UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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OR
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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1-14074
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(Commission File Number)
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
ContiFinancial Corporation
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(Exact name of registrant as specified in its charter)
Delaware 13-3852588
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
277 Park Avenue
New York, New York 10172
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 207-2800
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no change
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-- --
The Company had 44,378,953 shares of common stock outstanding as of
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August 8, 1996.
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
CONTIFINANCIAL CORPORATION
Condensed Consolidated Balance Sheets
as of June 30, 1996 and March 31, 1996
(dollars in thousands, except share data)
(unaudited)
June 30, March 31,
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1996 1996
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Assets
------
Cash and cash equivalents ............................ $ 24,919 $ 32,479
Securities purchased under agreements to resell ...... 183,152 179,875
Interest-only and Residual Certificates ............. 223,802 293,218
Capitalized servicing fees receivable ................ 14,816 11,689
Trade receivables, net .............................. 418,783 352,325
Other ................................................ 26,200 22,954
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Total assets ................................. $ 891,672 $ 892,540
========= =========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
- ------------
Securities sold but not yet purchased ................. $ 184,546 $ 180,729
Payables to affiliates ................................ 334,448 337,734
Other 56,870 79,258
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Total liabilities ............................. 575,864 597,721
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Commitments and contingencies
Stockholders' equity:
- ---------------------
Preferred stock (par value $0.01 per share;
25,000,000 shares authorized; none issued or
outstanding at June 30, 1996 and March 31, 1996) -- --
Common stock (par value $0.01 per share; 250,000,000
shares authorized; 44,378,953 shares issued and
outstanding at June 30, 1996 and
March 31, 1996) ................................. 444 444
Paid-in capital ..................................... 294,701 294,701
Retained earnings ................................... 42,081 22,648
Deferred Compensation .............................. (21,418) (22,974)
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Total stockholders' equity ..................... 315,808 294,819
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Total liabilities and stockholders' equity ..... $ 891,672 $ 892,540
========= =========
The accompanying notes to unaudited condensed consolidated financial statements
are an integral part of these statements
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CONTIFINANCIAL CORPORATION
Consolidated Statements of Income
for the three months ended June 30, 1996 and 1995
(dollars in thousands, except per share data)
(unaudited)
Three Months
Ended June 30,
-------------------------
1996 1995
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Gross income
Gain on sale of receivables ............. $ 31,166 $ 22,555
Interest ................................ 28,515 17,883
Net servicing income .................... 9,073 4,766
Other income ............................ 1,009 968
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Total gross income ................. 69,763 46,172
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Expenses
Compensation and benefits .............. 12,408 7,840
Interest (includes $6,226 and $3,271
for the three months ended
June 30, 1996 and 1995, respectively,
to affiliates) ........................ 19,662 15,245
Provision for loan losses ............... 219 148
General and administrative .............. 4,779 3,257
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Total expenses ..................... 37,068 26,490
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Income before income taxes and
minority interest ...................... 32,695 19,682
Income taxes .............................. 13,262 7,656
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Income before minority interest ........... 19,433 12,026
Minority interest of subsidiary ........... -- 3,310
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Net income ........................ $ 19,433 $ 8,716
=========== ===========
Primary and fully diluted earnings
per common share ........................ $ 0.44
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Fully diluted weighted average
number of shares outstanding............. 44,043,368
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Primary weighted average number
of shares outstanding ................... 43,898,281
===========
The accompanying notes to unaudited condensed consolidated financial
statements are an integral part of these statements.
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CONTIFINANCIAL CORPORATION
Condensed Consolidated Statements of Cash Flows
for the three months ended June 30, 1996 and 1995
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three
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Months Ended June 30,
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1996 1995
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<S> <C> <C>
Net cash provided by (used in) operating activities ............. $ (1,948) $(89,020)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ............................ (57) (494)
-------- --------
Cash provided by (used in) investing activities ........ (57) (494)
-------- --------
Cash flows from financing activities:
Net increase (decrease) in due to affiliates ................ (5,555) 91,074
-------- --------
Net cash provided by (used in) financing activities ... (5,555) 91,074
-------- --------
Net increase (decrease) in cash and cash equivalents ............ (7,560) 1,560
Cash and cash equivalents at beginning of period ............... 32,479 2,822
-------- --------
Cash and cash equivalents at end of period ...................... $ 24,919 $ 4,382
======== ========
</TABLE>
The accompanying notes to unaudited condensed consolidated financial statements
are an integral part of these statements
4
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 1996
(dollars in thousands)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
ContiFinancial Corporation and its directly wholly-owned subsidiaries
(collectively, "ContiFinancial" or the "Company") have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission and, in the
opinion of management, reflect all normal, recurring adjustments which are
necessary for a fair presentation of the financial position, results of
operations, and cash flows for each period shown. The results for interim
periods are not necessarily indicative of financial results for the full year.
