As filed with the Securities and Exchange Commission on May 6, 1997
Registration No. 333-23963
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
Amendment No. 1 to
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ContiFinancial Corporation
(Exact name of registrant as specified in its charter)
Delaware 6162 13-3852588
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation
or organization)
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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)
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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:
Mark R. Baker, 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) 259-8000 (212) 474-1000
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Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box: |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price Aggregate Amount of
Securities to be Registered Registered Per Unit(1) Offering Price(1) Registration Fee(2)
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<C> <C> <C> <C> <C>
7 1/2% Senior Notes Due 2002................ $200,000,000 100% $200,000,000 $60,606.06
====================================================================================================================================
</TABLE>
(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 under the Securities Act of 1933.
(2) Calculated pursuant to Rule 457(a).
------------------------
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>
PROSPECTUS
ContiFinancial Corporation
OFFER TO EXCHANGE ITS
7 1/2% SENIOR NOTES DUE 2002
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
7 1/2% SENIOR NOTES DUE 2002
------------------------------------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON JUNE 11, 1997, UNLESS EXTENDED
------------------------------------------
ContiFinancial Corporation, a Delaware corporation (the "Company"), hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus (as the same may be amended or supplemented from time to time, the
"Prospectus") and in the accompanying Letter of Transmittal (which together
constitute the "Exchange Offer"), to exchange up to $200,000,000 aggregate
principal amount of its 7 1/2% Senior Notes Due 2002 (the "New Notes") which
have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a Registration Statement (as defined herein) of
which this Prospectus constitutes a part, for a like principal amount of its
outstanding 7 1/2% Senior Notes Due 2002 (the "Old Notes"), of which
$200,000,000 aggregate principal amount is outstanding.
The terms of the New Notes are identical in all material respects to the
respective terms of the Old Notes, except that (i) the New Notes have been
registered under the Securities Act and therefore will not be subject to certain
restrictions on transfer applicable to the Old Notes, (ii) the New Notes are
issuable in minimum denominations of $100,000 compared to minimum denominations
of $1,000 for the Old Notes and (iii) the New Notes will not provide for any
increase in the interest rate thereon. In that regard, the Old Notes provide
that, if the Exchange Offer is not consummated by August 8, 1997, the interest
rate borne by the Old Notes will increase by 0.50% per annum commencing on
August 10, 1997 until the Exchange Offer is consummated. See "Description of the
Old Notes." The New Notes are being offered for exchange in order to satisfy
certain obligations of the Company under the Registration Rights Agreement dated
as of March 7, 1997 (the "Registration Rights Agreement") between the Company
and the Initial Purchasers (as defined herein) of the Old Notes. The New Notes
will be issued under the same Indenture (as defined herein) as the Old Notes.
The New Notes and the Old Notes will constitute a single series of debt
securities under the Indenture. In the event that the Exchange Offer is
consummated, any Old Notes which remain outstanding after consummation of the
Exchange Offer and the New Notes issued in the Exchange Offer will vote together
as a single class for purposes of determining whether holders of the requisite
percentage in outstanding principal amount thereof have taken certain actions or
exercised certain rights under the Indenture.
Interest on the New Notes is payable semiannually on March 15 and
September 15 of each year (each, an "Interest Payment Date"), commencing on the
first such date following the original issuance date of the New Notes. The New
Notes will mature on March 15, 2002.
(Continued on the following page)
SEE "RISK FACTORS" COMMENCING ON PAGE 21 FOR CERTAIN INFORMATION THAT
SHOULD BE CONSIDERED BY HOLDERS IN DECIDING WHETHER TO TENDER OLD NOTES IN THE
EXCHANGE OFFER.
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 AD-
EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 6, 1997.
------------------------------------------
<PAGE>
(Continued from cover)
The Company is making the Exchange Offer of the New Notes in reliance on
the position of the staff of the Division of Corporate Finance of the Securities
and Exchange Commission (the "Commission") as set forth in certain interpretive
letters addressed to third parties in other transactions. However, the Company
has not sought its own interpretive letter and there can be no assurance that
the staff of the Division of Corporate Finance of the Commission would make a
similar determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the
staff of the Division of Corporate Finance of the Commission, and subject to the
two immediately following sentences, the Company believes that New Notes issued
pursuant to this Exchange Offer in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by a holder thereof (other than a
holder who is a broker-dealer) without further compliance with the registration
and prospectus delivery requirements of the Securities Act, provided that such
New Notes are acquired in the ordinary course of such holder's business and that
such holder is not participating, and has no arrangement or understanding with
any person to participate, in a distribution (within the meaning of the
Securities Act) of such New Notes. However, any holder of Old Notes who is an
"affiliate" of the Company or who intends to participate in the Exchange Offer
for the purpose of distributing New Notes, or any broker-dealer who purchased
Old Notes from the Company for resale pursuant to Rule 144A under the Securities
Act ("Rule 144A") or any other available exemption under the Securities Act, (a)
will not be able to rely on the interpretations of the staff of the Division of
Corporation Finance of the Commission set forth in the above-mentioned
interpretive letters, (b) will not be permitted or entitled to tender such Old
Notes in the Exchange Offer and (c) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
sale or other transfer of such Old Notes unless such sale is made pursuant to an
exemption from such requirements. In addition, as described below, if any
broker-dealer holds Old Notes acquired for its own account as a result of
market-making or other trading activities and exchanges such Old Notes for New
Notes, then such broker-dealer must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of such New
Notes.
