voting Stock of a corporation
held by another corporation (a "parent corporation"), if such other person
is the beneficial owner (as defined above for such person), directly or
indirectly, of more than 35% of the voting power of the Voting Stock of
such parent corporation and the Permitted Holders beneficially own (as
defined above for the Permitted
<PAGE>
4
Holders), directly or indirectly, in the aggregate a lesser percentage of
the voting power of the Voting Stock of such parent corporation and do not
have the right or ability by voting power, contract or otherwise to elect
or designate for election a majority of the board of directors of such
parent corporation);
(ii) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors (together
with any new directors whose election by such Board of Directors or whose
nomination for election by the shareholders of the Company was approved by
a vote of 66-2/3% of the directors of the Company then still in office who
were either directors at the beginning of such period or whose election
or nomination for election was previously so approved) cease for any reason
to constitute a majority of the Board of Directors then in office; or
(iii) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company, or the
sale of all or substantially all the assets of the Company to another
Person (other than a Person that is controlled by the Permitted Holders),
and, in the case of any such merger or consolidation, the securities of the
Company that are outstanding immediately prior to such transaction and
which represent 100% of the aggregate voting power of the Voting Stock of
the Company are changed into or exchanged for cash, securities or property,
unless pursuant to such transaction such securities are changed into or
exchanged for, in addition to any other consideration, securities of the
surviving corporation that represent immediately after such transaction, at
least a majority of the aggregate voting power of the Voting Stock of the
surviving corporation; provided, however, that the sale by the Company or
-------- -------
its Restricted Subsidiaries from time to time of Receivables to a trust for
the purpose solely of effecting one or more securitizations shall not be
treated hereunder as a sale of all or substantially all the assets of the
Company.
"Code" means the Internal Revenue Code of 1986, as amended.
<PAGE>
5
"Company" means the party named as such in this Indenture until a
successor replaces it and, thereafter, means the successor and, for purposes of
any provision contained herein and required by the TIA, each other obligor on
the indenture securities.
"Consolidated Leverage Ratio" as of any date of determination means
the ratio of (i) the aggregate amount of all Indebtedness of the Company and its
Restricted Subsidiaries on a consolidated basis, excluding (A) Permitted
Warehouse Indebtedness and (B) Hedging Obligations permitted to be Incurred
pursuant to Section 4.03(b)(6) to (ii) the Consolidated Net Worth of the
Company.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
-------- -------
not be included in such Consolidated Net Income: (i) any net income of any
Person if such Person is not a Restricted Subsidiary, except that (A) subject to
the exclusion contained in clause (iv) below, the Company's equity in the net
income of any such Person for such period shall be included in such Consolidated
Net Income up to the aggregate amount of cash actually distributed by such
Person during such period to the Company or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or other
distribution paid to a Restricted Subsidiary, to the limitations contained in
clause (iii) below) and (B) the Company's equity in a net loss of any such
Person for such period shall be included in determining such Consolidated Net
Income; (ii) any net income (or loss) of any Person acquired by the Company or a
Subsidiary in a pooling of interests transaction for any period prior to the
date of such acquisition; (iii) any net income of any Restricted Subsidiary if
such Restricted Subsidiary is subject to restrictions, directly or indirectly,
on the payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that (A) subject to
the exclusion contained in clause (iv) below, the Company's equity in the net
income of any such Restricted Subsidiary for such period shall be included in
such Consolidated Net Income to the extent that cash could have been distributed
by such Restricted Subsidiary during such period to the Company or another
Restricted Subsidiary as a dividend or other distribution (subject, in the case
of a dividend or other distribution paid to another Restricted Subsidiary, to
the limitation contained in this clause) and
<PAGE>
6
(B) the Company's equity in a net loss of any such Restricted Subsidiary for
such period shall be included in determining such Consolidated Net Income; (iv)
any gain (but not loss) realized upon the sale or other disposition of any asset
(excluding any equity Investment in a Strategic Alliance Client) of the Company
or its consolidated Subsidiaries (including pursuant to any sale-and-leaseback
arrangement) which is not sold or otherwise disposed of in the ordinary course
of business and any gain (but not loss) realized upon the sale or other
disposition of any Capital Stock of any Person (excluding Capital Stock in a
Strategic Alliance Client); (v) extraordinary gains or losses; and (vi) the
cumulative effect of a change in accounting principles. Notwithstanding the
foregoing, for the purposes of Section 4.05 only, there shall be excluded from
Consolidated Net Income any dividends, repayments of loans or advances or other
transfers of assets from any Person to the Company or a Restricted Subsidiary to
the extent such dividends, repayments or transfers increase the amount of
Restricted Payments permitted under Section 4.05(a)(iii)(D).
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company for which financial statements are available, as
(i) the par or stated value of all outstanding Capital Stock of the Company plus
(ii) paid-in capital or capital surplus relating to such Capital Stock plus
(iii) any retained earnings or earned surplus less (A) any accumulated deficit,
(B) any amounts attributable to Disqualified Stock and (C) any amounts
attributable to deferred compensation.
"Consolidated Restricted Subsidiary" means a Restricted Subsidiary (i)
80% of the Capital Stock and 80% of the Voting Stock of which is owned by the
Company or one or more Consolidated Restricted Subsidiaries and (ii) which is
treated as a consolidated subsidiary for the purpose of the Company's U.S.
Federal income tax reporting.
"Continental Grain" means Continental Grain Company, a Delaware
corporation.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or
<PAGE>
7
other similar agreement to which such Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time
or both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital
Stock which by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable) or upon the happening of any event
(i) matures or is mandatorily redeemable pursuant to a sinking fund obligation
or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in each case in whole or in part on or prior to the first anniversary of the
Stated Maturity of the Securities; provided, however, that any Capital Stock
-------- -------
that would not constitute Disqualified Stock but for provisions thereof giving
holders thereof the right to require such Person to repurchase or redeem such
Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the first anniversary of the Stated Maturity of the
Securities shall not constitute Disqualified Stock if the "asset sale" or
"change of control" provisions applicable to such Capital Stock are not more
favorable to the holders of such Capital Stock than the provisions in
Sections 4.07 and 4.09.
"Eligible Excess Spread Receivables" means Excess Spread Receivables
created after April 2, 1996; provided, however, that Eligible Excess Spread
-------- -------
Receivables shall not include any Excess Spread Receivables created as the
result of the securitization or sale of other Excess Spread Receivables.
"Excess Spread" means, over the life of a "pool" of Receivables that
have been sold by a Person to a trust or other Person in a securitization or
sale, the rights retained by such Person or its Restricted Subsidiaries at or
subsequent to the closing of such securitization or sale to receive cash flows
attributable to such "pool".
"Excess Spread Receivables" of a Person means the contractual or
certificated right to Excess Spread capitalized on such Person's consolidated
balance sheet (the
<PAGE>
8
amount of which shall be the present value of the Excess Spread, calculated in
accordance with GAAP).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect as of the Issue Date, including those set forth
(i) in the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) in such other
statements by such other entity as approved by a significant segment of the
accounting profession, and (iv) the rules and regulations of the SEC governing
the inclusion of financial statements (including pro forma financial statements)
in periodic reports required to be filed pursuant to Section 13 of the Exchange
Act, including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC and releases of
the Emerging Issues Task Force.
"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness or other obligation
of any Person and any obligation, direct or indirect, contingent or otherwise,
of such Person (i) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Indebtedness or other obligation of such Person
(whether arising by virtue of partnership arrangements, or by agreements to
keep-well, to purchase assets, goods, securities or services, to take-or-pay or
to maintain financial statement conditions or otherwise) or (ii) entered into
for the purpose of assuring in any other manner the obligee of such Indebtedness
or other obligation of the payment thereof or to protect such obligee against
loss in respect thereof (in whole or in part); provided, however, that the term
-------- -------
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning. The term "Guarantor" shall mean any Person Guaranteeing
any obligation.
"Hedging Obligations" of any Person means the obligations of such
Person pursuant to any Interest Rate Agreement, Currency Agreement or such other
agreement designed to mitigate risks of fluctuations in value of
<PAGE>
9
assets owned, financed or sold, or of liabilities incurred or assumed, in either
case in the ordinary course of business of the Company or its Restricted
Subsidiaries.
"Holder" or "Securityholder" means the Person in whose name a Security
is registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become
liable for; provided, however, that any Indebtedness or Capital Stock of a
-------- -------
Person existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a correlative meaning. The accretion of principal of a non-
interest bearing or other discount security shall be deemed the Incurrence of
Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable; (ii) all Capital
Lease Obligations of such Person; (iii) all obligations of such Person issued or
assumed as the deferred purchase price of property, all conditional sale
obligations of such Person and all obligations of such Person under any title
retention agreement (but excluding trade accounts payable and expense accruals
arising in the ordinary course of business); (iv) all obligations of such Person
for the reimbursement of any obligor on any letter of credit, banker's
acceptance or similar credit transaction (other than obligations with respect to
letters of credit securing obligations (other than obligations described in (i)
through (iii) above) entered into in the ordinary course of business of such
Person to the extent such letters of credit are not drawn upon or, if and to the
extent drawn upon, such drawing is reimbursed no later than the tenth Business
Day following receipt by such Person of a demand for reimbursement following
payment on the letter of credit); (v) the amount of all obligations of such
Person with respect to the redemption, repayment or other repurchase of any
Disqualified Stock (but excluding any accrued dividends); (vi) Warehouse
Indebtedness; (vii) in connection with each
<PAGE>
10
sale by such Person of any Excess Spread Receivables, the maximum aggregate
contractual claim (if any) that the purchaser thereof could have against such
Person if the amounts anticipated at the time of such sale to be received by
such purchaser in connection with such Excess Spread Receivables are not
received by such purchaser; (viii) all obligations of the type referred to in
clauses (i) through (vii) of other Persons and all dividends of other Persons
for the payment of which, in either case, such Person is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise, including by means
of any Guarantee; (ix) all obligations of the type referred to in clauses (i)
through (viii) of other Persons secured by any Lien on any property or asset of
such Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value of such
property or assets or the amount of the obligation so secured and (x) to the
extent not otherwise included in this definition, Hedging Obligations of such
Person. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date.
Notwithstanding the foregoing, any securities issued in a securitization by a
special purpose owner trust or similar entity formed by or on behalf of a Person
and to which Receivables or Excess Spread Receivables have been sold or
otherwise transferred by or on behalf of such Person or its Subsidiaries shall
not be treated as Indebtedness of such Person or its Subsidiaries under this
Indenture, regardless of whether such securities are treated as indebtedness for
tax purposes.
"Indenture" means this Indenture as amended or supplemented from time
to time.
"Interest Rate Agreement" means any interest rate swap agreement,
interest rate cap agreement, repurchase agreement, futures contract or other
financial agreement or arrangement designed to protect the Company or any
Restricted Subsidiary against fluctuations in interest rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as trade
<PAGE>
11
accounts on the balance sheet of the lender) or other extensions of credit
(including by way of Guarantee or similar arrangement) or capital contribution
to (by means of any transfer of cash or other property to others or any payment
for property or services for the account or use of others), or any purchase or
acquisition of Capital Stock, Indebtedness or other similar instruments issued
by such Person. For purposes of the definition of "Unrestricted Subsidiary", the
definition of "Restricted Payment" and Section 4.05, (i) "Investment" shall
include the portion (proportionate to the Company's equity interest in such
Subsidiary) of the fair market value of the net assets of any Subsidiary of the
Company at the time that such Subsidiary is designated an Unrestricted
Subsidiary; provided, however, that upon a redesignation of such Subsidiary as a
-------- -------
Restricted Subsidiary, the Company shall be deemed to continue to have a
permanent "Investment" in an Unrestricted Subsidiary equal to an amount (if
positive) equal to (x) the Company's "Investment" in such Subsidiary at the time
of such redesignation less (y) the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value of the net assets
of such Subsidiary at the time of such redesignation; and (ii) any property
transferred to or from an Unrestricted Subsidiary shall be valued at its fair
market value at the time of such transfer, in each case as determined in good
faith by the Board of Directors.
"Investment Grade Rating" means a rating equal to or higher than Baa3
(or the equivalent) and BBB- (or the equivalent) by Moody's Investors Service,
Inc. (or any successor to the rating agency business thereof) and Standard &
Poor's Ratings Group (or any successor to the rating agency business thereof),
respectively.
"Issue Date" means the date on which the Securities are originally
issued.
"Lien" means (i) any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (including any conditional sale or other title
retention agreement or lease in the nature thereof) and (ii) any claim (whether
direct or indirect through subordination or other structural encumbrance)
against any Excess Spread Receivables sold unless the seller is not liable for
any losses thereon.
<PAGE>
12
"Net Available Cash" from an Asset Disposition means cash payments
received therefrom (including any cash payments received by way of deferred
payment of principal pursuant to a note or installment receivable or otherwise,
but only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring Person of Indebtedness or other
obligations relating to such properties or assets or received in any other
noncash form) in each case net of (i) all legal, title and recording tax
expenses, commissions and other fees and expenses incurred, and all Federal,
state, provincial, foreign and local taxes required to be accrued as a liability
under GAAP, as a consequence of such Asset Disposition, (ii) all payments made
on any Indebtedness which is secured by any assets subject to such Asset
Disposition, in accordance with the terms of any Lien upon or other security
agreement of any kind with respect to such assets, or which must by its terms,
or in order to obtain a necessary consent to such Asset Disposition, or by
applicable law be, repaid out of the proceeds from such Asset Disposition, (iii)
all distributions and other payments required to be made to minority interest
holders in Subsidiaries or joint ventures as a result of such Asset Disposition
and (iv) the deduction of appropriate amounts provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated with the
property or other assets disposed in such Asset Disposition and retained by the
Company or any Restricted Subsidiary after such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital
Stock, means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Officer" means the Chairman of the Board, the President, any Senior
Vice President, any Vice President, the Treasurer or the Secretary of the
Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel
<PAGE>
13
may be an employee of or counsel to the Company or the Trustee.
"Permitted Holders" means lineal descendants of Jules Fribourg,
including any individual legally adopted; spouses of such descendants; trusts,
the beneficiaries of which are any of the foregoing; partnerships, corporations,
or other entities in which any of the foregoing (individually or collectively)
has a controlling interest; and charitable organizations established by any of
the foregoing.
"Permitted Investment" means an Investment by the Company or any
Restricted Subsidiary in (i) a Restricted Subsidiary or a Person that will, upon
the making of such Investment, become a Restricted Subsidiary; provided,
--------
however, that the primary business of such Restricted Subsidiary is a Related
- -------
Business; (ii) a Strategic Alliance Client to the extent such Investment
consists of options, warrants or other securities that are convertible or
exchangeable for equity securities of such Strategic Alliance Client and is
received by the Company or a Restricted Subsidiary without the payment of any
consideration other than the concurrent provision by the Company or such
Restricted Subsidiary to such Strategic Alliance Client of financing or asset
securitization expertise on terms determined by the Company to be fair and
reasonable to the Company or such Restricted Subsidiary from a financial point
of view without taking into consideration any value that may inhere in such
option, warrant or convertible or exchangeable security; (iii) another Person if
as a result of such Investment such other Person is merged or consolidated with
or into, or transfers or conveys all or substantially all its assets to, the
Company or a Restricted Subsidiary; provided, however, that such Person's
-------- -------
primary business is a Related Business; (iv) Temporary Cash Investments; (v)
receivables owing to the Company or any Restricted Subsidiary if created or
acquired in the ordinary course of business and payable or dischargeable in
accordance with customary trade terms; (vi) payroll, travel and similar advances
to cover matters that are expected at the time of such advances ultimately to be
treated as expenses for accounting purposes and that are made in the ordinary
course of business; (vii) loans or advances to employees made in the ordinary
course of business consistent with past practices of the Company or such
Restricted Subsidiary; (viii) stock, obligations or securities received
<PAGE>
14
in settlement of debts created in the ordinary course of business and owing to
the Company or any Restricted Subsidiary or in satisfaction of judgments; (ix)
any Person to the extent such Investment represents the non-cash portion of the
consideration received for an Asset Disposition as permitted pursuant to Section
4.07; (x) Receivables; (xi) a Strategic Alliance Client to the extent such
Investment consists of (A) Indebtedness of such Strategic Alliance Client that
is secured by Receivables owned by such Strategic Alliance Client in an
aggregate principal amount at any time outstanding not to exceed 100% of the
aggregate market value of such Receivables; provided, however, that such
-------- -------
Receivables are eligible to be characterized under GAAP as held for sale on the
balance sheet of such Strategic Alliance Client and such Indebtedness has not
been outstanding in excess of 364 days; and (B) Indebtedness of such Strategic
Alliance Client that is secured by Excess Spread Receivables owned by such
Strategic Alliance Client; provided, however, that such Excess Spread
-------- -------
Receivables are attributed solely to one or more "pools" of Receivables that
were securitized in one or more transactions in which the Company or its
Restricted Subsidiaries either acted as underwriters or placement agent or
provided all or a portion of the financing for such "pool" prior to such
securitization; and (xii) Excess Spread Receivables; provided, however, that
-------- -------
such Excess Spread Receivables represent interests in one or more "pools" of
Receivables that were securitized in one or more transactions in which the
Company or its Restricted Subsidiaries acted as sponsor, underwriter or
placement agent or provided all or a portion of the financing for such "pool"
prior to such securitization.