These unaudited condensed consolidated financial statements should be read in
conjunction with the audited Consolidated Financial Statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1996 (the "Annual Report"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Certain reclassifications of 1995 amounts have been made to conform to the
current year presentation.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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 transferors 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 to be applied
prospectively. The Company is currently evaluating the impact of SFAS 125 on its
financial position and 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
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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.
3. SUBSEQUENT EVENT
On July 5, 1996, the Company filed a registration statement with the United
States Securities and Exchange Commission with respect to $300.0 million of
Senior Notes due 2003.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This discussion should be read in conjunction with the accompanying unaudited
condensed consolidated financial statements and notes thereto, and the Company's
Consolidated Financial Statements and notes thereto included in the Annual
Report.
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 asset purchase and sale facilities
with certain financial institutions ("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. The
increase in securities purchased under agreement to resell was primarily due to
the increase in receivables held for sale, partially offset by the greater use
of futures contracts.
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.
Other increased $3.2 million from $23.0 million at March 31, 1996 to $26.2
million at June 30, 1996. This increase is primarily due to an increase in other
assets which consists of prepaid expenses, margin deposits and other real estate
owned. The increase in these accounts was related to the increase in the
Company's securitization volume.
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 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 was
primarily due to the increase in the Company's securitization volume.
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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.
Other decreased $22.4 from $79.3 at March 31, 1996 to $56.9 at June 30, 1996.
The decrease is primarily due to a decrease in accounts payable and accrued
expenses resulting from 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.
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.
Results of Operations
Three Months Ended June 30, 1996 Compared to Three Months Ended June 30, 1995
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. Net income has 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.
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:
Three Months Ended June 30,
---------------------------
Gross income 1996 1995
---- ----
Gain on sale of receivables 44.67% 48.85%
Interest 40.87% 38.73%
Net servicing income 13.01% 10.32%
Other income 1.45% 2.10%
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Total gross income 100.00% 100.00%
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Expenses
Compensation and benefits 17.79% 16.98%
Interest 28.18% 33.02%
Provision for loan losses 0.31% 0.32%
General and administrative 6.85% 7.05%
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Total expenses 53.13% 57.37%
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Income before income taxes and minority interest 46.87% 42.63%
Income taxes 19.01% 16.58%
Minority interest of subsidiary 0.00% 7.17%
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Net income 27.86% 18.88%
======= =======
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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. The following table sets forth information regarding the components
of the Company's total gross income in each of the three month periods ended
June 30:
Three Months
Ended June 30,
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(in thousands)
1996 1995
---- ----
Gain on sale of receivables ................... $31,166 $22,555
Interest ...................................... 28,515 17,883
Net servicing income .......................... 9,073 4,766
Other income .................................. 1,009 968
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Total gross income ......................... $69,763 $46,172
======== ========
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)
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 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
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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 ending 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 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 steady 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 costs associated with increased home equity
volume.
The following table sets forth the components of the Company's expenses for the
three months ended June 30, 1996 and 1995.
Three Months
Ended June 30,
--------------
(in thousands)
1996 1995
---- ----
Compensation and benefits ......... $12,408 $ 7,840
Interest .......................... 19,662 15,245
Provision for loan losses ......... 219 148
General and administrative ........ 4,779 3,257
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Total expenses ................. $37,068 $26,490
======= =======
Compensation and benefits expense 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
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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 three months ended June 30, 1996 by $1.6
million. The commissions paid 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 expense 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
a 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 Corporation ("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
11
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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 include 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.
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 a tax sharing
agreement with Continental Grain; and (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. The Company securitized and sold
in the secondary market $993.5 million of loans in the three months ended June
30, 1996 compared to $491.0 million in the three months ended June 30, 1995. The
Company used $1.9 million of cash in operations during the three months ended
June 30, 1996.