Each holder of Old Notes who wishes to exchange Old Notes for New Notes in
the Exchange Offer will be required to represent that (i) it is not an
"affiliate" of the Company, (ii) any New Notes to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes, and (iv) if such holder is not
a broker-dealer, such holder is not engaged in, and does not intend to engage
in, a distribution (within the meaning of the Securities Act) of such New Notes.
In addition, the Company may require such holder, as a condition to such
holder's eligibility to participate in the Exchange Offer, to furnish to the
Company (or an agent thereof) in writing information as to the number of
"beneficial owners" (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, as amended) on behalf of whom such holder holds the Notes
to be exchanged in the Exchange Offer. Each broker-dealer that receives New
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it acquired the Old Notes for its own account as the result of market-making
activities or other trading activities and must agree that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such New Notes. The Letter of Transmittal states that, by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
Based on the position taken by the staff of the Division of Corporation Finance
of the Commission in the interpretive letters referred to above, the Company
believes that broker-dealers who acquired Old Notes for their own accounts, as a
result of market-making activities or other trading activities ("Participating
Broker-Dealers"), may fulfill their prospectus delivery requirements with
respect to the New Notes received upon exchange of such Old Notes (other than
Old Notes which represent an unsold allotment from the original sale of the Old
Notes) with a prospectus meeting the requirements of the Securities Act, which
may be the prospectus prepared for an exchange offer so long as it contains a
description of the plan of distribution with respect to the resale of such New
Notes. Accordingly, this Prospectus, as it may be amended or supplemented from
time to time, may be used by a Participating Broker-Dealer during the period
referred to below in connection with resales of New Notes received in exchange
for Old Notes where such Old Notes were acquired by such Participating
Broker-Dealer for its own account as a result of market-making or other trading
activities. Subject to certain provisions set forth in the Registration Rights
Agreement, the Company has agreed that this Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer in
connection with resales of such New Notes for a period ending 180 days after the
Expiration Date (as defined herein) (subject to extension under
2
<PAGE>
certain limited circumstances described below) or, if earlier, when all such New
Notes have been disposed of by such Participating Broker-Dealer. See "Plan of
Distribution." Any Participating Broker-Dealer who is an "affiliate" of the
Company may not rely on such interpretive letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. See "The Exchange Offer--Resales of New
Notes."
In that regard, each Participating Broker-Dealer who surrenders Old Notes
pursuant to the Exchange Offer will be deemed to have agreed, by execution of
the Letter of Transmittal, that, upon receipt of notice from the Company of the
occurrence of any event or the discovery of any fact which makes any statement
contained or incorporated by reference in this Prospectus untrue in any material
respect or which causes this Prospectus to omit to state a material fact
necessary in order to make the statements contained or incorporated by reference
herein, in light of the circumstances under which they were made, not misleading
or of the occurrence of certain other events specified in the Registration
Rights Agreement, such Participating Broker-Dealer will suspend the sale of New
Notes pursuant to this Prospectus until the Company has amended or supplemented
this Prospectus to correct such misstatement or omission and has furnished
copies of the amended or supplemented Prospectus to such Participating
Broker-Dealer or the Company has given notice that the sale of the New Notes may
be resumed, as the case may be. If the Company gives such notice to suspend the
sale of the New Notes, it shall extend the 180-day period referred to above
during which Participating Broker-Dealers are entitled to use this Prospectus in
connection with the resale of New Notes by the number of days during the period
from and including the date of the giving of such notice to and including the
date when Participating Broker-Dealers shall have received copies of the amended
or supplemented Prospectus necessary to permit resales of the New Notes or to
and including the date on which the Company has given notice that the sale of
New Notes may be resumed, as the case may be.
Prior to the Exchange Offer, there has been only a limited secondary
market and no public market for the Old Notes. The New Notes will be a new issue
of securities for which there currently is no market. Although the Initial
Purchasers have informed the Company that they each currently intend to make a
market in the New Notes, they are not obligated to do so, and any such market
making may be discontinued at any time without notice. Accordingly, there can be
no assurance as to the development or liquidity of any market for the New Notes.
The Company does not intend to apply for listing of the New Notes on any
securities exchange or for quotation through the National Association of
Securities Dealers Automated Quotation System ("NASDAQ").