"Permitted Liens" means, with respect to any Person, (a) pledges or
deposits by such Person under worker's compensation laws, unemployment insurance
laws or similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of Indebtedness) or leases to
which such Person is a party, or deposits to secure public or statutory
obligations of such Person or deposits of cash or United States government bonds
to secure surety or appeal bonds to which such Person is a party, or deposits as
security for contested taxes or import duties or for the payment of rent, in
each case Incurred in the ordinary course of business; (b) Liens imposed by law,
such as carriers', warehousemen's and mechanics' Liens, in each case for sums
not yet due or being contested in good
<PAGE>
15
faith by appropriate proceedings or other Liens arising out of judgments or
awards against such Person with respect to which such Person shall then be
proceeding with an appeal or other proceedings for review; (c) Liens for
property taxes not yet subject to penalties for non-payment or which are being
contested in good faith and by appropriate proceedings; (d) Liens in favor of
issuers of surety bonds or letters of credit issued pursuant to the request of
and for the account of such Person in the ordinary course of its business;
provided, however, that such letters of credit do not constitute Indebtedness;
- -------- -------
(e) minor survey exceptions, minor encumbrances, easements or reservations of,
or rights of others for, licenses, rights of way, sewers, electric lines,
telegraph and telephone lines and other similar purposes, or zoning or other
restrictions as to the use of real property or Liens incidental to the conduct
of the business of such Person or to the ownership of its properties which were
not Incurred in connection with Indebtedness and which do not in the aggregate
materially adversely affect the value of said properties or materially impair
their use in the operation of the business of such Person; (f) Liens securing
Indebtedness Incurred to finance the construction, purchase or lease of, or
repairs, improvements or additions to, property of such Person (but excluding
Capital Stock of another Person); provided, however, that the Lien may not
-------- -------
extend to any other property owned by such Person or any of its Subsidiaries at
the time the Lien is Incurred, and the Indebtedness secured by the Lien may not
be Incurred more than 180 days after the later of the acquisition, completion of
construction, repair, improvement, addition or commencement of full operation of
the property subject to the Lien; (g) Liens on Receivables owned by the Company
or a Restricted Subsidiary, as the case may be, to secure Indebtedness permitted
under Section 4.03(b)(1) or Section 4.04(a); (h) Liens on Excess Spread
Receivables (or on the Capital Stock of any Subsidiary of such Person
substantially all the assets of which are Excess Spread Receivables); provided,
--------
however, that, unless the Covenant Termination has occurred, (A) any such Liens
- -------
shall not pertain to any Excess Spread Receivable existing on April 2, 1996
which, if created thereafter, would have been an Eligible Excess Spread
Receivable and (B) any such Lien on any Eligible Excess Spread Receivables shall
extend to Eligible Excess Spread Receivables representing no more than 50% of
the amount of Eligible Excess Spread Receivables shown on the balance sheet of
the Company and its consolidated Restricted Subsidiaries, determined on a
<PAGE>
16
consolidated basis in accordance with GAAP, as of the later of (x) the Issue
Date and (y) the end of the most recent fiscal quarter of the Company prior to
the creation of such Lien for which financial statements are available; (i)
Liens existing on the Issue Date; (j) Liens on property or shares of Capital
Stock of another Person at the time such other Person becomes a Subsidiary of
such Person; provided, however, that such Liens are not created, incurred or
-------- -------
assumed in connection with, or in contemplation of, such other Person becoming
such a Subsidiary; provided further, however, that such Lien may not extend to
---------------- -------
any other property owned by such Person or any of its Subsidiaries; (k) Liens on
property at the time such Person or any of its Subsidiaries acquires the
property, including any acquisition by means of a merger or consolidation with
or into such Person or a Subsidiary of such Person; provided, however, that such
-------- -------
Liens are not created, incurred or assumed in connection with, or in
contemplation of, such acquisition; provided further, however, that the Liens
---------------- -------
may not extend to any other property owned by such Person or any of its
Subsidiaries; (l) Liens securing Indebtedness or other obligations of a
Subsidiary of such Person owing to such Person or a Consolidated Restricted
Subsidiary of such Person; (m) Liens (other than on any Excess Spread
Receivables) securing Hedging Obligations; (n) Liens on cash or other assets
(other than Excess Spread Receivables) securing Warehouse Indebtedness (other
than Permitted Warehouse Indebtedness) of the Company or its Restricted
Subsidiaries; and (o) Liens to secure any Refinancing (or successive
Refinancings) as a whole, or in part, of any Indebtedness secured by any Lien
referred to in the foregoing clauses (f), (i), (j) and (k); provided, however,
-------- -------
that (x) such new Lien shall be limited to all or part of the same property that
secured the original Lien (plus improvements to or on such property) and (y) the
Indebtedness secured by such Lien at such time is not increased to any amount
greater than the sum of (A) the outstanding principal amount or, if greater,
committed amount of the Indebtedness described under clauses (f), (i), (j) or
(k), as the case may be, at the time the original Lien became a Permitted Lien
and (B) an amount necessary to pay any fees and expenses, including premiums,
related to such refinancing, refunding, extension, renewal or replacement.
Notwithstanding the foregoing, "Permitted Liens" will not include any Lien
described in clauses (f), (j) or (k) above to the extent such Lien applies to
any
<PAGE>
17
Additional Assets acquired directly or indirectly from Net Available Cash
pursuant to Section 4.07.
"Permitted Warehouse Indebtedness" means Warehouse Indebtedness in
connection with a Warehouse Facility; provided, however, that (i) the assets as
-------- -------
to which such Warehouse Indebtedness relates are or, prior to any funding under
the related Warehouse Facility with respect to such assets, were eligible to be
recorded as held for sale on the consolidated balance sheet of the Company in
accordance with GAAP, (ii) such Warehouse Indebtedness will be deemed to be
Permitted Warehouse Indebtedness except to the extent the holders of such
Warehouse Indebtedness have contractual recourse to the Company or its
Restricted Subsidiaries to satisfy claims in respect of such Warehouse
Indebtedness in excess of (A) the realizable value of the assets as to which
such Warehouse Indebtedness relates and (B) any assets securing such Warehouse
Indebtedness, and (iii) any such Indebtedness has not been outstanding in excess
of 364 days.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, limited liability company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any Person,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such Person,
over shares of Capital Stock of any other class of such Person.
"principal" of a Security means the principal of the Security plus the
premium, if any, payable on the Security which is due or overdue or is to become
due at the relevant time.
"Public Equity Offering" means an underwritten primary public offering
of common stock of the Company pursuant to an effective registration statement
under the Securities Act.
"Rating Agencies" mean Standard & Poor's Ratings Group, a division of
McGraw Hill, Inc., and Moody's
<PAGE>
18
Investors Service, Inc. or any successor to the respective rating agency
businesses thereof.
"Receivables" means consumer and commercial loans, leases and
receivables purchased or originated by the Company, any Restricted Subsidiary or
a Strategic Alliance Client in the ordinary course of business; provided,
--------
however, that for purposes of determining the amount of a Receivable at any
- -------
time, such amount shall be determined in accordance with GAAP, consistently
applied, as of the most recent practicable date.
"Refinance" means, in respect of any Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue
other Indebtedness in exchange or replacement for, such Indebtedness.
"Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with this Indenture including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that (i) such
-------- -------
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal amount (or if
Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced; provided further,
----------------
however, that Refinancing Indebtedness shall not include (x) Indebtedness of a
- -------
Subsidiary that Refinances Indebtedness of the Company or another Subsidiary or
(y) Indebtedness of the Company or a Restricted Subsidiary that Refinances
Indebtedness of an Unrestricted Subsidiary.
"Related Business" means any consumer or commercial finance business
or any financial service business.
<PAGE>
19
"Restricted Payment" with respect to any Person means (i) the
declaration or payment of any dividends or any other distributions of any sort
in respect of its Capital Stock (including any payment in connection with any
merger or consolidation involving such Person) or similar payment to the direct
or indirect holders of its Capital Stock (other than (A) dividends or
distributions payable solely in its Capital Stock (other than Disqualified
Stock), (B) dividends or distributions payable solely to the Company or a
Restricted Subsidiary and (C) pro rata dividends or other distributions made by
a Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders (or
owners of an equivalent interest in the case of a Subsidiary that is an entity
other than a corporation)), (ii) the purchase, redemption or other acquisition
or retirement for value of any Capital Stock of the Company held by any Person
or of any Capital Stock of a Restricted Subsidiary held by any Affiliate of the
Company (other than a Restricted Subsidiary), including the exercise of any
option to exchange any Capital Stock (other than into Capital Stock of the
Company that is not Disqualified Stock), (iii) the purchase, repurchase,
redemption, defeasance or other acquisition or retirement for value, prior to
scheduled maturity, scheduled repayment or scheduled sinking fund payment of any
Subordinated Obligations (other than the purchase, repurchase or other
acquisition of Subordinated Obligations purchased in anticipation of satisfying
a sinking fund obligation, principal installment or final maturity, in each case
due within one year of the date of acquisition) or (iv) the making of any
Investment (other than a Permitted Investment) in any Person.
"Restricted Subsidiary" means any Subsidiary of the Company that is
not an Unrestricted Subsidiary.
"SEC" means the Securities and Exchange Commission.
"Securities" means the Securities issued under this Indenture.
"Senior Indebtedness" means (i) Indebtedness of any Person, whether
outstanding on the Issue Date or thereafter Incurred and (ii) accrued and unpaid
interest (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company to the extent post-
filing interest is allowed in
<PAGE>
20
such proceeding) in respect of (A) indebtedness of such Person for money
borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other
similar instruments for the payment of which such Person is responsible or
liable unless, in the case of either clause (i) or (ii), in the instrument
creating or evidencing the same or pursuant to which the same is outstanding, it
is provided that such obligations are subordinate in right of payment to the
Securities; provided, however, that Senior Indebtedness shall not include (1)
-------- -------
any obligation of such Person to any Subsidiary of such Person, (2) any
liability for Federal, state, local or other taxes owed or owing by such Person,
(3) any accounts payable or other liability to trade creditors arising in the
ordinary course of business (including guarantees thereof or instruments
evidencing such liabilities), (4) any obligation in respect of Capital Stock of
such Person or (5) that portion of any Indebtedness which at the time of
Incurrence is Incurred in violation of this Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be
a "Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date
specified in such security as the fixed date on which the final payment of
principal of such security is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof upon the
happening of any contingency unless such contingency has occurred).
"Strategic Alliance Client" means any Person (other than a Restricted
Subsidiary) engaged in a Related Business to which the Company provides, or
reasonably expects to provide, financing or asset securitization expertise in
return for asset-backed underwriting or placement agent commitments.
"Subordinated Obligation" means any Indebtedness of the Company
(whether outstanding on the Issue Date or thereafter Incurred) which is
subordinate or junior in right of payment to the Securities pursuant to a
written agreement to that effect.
<PAGE>
21
"Subsidiary" means, in respect of any Person, any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of shares of Capital Stock or other interests (including
partnership interests) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by (i) such Person,
(ii) such Person and one or more Subsidiaries of such Person or (iii) one or
more Subsidiaries of such Person.
"Temporary Cash Investments" means any of the following: (i) any
investment in direct obligations of the United States of America or any agency
thereof or obligations guaranteed by the United States of America or any agency
thereof, (ii) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 180 days of the date of acquisition
thereof issued by a bank or trust company that is not an Affiliate of the
Company and which is organized under the laws of the United States of America,
any state thereof or any foreign country recognized by the United States, and
which bank or trust company has capital, surplus and undivided profits
aggregating in excess of $50,000,000 (or the foreign currency equivalent
thereof) and has outstanding debt which is rated "A" (or such similar equivalent
rating) or higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act) or any money-
market fund sponsored by a registered broker dealer or mutual fund distributor,
(iii) repurchase obligations with a term of not more than 30 days for underlying
securities of the types described in clause (i) above entered into with a bank
meeting the qualifications described in clause (ii) above, (iv) investments in
commercial paper, maturing not more than 90 days after the date of acquisition,
issued by a corporation (other than an Affiliate of the Company) organized and
in existence under the laws of the United States of America or any foreign
country recognized by the United States of America with a rating at the time as
of which any investment therein is made of "P-1" (or higher) according to
Moody's Investors Service, Inc. or "A-1" (or higher) according to Standard and
Poor's Ratings Group, and (v) investments in securities with maturities of six
months or less from the date of acquisition issued or fully guaranteed by any
state, commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof,
<PAGE>
22
and rated at least "A" by Standard & Poor's Ratings Group or "A" by Moody's
Investors Service, Inc.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sec.Sec. 77aaa-
------
77bbbb) as in effect on the date of this Indenture.
"Trustee" means the party named as such in this Indenture until a
successor replaces it and, thereafter, means the successor.
"Trust Officer" means the Chairman of the Board, the President, any
vice president, any assistant vice president, the secretary, any assistant
secretary, the treasurer, any assistant treasurer, the cashier, any assistant
cashier, any trust officer or assistant trust officer of the Trustee assigned by
the Trustee to administer its corporate trust matters.
"Uniform Commercial Code" means the New York Uniform Commercial Code
as in effect from time to time.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that
at the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary
of the Company (including any newly acquired or newly formed Subsidiary) to be
an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries
owns any Capital Stock or Indebtedness of, or holds any Lien on any property of,
the Company or any other Subsidiary of the Company that is not a Subsidiary of
the Subsidiary to be so designated; provided, however, that either (A) the
-------- -------
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, such designation would be permitted
under Section 4.05. The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
-------- -------
after giving effect to such designation (x) the Company could Incur $1.00 of
additional Indebtedness under Section 4.03(a) and (y) no Default shall have
occurred and be continuing. Any such designation by the Board of Directors shall
be evidenced by the Company to the Trustee by promptly filing with the Trustee a
copy of the board resolution giving effect to such designation and an Officers'
Certificate certifying that
<PAGE>
23
such designation complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or
certificates representing an ownership interest in such obligations) of the
United States of America (including any agency or instrumentality thereof) for
the payment of which the full faith and credit of the United States of America
is pledged and which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests or membership interests) of such
Person then outstanding and normally entitled (without regard to the occurrence
of any contingency) to vote in the election of directors, managers or trustees
thereof.
"Warehouse Facility" means any funding arrangement with a financial
institution or other lender or purchaser exclusively to finance the purchase or
origination of Receivables by the Company, a Subsidiary of the Company or a
Strategic Alliance Client for the purpose of pooling such Receivables prior to
securitization or sale in the ordinary course of business, including purchase
and sale facilities pursuant to which the Company or a Subsidiary of the Company
sells Receivables or debt of a Strategic Alliance Client secured by Receivables
owned or financed by such Strategic Alliance Client to a financial institution
and retains a right of first refusal upon the subsequent resale of such
Receivables or debt by such financial institution.
"Warehouse Indebtedness" means the greater of (x) the consideration
received by the Company or its Restricted Subsidiaries under a Warehouse
Facility and (y) the book value of the assets financed under a Warehouse
Facility with respect to Receivables or debt of a Strategic Alliance Client
secured by Receivables owned or financed by such Strategic Alliance Client until
such time such Receivables or debt are (i) securitized, (ii) repurchased by the
Company or its Restricted Subsidiaries or (iii) sold by the counterparty under
the Warehouse Facility to a Person who is not an Affiliate of the Company.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the
Capital Stock of which (other than directors' qualifying shares and shares held
by other Persons to the extent such shares are required by applicable
<PAGE>
24
law to be held by a Person other than the Company or a Restricted Subsidiary) is
owned by the Company or one or more Wholly Owned Subsidiaries.
SECTION 1.02. Other Definitions.
------------------
Defined in
Term Section
---- -----------
"Affiliate Transaction" ................ 4.08
"Bankruptcy Law" ....................... 6.01
"covenant defeasance option" ........... 8.01(b)
"Covenant Termination" ................. 4.14
"Custodian" ............................ 6.01
"Event of Default" ..................... 6.01
"legal defeasance option" .............. 8.01(b)
"Legal Holiday" ........................ 10.08
"Offer" ................................ 4.07
"Offer Amount" ......................... 4.07
"Offer Period" ......................... 4.07
"Paying Agent" ......................... 2.03
"Purchase Date" ........................ 4.07
"Registrar"............................. 2.03
"Successor Company" .................... 5.01
SECTION 1.03. Incorporation by Reference of Trust Indenture Act.
--------------------------------------------------
This Indenture is subject to the mandatory provisions of the TIA which are
incorporated by reference in and made a part of this Indenture. The following
TIA terms have the following meanings:
"Commission" means the SEC.
"indenture securities" means the Securities.
"indenture security holder" means a Securityholder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Company and any other
obligor on the indenture securities.