During the life of the REMICs, owner trusts or grantor trusts, 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 REMICs, 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 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.
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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.
Through ContiTrade Services L.L.C. (ContiTrade), the Company has $1.45 billion
of committed sale capacity under its Purchase and Sale Facilities with various
financial institutions. 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 August 1996 to June 1998. On June 30, 1996, the Company had utilized
$596.8 million of the capacity under these facilities. The Company currently
anticipates that it will be able to renew these facilities when they expire and
to obtain additional facilities.
In order to fund the Company's past growth, Continental Grain provided the
Company with intercompany financing ("Intercompany Debt"). 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 $324.0 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
(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 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 Notes is subject to limitations contained
in the Continental Grain debt agreements such as restrictions on the incurrence
of debt and liens and other financial covenants.
In fiscal 1995, ContiSecurities Asset Funding Corp. ("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, as well as Continental 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
13
<PAGE>
Excess Spread Receivables) and other working capital needs. On July 5, 1996, the
Company filed a registration statement with the United States Securities and
Exchange Commission with respect to $300.0 million of Senior Notes due 2003.
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 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 .
Certain Accounting Considerations
For a discussion of recent accounting pronouncements, see Note 2 to the
unaudited condensed consolidated financial statements, Part I, Item I.
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 "Excess Spread"). 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"). 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 and March 31, 1996 is 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.
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
14
<PAGE>
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.
Additionally, upon sale or securitization of servicing retained mortgages, the
Company capitalizes 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.
15
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
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 effect on the consolidated financial
position or results of operations.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
1. Mr. Donald L. Staheli, who is a Class I Director at the election
to be held at the September 17, 1996 Annual Meeting of
Stockholders, is a director of Prudential Life Insurance Company
of America, Bankers Trust Company and Bankers Trust New York
Corporation.
2. Mr. John P. Tierney, who is a Class III Director, is a director
of RCSB Financial, Inc. (a holding company for Rochester
Community Savings Bank).
16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
No. Description
- -------- -----------
10.1 Amended and Restated Indemnification Agreement
11.1 Computation of the Company's earnings per common share
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ContiFinancial Corporation
<TABLE>
<CAPTION>
Date Signature Title
- ---- --------- -----
<S> <C> <C>
August 14, 1996 /s/ Jerome M. Perelson Senior Vice President and Chief
- --------------- ----------------------
Jerome M. Perelson Financial Officer (Principal
Financial Officer)
August 14, 1996 /s/ Susan E. O'Donovan Vice President and Controller
- --------------- ----------------------
Susan E. O'Donovan (Principal Accounting Officer)
</TABLE>
18
Exhibit 10.1
AMENDED AND RESTATED INDEMNIFICATION AGREEMENT
----------------------------------------------
AMENDED AND RESTATED INDEMNIFICATION AGREEMENT, dated as of July
5, 1996 (the "Agreement"), between Continental Grain Company, a Delaware
corporation ("Continental Grain") and ContiFinancial Corporation, a
Delaware corporation (the "Company").
WHEREAS, the Company made initial public offerings of its shares
of common stock (the "Common Stock") in the United States and outside the
United States (the "Offerings"), pursuant to the Company's registration
statement on Form S-1 (File No. 33-98016), as originally filed with the
Securities and Exchange Commission on October 11, 1995 (as amended and
supplemented, the "Registration Statement");
WHEREAS, the Indemnification Agreement, dated as of February 14,
1996 (the "Original Indemnification Agreement"), between Continental Grain
and the Company set forth the understanding of Continental Grain and the
Company with respect to indemnification and contribution arrangements and
the payment of certain costs and expenses in connection with the
Registration Statement and certain related matters; and
WHEREAS, Continental Grain and the Company have agreed to amend
and restate the Original Indemnification Agreement.
NOW THEREFORE, in consideration of the mutual covenants set forth
herein and for other good and valuable consideration, the receipt and
sufficiency of
<PAGE>
which is hereby acknowledged, and subject to the conditions and upon the
terms hereof, the parties hereby agree as follows:
1. Definitions. As used herein, unless the context otherwise
-----------
requires, the following terms have the following respective meanings.
"Company Group" means the Company and its Subsidiaries.