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the same rights and will be subject to
the same limitations applicable thereto under the Indenture (except for those
rights in respect of the Exchange Offer). Following consummation of the Exchange
Offer, the holders of Old Notes will continue to be subject to all of the
existing restrictions upon transfer thereof and the Company will not have any
further obligation to such holders (other than under certain limited
circumstances) to provide for registration under the Securities Act of the Old
Notes held by them. To the extent that Old Notes are tendered and accepted in
the Exchange Offer, a holder's ability to sell untendered Old Notes could be
adversely affected. See "Risk Factors--Consequences of a Failure to Exchange Old
Notes."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF OLD NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
Old Notes may be tendered for exchange on or prior to 5:00 p.m., New York
City time, on June 11, 1997 (such time on such date being hereinafter called the
"Expiration Date"), unless the Exchange Offer is extended by the Company (in
which case the term "Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended). Tenders of Old Notes may be withdrawn at
any time on or prior to the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. However, the Exchange Offer is subject to certain events and
conditions which may be waived by the Company and to the terms and provisions of
the Registration Rights Agreement. Old Notes may be tendered in whole or in part
in a principal amount of $1,000 or any integral multiple thereof. The Company
has agreed to pay all expenses of the Exchange Offer. See "The Exchange
Offer--Fees and Expenses." Each New Note will bear interest from the most recent
date to which interest has been paid or duly provided for on the Old Note
surrendered in exchange for such New Note or, if no such interest has been paid
or duly provided for on such Old Note, from March 12, 1997. Holders of the Old
Notes whose Old Notes are accepted for exchange will not receive accrued
interest on such Old Notes for any period from and after the last Interest
Payment Date to which interest has been paid or duly provided for on such Old
Notes prior to the original issue date of the New Notes or, if no such interest
has been paid or duly provided for, will not receive any accrued interest on
such Old Notes, and will be deemed to have waived the right
3
<PAGE>
to receive any interest on such Old Notes accrued from and after such Interest
Payment Date or, if no such interest has been paid or duly provided for, from
and after March 12, 1997. This Prospectus, together with the Letter of
Transmittal, is being sent to all registered holders of Old Notes as of May 12,
1997.
The Company will not receive any cash proceeds from the issuance of the
New Notes offered hereby. No dealer-manager is being used in connection with
this Exchange Offer. See "Use of Proceeds" and "Plan of Distribution."
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON
REQUEST FROM CONTIFINANCIAL CORPORATION, 277 PARK AVENUE, NEW YORK, NEW YORK
10172, ATTENTION: CHIEF COUNSEL OR BY TELEPHONE AT (212) 207-2800.
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4
<PAGE>
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THIS EXCHANGE
OFFER AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE
AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR A SOLICITATION
BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
------------------------
TABLE OF CONTENTS
Page
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Available Information..........................................................6
Incorporation of Certain Documents by Reference................................6
Prospectus Summary.............................................................7
Summary Financial Information.................................................20
Risk Factors..................................................................21
Use of Proceeds from Sale of Old Notes........................................34
Capitalization................................................................35
Business......................................................................36
Regulation....................................................................60
Description of Certain Indebtedness and Financing Arrangements................63
The Exchange Offer............................................................64
Description of the New Notes..................................................74
Description of the Old Notes..................................................98
Book Entry Form of the Notes..................................................98
Certain Federal Income Tax Consequences......................................101
Erisa Considerations.........................................................102
Plan of Distribution.........................................................103
Special Note Regarding Forward-Looking Statements............................103
Legal Matters ...............................................................104
Experts......................................................................104
5
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE NEW NOTES,
INCLUDING OVER-ALLOTMENT OR OTHER TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE
MARKET PRICE OF THE NEW NOTES OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH WOULD
OTHERWISE PREVAIL IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"PLAN OF DISTRIBUTION."
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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 Suite 1300, Seven World Trade Center,
New York, New York 10048, and Suite 1400, CitiCorp 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 and electronically through the
Commission's Electronic Data Gathering, Analysis and Retrieval System at the
Commission's web site (http:\\www.sec.gov). Such materials can also be inspected
at the offices of the New York Stock Exchange, 20 Broad Street, New York, New
York 10005 on which the Company's common stock is listed.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1996 and the Company's Quarterly Reports on Form 10-Q for the quarters ended
June 30, 1996, September 30, 1996 and December 31, 1996, filed with the
Commission, are hereby incorporated by reference in this Prospectus except as
superseded or modified herein.
All documents filed with the Commission pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act, after the date of this Prospectus and prior to
the termination of the Offering shall be deemed to be incorporated by reference
into this Prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained in any document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as modified or
superseded, to constitute a part of this Prospectus.