<PAGE>
25
All other TIA terms used in this Indenture that are defined by the
TIA, defined by TIA reference to another statute or defined by SEC rule have the
meanings assigned to them by such definitions.
SECTION 1.04. Rules of Construction. Unless the context otherwise
----------------------
requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned
to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) "including" means including without limitation;
(5) words in the singular include the plural and words in the plural
include the singular;
(6) unsecured Indebtedness shall not be deemed to be subordinate or
junior to Secured Indebtedness merely by virtue of its nature as unsecured
Indebtedness;
(7) the principal amount of any noninterest bearing or other discount
security at any date shall be the principal amount thereof that would be
shown on a balance sheet of the issuer dated such date prepared in
accordance with GAAP and accretion of principal on such security shall be
deemed to be the Incurrence of Indebtedness; and
(8) the principal amount of any Preferred Stock shall be (i) the
maximum liquidation value of such Preferred Stock or (ii) the maximum
mandatory redemption or mandatory repurchase price with respect to such
Preferred Stock, whichever is greater.
ARTICLE 2
The Securities
--------------
SECTION 2.01. Form and Dating. The Securities and the Trustee's
----------------
certificate of authentication shall be substantially in the form of Exhibit A,
which is hereby
<PAGE>
26
incorporated in and expressly made a part of this Indenture. The Securities may
have notations, legends or endorsements required by law, stock exchange rule,
agreements to which the Company is subject, if any, or usage (provided that any
such notation, legend or endorsement is in a form acceptable to the Company).
Each Security shall be dated the date of its authentication. The terms of the
Securities set forth in Exhibit A are part of the terms of this Indenture.
SECTION 2.02. Execution and Authentication. Two Officers shall sign
-----------------------------
the Securities for the Company by manual or facsimile signature. The Company's
seal shall be impressed, affixed, imprinted or reproduced on the Securities and
may be in facsimile form.
If an Officer whose signature is on a Security no longer holds that
office at the time the Trustee authenticates the Security, the Security shall be
valid nevertheless.
A Security shall not be valid until an authorized signatory of the
Trustee manually signs the certificate of authentication on the Security. The
signature shall be conclusive evidence that the Security has been authenticated
under this Indenture.
The Trustee shall authenticate and deliver Securities for original
issue in an aggregate principal amount of $300,000,000, upon a written order of
the Company signed by two Officers or by an Officer and either an Assistant
Treasurer or an Assistant Secretary of the Company. Such order shall specify
the amount of the Securities to be authenticated and the date on which the
original issue of Securities is to be authenticated. The aggregate principal
amount of Securities outstanding at any time may not exceed that amount except
as provided in Section 2.07.
The Trustee may appoint an authenticating agent reasonably acceptable
to the Company to authenticate the Securities. Unless limited by the terms of
such appointment, an authenticating agent may authenticate Securities whenever
the Trustee may do so. Each reference in this Indenture to authentication by
the Trustee includes authentication by such agent. An authenticating agent has
the same rights as any Registrar, Paying Agent or agent for service of notices
and demands.
<PAGE>
27
SECTION 2.03. Registrar and Paying Agent. The Company shall maintain
---------------------------
an office or agency where Securities may be presented for registration of
transfer or for exchange (the "Registrar") and an office or agency where Securi-
ties may be presented for payment (the "Paying Agent"). The Registrar shall
keep a register of the Securities and of their transfer and exchange. The
Company may have one or more co-registrars and one or more additional paying
agents. The term "Paying Agent" includes any additional paying agent.
The Company shall enter into an appropriate agency agreement with any
Registrar, Paying Agent or co-registrar not a party to this Indenture, which
shall incorporate the terms of the TIA. The agreement shall implement the
provisions of this Indenture that relate to such agent. The Company shall
notify the Trustee of the name and address of any such agent. If the Company
fails to maintain a Registrar or Paying Agent, the Trustee shall act as such and
shall be entitled to appropriate compensation therefor pursuant to Section 7.07.
The Company or any of its domestically incorporated Wholly Owned Subsidiaries
may act as Paying Agent, Registrar, co-registrar or transfer agent.
The Company initially appoints the Trustee as Registrar and Paying
Agent in connection with the Securities.
SECTION 2.04. Paying Agent To Hold Money in Trust. By 11:00 a.m.,
------------------------------------
New York time, on each due date of the principal and interest on any Security,
the Company shall deposit with the Paying Agent a sum sufficient to pay such
principal and interest when so becoming due. The Company shall require each
Paying Agent (other than the Trustee) to agree in writing that the Paying Agent
shall hold in trust for the benefit of Securityholders or the Trustee all money
held by the Paying Agent for the payment of principal of or interest on the
Securities and shall notify the Trustee of any default by the Company in making
any such payment. If the Company or a Subsidiary of the Company acts as Paying
Agent, it shall segregate the money held by it as Paying Agent and hold it as a
separate trust fund. The Company at any time may require a Paying Agent to pay
all money held by it to the Trustee and to account for any funds disbursed by
the Paying Agent. Upon complying with this Section, the Paying Agent shall have
no further liability for the money paid to the Trustee.
<PAGE>
28
SECTION 2.05. Securityholder Lists. The Trustee shall preserve in as
---------------------
current a form as is reasonably practicable the most recent list available to it
of the names and addresses of Securityholders. If the Trustee is not the
Registrar, the Company shall furnish to the Trustee, in writing at least five
Business Days before each interest payment date and at such other times as the
Trustee may request in writing, a list in such form and as of such date as the
Trustee may reasonably require of the names and addresses of Securityholders.
SECTION 2.06. Transfer and Exchange. The Securities shall be issued
----------------------
in registered form and shall be transferable only upon the surrender of a
Security for registration of transfer. When a Security is presented to the
Registrar or a co-registrar with a request to register a transfer, the Registrar
shall register the transfer as requested if the requirements of Section 8-401(1)
of the Uniform Commercial Code are met. When Securities are presented to the
Registrar or a co-registrar with a request to exchange them for an equal
principal amount of Securities of other denominations, the Registrar shall make
the exchange as requested if the same requirements are met. To permit
registration of transfers and exchanges, the Company shall execute and the
Trustee shall authenticate Securities at the Registrar's or co-registrar's
request. The Company may require payment of a sum sufficient to pay all taxes,
assessments or other governmental charges in connection with any transfer or
exchange pursuant to this Section. The Company shall not be required to make
and the Registrar need not register transfers or exchanges of Securities
selected for redemption (except, in the case of Securities to be redeemed in
part, the portion thereof not to be redeemed) or any Securities for a period of
15 days before a selection of Securities to be redeemed or 15 days before an
interest payment date.
Prior to the due presentation for registration of transfer of any
Security, the Company, the Trustee, the Paying Agent, the Registrar or any co-
registrar may deem and treat the person in whose name a Security is registered
as the absolute owner of such Security for the purpose of receiving payment of
principal of and interest on such Security and for all other purposes
whatsoever, whether or not such Security is overdue, and none of the Company,
the Trustee, the Paying Agent, the Registrar or any co-registrar shall be
affected by notice to the contrary.
<PAGE>
29
All Securities issued upon any transfer or exchange pursuant to the
terms of this Indenture will evidence the same debt and will be entitled to the
same benefits under this Indenture as the Securities surrendered upon such
transfer or exchange.
SECTION 2.07. Replacement Securities. If a mutilated Security is
-----------------------
surrendered to the Registrar or if the Holder of a Security claims that the
Security has been lost, destroyed or wrongfully taken, the Company shall issue
and the Trustee shall authenticate a replacement Security if the requirements of
Section 8-405 of the Uniform Commercial Code are met and the Holder satisfies
any other reasonable requirements of the Trustee. If required by the Trustee or
the Company, such Holder shall furnish an indemnity bond sufficient in the
judgment of the Company and the Trustee to protect the Company, the Trustee, the
Paying Agent, the Registrar and any co-registrar from any loss which any of them
may suffer if a Security is replaced. The Company and the Trustee may charge
the Holder for their expenses in replacing a Security.
Every replacement Security is an additional obligation of the Company.
SECTION 2.08. Outstanding Securities. Securities outstanding at any
-----------------------
time are all Securities authenticated by the Trustee except for those canceled
by it, those delivered to it for cancellation and those described in this
Section as not outstanding. A Security does not cease to be outstanding because
the Company or an Affiliate of the Company holds the Security.
If a Security is replaced pursuant to Section 2.07, it ceases to be
outstanding unless the Trustee and the Company receive proof satisfactory to
them that the replaced Security is held by a bona fide purchaser.
If the Paying Agent segregates and holds in trust, in accordance with
this Indenture, on a redemption date or maturity date money sufficient to pay
all principal and interest payable on that date with respect to the Securities
(or portions thereof) to be redeemed or maturing, as the case may be, then on
and after that date such Securities (or portions thereof) cease to be
outstanding and interest on them ceases to accrue.
<PAGE>
30
SECTION 2.09. Temporary Securities. Until definitive Securities are
---------------------
ready for delivery, the Company may prepare and the Trustee shall authenticate
temporary Securities. Temporary Securities shall be substantially in the form
of definitive Securities but may have variations that the Company considers
appropriate for temporary Securities. Without unreasonable delay, the Company
shall prepare and the Trustee shall authenticate definitive Securities and
deliver them in exchange for temporary Securities.
SECTION 2.10. Cancellation. The Company at any time may deliver
-------------
Securities to the Trustee for cancellation. The Registrar and the Paying Agent
shall forward to the Trustee any Securities surrendered to them for registration
of transfer, exchange or payment. The Trustee and no one else shall cancel and
destroy (subject to the record retention requirements of the Exchange Act) all
Securities surrendered for registration of transfer, exchange, replacement in
the event of a mutilated security, payment or cancellation and deliver a
certificate of such destruction to the Company unless the Company directs the
Trustee to deliver canceled Securities to the Company. The Company may not
issue new Securities to replace Securities it has redeemed, paid or delivered to
the Trustee for cancellation.
SECTION 2.11. Defaulted Interest. If the Company defaults in a
-------------------
payment of interest on the Securities, the Company shall pay defaulted interest
(plus interest on such defaulted interest to the extent lawful) in any lawful
manner. The Company may pay the defaulted interest to the persons who are
Securityholders on a subsequent special record date. The Company shall fix or
cause to be fixed any such special record date (which shall be no less than
10 days prior to the payment date) and payment date to the reasonable
satisfaction of the Trustee and shall promptly mail to each Securityholder a
notice that states the special record date, the payment date and the amount of
defaulted interest to be paid, which notice shall be mailed not less than
10 days prior to such special record date.
SECTION 2.12. CUSIP Numbers. The Company in issuing the Securities
--------------
may use "CUSIP" numbers (if then generally in use) and, if so, the Trustee shall
use "CUSIP" numbers in notices of redemption as a convenience to Holders;
provided, however, that any such notice may state that no representation is made
- -------- -------
as to the correctness of such numbers either as printed on the Securities or as
contained in any notice of a redemption and that reliance may be placed only on
the other identification numbers printed on the Securities, and any such
redemption shall not be affected by any defect in or omission of such numbers.
ARTICLE 3
Redemption
----------
SECTION 3.01. Notices to Trustee. If the Company elects to redeem
-------------------
Securities pursuant to paragraph 5 of the Securities, it shall notify the
Trustee in writing of the redemption date and the principal amount of Securities
to be redeemed.
The Company shall give each notice to the Trustee provided for in this
Section at least 60 days before the redemption date unless the Trustee consents
to a shorter period. Such notice shall be accompanied by an Officers'
Certificate and an Opinion of Counsel from the Company to the effect that such
redemption will comply with the conditions herein.
SECTION 3.02. Selection of Securities To Be Redeemed. If fewer than
---------------------------------------
all the Securities are to be redeemed, the Trustee shall select the Securities
to be redeemed pro rata or by lot or by a method that complies with applicable
legal and securities exchange requirements, if any, and that the Trustee in its
sole discretion considers fair and appropriate. The Trustee shall make the
selection from outstanding Securities not previously called for redemption. The
Trustee may select for redemption portions of the principal of Securities that
have denominations larger than $1,000. Securities and portions of them the
Trustee selects shall be in amounts of $1,000 or a whole multiple of $1,000.
Provisions of this Indenture that apply to Securities called for redemption also
apply to portions of Securities called for redemption. The Trustee shall notify
the Company promptly of the Securities or portions of Securities to be redeemed.
<PAGE>
31
SECTION 3.03. Notice of Redemption. At least 30 days but not more
---------------------
than 60 days before a date for redemption of Securities, the Company shall mail
a notice of redemption by first-class mail to each Holder of Securities to be
redeemed.
The notice shall identify the Securities to be redeemed and shall
state:
(1) the redemption date;
(2) the redemption price;
(3) the name and address of the Paying Agent;
(4) that Securities called for redemption must be surrendered to the
Paying Agent to collect the redemption price;
(5) if fewer than all the outstanding Securities are to be redeemed,
the identification and principal amounts of the particular Securities to be
redeemed;
(6) that, unless the Company defaults in making such redemption
payment, interest on Securities (or portion thereof) called for redemption
ceases to accrue on and after the redemption date; and
(7) that no representation is made as to the correctness or accuracy
of the CUSIP number, if any, listed in such notice or printed on the
Securities.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense. In such event,
the Company shall provide the Trustee with the information required by this
Section.
SECTION 3.04. Effect of Notice of Redemption. Once notice of
-------------------------------
redemption is mailed, Securities called for redemption become due and payable on
the redemption date and at the redemption price stated in the notice. Upon
surrender to the Paying Agent, such Securities shall be paid at the redemption
price stated in the notice, plus accrued interest to the redemption date.
Failure to give notice or any defect in the notice to any Holder shall not
affect the validity of the notice to any other Holder.
SECTION 3.05. Deposit of Redemption Price. Prior to 11:00 a.m., New
----------------------------
York time, on the redemption date, the Company shall deposit with the Paying
Agent (or, if the Company or a Subsidiary is the Paying Agent, shall segregate
and hold in trust) money sufficient to pay the redemption price of and accrued
interest on all Securities to be redeemed on that date other than Securities or
portions of Securities called for redemption which have been delivered by the
Company to the Trustee for cancellation.
SECTION 3.06. Securities Redeemed in Part. Upon surrender of a
----------------------------
Security that is redeemed in part, the Company shall execute and the Trustee
shall authenticate for the Holder (at the Company's expense) a new Security
equal in principal amount to the unredeemed portion of the Security surrendered.
ARTICLE 4
Covenants
---------
SECTION 4.01. Payment of Securities. The Company shall promptly pay
----------------------
the principal of and interest on the Securities on the dates and in the manner
provided in the Securities and in this Indenture. Principal and interest shall
be considered paid on the date due if on such date the Trustee or the Paying
Agent holds in accordance with this Indenture money sufficient to pay all
principal and interest then due. The Company shall pay interest on overdue
principal at the rate specified therefor in the Securities, and it shall pay
interest on overdue installments of interest at the same rate to the extent
lawful.
SECTION 4.02. SEC Reports. Notwithstanding that the Company may not
------------
be required to remain subject to the reporting requirements of Section 13 or
15(d) of the Exchange Act, the Company shall file with the SEC and provide the
Trustee and Securityholders with such annual reports and such information,
<PAGE>
32
documents and other reports as are specified in Sections 13 and 15(d) of the
Exchange Act
and applicable to a U.S. corporation subject to such Sections, such information,
documents and other reports to be so filed and provided at the time specified
for the filing of such information, documents and reports under such Sections.
The Company also shall comply with the other provisions of TIA Sec. 314(a).
SECTION 4.03. Limitation on Indebtedness. (a) The Company shall not
---------------------------
Incur, directly or indirectly, any Indebtedness if, on the date of such
Incurrence and after giving effect thereto, the Consolidated Leverage Ratio
exceeds 2.5 to 1.0.
(b) Notwithstanding Section 4.03(a), the Company may Incur any or all
of the following Indebtedness:
(1) Permitted Warehouse Indebtedness;
(2) Indebtedness owed to and held by the Company or a
Consolidated Restricted Subsidiary; provided, however, that any
-------- -------
subsequent issuance or transfer of any Capital Stock which results
in any such Consolidated Restricted Subsidiary ceasing to be a
Consolidated Restricted Subsidiary or any subsequent transfer of such
Indebtedness (other than to the Company or another Consolidated
Restricted Subsidiary) shall be deemed, in each case, to constitute
the Incurrence of such Indebtedness by the Company;
(3) the Securities;
(4) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2) or (3) of this Section
4.03(b));
(5) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to Section 4.03(a) or pursuant to clause (3) or (4) or this
clause (5) of this Section 4.03(b);
(6) Hedging Obligations directly related to: (i) Indebtedness
Incurred (or reasonably expected to be Incurred) and permitted to be
Incurred by the Company or the Restricted Subsidiaries pursuant to
this Indenture; (ii) Receivables held by the Company or its Restricted
Subsidiaries pending sale or securitization; (iii) Receivables of the
Company or its Restricted Subsidiaries that have been sold pursuant to
a Warehouse Facility; (iv) Receivables with respect to which the
Company reasonably expects to purchase or commit to purchase, finance
or accept as collateral; or (v) Excess Spread Receivables and other
assets owned or financed by the Company or its Restricted Subsidiaries
in the ordinary course of business; provided, however, that such
-------- -------
Hedging Obligations are eligible to receive hedge accounting treatment
in accordance with GAAP as applied by the Company as of the Issue
Date; and
(7) Indebtedness in an aggregate principal amount which, together
with the principal amount of all other Indebtedness of the Company
outstanding on the date of such Incurrence (other than Indebtedness
permitted by clauses (1) through (6) above of this Section 4.03(b) or
Section 4.03(a) does not exceed $40.0 million.