---------------
"Continental Grain Group" means Continental Grain and its
-------------------------
Subsidiaries (other than the Company and the Subsidiaries of the Company).
"Indemnifiable Losses" means, with respect to any claim by
----------------------
an Indemnitee for indemnification or contribution pursuant to this
Agreement, any and all losses, Liabilities, damages, claims, demands,
judgments or settlements of any nature or kind, known or unknown,
including, without limitation, all reasonable costs and expenses (legal,
accounting or otherwise) relating thereto, suffered by such Indemnitee with
respect to such claim.
"Indemnifying Party" means a Person who or which is
--------------------
obligated under this Agreement to provide indemnification.
"Indemnitee" means a Person who or which may seek
------------
indemnification under this Agreement.
"Indemnity Payment" means an amount that an Indemnifying
-------------------
Party is required to pay an Indemnitee pursuant to this Agreement.
"Liabilities" means all debts, liabilities and obligations,
-------------
whether accrued or contingent.
<PAGE>
"Person" means any individual, firm, corporation,
--------
partnership, limited liability company or partnership, trust, incorporated
or unincorporated association, joint venture, joint stock company,
government (or an agency or political subdivision thereof) or other entity
of any kind and shall include any successor (by merger or otherwise) of
such entity.
"Registration Expenses" means all expenses related to the
-----------------------
Offerings, including, without limitation, all registration and filing fees,
all fees of the New York Stock Exchange, Inc., other national securities
exchanges or the National Association of Securities Dealers, Inc., all fees
and expenses of complying with securities or blue sky laws, all word
processing, duplicating and printing expenses, messenger and delivery
expenses, the fees and disbursements of counsel for the Company and of its
independent public accountants, including the expenses of "comfort" letters
required by the underwriters in the Offerings, any fees and disbursements
of underwriters customarily paid by issuers of securities and the
reasonable fees and expenses of counsel to Continental Grain incurred in
connection with the Offerings.
"Subsidiary" means, with respect to any specified Person,
------------
any Person of which the specified Person or any of its Subsidiaries
controls or owns, directly or indirectly, more than 50% of the capital
stock or other equity interest entitled to vote in the election of members
of the board of directors or similar governing body.
<PAGE>
"Third Party Claim" means any claim, suit, arbitration,
-------------------
inquiry, proceeding or investigation by or before any court, any
governmental or other regulatory or administrative agency or commission or
any arbitration tribunal asserted by a person who is not a party to this
Agreement.
2. Indemnification.
---------------
2.1 Indemnification by the Company.
------------------------------
(a) As of and after the closing date of the Offerings,
the Company shall indemnify, defend and hold harmless the Continental Grain
Group from and against any Liabilities and Indemnifiable Losses relating
to, arising out of or due to, directly or indirectly, the assets, business,
operations, conduct, products and employees (including former employees) of
the Company Group, whether relating to or arising out of occurrences prior
to, at or after the closing of the Offerings.
(b) The Company shall indemnify and hold harmless
Continental Grain and each other Person, if any, who controls Continental
Grain within the meaning of the Securities Act of 1933, as amended (the
"Securities Act") or the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and their respective directors, officers, partners, agents
and affiliates, against any Liabilities and Indemnifiable Losses, joint or
several, to which they or any of them may become subject under the
Securities Act, the Exchange Act or otherwise, including, without
limitation, the reasonable fees and expenses of legal counsel, insofar as
such Liabilities and Indemnifiable Losses (or actions or proceedings,
whether commenced or threatened, in respect thereof) arise out of or are
based upon any untrue statement
<PAGE>
or alleged untrue statement of any material fact contained in the
Registration Statement, any preliminary prospectus, final prospectus or
summary prospectus contained therein, or any amendment or supplement
thereto, or any 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 the Company will reimburse Continental Grain
and each such director, officer, agent, affiliate and controlling person
for any reasonable legal or any other expenses incurred by them in
connection with investigating or defending such settlement, action or
proceeding; provided, however, that the Company shall not be liable in any
-------- -------
such case to the extent that any such Liability or Indemnifiable Loss (or
action or proceeding in respect thereof), arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged
omission made in the Registration Statement, any such preliminary
prospectus, final prospectus, summary prospectus, amendment or supplement
in reliance upon and in conformity with written information furnished to
the Company by or on behalf of Continental Grain specifically stating that
it is for use in the preparation thereof. Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf
of Continental Grain or any such director, officer, partner, agent,
affiliate or controlling person.