As used herein, the terms "Prospectus" and "herein" mean this Prospectus,
including the documents incorporated or deemed to be incorporated herein by
reference, as the same may be amended, supplemented or otherwise modified from
time to time. Statements contained in this Prospectus as to the contents of any
contract or other document referred to herein do not purport to be complete, and
where reference is made to the particular provisions of such contract or other
document, such provisions are qualified in all respects by reference to all of
the provisions of such contract or other document. The Company will provide
without charge to each person, including any beneficial owner, to whom this
Prospectus is delivered, upon written or oral request of such person, a copy of
any and all of the documents that have been or may be incorporated by reference
herein (other than exhibits to such documents which are not specifically
incorporated by reference into such documents). Such requests should be directed
to ContiFinancial Corporation, 277 Park Avenue, New York, New York 10172,
Attention: Chief Counsel or by telephone at (212) 207-2800.
6
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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 or incorporated herein by reference.
Unless the context indicates otherwise, all references in this Prospectus to the
Company include ContiFinancial Corporation and its subsidiaries, ContiMortgage
Corporation ("ContiMortgage"), ContiWest Corporation ("ContiWest"), 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., ContiSecurities Asset Funding Corp. III ("CSAF III"), ContiSecurities
Asset Funding Corp. IV ("CSAF IV"), ContiFunding Corporation, Royal Mortgage
Partners, L.P. d/b/a Royal MortgageBanc ("Royal"), California Lending Group,
Inc. d/b/a United Lending Group ("ULG"), Triad Financial Corporation ("Triad"),
ContiAuto Asset Funding Corp. ("ContiAuto") and Resource One Consumer Discount
Company, Inc. (doing business in New York as Recore One) ("Resource One"). For a
description of certain terms used in this Prospectus, see "Glossary." Certain
statements in this Prospectus (including this Summary) may constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). See "Special Note Regarding
Forward-Looking Statements."
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,
non-prime and sub-prime auto loans and leases and timeshare loans. For the nine
months ended December 31, 1996 and the year ended March 31, 1996, the Company
originated or purchased $2.8 billion and $2.3 billion, respectively, of home
equity loans through ContiMortgage. In addition, for the same periods, the
Company securitized or sold $922 million and $2.0 billion, 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 across the United States; (ii) expanding its broker loan network to
complement its existing wholesale loan network; (iii) adding new loan products;
(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. Through December 31, 1996,
ContiMortgage completed 25 AAA/Aaa-rated REMIC securitizations totalling $6.3
billion. As of December 31, 1996, ContiMortgage had a servicing portfolio of
$5.7 billion.
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7
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The Company, through its subsidiary, ContiTrade, provides financing and
asset securitization structuring expertise, and through its subsidiary,
ContiFinancial Services, provides 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 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, 1996 and 1995, services
provided by ContiTrade to Strategic Alliance clients contributed $108.5 million
and $14.8 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 in the consumer
and commercial finance business through geographic expansion of its home equity
loan business, diversification of origination capabilities, Strategic Alliance
activities, selected acquisition opportunities ("Strategic Acquisitions") and
investments in origination, servicing and collection information systems and
technology. The Company seeks to become the most efficient low cost provider of
non-conforming home equity loans underwritten in accordance with sound criteria
which perform with excellent delinquency, default and loss experience relative
to the industry. Further, where prudent and appropriate, the Company will
diversify into business lines which are otherwise under-served by the market
presently and which can benefit from the lower cost of funds and the discipline
provided through securitization as well as from the Company's approach to growth
in originations, servicing and collections as successfully applied to
ContiMortgage.
The Company is implementing its home equity loan growth strategy through
the use of ContiMortgage as an origination, underwriting, servicing and sales
platform. The Company channels its home equity loan products from the wholesale
and small broker markets through ContiMortgage with its centralized
underwriting, servicing and collections which are utilized by ContiMortgage's
regional offices as well as the Company's home equity lending subsidiaries.
Direct retail production through branch systems has been implemented by the
acquisition of Royal and Resource One which combined have 36 branch offices
located throughout the west, the mid-west and the northeast United States. ULG,
another recent acquisition, originates home equity loans and home improvement
loans nationally through direct
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8
<PAGE>
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mail and telemarketing. The full implementation of this growth strategy, through
the completion of additional Strategic Alliances and Strategic Acquisitions,
will allow the Company to build its market share by building a broad national
penetration of all origination channels of the home equity market in the United
States.
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. The Company currently has 12 active
Strategic Alliances. In addition, the Company may, from time to time, make an
equity or subordinated debt investment in a Strategic Alliance client.
In addition to substantial loan, lease, and receivable originations from
Strategic Alliance clients, the Company originated in excess of $1 billion in
commercial mortgage loans since fiscal 1995. The Company plans to expand its
market share in multi-family, healthcare, and self-storage facilities and
broaden its array of loan products in the commercial mortgage market sector.