(c) Notwithstanding Section 4.03(a) and Section 4.03(b), the Company
shall not Incur any Indebtedness if the proceeds thereof are used, directly
or indirectly, to Refinance any Subordinated Obligations unless such
Indebtedness shall be subordinated to the Securities to at least the same
extent as such Subordinated Obligations.
(d) For purposes of determining compliance with this Section 4.03,
(i) in the event that an item of Indebtedness meets the criteria of more
than one of the types of Indebtedness described above, the Company, in its
sole discretion, will classify such item of Indebtedness and only be
required to include the amount and type of such Indebtedness in one of the
above clauses and (ii) an item of Indebtedness may be divided and
classified in more than one of the types of Indebtedness described above.
SECTION 4.04. Limitation on Indebtedness and Preferred Stock of
-------------------------------------------------
Restricted Subsidiaries. The Company shall not permit any Restricted Subsidiary
- ------------------------
<PAGE>
33
to Incur, directly or indirectly, any Indebtedness or Preferred Stock except:
(a) Permitted Warehouse Indebtedness;
(b) Indebtedness or Preferred Stock issued to and held by the Company
or a Consolidated Restricted Subsidiary; provided, however, that any
-------- -------
subsequent issuance or transfer of any Capital Stock which results in any
such Consolidated Restricted Subsidiary ceasing to be a Consolidated
Restricted Subsidiary or any subsequent transfer of such Indebtedness or
Preferred Stock (other than to the Company or a Consolidated Restricted
Subsidiary) shall be deemed, in each case, to constitute the issuance of
such Indebtedness or Preferred Stock by the issuer thereof;
(c) Indebtedness or Preferred Stock of a Subsidiary Incurred and
outstanding on or prior to the date on which such Subsidiary was acquired
by the Company (other than Indebtedness or Preferred Stock Incurred in
connection with, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Subsidiary became a Subsidiary or was
acquired by the Company); provided, however, that on the date of such
-------- -------
acquisition and after giving effect thereto, the Company would have been
able to Incur at least $1.00 of Indebtedness pursuant to Section 4.03(a);
(d) Indebtedness or Preferred Stock outstanding on the Issue Date
(other than Indebtedness described in clause (a), (b) or (c) of this
Section 4.04); and
(e) Refinancing Indebtedness Incurred in respect of Indebtedness or
Preferred Stock referred to in clause (c) or (d) of this Section 4.04 or
this clause (e); provided, however, that to the extent such Refinancing
-------- -------
Indebtedness directly or indirectly Refinances Indebtedness or Preferred
Stock of a Subsidiary described in clause (c) of this Section 4.04, such
Refinancing Indebtedness shall be Incurred only by such Subsidiary.
SECTION 4.05. Limitation on Restricted Payments. (a) The Company
----------------------------------
shall not, and shall not permit any Restricted Subsidiary, directly or
indirectly, to make a Restricted Payment if at the time the Company or such
Restricted Subsidiary makes such Restricted Payment: (i) a Default shall have
occurred and be continuing (or would result therefrom); (ii) the Company is not
able to Incur an additional $1.00 of Indebtedness pursuant to Section 4.03(a);
or (iii) the aggregate amount of such Restricted Payment and all other
Restricted Payments since the Issue Date would exceed the sum of: (A) 25% of the
Consolidated Net Income accrued during the period (treated as one accounting
period) from the beginning of the fiscal quarter during which the Issue Date
occurs to the end of the most recent fiscal quarter prior to the date of such
Restricted Payment for which financial statements are available (or, in case
such Consolidated Net Income shall be a deficit, minus 100% of such deficit);
(B) the aggregate Net Cash Proceeds received by the Company from the issuance or
sale of its Capital Stock (other than Disqualified Stock) subsequent to the
Issue Date (other than an issuance or sale to a Subsidiary of the Company and
other than an issuance or sale to an employee stock ownership plan or to a trust
established by the Company or any of its Subsidiaries for the benefit of their
employees); (C) the amount by which Indebtedness of the Company is reduced on
the Company's balance sheet upon the conversion or exchange (other than by a
Subsidiary of the Company) subsequent to the Issue Date, of any Indebtedness of
the Company convertible or exchangeable for Capital Stock (other than
Disqualified Stock) of the Company (less the amount of any cash, or the fair
value of any other property, distributed by the Company upon such conversion or
exchange); (D) an amount equal to the sum of (i) the net reduction in
Investments in any Person resulting from dividends or repayments of loans or
advances, in each case to the Company or any Restricted Subsidiary from such
Person, and (ii) the portion (proportionate to the Company's equity interest in
such Subsidiary) of the fair market value of the net assets of an Unrestricted
Subsidiary at the time such Unrestricted Subsidiary is designated a Restricted
Subsidiary; provided, however, that the foregoing sum in this clause (D) shall
-------- -------
not exceed, in the case of any Person, the amount of Investments made since the
Issue Date by the Company or any Restricted Subsidiary in such Person and
treated as a Restricted Payment; and (E) $15 million.
(b) The provisions of Section 4.05(a) shall not prohibit: (i) any
purchase or redemption of Capital Stock or Subordinated Obligations of the
Company made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Company (other than Disqualified Stock
<PAGE>
34
and other than Capital Stock issued or sold to a Subsidiary of the Company or an
employee stock ownership plan or to a trust established by the Company or any of
its Subsidiaries for the benefit of their employees); provided, however, that
-------- -------
(A) such purchase or redemption shall be excluded in the calculation of the
amount of Restricted Payments and (B) the Net Cash Proceeds from such sale shall
be excluded from the calculation of amounts under clause (iii)(B) of Section
4.05(a); (ii) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations made by exchange
for, or out of the proceeds of the substantially concurrent sale of,
Indebtedness of the Company which is permitted to be Incurred pursuant to
Section 4.03; provided, however, that such purchase, repurchase, redemption,
-------- -------
defeasance or other acquisition or retirement for value shall be excluded in the
calculation of the amount of Restricted Payments; (iii) dividends paid within 60
days after the date of declaration thereof if at such date of declaration such
dividend would have complied with this Section 4.05; provided, however, that at
-------- -------
the time of payment of such dividend, no other Default shall have occurred and
be continuing (or result therefrom); provided further, however, that such
---------------- -------
dividend shall be included in the calculation of the amount of Restricted
Payments; (iv) any purchase of Capital Stock of the Company made from time to
time to meet the Company's obligations under its employee stock ownership and
option plans; provided, however, that such purchase shall be excluded in the
-------- -------
calculation of the amount of Restricted Payments; (v) the exercise or conversion
of an option, warrant or other security convertible or exchangeable for an
equity security of a Strategic Alliance Client in connection with a
substantially simultaneous sale or other disposition by the Company or a
Restricted Subsidiary of such equity security; provided, however, that the
-------- -------
exercise price or other consideration paid by the Company or a Restricted
Subsidiary in connection with such exercise or conversion shall be excluded from
the calculation of the amount of Restricted Payments.
SECTION 4.06. Limitation on Restrictions on Distributions from
------------------------------------------------
Restricted Subsidiaries. The Company shall not, and shall not permit any
- ------------------------
Restricted Subsidiary to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any consensual encumbrance or restriction on
the ability of any Restricted Subsidiary (a) to pay dividends or make any other
distributions on its Capital Stock to the Company or a Restricted Subsidiary or
pay any Indebtedness owed to the Company, (b) to make any loans or advances to
the Company or (c) transfer any of its property or assets to the Company,
except: (i) any encumbrance or restriction pursuant to an agreement in effect at
or entered into on the Issue Date; (ii) any encumbrance or restriction with
respect to a Restricted Subsidiary pursuant to an agreement applicable to such
Restricted Subsidiary on or prior to the date on which such Restricted
Subsidiary was acquired by the Company (other than an agreement entered into in
connection with, or in anticipation of, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Company) and outstanding on such date; (iii)
any encumbrance or restriction with respect to a Restricted Subsidiary pursuant
to any other agreement contained in any amendment to an agreement referred to in
clause (i) or (ii) of this Section 4.06 or this clause (iii); provided, however,
-------- -------
that the encumbrances and restrictions with respect to such Restricted
Subsidiary contained in any such agreement or amendment are no less favorable to
the Securityholders than encumbrances and restrictions with respect to such
Restricted Subsidiary contained in the agreements referred to in clauses (i) or
(ii) of this Section 4.06, as the case may be; (iv) any such encumbrance or
restriction consisting of customary non assignment provisions in leases
governing leasehold interests to the extent such provisions restrict the
transfer of the lease or the property leased thereunder; (v) in the case of
clause (c) above, restrictions contained in security agreements or mortgages
securing Indebtedness of a Restricted Subsidiary to the extent such restrictions
restrict the transfer of the property subject to such security agreements or
mortgages; and (vi) any restriction with respect to a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or disposition of all
or substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition.
SECTION 4.07. Limitation on Sales of Assets and Subsidiary Stock. (a)
---------------------------------------------------
The Company shall not, and shall not permit any Restricted Subsidiary to,
directly or indirectly, consummate any Asset Disposition unless (i) the Company
or such Restricted Subsidiary receives consideration at the time of such Asset
Disposition at least equal to the fair market value (including as to the value
of all non-cash consideration), as determined in good faith by the Board of
Directors, of the shares and assets subject to such Asset Disposition and at
least 85% of the consideration thereof received by the Company or such
Restricted Subsidiary is in the form of cash or cash equivalents and (ii) an
<PAGE>
35
amount equal to 100% of the Net Available Cash from such Asset Disposition is
applied by the Company (or such Restricted Subsidiary, as the case may be) (A)
first, to the extent the Company elects, either to (x) acquire Additional
- -----
Assets, either directly or through a Restricted Subsidiary, or (y) prepay,
repay, redeem or purchase Senior Indebtedness of the Company or any Indebtedness
of a Restricted Subsidiary, as the case may be (other than in either case
Indebtedness owed to the Company or an Affiliate of the Company), in either case
within 180 days from the later of the date of such Asset Disposition or the
receipt of such Net Available Cash; (B) second, to the extent of the balance of
------
such Net Available Cash after application in accordance with clause (A), to make
an offer to the holders of the Securities (and to holders of other Senior
Indebtedness designated by the Company) to purchase Securities (and such other
Senior Indebtedness) pursuant to and subject to the conditions contained in this
Section 4.07; and (C) third, to the extent of the balance of such Net Available
-----
Cash after application in accordance with clauses (A) and (B) to (x) the
acquisition by the Company or any Restricted Subsidiary of Additional Assets or
(y) the prepayment, repayment or purchase of Indebtedness (other than any
Disqualified Stock) of the Company (other than Indebtedness owed to an Affiliate
of the Company), in each case within 180 days from the later of the receipt of
such Net Available Cash and the date the offer described in clause (b) below is
consummated; provided, however, that in connection with any prepayment,
-------- -------
repayment or purchase of Indebtedness pursuant to clause (A), (B) or (C) above,
the Company or such Restricted Subsidiary shall retire such Indebtedness and
shall cause the related loan commitment (if any) to be permanently reduced in an
amount equal to the principal amount so prepaid, repaid or purchased, and (iii)
at the time of such Asset Disposition no Default shall have occurred and be
continuing (or would result therefrom). Notwithstanding the foregoing provisions
of this Section 4.07(a), the Company and the Restricted Subsidiaries shall not
be required to apply any Net Available Cash in accordance with this Section
4.07(a) except to the extent that the aggregate Net Available Cash from all
Asset Dispositions which are not applied in accordance with this paragraph
exceeds $10 million. Pending application of Net Available Cash pursuant to this
Section 4.07(a), such Net Available Cash shall be invested in Temporary Cash
Investments.
For the purposes of this Section 4.07(a), the following are deemed to
be cash or cash equivalents: (x) the assumption of Indebtedness of the Company
or any Restricted Subsidiary, and the release of the Company and its continuing
Restricted Subsidiaries from all liability on such Indebtedness, in connection
with such Asset Disposition and (y) securities received by the Company or any
Restricted Subsidiary from the transferee that are promptly converted by the
Company or such Restricted Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase
of the Securities (and other Senior Indebtedness) pursuant to Section
4.07(a)(ii)(B) above, the Company will be required to purchase Securities
tendered pursuant to an offer (the "Offer") by the Company for the Securities
(and other Senior Indebtedness) at a purchase price of 100% of their principal
amount (without premium) plus accrued but unpaid interest (or, in respect of
such other Senior Indebtedness, such lesser price, if any, as may be provided
for by the terms of such Senior Indebtedness) in accordance with the procedures
(including prorating in the event of oversubscription) set forth in this Section
4.07. If the aggregate purchase price of Securities (and any other Senior
Indebtedness) tendered pursuant to such offer is less than the Net Available
Cash allotted to the purchase thereof, the Company will be required to apply the
remaining Net Available Cash in accordance with Section 4.07(a)(ii)(C). The
Company shall not be required to make such an offer to purchase Securities (and
other Senior Indebtedness) pursuant to this Section 4.07 if the Net Available
Cash available therefor is less than $10 million (which lesser amount shall be
carried forward for purposes of determining whether such an offer is required
with respect to any subsequent Asset Disposition).
(c) (1) Promptly, and in any event within 10 days after the Company
becomes obligated to make an Offer, the Company shall be obligated to deliver to
the Trustee and send, by first-class mail to each Holder, a written notice
stating that the Holder may elect to have his Securities purchased by the
Company either in whole or in part (subject to prorationing as hereinafter
described in the event the Offer is oversubscribed) in integral multiples of
$1,000 of principal amount, at the applicable purchase price. The notice shall
specify a purchase date not less than 30 days nor more than 60 days after the
date of such notice (the "Purchase Date") and shall contain such information
concerning the business of the Company which the Company in good faith believes
will enable such Holders to make an informed decision (which at a minimum will
include (i) the most recently filed Annual Report on Form 10-K (including
audited consolidated financial statements) of the Company, the most recent
<PAGE>
36
subsequently filed Quarterly Report on Form 10-Q and any Current Report on Form
8-K of the Company filed subsequent to such Quarterly Report, other than Current
Reports describing Asset Dispositions otherwise described in the offering
materials (or corresponding successor reports), (ii) a description of material
developments in the Company's business subsequent to the date of the latest of
such Reports, and (iii) if material, appropriate pro forma financial
information) and all instructions and materials necessary to tender Securities
pursuant to the Offer, together with the information contained in clause (3).
(2) Not later than the date upon which written notice of an Offer is
delivered to the Trustee as provided below, the Company shall deliver to the
Trustee an Officers' Certificate as to (i) the amount of the Offer (the "Offer
Amount"), (ii) the allocation of the Net Available Cash from the Asset
Dispositions pursuant to which such Offer is being made and (iii) the compliance
of such allocation with the provisions of Section 4.07(a). On such date, the
Company shall also irrevocably deposit with the Trustee or with a Paying Agent
(or, if the Company is acting as its own Paying Agent, segregate and hold in
trust) in cash an amount equal to the Offer Amount to be held for payment in
accordance with the provisions of this Section. Upon the expiration of the
period for which the Offer remains open (the "Offer Period"), the Company shall
deliver to the Trustee for cancellation the Securities or portions thereof which
have been properly tendered to and are to be accepted by the Company. The
Trustee shall, on the Purchase Date, mail or deliver payment to each tendering
Holder in the amount of the purchase price. In the event that the aggregate
purchase price of the Securities delivered by the Company to the Trustee is less
than the Offer Amount, the Trustee shall deliver the excess to the Company
immediately after the expiration of the Offer Period for application in
accordance with this Section.
(3) Holders electing to have a Security purchased will be required to
surrender the Security, with an appropriate form duly completed, to the Company
at the address specified in the notice at least three Business Days prior to the
Purchase Date. Holders will be entitled to withdraw their election if the
Trustee or the Company receives not later than one Business Day prior to the
Purchase Date, a telegram, facsimile transmission or letter setting forth the
name of the Holder, the principal amount of the Security which was delivered by
the Holder for purchase by the Company and a statement that such Holder is
withdrawing his election to have such Security purchased. If at the expiration
of the Offer Period the aggregate principal amount of Securities surrendered by
Holders exceeds the Offer Amount, the Company shall select the Securities to be
purchased on a pro rata basis (with such adjustments as may be deemed
appropriate by the Company so that only Securities in denominations of $1,000,
or integral multiples thereof, shall be purchased). Holders whose Securities
are purchased only in part will be issued new Securities equal in principal
amount to the unpurchased portion of the Securities surrendered.