2.2 Indemnification by Continental Grain.
-------------------------------------
(a) As of and after the closing of the Offerings,
Continental Grain shall indemnify, defend and hold harmless the Company
Group from and against any Liabilities and Indemnifiable Losses arising out
of or due to,
<PAGE>
directly or indirectly, the assets, business, operations, conduct, products
and employees (including former employees) of the Continental Grain Group,
whether relating to or arising out of occurrences prior to, at or after the
closing of the Offerings (including, without limitation all Liabilities and
Indemnifiable Losses relating, arising out of or due to the case of
Wellington Funding and Business Consulting, Inc. v. Continental Grain
- ---------------------------------------------------------------------
Company, ContiTrade Services Corp, and ContiFinancial Services Corp., No.
- --------------------------------------------------------------------
1167997/95 (N.Y. Sup. Ct.), and any related cases).
(b) Continental Grain shall indemnify and hold harmless
(in the same manner and to the same extent as set forth in Section l(b))
the Company, and each director of the Company, each officer of the Company
who signs the Registration Statement, and each other Person who controls
the Company within the meaning of the Securities Act or the Exchange Act,
with respect to any statement or alleged statement, any preliminary
prospectus, final prospectus or summary prospectus contained therein, or
any amendment or supplement thereto, if such statement or alleged statement
or omission or alleged omission was made in reliance upon and in conformity
with written information furnished to the Company by Continental Grain
specifically stating that it is for use in the preparation of such
Registration Statement, preliminary prospectus, final prospectus, summary
prospectus, amendment or supplement. Such indemnity shall remain in full
force and effect, regardless of any investigation made by or on behalf of
the Company or any such director, officer or controlling person.
<PAGE>
2.3 Tax Benefits of Indemnification. If an Indemnitee shall
-------------------------------
realize a tax benefit by reason of having incurred an Indemnifiable Loss
for which such Indemnitee shall have received an Indemnity Payment from an
Indemnifying Party, then such Indemnitee shall pay to such Indemnifying
Party an amount equal to the tax benefit. If, in the opinion of counsel to
an Indemnifying Party reasonably acceptable to the affected Indemnitee,
there is a substantial likelihood that the Indemnitee will be entitled to a
tax benefit by reason of an Indemnifiable Loss, the Indemnifying Party
shall promptly notify the Indemnitee and the Indemnitee shall promptly take
any steps (including, without limitation, the filing of such returns,
amended returns or claims for refunds consistent with the claiming of such
tax benefit) which, in the reasonable judgment of the Indemnifying Party,
are necessary and appropriate to obtain any such tax benefit.
2.4 Insurance Proceeds. The amount which an Indemnifying
------------------
Party is required to pay to any Indemnitee pursuant to this Section 2 shall
be reduced (including, without limitation, retroactively) by any insurance
proceeds and other amounts actually recovered by such Indemnitee in
reduction of the related Indemnifiable Loss, it being understood and agreed
that each of Continental Grain and the Company shall use its best efforts
to collect on insurance coverage of insurance carriers as to which it or
any of its subsidiaries is the insured party, without regard to whether it
is the Indemnifying Party hereunder. If an Indemnitee shall have received
an Indemnity Payment in respect of an Indemnifiable Loss and shall
subsequently actually receive insurance proceeds or other amounts in
respect of such Indemnifiable
<PAGE>
Loss, then such Indemnitee shall pay to such Indemnifying Party a sum equal
to the lesser of the amount of such insurance proceeds or other amounts
actually received or the amount of such Indemnifiable Loss.
2.5 Proceedure for Indemnification.
-------------------------------
(a) Promptly after receipt by an Indemnitee of notice
of the commencement of any Third Party Claim referred to in Sections 2.1 or
2.2, such Indemnitee shall, if a claim in respect thereof is to be made
against an Indemnifying Party, give written notice to the Indemnifying
Party of the commencement of such action; provided, however, that the
-------- -------
failure of any Indemnitee to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under Sections 2.1 or
2.2, except to the extent that the Indemnifying Party is actually and
materially prejudiced by such failure to give notice. Such notice shall
describe the Third Party Claim in reasonable detail.