As a key part of its growth strategy to diversify into asset classes that
can benefit from securitization, the Company has formed five Strategic Alliances
with originators of non-prime and sub-prime auto loans since fiscal 1995.
Management believes that this market benefits significantly from securitization
through reduced cost of funds, and the discipline which the regular
securitization process brings to the origination, underwriting, servicing, and
collection of auto loans and losses. Consequently, after closely monitoring the
performance and development of its Strategic Alliances in this industry, the
Company has acquired 56.0% of the outstanding common stock of Triad, a former
Strategic Alliance. The Company's strategy is to apply to Triad the same
disciplined approach to underwriting, creditgrading, servicing and collections
as has been applied to ContiMortgage. The Company believes that its strategy
with respect to Triad, combined with prudent growth, will create a significant
market presence in the non-prime automobile finance industry.
The Company's strategy with respect to Strategic Acquisitions is an
extension of its Strategic Alliance strategy, which the Company believes
provides it with a unique capability to analyze and select acquisition
opportunities. Specifically, the Company has targeted the acquisition of
companies with which it has significant experience as either a Strategic
Alliance or as a broker/loan originator which has been selling home equity loans
to ContiMortgage and which will enhance the Company's geographic diversification
or method of origination. This focused approach on existing relationships, using
considerable static pool data and analysis (loan characteristics, demographics,
delinquencies, losses and prepayments), allows the Company to better judge: (i)
the management team; (ii) the quality of the origination and underwriting; (iii)
the ability to pass rating agency and/or financial guarantor scrutiny; and (iv)
product consistency. The Company has sought to align itself with management
teams which have consistently delivered securitizable product and which have
demonstrated performance histories consistent with the Company's emphasis on
quality originations rather than volume.
The Strategic Acquisitions are deliberately structured to motivate the
respective management teams to achieve goals consistent with those of the
Company, with an emphasis on operating efficiencies and immediate accretion to
earning per share. The Company's four Strategic Acquisitions to date have all
included the following characteristics: (i) a purchase price providing for a
modest upfront payment; (ii) subsequent installments based upon profit
performance (i.e., net income, not volume); and (iii) management long-term
incentives with attractive upside if successful in achieving agreed upon goals.
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9
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Recent Developments
Since December 31, 1996, the Company has completed three additional
securitizations consisting of a $400 million and a $835 million securitization
of ContiMortgage home equity loans and a $44.2 million securitization of Triad
non-prime auto loans. The securitizations of the ContiMortgage home equity loans
were each modelled as a REMIC, non-bond insured, senior/subordinated structure.
These securitizations were notable in that they were structured utilizing
subordinated tranches as credit enhancement in lieu of ContiMortgage's previous
standard structure which made use of a surety guaranty to obtain AAA/Aaa rated
securities. By introducing a "natural" AAA/Aaa security along with some higher
yielding subordinated tranches, ContiMortgage was able to broaden the market for
its structured securities, increase the investor demand and improve the
execution of its securitizations.
During the third quarter of fiscal 1997, the Company moved towards
achieving its strategic objectives of expanding and diversifying its loan
origination methodology and product mix by acquiring three retail home equity
loan originators. In November 1996, the Company purchased California Lending
Group, Inc. d/b/a United Lending Group, a West Coast-based home equity lender
specializing in retail origination through direct mail and telemarketing
throughout the United States, and Royal Mortgage Partners L.P. d/b/a Royal
MortgageBanc, a California-based wholesale and retail originator of home equity
loans. In December 1996, the Company purchased Resource One Consumer Discount
Company, Inc., a Pennsylvania-based home equity lender specializing in retail
origination through direct mail, television, and telemarketing throughout the
eastern and mid-western states. Combined, ULG, Royal and Resource One originated
approximately $636 million of home equity loans and home improvement loans
during calendar year 1996. The Company expects to securitize most of the home
equity loans originated by these new subsidiaries through ContiMortgage. In each
case the companies acquired were former Strategic Alliances or ContiMortgage
loan origination sources.
The Company organized ContiWest, a Nevada corporation, in September 1996
to better administer and underwrite the Company's origination portfolio.
As part of the Company's strategic growth plan, the Company determined
that the acquisition of originators and servicers of under-served securitizable
asset classes other than home equity loans would provide diversity. The
Company's growth strategy dictated that such acquisitions would only be made in
asset classes in which the Company had significant securitization experience and
the acquisition candidate had strong and experienced management. Consequently,
in November 1996, the Company purchased 53.5% of the common stock of Triad, a
former Strategic Alliance. The Company purchased an additional 2.5% in January
1997 and has the right and obligation to purchase the remaining 44.0% over the
next 4.5 years. Triad is a California-based auto finance company specializing in
origination of non-prime auto finance contracts for new and used vehicles.