(4) At the time the Company delivers Securities to the Trustee which
are to be accepted for purchase, the Company will also deliver an Officers'
Certificate stating that such Securities are to be accepted by the Company
pursuant to and in accordance with the terms of this Section and confirming that
the Company has complied with all the provisions of this Section 4.07. A
Security shall be deemed to have been accepted for purchase at the time the
Trustee, directly or through an agent, mails or delivers payment therefor to the
surrendering Holder.
(d) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Securities pursuant to this
Section. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this Section, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this Section by virtue thereof.
SECTION 4.08. Limitation on Affiliate Transactions. (a) The Company
-------------------------------------
shall not, and shall not permit any Restricted Subsidiary to, enter into or
permit to exist any transaction (including the purchase, sale, lease or exchange
of any property, employee compensation arrangements or the rendering of any
service) with any Affiliate of the Company (an "Affiliate Transaction") unless
the terms thereof (1) are no less favorable to the Company or such Restricted
Subsidiary than those that could be obtained at the time of such transaction in
arm's-length dealings with a Person who is not such an Affiliate, (2) if such
Affiliate Transaction involves an amount in excess of $2.0 million, (i) are set
forth in writing and (ii) have been approved by a majority of the members of the
Board of Directors having no personal stake in such Affiliate Transaction and
<PAGE>
37
(3) if such Affiliate Transaction involves an amount in excess of $10.0 million,
have been determined by a nationally recognized investment banking firm to be
fair, from a financial standpoint, to the Company and its Restricted
Subsidiaries.
(b) The provisions of Section 4.08(a) shall not prohibit (i) any
Restricted Payment permitted to be made pursuant to Section 4.05 or any
Permitted Investment, (ii) any issuance of securities, or other payments, awards
or grants in cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans approved by the
Board of Directors, (iii) the grant of stock options or similar rights to
employees and directors of the Company pursuant to plans approved by the Board
of Directors, (iv) loans or advances to employees in the ordinary course of
business in accordance with the past practices of the Company or its Restricted
Subsidiaries, but in any event not to exceed $10 million in aggregate principal
amount outstanding at any one time, (v) the payment of reasonable fees to
directors of the Company and its Restricted Subsidiaries who are not employees
of the Company or its Restricted Subsidiaries, (vi) any Affiliate Transaction
between the Company and a Consolidated Restricted Subsidiary or between
Consolidated Restricted Subsidiaries and (vii) transactions pursuant to any
agreement as in existence as of the Issue Date between the Company or its
Restricted Subsidiaries and Continental Grain or one of its Subsidiaries.
SECTION 4.09. Change of Control. (a) Upon a Change of Control, each
------------------
Holder shall have the right to require that the Company repurchase such Holder's
Securities at a purchase price in cash equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of purchase
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date), in accordance with
the terms contemplated in Section 4.09(b).
(b) Within 30 days following any Change of Control, the Company shall
mail a notice to each Holder with a copy to the Trustee stating:
(1) that a Change of Control has occurred and that such Holder has the
right to require the Company to purchase such Holder's Securities at a
purchase price in cash equal to 101% of the principal amount thereof plus
accrued and unpaid interest, if any, to the date of purchase (subject to
the right of Holders of record on the relevant record date to receive
interest on the relevant interest payment date);
(2) the circumstances and relevant facts regarding such Change of
Control (including information with respect to pro forma results of
operations, cash flow and capitalization after giving effect to such Change
of Control);
(3) the repurchase date (which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed); and
(4) the instructions determined by the Company, consistent with this
Section, that a Holder must follow in order to have its Securities
purchased.
(c) Holders electing to have a Security purchased will be required to
surrender the Security, with an appropriate form duly completed, to the Company
at the address specified in the notice at least three Business Days prior to the
purchase date. Holders will be entitled to withdraw their election if the
Trustee or the Company receives not later than one Business Day prior to the
purchase date, a telegram, facsimile transmission or letter setting forth the
name of the Holder, the principal amount of the Security which was delivered by
the Holder for purchase by the Company and a statement that such Holder is
withdrawing his election to have such Security purchased.
(d) On the purchase date, all Securities purchased by the Company
under this Section shall be delivered by the Trustee for cancellation, and the
Company shall pay the purchase price plus accrued and unpaid interest, if any,
to the Holders entitled thereto.
(e) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Securities pursuant to this
Section. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this Section, the Company shall comply
<PAGE>
38
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this Section by virtue thereof.
SECTION 4.10. Limitation on Liens. The Company shall not, and shall
--------------------
not permit any Restricted Subsidiary to, directly or indirectly, Incur or permit
to exist any Lien of any nature whatsoever on any of its properties (including
Capital Stock of a Restricted Subsidiary), whether owned at the Issue Date or
thereafter acquired, other than Permitted Liens, without effectively providing
that the Securities shall be secured equally and ratably with (or prior to) the
obligations so secured for so long as such obligations are so secured.
SECTION 4.11. Limitation on Investment Company Status. The Company
----------------------------------------
shall not take any action, or otherwise permit to exist any circumstance, that
would require the Company to register as an "investment company" under the
Investment Company Act of 1940, as amended.
SECTION 4.12. Compliance Certificate. The Company shall deliver to
-----------------------
the Trustee within 120 days after the end of each fiscal year of the Company an
Officers' Certificate stating that in the course of the performance by the
signers of their duties as Officers of the Company they would normally have
knowledge of any Default and whether or not the signers know of any Default that
occurred during such period. If they do, the certificate shall describe the
Default, its status and what action the Company is taking or proposes to take
with respect thereto. The Company also shall comply with TIA Sec. 314(a)(4).
SECTION 4.13. Further Instruments and Acts. Upon request of the
-----------------------------
Trustee, the Company will execute and deliver such further instruments and do
such further acts as may be reasonably necessary or proper to carry out more
effectively the purpose of this Indenture.
SECTION 4.14. Certain Covenants Suspended. The covenants set forth
----------------------------
above in this Article 4 will be applicable to the Company, except that in the
event that at any time (i) the ratings assigned to the Securities by both of the
Rating Agencies are Investment Grade Ratings and (ii) no Default has occurred
and is continuing under this Indenture, the Company and its Restricted
Subsidiaries will no longer be subject to the provisions of Sections 4.03, 4.04,
4.05, 4.06, 4.07 and 4.08 and clause (iii) of Section 5.01 (the termination of
such Sections being herein called the "Covenant Termination"). The Company will
deliver to the Trustee an Officer's Certificate confirming the occurrence of the
Covenant Termination.
ARTICLE 5
Successor Company
-----------------
SECTION 5.01. When Company May Merge or Transfer Assets. The Company
------------------------------------------
shall not consolidate with or merge with or into, or convey, transfer or lease,
in one transaction or a series of related transactions, all or substantially all
its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor
Company") shall be a Person organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia and
the Successor Company (if not the Company) shall expressly assume, by an
indenture supplemental hereto, executed and delivered to the Trustee, in
form satisfactory to the Trustee, all the obligations of the Company under
the Securities and this Indenture;
(ii) immediately after giving effect to such transaction (and treating
any Indebtedness which becomes an obligation of the Successor Company or
any Subsidiary as a result of such transaction as having been Incurred by
the Successor Company or such Subsidiary at the time of such transaction),
no Default shall have occurred and be continuing;
(iii) immediately after giving effect to such transaction, the Successor
Company would be able to incur an additional $1.00 of Indebtedness pursuant
to Section 4.03(a);
(iv) immediately after giving effect to such transaction, the Successor
Company shall have Consolidated Net Worth in an amount which is not less
than the Consolidated Net Worth of the Company immediately prior to such
transaction; and
<PAGE>
39
(v) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with this Indenture.
The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under this Indenture, but the predecessor Company in the case of a
lease of all or substantially all its assets shall not be released from the
obligation to pay the principal of and interest on the Securities.
Notwithstanding the foregoing clauses (ii), (iii) and (iv), any
Restricted Subsidiary may consolidate with, merge into or transfer all or part
of its properties and assets to the Company.
ARTICLE 6
Defaults and Remedies
---------------------
SECTION 6.01. Events of Default. An "Event of Default" occurs if:
------------------
(1) the Company defaults in any payment of interest on any Security
when the same becomes due and payable, and such default continues for a
period of 30 days;
(2) the Company (i) defaults in the payment of the principal of any
Security when the same becomes due and payable at its Stated Maturity, upon
redemption, upon declaration or otherwise, or (ii) fails to redeem or
purchase Securities when required pursuant to this Indenture or the
Securities;
(3) the Company fails to comply with Section 5.01;
(4) the Company fails to comply with Section 4.02, 4.03, 4.04, 4.05,
4.06, 4.07, 4.08, 4.09, 4.10 or 4.11 (other than a failure to purchase
Securities when required under Section 4.07 or 4.09) and such failure
continues for 30 days after the notice specified below;
(5) the Company fails to comply with any of its agreements in the
Securities or this Indenture (other than those referred to in (1), (2), (3)
or (4) above) and such failure continues for 60 days after the notice
specified below;
(6) Indebtedness of the Company or any Significant Subsidiary is not
paid within any applicable grace period after final maturity or is
accelerated by the holders thereof because of a default and the total
amount of such Indebtedness unpaid or accelerated exceeds $10,000,000 or
its foreign currency equivalent at the time;
(7) the Company or any Significant Subsidiary pursuant to or within
the meaning of any Bankruptcy Law:
(A) commences a voluntary case;
(B) consents to the entry of an order for relief against it in an
involuntary case;
(C) consents to the appointment of a Custodian of it or for any
substantial part of its property; or
(D) makes a general assignment for the benefit of its creditors;
or takes any comparable action under any foreign laws relating to
insolvency;
(8) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that:
(A) is for relief against the Company or any Significant
Subsidiary in an involuntary case;
(B) appoints a Custodian of the Company or any Significant
Subsidiary or for any substantial part of its property; or
<PAGE>
40
(C) orders the winding up or liquidation of the Company or any
Significant Subsidiary;
or any similar relief is granted under any foreign laws and the order or
decree remains unstayed and in effect for 60 days; or
(9) any judgment or decree for the payment of money in excess of
$10,000,000 or its foreign currency equivalent at the time is entered
against the Company or any Significant Subsidiary and is not discharged and
either (A) an enforcement proceeding has been commenced by any creditor
upon such judgment or decree or (B) there is a period of 60 days following
the entry of such judgment or decree during which such judgment or decree
is not discharged, waived or the execution thereof stayed.
The foregoing will constitute Events of Default whatever the reason
for any such Event of Default and whether it is voluntary or involuntary or is
effected by operation of law or pursuant to any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body.
The term "Bankruptcy Law" means Title 11, United States Code, or any
------------------
similar Federal or state law for the relief of debtors. The term "Custodian"
means any receiver, trustee, assignee, liquidator, custodian or similar official
under any Bankruptcy Law.
A Default under clause (4), (5) or (9) of this Section 6.01 is not an
Event of Default until the Trustee or the Holders of at least 25% in principal
amount of the Securities notify the Company of the Default and the Company does
not cure such Default within the time specified after receipt of such notice.
Such notice must specify the Default, demand that it be remedied and state that
such notice is a "Notice of Default".
The Company shall deliver to the Trustee, within 30 days after the
occurrence thereof, written notice in the form of an Officers' Certificate of
any Event of Default under clause (6) of this Section 6.01 and any event which
with the giving of notice or the lapse of time would become an Event of Default
under clause (4), (5) or (9) of this Section 6.01, its status and what action
the Company is taking or proposes to take with respect thereto.
SECTION 6.02. Acceleration. If an Event of Default (other than an
-------------
Event of Default specified in Section 6.01(7) or (8) with respect to the
Company) occurs and is continuing, the Trustee by notice to the Company, or the
Holders of at least 25% in principal amount of the Securities by notice to the
Company and the Trustee, may declare the principal of and accrued but unpaid
interest on all the Securities to be due and payable. Upon such a declaration,
such principal and interest shall be due and payable immediately. If an Event
of Default specified in Section 6.01(7) or (8) with respect to the Company
occurs and is continuing, the principal of and interest on all the Securities
shall ipso facto become and be immediately due and payable without any
---- -----
declaration or other act on the part of the Trustee or any Securityholders. The
Holders of a majority in principal amount of the Securities by notice to the
Trustee may rescind an acceleration and its consequences if the rescission would
not conflict with any judgment or decree and if all existing Events of Default
have been cured or waived except nonpayment of principal or interest that has
become due solely because of acceleration. No such rescission shall affect any
subsequent Default or impair any right consequent thereto.
SECTION 6.03. Other Remedies. If an Event of Default occurs and is
---------------
continuing, the Trustee may pursue any available remedy to collect the payment
of principal of or interest on the Securities or to enforce the performance of
any provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any
of the Securities or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Securityholder in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative.
SECTION 6.04. Waiver of Past Defaults. The Holders of a majority in
------------------------
principal amount of the Securities by notice to the Trustee may waive an
existing Default and its consequences except (i) a Default in the payment of the
principal of or interest on a Security or (ii) a Default in respect of a
provision that under Section 9.02 cannot be amended without the consent of each
<PAGE>
41
Securityholder affected. When a Default is waived, it is deemed cured, but no
such waiver shall extend to any subsequent or other Default or impair any
consequent right.
SECTION 6.05. Control by Majority. The Holders of a majority in
--------------------
principal amount of the Securities may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. However, the Trustee
may refuse to follow any direction that conflicts with law or this Indenture or,
subject to Section 7.01, that the Trustee determines is unduly prejudicial to
the rights of other Securityholders or would involve the Trustee in personal
liability; provided, however, that the Trustee may take any other action deemed
-------- -------
proper by the Trustee that is not inconsistent with such direction. Prior to
taking any action hereunder, the Trustee shall be entitled to indemnification
satisfactory to it in its sole discretion against all losses and expenses caused
by taking or not taking such action.
SECTION 6.06. Limitation on Suits. A Securityholder may not pursue
--------------------
any remedy with respect to this Indenture or the Securities unless:
(1) the Holder gives to the Trustee written notice stating that an
Event of Default is continuing;
(2) the Holders of at least 25% in principal amount of the Securities
make a written request to the Trustee to pursue the remedy;
(3) such Holder or Holders offer to the Trustee reasonable security or
indemnity against any loss, liability or expense;
(4) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of security or indemnity; and
(5) the Holders of a majority in principal amount of the Securities do
not give the Trustee a direction inconsistent with the request during such
60-day period.
A Securityholder may not use this Indenture to prejudice the rights of
another Securityholder or to obtain a preference or priority over another
Securityholder.
SECTION 6.07. Rights of Holders To Receive Payment. Notwithstanding
-------------------------------------
any other provision of this Indenture, the right of any Holder to receive
payment of principal of and interest on the Securities held by such Holder, on
or after the respective due dates expressed in the Securities, or to bring suit
for the enforcement of any such payment on or after such respective dates, shall
not be impaired or affected without the consent of such Holder.
SECTION 6.08. Collection Suit by Trustee. If an Event of Default
---------------------------
specified in Section 6.01(1) or (2) occurs and is continuing, the Trustee may
recover judgment in its own name and as trustee of an express trust against the
Company for the whole amount then due and owing (together with interest on any
unpaid interest to the extent lawful) and the amounts provided for in Section
7.07.
SECTION 6.09. Trustee May File Proofs of Claim. The Trustee may file
---------------------------------
such proofs of claim and other papers or documents as may be necessary or
advisable in order to have the claims of the Trustee and the Securityholders
allowed in any judicial proceedings relative to the Company, its creditors or
its property and, unless prohibited by law or applicable regulations, may vote
on behalf of the Holders in any election of a trustee in bankruptcy or other
Person performing similar functions, and any Custodian in any such judicial
proceeding is hereby authorized by each Holder to make payments to the Trustee
and, in the event that the Trustee shall consent to the making of such payments
directly to the Holders, to pay to the Trustee any amount due it for the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and its counsel, and any other amounts due the Trustee under Section
7.07.
SECTION 6.10. Priorities. If the Trustee collects any money or
-----------
property pursuant to this Article 6, it shall pay out the money or property in
the following order:
FIRST: to the Trustee for amounts due under Section 7.07;
<PAGE>
42
SECOND: to Securityholders for amounts due and unpaid on the
Securities for principal and interest, ratably, without preference or
priority of any kind, according to the amounts due and payable on the
Securities for principal and interest, respectively; and
THIRD: to the Company.
The Trustee may fix a record date and payment date for any payment to
Securityholders pursuant to this Section. At least 15 days before such record
date, the Company shall mail to each Securityholder and the Trustee a notice
that states the record date, the payment date and amount to be paid.
SECTION 6.11. Undertaking for Costs. In any suit for the enforcement
----------------------
of any right or remedy under this Indenture or in any suit against the Trustee
for any action taken or omitted by it as Trustee, a court in its discretion may
require the filing by any party litigant in the suit of an undertaking to pay
the costs of the suit, and the court in its discretion may assess reasonable
costs, including reasonable attorneys' fees, against any party litigant in the
suit, having due regard to the merits and good faith of the claims or defenses
made by the party litigant. This Section does not apply to a suit by the
Trustee, a suit by a Holder pursuant to Section 6.07 or a suit by Holders of
more than 10% in principal amount of the Securities.