(b) In case any Third Party Claim shall be brought against
any Indemnitee and it shall notify the Indemnifying Party of the
commencement thereof, the Indemnifying Party shall be entitled to
participate therein and, to the extent that it may wish, to assume the
defense thereof, with counsel reasonably satisfactory to such Indemnitee;
provided, however, that any Indemnitee may, at its own expense, retain
- -------- -------
separate counsel to participate in such defense. Notwithstanding the
foregoing, in any action or proceeding in which both an Indemnifying Party
and an Indemnitee is, or is reasonably likely to become, a party, such
Indemnitee shall have the right to employ separate counsel at the
Indemnifying
<PAGE>
Party's expense and to control its own defense of such action or proceeding
if, in the reasonable opinion of counsel to such Indemnitee, (a) there are
or may be legal defenses available to such Indemnitee or to other
Indemnitees that are different from or additional to those available to the
Indemnifying Party or (b) any conflict or potential conflict exists between
the Indemnifying Party and such Indemnitee that would make such separate
representation advisable; provided, however, that in no event shall the
-------- -------
Indemnifying Party be required to pay fees and expenses under this Section
2.5 for more than one firm of attorneys representing the Indemnitees
(together, if appropriate, with one firm of local counsel per jurisdiction)
in any one legal action or group of related legal actions. No Indemnifying
Party shall be liable for any settlement of any action or proceeding
effected without its written consent, which consent shall not be
unreasonably withheld. No Indemnifying Party shall, without the consent of
the Indemnitee, which consent shall not be unreasonably withheld, consent
to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnitee of a release from all liability in respect to
such claim or litigation or which requires action other than the payment of
money by the Indemnifying Party.
(c) If the indemnification provided for in Sections 2.1 or
2.2 shall for any reason be held by a court to be unavailable to an
Indemnitee under Sections 2.1 or 2.2 in respect of any Liability or
Indemnifiable Loss, or any action or proceeding in respect thereof, then,
in lieu of the amount paid or payable under Sections 2.1 or 2.2, the
Indemnitee and the Indemnifying Party under
<PAGE>
Sections 2.1 or 2.2 shall contribute to the aggregate Liabilities and
Indemnifiable Losses (including legal or other expenses reasonably incurred
in connection with investigating the same), in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and the
Indemnitee which resulted in such Liability or Indemnifiable Loss, or
action or proceeding in respect thereof, with respect to the actions,
statements or omissions which resulted in such Liability or Indemnifiable
Loss, or action or proceeding in respect thereof, as well as any other
relevant equitable considerations; provided, that for purposes of this
Section 2.5(c), no party shall be obligated to contribute to another party
any amount in excess of the amount that such party would have been
obligated to pay to such other party if the indemnity under Section 2.1 or
2.2 were available. With respect to the Offerings, the relative fault shall
be determined by reference to whether an untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact
relates to information supplied by the Indemnifying Party on one hand and
the Indemnitee on the other hand, the intent of the parties and their
relative knowledge, access to information and opportunity to correct or
prevent such statement or omission, but not by a party's stock ownership in
the Company. No Person guilty of fraudulent misrepresentation (within the
meaning of Section 11 (f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation. In addition, no Person shall be obligated to contribute
hereunder any amounts in payment for any settlement of any Third Party
Claim
<PAGE>
effected without such Person's consent, which consent shall not be
unreasonably withheld.
(d) The indemnification and contribution required by this
Section 2 shall be made by periodic payments of the amount thereof during
the course of the investigation or defense, as and when bills are received
or Liabilities or Indemnifiable Losses are incurred.
3. Offering Expenses. The Company hereby agrees to pay all of
-----------------
the Registration Expenses incurred or to be incurred by the Company and
Continental Grain in connection with the Offerings contemplated by the
Registration Statement.
4. Notices. All notices, demands and other communications
-------
provided for or permitted hereunder shall be made in writing and shall be
by registered or certified first-class mail, return receipt requested,
telecopier, courier service or personal delivery:
(a) If to Continental Grain at 277 Park Avenue, New York,
New York 10172, attention: Lawrence G. Weppler, Vice President and General
Counsel-Corporate or at such other address as Continental Grain shall have
furnished to the Company in the manner set forth herein; or
(b) If to the Company, at 277 Park Avenue, New York, New
York 10172, attention: Alan L. Langus, Vice President, Secretary and Chief
Counsel or at such other address as the Company shall have furnished to
Continental Grain in the manner set forth herein.