Non-prime auto loans and leases are originated to primarily "B" and "C" credit
grade borrowers as opposed to sub-prime auto loans which are usually issued on a
discount basis to "C-" and "D" credit grade borrowers. Triad's originations for
the calendar year 1996 were $85 million.
In January 1997, the Company closed a $200 million unsecured revolving
credit facility ("Credit Facility") lead-managed by Credit Suisse and Dresdner
Bank, with participation by a group of twelve other major U.S. and foreign
banks. The Company has the option of several interest rate pricing alternatives
under this three-year facility, including those based on LIBOR and federal funds
rates.
In August 1996, the Company issued $300 million aggregate principal amount
of 8 3/8% senior notes, due 2003 (the "8 3/8% Senior Notes"). The 8 3/8% Senior
Notes were rated BB+ by Standard & Poor's Ratings Services, Ba1 by Moody's
Investors Service, Inc. and BBB by Fitch Investors Service, L.P.
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10
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In February 1997, the Company filed a Registration Statement on Form S-3
relating to a primary offering (the "Primary Common Stock Offering") by the
Company of 2,800,000 shares (or 3,220,000 shares if the underwriters in that
offering exercise their over-allotment option in full) of its common stock,
$0.01 par value ("Common Stock"). On April 2, 1997 the Company announced that it
had postponed the Primary Common Stock Offering.
In March 1997, the Company closed a Strategic Alliance with CMG Funding
Corp. (formerly Continental Mortgage Group, LC) ("CMG") which included an
acquisition of 30% of a class of convertible preferred stock of CMG and an
investment in convertible subordinated debt of CMG. The preferred stock is
convertible into 12% of the common stock of CMG and the subordinated debt is
convertible into an additional 18% of the common stock. CMG originates home
equity loans and conforming mortgage loans through retail channels primarily in
the southwestern and western United States.
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11
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The Exchange Offer
The Exchange Offer.......... Up to $200,000,000 aggregate principal amount of
New Notes are being offered in exchange for a like
aggregate principal amount of Old Notes. Old Notes
may be tendered for exchange in whole or in part
in a principal amount of $1000 or any integral
multiple thereof. The Company is making the
Exchange Offer in order to satisfy its obligations
under the Registration Rights Agreement relating
to the Old Notes. For a description of the
procedures for tendering Old Notes, see "The
Exchange Offer--Procedures for Tendering Old
Notes."
Expiration Date............. 5:00 p.m., New York City time, on June 11, 1997
(such time on such date, the "Expiration Date"),
unless the Exchange Offer is extended by the
Company (in which case the Expiration Date will be
the latest date and time to which the Exchange
Offer is extended). See "The Exchange
Offer--Expiration Date; Extensions; Amendments."
Conditions to the Exchange
Offer..................... The Exchange Offer is subject to certain
conditions, which may be waived by the Company in
its sole discretion. The Exchange Offer is not
conditioned upon any minimum principal amount of
Old Notes being tendered. See "The Exchange
Offer--Conditions to the Exchange Offer."
The Company reserves the right in its sole and
absolute discretion, subject to applicable law, at
any time and from time to time, to (i) delay the
acceptance of the Old Notes for exchange, (ii)
terminate the Exchange Offer if certain specified
conditions have not been satisfied, (iii) extend
the Expiration Date of the Exchange Offer and
retain all Old Notes tendered pursuant to the
Exchange Offer, subject, however, to the right of
holders of Old Notes to withdraw their tendered
Old Notes, or (iv) waive any condition or
otherwise amend the terms of the Exchange Offer in
any respect. See "The Exchange Offer--Expiration
Date; Extensions; Amendments."
Withdrawal Rights........... Tenders of Old Notes may be withdrawn at any time
on or prior to the Expiration Date by delivering a
written notice of such withdrawal to the Exchange
Agent in conformity with certain procedures set
forth below under "The Exchange Offer--Withdrawal
Rights."
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12
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Procedures for Tendering
Old Notes................. Tendering holders of Old Notes must complete and
sign a Letter of Transmittal in accordance with
the instructions contained therein and forward the
same by mail, facsimile or hand delivery, together
with any other required documents, to the Exchange
Agent, either with the Old Notes to be tendered or
in compliance with the specified procedures for
guaranteed delivery of Old Notes. Certain brokers,
dealers, commercial banks, trust companies and
other nominees may also effect tenders by
book-entry transfer. Holders of Old Notes
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
are urged to contact such person promptly if they
wish to tender Old Notes pursuant to the Exchange
Offer. See "The Exchange Offer--Procedures for
Tendering Old Notes."
Letters of Transmittal and certificates
representing Old Notes should not be sent to the
Company. Such documents should only be sent to the
Exchange Agent.
Questions regarding how to tender and requests for
information should be directed to the Exchange
Agent. See "The Exchange Offer--Exchange Agent."