SECTION 6.12. Waiver of Stay or Extension Laws. The Company (to the
---------------------------------
extent it may lawfully do so) shall not at any time insist upon, or plead, or in
any manner whatsoever claim or take the benefit or advantage of, any stay or
extension law wherever enacted, now or at any time hereafter in force, which may
affect the covenants or the performance of this Indenture; and the Company (to
the extent that it may lawfully do so) hereby expressly waives all benefit or
advantage of any such law, and shall not hinder, delay or impede the execution
of any power herein granted to the Trustee, but shall suffer and permit the exe-
cution of every such power as though no such law had been enacted.
ARTICLE 7
Trustee
-------
SECTION 7.01. Duties of Trustee. (a) If an Event of Default has
------------------
occurred and is continuing, the Trustee shall exercise such of the rights and
powers vested in it by this Indenture and use the same degree of care and skill
in their exercise as a prudent Person would exercise or use under the
circumstances in the conduct of such Person's own affairs.
(b) Except during the continuance of an Event of Default:
(1) the Trustee undertakes to perform such duties and only such duties
as are specifically set forth in this Indenture and no implied covenants or
obligations shall be read into this Indenture against the Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions furnished to
the Trustee and conforming to the requirements of this Indenture. However,
the Trustee shall examine the certificates and opinions to determine
whether or not they conform to the requirements of this Indenture.
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act or its own wilful misconduct,
except that:
(1) this paragraph does not limit the effect of paragraph (b) of this
Section;
(2) the Trustee shall not be liable for any error of judgment made in
good faith by a Trust Officer unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts; and
(3) the Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.05.
(d) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b) and (c) of this Section.
<PAGE>
43
(e) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Company.
(f) Money held in trust by the Trustee need not be segregated from
other funds except to the extent required by law.
(g) No provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur financial liability in the
performance of any of its duties hereunder or in the exercise of any of its
rights or powers, if it shall have reasonable grounds to believe that repayment
of such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
(h) Every provision of this Indenture relating to the conduct or
affecting the liability of or affording protection to the Trustee shall be
subject to the provisions of this Section and to the provisions of the TIA.
SECTION 7.02. Rights of Trustee. (a) The Trustee may rely on any
------------------
document reasonably believed by it to be genuine and to have been signed or
presented by the proper Person. The Trustee need not investigate any fact or
matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may require
an Officers' Certificate or an Opinion of Counsel. The Trustee shall not be
liable for any action it takes or omits to take in good faith in reliance on the
Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents.
(d) The Trustee shall not be liable for any action it takes or omits
to take in good faith which it believes to be authorized or within its rights or
powers; provided, however, that the Trustee's conduct does not constitute wilful
--------- -------
misconduct or negligence.
(e) The Trustee may consult with nationally recognized counsel with
expertise in trust indenture matters, and the advice or opinion of such counsel
with respect to legal matters relating to this Indenture and the Securities
shall be full and complete authorization and protection from liability in
respect to any action taken, omitted or suffered by it hereunder in good faith
and in accordance with the advice or opinion of such counsel.
SECTION 7.03. Individual Rights of Trustee. The Trustee in its
-----------------------------
individual or any other capacity may become the owner or pledgee of Securities
and may otherwise deal with the Company or its Affiliates with the same rights
it would have if it were not Trustee. Any Paying Agent, Registrar, co-registrar
or co-paying agent may do the same with like rights. However, the Trustee must
comply with Sections 7.10 and 7.11.
SECTION 7.04. Trustee's Disclaimer. The Trustee shall not be
---------------------
responsible for and makes no representation as to the validity or adequacy of
this Indenture or the Securities, it shall not be accountable for the Company's
use of the proceeds from the Securities, and it shall not be responsible for any
statement of the Company in the Indenture or in any document issued in
connection with the sale of the Securities or in the Securities other than the
Trustee's certificate of authentication.
SECTION 7.05. Notice of Defaults. If a Default occurs and is
-------------------
continuing and if it is known to the Trustee, the Trustee shall mail to each
Securityholder notice of the Default within 90 days after it occurs. Except in
the case of a Default in payment of principal of or interest on any Security
(including payments pursuant to the optional redemption provisions or purchase
provisions of such Security, if any), the Trustee may withhold the notice if and
so long as a committee of its Trust Officers in good faith determines that
withholding the notice is in the interests of Securityholders.
SECTION 7.06. Reports by Trustee to Holders. As promptly as
------------------------------
practicable after each May 15 beginning with the May following the date of this
Indenture, and in any event prior to July 15 in each year, the Trustee shall
mail to each Securityholder a brief report dated as of May 15 that complies with
TIA Sec. 313(a) to the extent required thereunder. The Trustee also shall
comply with TIA Sec. 313(b).
A copy of each report at the time of its mailing to Securityholders
shall be filed with the SEC and each stock exchange (if any) on which the
<PAGE>
44
Securities are listed. The Company shall notify promptly the Trustee whenever
the Securities become listed on any stock exchange and of any delisting thereof.
SECTION 7.07. Compensation and Indemnity. The Company shall pay to
---------------------------
the Trustee from time to time reasonable compensation for its services. The
Trustee's compensation shall not be limited by any law on compensation of a
trustee of an express trust. The Company shall reimburse the Trustee upon
request for all reasonable out-of-pocket expenses incurred or made by it,
including costs of collection, in addition to the compensation for its services
in connection with its performance of its duties under this Indenture. Such
expenses shall include the reasonable compensation and expenses, disbursements
and advances of the Trustee's agents, counsel, accountants and experts. The
Company shall indemnify the Trustee against any and all loss, liability or
reasonable expense (including reasonable attorneys' fees) incurred by it in
connection with the administration of this trust and the performance of its
duties hereunder. The Trustee shall notify the Company promptly of any claim
for which it may seek indemnity. Failure by the Trustee to so notify the
Company shall not relieve the Company of its obligations hereunder. [The
Company shall defend the claim and the Trustee may have separate counsel and the
Company shall pay the fees and expenses of such counsel.] The Company need not
reimburse any expense or indemnify against any loss, liability or expense
incurred by the Trustee through the Trustee's own wilful misconduct, negligence
or bad faith.
To secure the Company's payment obligations in this Section, the
Trustee shall have a lien prior to the Securities on all money or property held
or collected by the Trustee other than money or property held in trust to pay
principal of and interest on particular Securities.
The Company's payment obligations pursuant to this Section shall
survive the discharge of this Indenture. When the Trustee incurs expenses after
the occurrence of a Default specified in Section 6.01(7) or (8) with respect to
the Company, the expenses are intended to constitute expenses of administration
under the Bankruptcy Law.
SECTION 7.08. Replacement of Trustee. The Trustee may resign at any
-----------------------
time by so notifying the Company. The Holders of a majority in principal amount
of the Securities may remove the Trustee by so notifying the Trustee and the
Company and may appoint a successor Trustee. The Company shall remove the
Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged bankrupt or insolvent;
(3) a receiver or other public officer takes charge of the Trustee or
its property; or
(4) the Trustee otherwise becomes incapable of acting.
If the Trustee resigns, is removed by the Company or by the Holders of
a majority in principal amount of the Securities and such Holders do not
reasonably promptly appoint a successor Trustee, or if a vacancy exists in the
office of Trustee for any reason (the Trustee in such event being referred to
herein as the retiring Trustee), the Company shall promptly appoint a successor
Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Securityholders. The retiring Trustee shall promptly transfer all
property held by it as Trustee to the successor Trustee, subject to the lien
provided for in Section 7.07.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee or the Holders of
10% in principal amount of the Securities may petition any court of competent
jurisdiction for the appointment of a successor Trustee.
If the Trustee fails to comply with Section 7.10, any Securityholder
may petition any court of competent jurisdiction for the removal of the Trustee
and the appointment of a successor Trustee.
<PAGE>
45
Notwithstanding the replacement of the Trustee pursuant to this
Section, the Company's obligations under Section 7.07 shall continue for the
benefit of the retiring Trustee.
SECTION 7.09. Successor Trustee by Merger. If the Trustee
----------------------------
consolidates with, merges or converts into, or transfers all or substantially
all its corporate trust business or assets to, another corporation or banking
association, the resulting, surviving or transferee corporation without any
further act shall be the successor Trustee.
In case at the time such successor or successors by merger, conversion
or consolidation to the Trustee shall succeed to the trusts created by this
Indenture any of the Securities shall have been authenticated but not delivered,
any such successor to the Trustee may adopt the certificate of authentication of
any predecessor trustee, and deliver such Securities so authenticated; and in
case at that time any of the Securities shall not have been authenticated, any
successor to the Trustee may authenticate such Securities either in the name of
any predecessor hereunder or in the name of the successor to the Trustee; and in
all such cases such certificates shall have the full force which it is anywhere
in the Securities or in this Indenture provided that the certificate of the
Trustee shall have.
SECTION 7.10. Eligibility; Disqualification. The Trustee shall at
------------------------------
all times satisfy the requirements of TIA Sec. 310(a). The Trustee shall have a
combined capital and surplus of at least $50,000,000 as set forth in its most
recent published annual report of condition. The Trustee shall comply with TIA
Sec. 310(b); provided, however, that there shall be excluded from the operation
-------- -------
of TIA Sec. 310(b)(1) any indenture or indentures under which other securities
or certificates of interest or participation in other securities of the Company
are outstanding if the requirements for such exclusion set forth in TIA
Sec. 310(b)(1) are met.
SECTION 7.11. Preferential Collection of Claims Against Company. The
--------------------------------------------------
Trustee shall comply with TIA Sec. 311(a), excluding any creditor relationship
listed in TIA Sec. 311(b). A Trustee who has resigned or been removed shall be
subject to TIA Sec. 311(a) to the extent indicated.
ARTICLE 8
Discharge of Indenture; Defeasance
----------------------------------
SECTION 8.01. Discharge of Liability on Securities; Defeasance.
-------------------------------------------------
(a) When (i) the Company delivers to the Trustee all outstanding Securities
(other than Securities replaced pursuant to Section 2.07) for cancellation or
(ii) all outstanding Securities have become due and payable, whether at maturity
or as a result of the mailing of a notice of redemption pursuant to Article 3
hereof and the Company irrevocably deposits with the Trustee funds sufficient to
pay at maturity or upon redemption all outstanding Securities, including
interest thereon to maturity or such redemption date (other than Securities
replaced pursuant to Section 2.07), and if in either case the Company pays all
other sums payable hereunder by the Company, then this Indenture shall, subject
to Sections 8.01(c), cease to be of further effect. The Trustee shall acknow-
ledge satisfaction and discharge of this Indenture, other than those surviving
obligations set forth in Section 8.01((c), on demand of the Company accompanied
by an Officers' Certificate and an Opinion of Counsel and at the cost and
expense of the Company.
(b) Subject to Sections 8.01(c) and 8.02, the Company at any time may
terminate (i) all its obligations under the Securities and this Indenture
("legal defeasance option") or (ii) its obligations under Sections 4.02, 4.03,
4.04, 4.05, 4.06, 4.07, 4.08, 4.09, 4.10 and 4.11 and the operation of Section
6.01(6), 6.01(7) (with respect to Significant Subsidiaries), 6.01(8) (with
respect to Significant Subsidiaries) and 6.01(9) and the limitations contained
in clauses (iii) and (iv) of Section 5.01 ("covenant defeasance option"). The
Company may exercise its legal defeasance option notwithstanding its prior
exercise of its covenant defeasance option.
If the Company exercises its legal defeasance option, payment of the
Securities may not be accelerated because of an Event of Default. If the
Company exercises its covenant defeasance option, payment of the Securities may
not be accelerated because of an Event of Default specified in 6.01(4), 6.01(6),
6.01(7) (with respect to Significant Subsidiaries), 6.01(8) (with respect to
<PAGE>
46
Significant Subsidiaries) and 6.01(9) or because of the failure of the Company
to comply with clause (iii) or (iv) of Section 5.01.
Upon satisfaction of the conditions set forth herein and upon request
of the Company, the Trustee shall acknowledge in writing the discharge of those
obligations that the Company terminates.
(c) Notwithstanding clauses (a) and (b) above, the Company's
obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.07, 7.07 and 7.08 and this
Article 8 shall survive until the Securities have been paid in full.
Thereafter, the Company's obligations in Sections 7.07, 8.04 and 8.05 shall
survive.
SECTION 8.02. Conditions to Defeasance. The Company may exercise its
-------------------------
legal defeasance option or its covenant defeasance option only if:
(1) the Company irrevocably deposits in trust with the Trustee money
or U.S. Government Obligations for the payment of principal of and interest
on the Securities to maturity or redemption, as the case may be;
(2) the Company delivers to the Trustee a certificate from a
nationally recognized firm of independent accountants expressing their
opinion that the payments of principal and interest when due and without
reinvestment on the deposited U.S. Government Obligations plus any
deposited money without investment will provide cash at such times and in
such amounts as will be sufficient to pay principal and interest when due
on all the Securities to maturity or redemption, as the case may be;
(3) 123 days pass after the deposit is made and during the 123-day
period no Default specified in Section 6.01(7) or (8) with respect to the
Company occurs which is continuing at the end of the period;
(4) the deposit does not constitute a default under any other
agreement binding on the Company;
(5) the Company delivers to the Trustee an Opinion of Counsel to the
effect that the trust resulting from the deposit does not constitute, or is
qualified as, a regulated investment company under the Investment Company
Act of 1940;
(6) in the case of the legal defeasance option, the Company shall have
delivered to the Trustee an Opinion of Counsel stating that (i) the Company
has received from, or there has been published by, the Internal Revenue
Service a ruling, or (ii) since the date of this Indenture there has been a
change in the applicable Federal income tax law, in either case to the
effect that, and based thereon such Opinion of Counsel shall confirm that,
the Securityholders will not recognize income, gain or loss for Federal
income tax purposes as a result of such defeasance and will be subject to
Federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such defeasance had not occurred;
(7) in the case of the covenant defeasance option, the Company shall
have delivered to the Trustee an Opinion of Counsel to the effect that the
Securityholders will not recognize income, gain or loss for Federal income
tax purposes as a result of such covenant defeasance and will be subject to
Federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such covenant defeasance had not
occurred; and
(8) the Company delivers to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that all conditions precedent to the
defeasance and discharge of the Securities as contemplated by this Article
8 have been complied with.
Before or after a deposit, the Company may make arrangements
satisfactory to the Trustee for the redemption of Securities at a future date in
accordance with Article 3.
SECTION 8.03. Application of Trust Money. The Trustee shall hold in
---------------------------
trust money or U.S. Government Obligations deposited with it pursuant to this
Article 8. It shall apply the deposited money and the money from U.S.
Government Obligations in accordance with this Indenture to the payment of
principal of and interest on the Securities.
<PAGE>
47
SECTION 8.04. Repayment to Company. The Trustee and the Paying Agent
---------------------
shall promptly turn over to the Company upon request any excess money or
securities held by them at any time.
Subject to any applicable abandoned property law and the right of the
Trustee to publish or mail notice to Securityholders prior to making such
payment to the Company, the Trustee and the Paying Agent shall pay to the
Company upon request any money held by them for the payment of principal or
interest that remains unclaimed for two years, and, thereafter, Securityholders
entitled to the money must look to the Company for payment as general creditors.
SECTION 8.05. Indemnity for Government Obligations. The Company
-------------------------------------
shall pay and shall indemnify the Trustee against any tax, fee or other charge
imposed on or assessed against deposited U.S. Government Obligations or the
principal and interest received on such U.S. Government Obligations.
SECTION 8.06. Reinstatement. If the Trustee is unable to apply any
--------------
money or U.S. Government Obligations in accordance with this Article 8 by reason
of any legal proceeding or by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, the Company's obligations under this Indenture and the Securities
shall be revived and reinstated as though no deposit had occurred pursuant to
this Article 8 until such time as the Trustee or Paying Agent is permitted to
apply all such money or U.S. Government Obligations in accordance with this
Article 8; provided, however, that, if the Company has made any payment of
--------- -------
interest on or principal of any Securities because of the reinstatement of its
obligations, the Company shall be subrogated to the rights of the Holders of
such Securities to receive such payment from the money or U.S. Government
Obligations held by the Trustee or Paying Agent.
ARTICLE 9
Amendments
----------
SECTION 9.01. Without Consent of Holders. The Company, when
--------------------------
authorized by a resolution of its Board of Directors, and the Trustee may amend
this Indenture or the Securities without notice to or consent of any Security-
holder:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to comply with Article 5;
(3) to provide for uncertificated Securities in addition to or in
place of certificated Securities; provided, however, that the
-------- -------
uncertificated Securities are issued in registered form for purposes of
Section 163(f) of the Code or in a manner such that the uncertificated
Securities are described in Section 163(f)(2)(B) of the Code;
(4) to add guarantees with respect to the Securities or to secure the
Securities;
(5) to add to the covenants of the Company for the benefit of the
Holders or to surrender any right or power herein conferred upon the
Company;
(6) to comply with any requirements of the SEC in connection with
qualifying this Indenture under the TIA; or
(7) to make any change that does not adversely affect the rights of
any Securityholder.