<PAGE>
All such notices and communications shall be deemed to have been
duly given: when delivered by hand, if personally delivered; when delivered
by a courier, if delivered by overnight courier service; three business
days after being deposited in the mail, postage prepaid, if mailed; and
when receipt is acknowledged, if telecopied.
5. Governing 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 law.
6. Binding Effect; Assignment.
---------------------------
(a) This Agreement shall be binding upon the parties and
their respective successors and assigns and shall inure to the benefit of
such parties and their respective successors and permitted assigns. No
party shall assign any of its rights or delegate any of its duties under
this Agreement (by operation of law or otherwise) without the prior written
consent of the other party. Any assignment of rights or delegation of
duties under this Agreement by any party without the prior written consent
of the other party shall be void.
(b) Nothing in this Agreement, expressed or implied, is
intended or shall be construed to confer upon any Person (other than the
parties and their successors and permitted assigns and any Person entitled
to the benefit of Section 2.1 or 2.2) any right, remedy or claim under or
by reason of this Agreement.
<PAGE>
7. Entire Agreement. This Agreement is intended by the parties
----------------
as a final expression of their agreement and intended to be a complete and
exclusive statement of the agreement and understanding of the parties
hereto in respect of the subject matter contained herein. There are no
restrictions, promises, warranties or undertakings, other than those set
forth or referred to herein. This Agreement supersedes all prior agreements
and understandings between the parties with respect to such subject matter.
8. Amendments and Waivers. No supplement, modification or
----------------------
amendment of this Agreement shall be binding unless executed in writing by
both of the parties hereto. No waiver of this Agreement or of any provision
hereof shall be effective unless it is in writing and signed by the party
against whom such waiver is sought to be enforced. No course of dealing
between any parties or any delay on the part of any party in exercising any
rights hereunder or under any agreement contemplated hereby shall operate
as a waiver of any rights of any such party. No delay on the part of any
party in exercising any right, power or privilege hereunder shall operate
as a waiver thereof, or shall any waiver on the part of any party of any
such right, power or privilege, nor any single or partial exercise of any
such right, power or privilege, preclude any further exercise thereof or
the exercise of any other such right, power or privilege. The rights and
remedies herein provided are cumulative and are not exclusive of any rights
or remedies that any party may otherwise have at law or in equity.
<PAGE>
9. Headings. The headings in this Agreement are for convenience
--------
of reference only and shall not limit or otherwise affect the meaning
hereof.
10. Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed an original and all of which taken
together shall constitute one and the same instrument.
11. Severability. If any term or provision of this Agreement is
------------
held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms and provisions set forth herein
shall remain in full force and
<PAGE>
effect and shall in no way be affected, impaired or invalidated, and the
parties hereto shall use their best efforts to find and employ an
alternative means to achieve the same or substantially the same result as
that contemplated by such term or provision.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed and delivered as of the date first above written.
CONTINENTAL GRAIN COMPANY
By: /s/ Paul J. Fribourg
--------------------------
Name: Paul J. Fribourg
Title: President
CONTIFINANCIAL CORPORATION
By: /s/ James E. Moore
----------------------------
Name: James E. Moore
Title: President
Exhibit 11.1
<TABLE>
<CAPTION>
ContiFinancial Corporation
- --------------------------
First Quarter F97 Weighted
- ----------------- PRIMARY Weighting Avg Shares
-------
<S> <C> <C> <C>
Continental Grain Shares 35,918,421 100.00% 35,918,421
New shares issued 7,130,000 100.00% 7,130,000
Effect of Restricted Shared
Assumed Proceeds
Average unamortized deferred compensation
Restricted Shares 1,330,532
Offering Price $21.00
--------------
Total Value of Restricted Shares $27,941,172