Resales of New Notes........ The Company is making the Exchange Offer in
reliance on the position of the staff of the
Division of Corporation Finance of the Commission
as set forth in certain interpretive letters
addressed to third parties in other transactions.
However, the Company has not sought its own
interpretive letter and there can be no assurance
that the staff of the Division of Corporation
Finance of the Commission would make a similar
determination with respect to the Exchange Offer
as it has in such interpretive letters to third
parties. Based on these interpretations by the
staff of the Division of Corporation Finance of
the Commission, and subject to the two immediately
following sentences, the Company believes that New
Notes issued pursuant to this Exchange Offer in
exchange for Old Notes may be offered for resale,
resold and otherwise transferred by a holder
thereof (other than a holder who is a
broker-dealer) without further compliance with the
registration and prospectus delivery requirements
of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such
holder's business and that such holder is not
participating, and has no
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13
<PAGE>
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arrangement or understanding with any person to
participate, in a distribution (within the meaning
of the Securities Act) of such New Notes. However,
any holder of Old Notes who is an "affiliate" of
the Company or who intends to participate in the
Exchange Offer for the purpose of distributing the
New Notes, or any broker-dealer who purchased the
Old Notes from the Company for resale pursuant to
Rule 144A or any other available exemption under
the Securities Act, (a) will not be able to rely
on the interpretations of the staff of the
Division of Corporation Finance of the Commission
set forth in the above-mentioned interpretive
letters, (b) will not be permitted or entitled to
tender such Old Notes in the Exchange Offer and
(c) must comply with the registration and
prospectus delivery requirements of the Securities
Act in connection with any sale or other transfer
of such Old Notes unless such sale is made
pursuant to an exemption from such requirements.
In addition, as described below, if any
broker-dealer holds Old Notes acquired for its own
account as a result of market-making or other
trading activities and exchanges such Old Notes
for New Notes, then such broker-dealer must
deliver a prospectus meeting the requirements of
the Securities Act in connection with any resales
of such New Notes.
Each holder of Old Notes who wishes to exchange
Old Notes for New Notes in the Exchange Offer will
be required to represent that (i) it is not an
"affiliate" of the Company , (ii) any New Notes to
be received by it are being acquired in the
ordinary course of its business, (iii) it has no
arrangement or understanding with any person to
participate in a distribution (within the meaning
of the Securities Act) of such New Notes, and (iv)
if such holder is not a broker-dealer, such holder
is not engaged in, and does not intend to engage
in, a distribution (within the meaning of the
Securities Act) of such New Notes. Each
broker-dealer that receives New Notes for its own
account pursuant to the Exchange Offer must
acknowledge that it acquired the Old Notes for its
own account as the result of market-making
activities or other trading activities and must
agree that it will deliver a prospectus meeting
the requirements of the Securities Act in
connection with any resale of such New Notes. The
Letter of Transmittal states that, by so
acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that
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14
<PAGE>
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it is an "underwriter" within the meaning of the
Securities Act. Based on the position taken by the
staff of the Division of Corporation Finance of
the Commission in the interpretive letters
referred to above, the Company believes that
broker-dealers who acquired Old Notes for their
own accounts as a result of market-making
activities or other trading activities
("Participating Broker-Dealers") may fulfill their
prospectus delivery requirements with respect to
the New Notes received upon exchange of such Old
Notes (other than Old Notes which represent an
unsold allotment from the original sale of the Old
Notes) with a prospectus meeting the requirements
of the Securities Act, which may be the prospectus
prepared for an exchange offer so long as it
contains a description of the plan of distribution
with respect to the resale of such New Notes.
Accordingly, this Prospectus, as it may be amended
or supplemented from time to time, may be used by
a Participating Broker-Dealer in connection with
resales of New Notes received in exchange for Old
Notes where such Old Notes were acquired by such
Participating Broker-Dealer for its own account as
a result of market-making or other trading
activities. Subject to certain provisions set
forth in the Registration Rights Agreement and to
the limitations described below under "The
Exchange Offer--Resales of New Notes," the Company
has agreed that this Prospectus, as it may be
amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in
connection with resales of such New Notes for a
period ending 180 days after the Expiration Date
(subject to extension under certain limited
circumstances) or, if earlier, when all such New
Notes have been disposed of by such Participating
Broker-Dealer. See "Plan of Distribution." Any
Participating Broker-Dealer who is an "affiliate"
of the Company may not rely on such interpretive
letters and must comply with the registration and
prospectus delivery requirements of the Securities
Act in connection with any resale transaction. See
"The Exchange Offer--Resales of New Notes."
Exchange Agent.............. The exchange agent with respect to the Exchange
Offer is The Chase Manhattan Bank (the "Exchange
Agent"). The applicable addresses, and telephone
and facsimile numbers, of the Exchange Agent are
set forth in "The Exchange Offer--Exchange Agent"
and in the Letter of Transmittal.