After an amendment under this Section becomes effective, the Company
shall mail to Securityholders a notice briefly describing such amendment. The
failure to give such notice to all Securityholders, or any defect therein, shall
not impair or affect the validity of an amendment under this Section.
SECTION 9.02. With Consent of Holders. The Company, when authorized
------------------------
by a resolution of its Board of Directors, and the Trustee may amend this
Indenture or the Securities without notice to any Securityholder but with the
<PAGE>
48
written consent of the Holders of at least a majority in principal amount of the
Securities. However, without the consent of each Securityholder affected, an
amendment may not:
(1) reduce the amount of Securities whose Holders must consent to an
amendment;
(2) reduce the rate of or extend the time for payment of interest on
any Security;
(3) reduce the principal of or extend the Stated Maturity of any
Security;
(4) reduce the premium payable upon the redemption of any Security or
change the time at which any Security may be redeemed in accordance with
Article 3;
(5) make any Security payable in money other than that stated in the
Security; or
(6) make any change in Section 6.04 or 6.07 or the second sentence of
this Section.
It shall not be necessary for the consent of the Holders under this
Section to approve the particular form of any proposed amendment, but it shall
be sufficient if such consent approves the substance thereof.
After an amendment under this Section becomes effective, the Company
shall mail to Securityholders a notice briefly describing such amendment. The
failure to give such notice to all Securityholders, or any defect therein, shall
not impair or affect the validity of an amendment under this Section.
SECTION 9.03. Compliance with Trust Indenture Act. Every amendment
------------------------------------
to this Indenture or the Securities shall comply with the TIA as then in effect.
SECTION 9.04. Revocation and Effect of Consents
---------------------------------
and Waivers. A consent to an amendment or a waiver by a Holder of a Security
- ------------
shall bind the Holder and every subsequent Holder of that Security or portion of
the Security that evidences the same debt as the consenting Holder's Security,
even if notation of the consent or waiver is not made on the Security. However,
any such Holder or subsequent Holder may revoke the consent or waiver as to such
Holder's Security or portion of the Security if the Trustee receives the notice
of revocation before the date the amendment or waiver becomes effective. After
an amendment or waiver becomes effective, it shall bind every Securityholder.
The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Securityholders entitled to give their consent or
take any other action described above or required or permitted to be taken
pursuant to this Indenture. If a record date is fixed, then notwithstanding the
immediately preceding paragraph, those Persons who were Securityholders at such
record date (or their duly designated proxies), and only those Persons, shall be
entitled to give such consent or to revoke any consent previously given or to
take any such action, whether or not such Persons continue to be Holders after
such record date. No such consent shall be valid or effective for more than 120
days after such record date.
SECTION 9.05. Notation on or Exchange of Securities. If an amendment
--------------------------------------
changes the terms of a Security, the Trustee may require the Holder of the
Security to deliver it to the Trustee. The Trustee may place an appropriate
notation on the Security regarding the changed terms and return it to the
Holder. Alternatively, if the Company or the Trustee so determines, the Company
in exchange for the Security shall issue and the Trustee shall authenticate a
new Security that reflects the changed terms. Failure to make the appropriate
notation or to issue a new Security shall not affect the validity of such
amendment.
SECTION 9.06. Trustee To Sign Amendments. The Trustee shall sign any
---------------------------
amendment authorized pursuant to this Article 9 if the amendment does not
adversely affect the rights, duties, liabilities or immunities of the Trustee.
If it does, the Trustee may but need not sign it. In signing such amendment the
Trustee shall be entitled to receive indemnity reasonably satisfactory to it and
to receive, and (subject to Section 7.01) shall be fully protected in relying
upon, an Officers' Certificate and an Opinion of Counsel stating that such
amendment is authorized or permitted by this Indenture.
<PAGE>
49
SECTION 9.07. Payment for Consent. Neither the Company nor any
--------------------
Affiliate of the Company shall, directly or indirectly, pay or cause to be paid
any consideration, whether by way of interest, fee or otherwise, to any Holder
for or as an inducement to any consent, waiver or amendment of any of the terms
or provisions of this Indenture or the Securities unless such consideration is
offered to be paid to all Holders that so consent, waive or agree to amend in
the time frame set forth in solicitation documents relating to such consent,
waiver or agreement.
ARTICLE 10
Miscellaneous
-------------
SECTION 10.01. Trust Indenture Act Controls. If any provision of
-----------------------------
this Indenture limits, qualifies or conflicts with another provision which is
required to be included in this Indenture by the TIA, the required provision
shall control.
SECTION 10.02. Notices. Any notice or communication shall be in
--------
writing and delivered in person or mailed by first-class mail or sent by
facsimile transmission addressed as follows:
if to the Company:
ContiFinancial Corporation
277 Park Avenue
New York, New York 10172
Facsimile No.: 212-207-2939
Attention of Chief Counsel
if to the Trustee:
The Chase Manhattan Bank
450 West 33rd Street
New York, New York 10172
Facsimile No.:
Attention of Corporate Trust Administration,
15th Floor
The Company or the Trustee by notice to the other may designate
additional or different addresses for subsequent notices or communications.
Any notice or communication mailed to a Securityholder shall be mailed
to the Securityholder at the Securityholder's address as it appears on the
registration books of the Registrar and shall be sufficiently given if so mailed
within the time prescribed.
Failure to mail a notice or communication to a Securityholder or any
defect in it shall not affect its sufficiency with respect to other
Securityholders. If a notice or communication is mailed in the manner provided
above, it is duly given, whether or not the addressee receives it.
SECTION 10.03. Communication by Holders with Other Holders.
--------------------------------------------
Securityholders may communicate pursuant to TIA Sec. 312(b) with other
Securityholders with respect to their rights under this Indenture or the
Securities. The Company, the Trustee, the Registrar and anyone else shall have
the protection of TIA Sec. 312(c).
SECTION 10.04. Certificate and Opinion as to Conditions Precedent.
---------------------------------------------------
Upon any request or application by the Company to the Trustee to take or refrain
from taking any action under this Indenture, the Company shall furnish to the
Trustee:
(1) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of the signers,
all conditions precedent, if any, provided for in this Indenture relating
to the proposed action have been complied with; and
<PAGE>
50
(2) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of such counsel,
all such conditions precedent have been complied with.
SECTION 10.05. Statements Required in Certificate or Opinion. Each
----------------------------------------------
certificate or opinion with respect to compliance with a covenant or condition
provided for in this Indenture shall include:
(1) a statement that the individual making such certificate or opinion
has read such covenant or condition;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of such individual, he has made
such examination or investigation as is necessary to enable him to express
an informed opinion as to whether or not such covenant or condition has
been complied with; and
(4) a statement as to whether or not, in the opinion of such
individual, such covenant or condition has been complied with.
SECTION 10.06. When Securities Disregarded. In determining whether
----------------------------
the Holders of the required principal amount of Securities have concurred in any
direction, waiver or consent, Securities owned by the Company or by any Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with the Company shall be disregarded and deemed not to be
outstanding, except that, for the purpose of determining whether the Trustee
shall be protected in relying on any such direction, waiver or consent, only
Securities which the Trustee knows are so owned shall be so disregarded. Also,
subject to the foregoing, only Securities outstanding at the time shall be
considered in any such determination.
SECTION 10.07. Rules by Trustee, Paying Agent and Registrar. The
---------------------------------------------
Trustee may make reasonable rules for action by or a meeting of Securityholders.
The Registrar and the Paying Agent may make reasonable rules for their
functions.
SECTION 10.08. Legal Holidays. A "Legal Holiday" is a Saturday, a
---------------
Sunday or a day on which banking institutions are not required to be open in the
State of New York. If a payment date is a Legal Holiday, payment shall be made
on the next succeeding day that is not a Legal Holiday, and no interest shall
accrue for the intervening period. If a regular record date is a Legal Holiday,
the record date shall not be affected.
SECTION 10.09. Governing Law. This Indenture and the Securities
--------------
shall be governed by, and construed in accordance with, the laws of the State of
New York but without giving effect to applicable principles of conflicts of law
to the extent that the application of the laws of another jurisdiction would be
required thereby.
SECTION 10.10. No Recourse Against Others. A director, officer,
---------------------------
employee or stockholder, as such, of the Company shall not have any liability
for any obligations of the Company under the Securities or this Indenture or for
any claim based on, in respect of or by reason of such obligations or their
creation. By accepting a Security, each Securityholder shall waive and release
all such liability. The waiver and release shall be part of the consideration
for the issue of the Securities.
SECTION 10.11. Successors. All agreements of the Company in this
-----------
Indenture and the Securities shall bind its successors. All agreements of the
Trustee in this Indenture shall bind its successors.
SECTION 10.12. Multiple Originals. The parties may sign any number
-------------------
of copies of this Indenture. Each signed copy shall be an original, but all of
them together represent the same agreement. One signed copy is enough to prove
this Indenture.
SECTION 10.13. Table of Contents; Headings. The table of contents,
----------------------------
cross-reference sheet and headings of the Articles and Sections of this
Indenture have been inserted for convenience of reference only, are not intended
<PAGE>
51
to be considered a part hereof and shall not modify or restrict any of the terms
or provisions hereof.
IN WITNESS WHEREOF, the parties have caused this Indenture to be duly
executed as of the date first written above.
CONTIFINANCIAL CORPORATION,
by
________________________
Name:
Title:
by
________________________
Name:
Title:
THE CHASE MANHATTAN BANK,
by
________________________
Name:
Title:
<PAGE>
EXHIBIT A
[FORM OF FACE OF SECURITY]
CUSIP:
No. $
% Senior Notes Due 2003
CONTIFINANCIAL CORPORATION, a Delaware corporation, promises to pay
to , or registered assigns, the principal sum
of Dollars on August , 2003.
Interest Payment Dates: February and August .
Record Dates: January and July .
Additional provisions of this Security are set forth on the other side
of this Security.
Dated:
CONTIFINANCIAL CORPORATION,
by
_______________________
President
_______________________
Secretary
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
THE CHASE MANHATTAN BANK,
as Trustee, certifies
that this is one of [Seal]
the Securities referred
to in the Indenture.
by
_____________________________
Authorized Signatory
<PAGE>
2
[FORM OF REVERSE SIDE OF SECURITY]
% Senior Note Due 2003
1. Interest
--------
ContiFinancial Corporation, a Delaware corporation (such corporation,
and its successors and assigns under the Indenture hereinafter referred to,
being herein called the "Company"), promises to pay interest on the principal
amount of this Security at the rate per annum shown above. The Company will pay
interest semiannually on February and August of each year. Interest on
the Securities will accrue from the most recent date to which interest has been
paid or, if no interest has been paid, from August , 1996. Interest will be
computed on the basis of a 360-day year of twelve 30-day months. The Company
shall pay interest on overdue principal at the rate borne by the Securities plus
1% per annum, and it shall pay interest on overdue installments of interest at
the same rate to the extent lawful.
2. Method of Payment
-----------------
The Company will pay interest on the Securities (except defaulted
interest) to the Persons who are registered holders of Securities at the close
of business on the January or July next preceding the interest payment
date even if Securities are canceled after the record date and on or before the
interest payment date. Holders must surrender Securities to a Paying Agent to
collect principal payments. The Company will pay principal and interest in
money of the United States that at the time of payment is legal tender for
payment of public and private debts. However, the Company may pay principal and
interest by check payable in such money. It may mail an interest check to a
Holder's registered address.
3. Paying Agent and Registrar
--------------------------
Initially, The Chase Manhattan Bank, a New York banking corporation
("Trustee"), will act as Paying Agent and Registrar. The Company may appoint
and change any Paying Agent, Registrar or co-registrar without notice. The
Company or any of its domestically incorporated Wholly Owned Subsidiaries may
act as Paying Agent, Registrar or co-registrar.
4. Indenture
---------
The Company issued the Securities under an Indenture dated as of
August 1, 1996 ("Indenture"), between the Company and the Trustee. The terms of
the Securities include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C.
------
Sections 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act").
Terms defined in the Indenture and not defined herein have the meanings
ascribed thereto in the Indenture. The Securities are subject to all such
terms, and Securityholders are referred to the Indenture and the Act for a
statement of those terms.
The Securities are general unsecured obligations of the Company
limited to $300 million aggregate principal amount (subject to Section 2.07 of
the Indenture). The Indenture contains certain covenants, including covenants
with respect to the following matters: (i) limitations on Indebtedness; (ii)
limitations on Indebtedness and Preferred Stock of Restricted Subsidiaries;
(iii) limitations on Liens; (iv) limitations on Restricted Payments such as
dividends, repurchases of the Company's or its Subsidiaries' stock and
repurchases of Subordinated Obligations; (v) limitations on restrictions on
distributions from Subsidiaries; (vi) limitations on sales of assets and
Subsidiary stock; and (vii) limitations on merger and consolidation.
5. Optional Redemption
-------------------
The Securities may be redeemed at the option of the Company in whole
at any time or in part from time to time at a redemption price equal to the
Treasury Rate plus 50 basis points, plus accrued but unpaid interest to the
<PAGE>
3
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the interest payment date).
"Treasury Rate" means the yield to maturity at the time of computation
of United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519) which
has become publicly available at least two business days prior to the date fixed
for repayment (or, if such Statistical Release is no longer published, any
publicly available source or similar market data)) most nearly equal to the then
remaining average life to Stated Maturity of the Securities; provided, however,
-------- -------
that if the average life to Stated Maturity of the Securities is not equal to
the constant maturity of a United States Treasury security for which a weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the weekly
average yields of United States Treasury securities for which such yields are
given, except that if the average life to Stated Maturity of the Securities is
less than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be used.
6. Notice of Redemption
--------------------
Notice of redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each Holder of Securities to be redeemed
at his registered address. Securities in denominations larger than $1,000 may
be redeemed in part but only in whole multiples of $1,000. If money sufficient
to pay the redemption price of and accrued interest on all Securities (or
portions thereof) to be redeemed on the redemption date is deposited with the
Paying Agent on or before the redemption date and certain other conditions are
satisfied, on and after such date interest ceases to accrue on such Securities
(or such portions thereof) called for redemption.
7. Put Provisions
--------------
Upon a Change of Control, any Holder of Securities will have the right
to cause the Company to repurchase all or any part of the Securities of such
Holder at a repurchase price equal to 101% of the principal amount of the Secur-
ities to be repurchased plus accrued interest to the date of repurchase (subject
to the right of holders of record on the relevant record date to receive
interest due on the relevant interest payment date) as provided in, and subject
to the terms of, the Indenture.
8. Denominations; Transfer; Exchange
---------------------------------
The Securities are in registered form without coupons in denominations
of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange
Securities in accordance with the Indenture. The Registrar may require a
Holder, among other things, to furnish appropriate endorsements or transfer
documents and to pay any taxes and fees required by law or permitted by the
Indenture. The Registrar need not register the transfer of or exchange any
Securities selected for redemption (except, in the case of a Security to be
redeemed in part, the portion of the Security not to be redeemed) or any
Securities for a period of 15 days before a selection of Securities to be
redeemed or 15 days before an interest payment date.
9. Persons Deemed Owners
---------------------
The registered Holder of this Security may be treated as the owner of
it for all purposes.
10. Unclaimed Money
---------------
If money for the payment of principal or interest remains unclaimed
for two years, the Trustee or Paying Agent shall pay the money back to the
Company at its request unless an abandoned property law designates another
Person. After any such payment, Holders entitled to the money must look only to
the Company and not to the Trustee for payment.
11. Discharge and Defeasance
------------------------
Subject to certain conditions, the Company at any time may terminate
some or all of its obligations under the Securities and the Indenture if the
Company deposits with the Trustee money or U.S. Government Obligations for the
payment of principal of and interest on the Securities to redemption or
maturity, as the case may be.
<PAGE>
4
12. Amendment, Waiver
-----------------
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities may be amended with the written consent of the
Holders of at least a majority in principal amount outstanding of the Securities
and (ii) any default or noncompliance with any provision may be waived with the
written consent of the Holders of a majority in principal amount outstanding of
the Securities. Subject to certain exceptions set forth in the Indenture,
without the consent of any Securityholder, the Company and the Trustee may amend
the Indenture or the Securities to cure any ambiguity, omission, defect or
inconsistency, or to comply with Article 5 of the Indenture, or to provide for
uncertificated Securities in addition to or in place of certificated Securities,
or to add guarantees with respect to the Securities or to secure the Securities,
or to add additional covenants or surrender rights and powers conferred on the
Company, or to comply with any request of the SEC in connection with qualifying
the Indenture under the Act, or to make any change that does not adversely
affect the rights of any Securityholder.