Value at End of Year 1.25 based on 5 year plan 75.00%
--------------
Annual Cost $20,955,879
--------------
Average Unamortized Deferred Premium $24,448,526
==============
Tax benefits credited to capital on assumed exercise
Restricted Shares 1,330,532
Average Market Price (qtr) $30.79400
--------------
Total Value $40,972,402
==============
Tax effect 16,798,685
Tax effect of compensation 11,455,881
--------------
Excess 5,342,804
==============
Total assumed proceeds 29,791,330
==============
Repurchase Shares on Open Market
Total assumed proceeds $29,791,330
Average Market Price $30.79400
--------------
Number of Shares 967,439
==============
Incremental Shares Considered to be Outstanding
Restricted Shares 1,330,532
Repurchase Shares 967,439
--------------
Incremental Shares 363,093 100.00% 363,093
==============
Effect of Options
Assumed Proceeds
Exercise of all options
Granted Options 2,623,500
Offering Price (blended rate) $21.11
--------------
Estimated Proceeds on excercising options $55,382,085
==============
Tax benefits credited to capital on assumed exercise
Granted Options 2,623,500
Issue price $21.11
Average Market Price $30.79400
--------------
Estimated compensation $25,405,974
Tax effect 10,416,449
--------------
Total assumed proceeds $65,798,534
==============
Repurchase Shares on Open Market
Total assumed proceeds $65,798,534
Average Market Price $30.79400
--------------
Number of Shares 2,136,732
==============
Incremental Shares
Granted options 2,623,500
Repurchase shares 2,136,732
--------------
Incremental Shares 486,768 100.00% 486,768
==============
------------
Weighted Average Shares 43,898,281
============
Net Income 19,433,000
============
Primary EPS $0.44
============
<PAGE>
Exhibit 11.1
- ------------
ContiFinancial Corporation
- --------------------------
First Quarter F97 Weighted
- ----------------- FULLY DILUTED Weighting Avg Shares
-------------
Continental Grain Shares 35,918,421 100.00% 35,918,421
New shares issued 7,130,000 100.00% 7,130,000
Effect of Restricted Shared
Assumed Proceeds
Unamortized deferred compensation
Restricted Shares 1,330,532
Offering Price $21.00
--------------
Total Value of Restricted Shares $27,941,172
Value at End of Year 1.25 based on 5 year plan 75.00%
--------------
Unamortized Deferred Comp at end of year $20,955,879
==============
Tax benefits credited to capital on assumed exercise
Restricted Shares 1,330,532
QTR end Price $29.50
--------------
Total value $39,250,694
==============
Tax effect (@41%) $16,092,785
Tax effect for compensation $11,455,881
--------------
Excess $4,636,904
==============
Total assumed proceeds $25,592,783
==============
Repurchase Shares on Open Market
Assumed Proceeds $25,592,783
QTR end price $29.50
--------------
Number of Shares 867,552
==============
Incremental Shares Considered to be Outstanding
Restricted Shares 1,330,532
Repurchase Shares 867,552
--------------
Incremental Shares 462,980 100.00% 462,980
==============
Effect of Options
Assumed Proceeds
Exercise of all options
Granted Options 2,623,500
Estimated Offering Price $21.11
--------------
Estimated Proceeds on exercising options $55,382,085
==============
Tax benefits credited to capital on assumed exercise
Granted Options 2,623,500
Issue price $21.11
QTR End Price $29.50
--------------
Estimated compensation $22,011,165
Tax effect 9,024,578
--------------
Total assumed proceeds $64,406,663
==============
Repurchase Shares on Open Market
Total assumed proceeds $64,406,663
Higher of: QTR end Market Price/Avg Mkt price $30.79400
--------------
Number of Shares 2,091,533
==============
Incremental Shares
Granted options 2,623,500
Repurchase shares 2,091,533
--------------
Incremental Shares 531,967 100.00% 531,967
==============
------------
Weighted Average Shares 44,043,368
============
Net Income 19,433,000
============
Primary EPS $0.44
============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 24,919
<SECURITIES> 406,954
<RECEIVABLES> 435,492
<ALLOWANCES> (1,893)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 6,460
<DEPRECIATION> (2,773)
<TOTAL-ASSETS> 891,672
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 444
<OTHER-SE> 315,364
<TOTAL-LIABILITY-AND-EQUITY> 891,672
<SALES> 0
<TOTAL-REVENUES> 69,763
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 17,187
<LOSS-PROVISION> 219
<INTEREST-EXPENSE> 19,662
<INCOME-PRETAX> 32,695
<INCOME-TAX> 13,262
<INCOME-CONTINUING> 19,433
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,433
<EPS-PRIMARY> .44
<EPS-DILUTED> .44
</TABLE>