13. Defaults and Remedies
---------------------
Under the Indenture, Events of Default include (i) default for 30 days
in payment of interest on the Securities; (ii) default in payment of principal
on the Securities at maturity, upon redemption pursuant to paragraph 5 of the
Securities, upon acceleration or otherwise, or failure by the Company to redeem
or purchase Securities when required; (iii) failure by the Company to comply
with other agreements in the Indenture or the Securities, in certain cases
subject to notice and lapse of time; (iv) certain accelerations (including
failure to pay within any grace period after final maturity) of other
Indebtedness of the Company if the amount accelerated (or so unpaid) exceeds $10
million; (v) certain events of bankruptcy or insolvency with respect to the
Company and the Significant Subsidiaries; and (vi) certain judgments or decrees
for the payment of money in excess of $10 million. If an Event of Default
occurs and is continuing, the Trustee or the Holders of at least 25% in
principal amount of the Securities may declare all the Securities to be due and
payable immediately. Certain events of bankruptcy or insolvency are Events of
Default which will result in the Securities being due and payable immediately
upon the occurrence of such Events of Default.
Securityholders may not enforce the Indenture or the Securities except
as provided in the Indenture. The Trustee may refuse to enforce the Indenture
or the Securities unless it receives reasonable indemnity or security. Subject
to certain limitations, Holders of a majority in principal amount of the
Securities may direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from Securityholders notice of any continuing Default
(except a Default in payment of principal or interest) if it determines that
withholding notice is in the interest of the Holders.
14. Trustee Dealings with the Company
---------------------------------
Subject to certain limitations imposed by the Act, the Trustee under
the Indenture, in its individual or any other capacity, may become the owner or
pledgee of Securities and may otherwise deal with and collect obligations owed
to it by the Company or its Affiliates and may otherwise deal with the Company
or its Affiliates with the same rights it would have if it were not Trustee.
15. No Recourse Against Others
--------------------------
A director, officer, employee or stockholder, as such, of the Company
or the Trustee shall not have any liability for any obligations of the Company
under the Securities or the Indenture or for any claim based on, in respect of
or by reason of such obligations or their creation. By accepting a Security,
each Securityholder waives and releases all such liability. The waiver and
release are part of the consideration for the issue of the Securities.
16. Authentication
--------------
This Security shall not be valid until an authorized signatory of the
Trustee (or an authenticating agent) manually signs the certificate of
authentication on the other side of this Security.
17. Abbreviations
-------------
Customary abbreviations may be used in the name of a Securityholder or
an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
<PAGE>
5
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
18. CUSIP Numbers
-------------
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures the Company has caused CUSIP numbers to be
printed on the Securities and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Securityholders. No representation is
made as to the accuracy of such numbers either as printed on the Securities or
as contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
20. Governing Law.
--------------
THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE
PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF
ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
The Company will furnish to any Securityholder upon written request
and without charge to the Securityholder a copy of the Indenture which has in it
the text of this Security in larger type. Requests may be made to:
Contifinancial Corporation, 277 Park Avenue, New York, New York 10172, Attention
of Chief Counsel.
<PAGE>
6
____________________________________________________________
ASSIGNMENT FORM
To assign this Security, fill in the form below:
I or we assign and transfer this Security to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to transfer this
Security on the books of the Company. The agent may substitute another to act
for him.
__________________________________________________________
Date: __________ Your Signature: _________________________
__________________________________________________________
Sign exactly as your name appears on the other side of this Security.
<PAGE>
7
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Security purchased by the
Company pursuant to Section 4.07 or 4.09 of the Indenture, check the box:
___
/ /
---
If you want to elect to have only part of this Security purchased
by the Company pursuant to Section 4.07 or 4.09 of the Indenture, state the
amount:
$
Date: __________________ Your Signature: __________________
(Sign exactly as your name appears on the
other side of the Security)
Signature Guarantee:_______________________________________
(Signature must be guaranteed by a member firm
of the New York Stock Exchange or a commercial bank or trust company)
EXHIBIT 10.18
FIRST AMENDMENT TO NOTE PURCHASE AGREEMENT
FIRST AMENDMENT, dated as of August 12, 1996 (this "Amendment") to the
---------
Note Purchase Agreement, dated as of February 14, 1996 (as amended, supplemented
or otherwise modified, the "Note Purchase Agreement") between ContiFinancial
-----------------------
Corporation, a Delaware corporation (the "Company") and Continental Grain
-------
Company, a Delaware corporation (the "Buyer").
-----
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company and the Buyer are parties to the Note Purchase
Agreement;
WHEREAS, the Company has requested that the Buyer amend the Note
Purchase Agreement as more fully set forth herein;
WHEREAS, the Buyer is willing to so amend the Note Purchase Agreement
only upon the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and mutual agreements
contained herein, and for other good and valuable consideration, the sufficiency
of which is hereby acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms defined in
-------------
the Note Purchase Agreement shall have such meanings when used herein.
2. Amendment of Section 1.1. Section 1.1 of the Note Purchase
------------------------
Agreement hereby is amended by:
(a) adding the following definitions of "Cal Lending" and "Guaranties"
in appropriate alphabetical order:
""Cal Lending" means California Lending Group, Inc., a California
corporation (d/b/a United Lending Group)."
""Guaranties" by any Person shall, without duplication, mean all
obligations (other than endorsements in the ordinary course of business of
negotiable instruments for deposit or collection) of such Person
guaranteeing, or in effect guaranteeing, any indebtedness, dividend or
other obligation of any other Person (the "primary obligor") in any manner,
whether directly or indirectly, including, without limitation, all
obligations incurred through an agreement, contingent or otherwise, by such
Person: (a) to purchase such indebtedness or obligation or any property or
assets constituting security
<PAGE>
2
therefor, (b) to lease property or to purchase securities or other property
or services primarily for the purpose of assuring the owner of such
indebtedness or obligation of the ability of the primary obligor to make
payment of the indebtedness or obligations or (c) otherwise to assure the
owner of the indebtedness or obligation of the primary obligor against loss
in respect thereof. For the purposes of all computations made under this
Note Purchase Agreement, a Guaranty in respect of any indebtedness for
borrowed money shall be deemed to be indebtedness equal to the principal
amount of such indebtedness for borrowed money which has been guaranteed,
and a Guaranty in respect of any other obligation or liability or any
dividend shall be deemed to be indebtedness equal to the maximum aggregate
amount of such obligation, liability or dividend."
(b) deleting in their entirety the definitions of "Consolidated Long-
Term Debt" and "Financial Leverage Ratio" and substituting therefor the
following in appropriate alphabetical order:
""Consolidated Long-Term Debt" means, as at any date of
determination, (i) the non-current portion of long-term debt
(including capitalized leases but excluding the Term Note, the Four
Year Note and the Indenture Note) of the Company and its Consolidated
Subsidiaries determined on a consolidated basis in accordance with
GAAP plus (ii) Guaranties of the non-current portion of long-term debt
(including capitalized leases) of any Person other than a Consolidated
Subsidiary."
""Financial Leverage Ratio" means the ratio of (i) Consolidated
Total Liabilities less Hedged Exposure to (ii) Consolidated Net Worth
----
less an amount equal to 5% of Hedged Exposure."
----
3. Addition of Section 6.8. The following Section 6.8 hereby is
-----------------------
added to the Note Purchase Agreement:
"6.8 Ranking. Cause the Indenture Note, the Term Note
-------
and the Four Year Note to rank at least pari passu with respect to
---- -----
priority of payment with all other existing and future senior
indebtedness of the Company and to rank senior to all future
subordinated indebtedness of the Company (it being understood that any
Lien permitted under Section 7.1 shall not itself cause the debt
secured thereby to be in violation of this Section 6.8)."
4. Amendment of Section 7.1. Section 7.1 of the Note Purchase
------------------------
Agreement hereby is amended by deleting in their entirety clauses (j) and (n)
thereof and substituting therefor the following clauses (j) and (n):
<PAGE>
3
"(j) Liens on assets acquired by the Company or any of its
Subsidiaries in connection with the origination or acquisition of such
assets by the Company or such Subsidiary in the ordinary course of its
business, for the purpose of enabling the Company or such Subsidiary to
arrange financing in connection with the origination or acquisition of such
assets;"
"(n) Liens on excess spread receivables or subordinated certificates
(or on the stock or other equity interests of any corporation, limited
liability company, or other entity, substantially all the assets of which
consist of excess spread receivables or subordinated certificates) of the
Company or any of its Subsidiaries, regardless of whether such excess
spread receivables or subordinated certificates are denominated "excess
spread receivables," "residuals," "interest-only certificates," "asset
backed securities," "subordinated certificates," "subordinated interests,"
"securitization certificates," " 'B' pieces," or otherwise in the financial
statements of the Company, such Liens to secure obligations of the Company
or any of its Subsidiaries, provided, however, that with respect to any
-------- -------
Lien imposed during any period after April 2, 1996 during which the senior
indebtedness of the Company is not rated equal to or higher than "Baa3" (or
the equivalent) by Moody's Investors Service, Inc. (or any successor to the
rating agency business thereof) and "BBB-" (or the equivalent) by
Standard & Poor's Ratings Group (or any successor to the rating agency
business thereof) (any such period, a "Non-Investment Grade Period"), the
---------------------------
book value as of the date such Lien is imposed of the excess spread
receivables and subordinated certificates subject to such Lien shall not
exceed 50% of the book value as of such date of the aggregate excess spread
receivables and subordinated certificates of the Company and its
Subsidiaries which were created during such Non-Investment Grade Period."
5. Deletion of Section 7.2. Section 7.2 of the Note Purchase
-----------------------
Agreement hereby is amended by deleting such Section in its entirety and
substituting therefor the words "[Intentionally omitted]."
6. Amendment of Section 7.4. Section 7.4 hereby is amended by
------------------------
deleting the period at the end thereof and adding the following proviso:
", provided, however, that, with respect to the Company's
-------- -------
fiscal year ending March 31, 1997, the Acquisition by the Company or
any of its Subsidiaries of Cal Lending shall be excluded from the
foregoing limitation, provided that (i) such Acquisition is completed
--------
on or prior to March 31, 1997, (ii) the cost of such Acquisition does
not exceed $15,000,000 and (iii) the Company or such Subsidiary
acquires all of the outstanding capital stock of Cal Lending in such
Acquisition."
<PAGE>
4
7. Amendment of Section 8.2. Section 8.2 of the Note Purchase
------------------------
Agreement hereby is amended by deleting the reference to "$135,000,000" and
substituting therefor "$225,000,000."
8. Amendment of Section 8.3. Section 8.3 of the Note Purchase
------------------------
Agreement hereby is deleted in its entirety and the following is substituted
therefor:
"8.3 Long Term Debt-to-Equity Ratio. Not permit the
------------------------------
ratio of Consolidated Long-Term Debt to Consolidated Adjusted Net
Worth to exceed 1.1:1 at any time on or prior to September 30, 1997
and 1:1 at any time thereafter."
9. Additional Covenants of the Company. To induce the Buyer to
-----------------------------------
execute and deliver this Amendment, the Company shall:
(a) Prepayment of Term Note. Within two (2) Banking Days
-----------------------
following receipt by the Company of the net proceeds from the issuance
and sale of its Senior Notes due 2003 (the "ContiFinancial 2003 Senior
--------------------------
Notes") as contemplated by that certain Preliminary Prospectus dated
-----
July 29, 1996, the Company will, from such net proceeds, prepay
$75,000,000 of the $125,000,000 aggregate principal amount Term Note
held by the Buyer if such net proceeds to be received by the Company
from the issuance and sale of the ContiFinancial 2003 Senior Notes do
not exceed $250,000,000 and will, from such net proceeds to be
received by the Company from the issuance and sale of the
ContiFinancial 2003 Senior Notes in excess of $250,000,000, prepay an
additional $1.00 of the outstanding principal amount of the Term Note
with each dollar of such net proceeds so received which exceeds
$250,000,000.
(b) Expenses Relating to Amendments. Pay all expenses,
-------------------------------
including, but not limited to, fees and disbursements of counsel,
incurred or to be incurred by the Company and the Buyer in connection
with (i) this Amendment, (ii) the First Supplemental Indenture to the
Indenture, dated as of February 14, 1996, between the Company and
Continental Grain Company, as trustee under the Indenture, (iii) the
First Amendment to the Term Loan Agreement, dated as of October 26,
1995, among the Buyer, the financial institutions parties thereto and
The Chase Manhattan Bank, N.A., as agent for the banks, (iv) the First
Amendment to the Credit Agreement, dated as of September 30, 1994,
among the Buyer, the financial institutions parties thereto, the co-
agents parties thereto, The Chase Manhattan Bank, N.A. as
administrative agent, and Union Bank of Switzerland, as documentation
agent, (v) the First Amendment to the Facility Lease, dated as of
December 30, 1991, between State Street Bank and Trust Company of
Connecticut, National Association, as
<PAGE>
5
corporate trustee except to the extent expressly provided therein, and W.
Jeffrey Kramer, as individual trustee, and the Buyer, (vi) the Third
Modification and Amendment to each of the Note Agreements, dated as of
March 22, 1994, as amended, supplemented or otherwise modified, between the
Buyer and The Northwestern Mutual Life Insurance Company, John Hancock Life
Insurance Company of America, John Hancock Mutual Life Insurance Company,
PFL Life Insurance Company, Monumental Life Insurance Company, Life
Investors Insurance Company of America, Bankers United Life Assurance
Company, The Life Insurance Company of Virginia and National Life Insurance
Company and (vii) the First Amendment to each of the Guarantee Agreement,
dated as of March 1, 1996, and the Guarantee Agreement, dated as of
March 1, 1995, by the Buyer in favor of Wilmington Trust Company, as
trustee of the ContiSecurities Residual Funding Trust.
10. Continuing Effect of Note Purchase Agreement. This Amendment
--------------------------------------------
shall not constitute a waiver, amendment or modification of any other provision
of the Note Purchase Agreement not expressly referred to herein and shall not be
construed as a waiver or consent to any further or future action on the part of
the Company that would require a waiver or consent of the Buyer. Except as
expressly amended or modified herein, the provisions of the Note Purchase
Agreement are and shall remain in full force and effect.
11. Counterparts. This Amendment may be executed by one or more of
------------
the parties hereto on any number of separate counterparts and all such
counterparts shall be deemed to be one and the same instrument. Each party
hereto confirms that any facsimile copy of such party's executed counterpart of
this Amendment (or its signature page thereof) shall be deemed to be an executed
original thereof.
12. Effectiveness. This Amendment shall be effective upon receipt by
-------------
the Company of counterparts hereof, duly executed and delivered by the Buyer.
13. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
-------------
CONSTRUED AND INTERPRETED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF NEW YORK.
<PAGE>
6
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their proper and duly authorized officers as
of the day and year first above written.
CONTIFINANCIAL CORPORATION
By:
-------------------------------------
-----------
Name:
Title:
CONTINENTAL GRAIN COMPANY
By:
-------------------------------------
Name:
Title:
By:
-------------------------------------
Name:
Title:
Exhibit 12.1
ContiFinancial Corporation
Exhibit 12
Computation of Ratios
<TABLE>
<CAPTION>
Years Ended March 31 3 Months Ended
1992 1993 1994 1995 1996 June 30,1995 June 30,1996
Ratio of Earnings to Fixed Charges
<S> <C> <C> <C> <C> <C> <C> <C>
Summary
Earnings 19,707 17,078 42,334 77,895 197,996 31,617 52,357
Fixed Charges 12,686 6,529 12,124 29,635 74,770 15,245 19,662
Ratio 1.55 2.62 3.49 2.63 2.65 2.07 2.66
Earnings
Pretax Income 7,765 12,149 35,286 56,988 126,536 19,682 32,695
Plus: Interest expense (4)(i)(A) 12,686 6,529 12,124 29,635 74,770 15,245 19,662
Less: Minority interest (3)(ii) (744) (1,600) (5,076) (8,728) (3,310) (3,310) 0
Total "Earnings" 19,707 17,078 42,334 77,895 197,996 31,617 52,357
Fixed Charges
Interest expense (4)(i)(A) 12,686 6,529 12,124 29,635 74,770 15,245 74,770
<CAPTION>
Percentage of Indebtness to Total
Capitalization
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt 60,311 12,463 49,846 114,907 324,000 206,347 324,000
Total capitalization
due to affiliates 60,311 12,463 49,846 114,907 0 0 0
Notes payable 0 0 0 0 324,000 206,347 324,000
stockholders' equity 15,430 55,339 71,823 67,915 294,819 76,631 315,808
total capitalization 75,741 67,802 121,669 182,822 618,819 282,978 639,808
Ratio 79.63% 18.38% 40.97% 62.85% 52.36% 72.92% 50.64%
Pre-tax Interest Coverage Ratio
Pretax Income 7,765 12,149 35,286 56,988 126,536 19,682 32,695
Interest Expense on Funded Debt 7,921 4,130 5,140 10,234 22,635 3,271 6,226
Ratio 1.98 3.94 7.86 6.57 6.59 7.02 6.25
</TABLE>
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
New York, New York
August 13, 1996