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15
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Use of Proceeds............. The Company will not receive any cash proceeds
from the issuance of the New Notes offered hereby.
See "Use of Proceeds from Sale of Old Notes."
Certain Federal Income Tax
Consequences................ Holders of Old Notes should review the information
set forth under "Certain Federal Income Tax
Consequences" prior to tendering Old Notes in the
Exchange Offer.
The New Notes
Securities Offered.......... Up to $200,000,000 aggregate principal amount of
the Company's 7 1/2% Senior Notes Due 2002 which
have been registered under the Securities Act. The
New Notes will be issued, and the Old Notes were
issued, under an Indenture, dated as of March 1,
1997 between the Company and The Chase Manhattan
Bank, as trustee (the "Trustee"). The New Notes
and any Old Notes which remain outstanding after
consummation of the Exchange Offer will constitute
a single series of debt under the Indenture and,
accordingly, will vote together as a single class
for purposes of determining whether holders of the
requisite percentage in outstanding principal
amount thereof have taken certain actions or
exercised certain rights under the Indenture. See
"Description of the New Notes--Amendments and
Waivers." The terms of the New Notes are identical
in all material respects to the terms of the Old
Notes, except that (i) the New Notes have been
registered under the Securities Act and therefore
are not subject to certain transfer restrictions
applicable to the Old Notes and will not be
entitled to registration rights or other rights
under the Registration Rights Agreement, (ii) the
New Notes are issuable in minimum denominations of
$1,000 compared to minimum denominations of
$100,000 for the Old Notes and (iii) the New Notes
will not provide for any increase in the interest
rate thereon. See "The Exchange Offer--Purpose of
the Exchange Offer," "Description of the New
Notes" and "Description of the Old Notes."
Maturity Date............... March 15, 2002.
Interest Payment Dates...... March 15 and September 15 of each year, commencing
September 15, 1997.
Denominations............... The New Notes will be issued in minimum
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16
<PAGE>
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denominations of $1,000 and integral multiples
thereof.
Ranking..................... The New 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 New
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 December 31, 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 $299 million and the
liabilities of the subsidiaries of the Company
would have been approximately $108 million. See
"Description of the New Notes--Ranking."
Optional Redemption......... The New Notes will not be redeemable at the option
of the Company prior to their maturity.
Change of Control........... Upon a Change of Control (as defined), each holder
of New Notes may require the Company to repurchase
the New 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."
Certain Covenants........... The indenture pursuant to which the New 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 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. However, all these limitations are
subject to a number of important exceptions and
qualifications. See "Description of the New
Notes."
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Absence of Market for
the New Notes............. The New Notes will be a new issue of securities
for which there currently is no market. Although
Bear, Stearns & Co. Inc. and Credit Suisse First
Boston Corporation (the "Initial Purchasers") have
informed the Company that they currently intend to
make a market in the New Notes, they are not
obligated to do so, and any such market making may
be discontinued at any time without notice.
Accordingly, there can be no assurance as to the
development or liquidity of any market for the New
Notes. The Company does not intend to apply for
listing of the New Notes on any securities
exchange or for inclusion in the National
Association of Securities Dealers Automated
Quotation System. See "Plan of Distribution."
Relationship with Continental Grain Company
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 currently owns approximately 81% of the Company's
outstanding Common Stock. If the Primary Common Stock Offering is completed,
Continental Grain will continue to be the Company's largest stockholder, owning
approximately 76% of the Company's outstanding Common Stock (approximately 75%
if the underwriters of the Primary Common Stock Offering exercise their
over-allotment options in full). On April 2, 1997 the Company announced that it
had postponed the Primary Common Stock Offering. On that date Continental Grain
announced that it had postponed its planned transaction under which a forward
purchase contract (the "Forward Contract") would be entered into with
ContiFinancial Trust pursuant to which shares of Common Stock of the Company
owned by Continental Grain might have been distributed to holders of Structured
Yield Product Exchangeable for StockSM ("STRYPES") issued by the Trust.
- ----------
(sm) Service Mark of Merrill Lynch & Co., Inc.
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18
<PAGE>
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As a result of its ownership interest, Continental Grain has, and will
continue to have, voting control on all matters submitted to stockholders,
including the election of directors and the approval of extraordinary corporate
transactions. Continental Grain has advised the Company that its current
intention is to continue to hold all of 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.
Prior to the IPO, Continental Grain provided the Company with certain
intercompany financing (the "Intercompany Debt"). As of December 31, 1996, the
amount of Intercompany Debt outstanding was $202 million. For a description of
the Intercompany Debt and certain other transactions between Continental Grain
and the Company, see "Description of Certain Indebtedness and Financing
Arrangements." The Company has repaid the Intercompany Debt with the proceeds
from the sale of the Old Notes, together with other available funds.
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."
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19
<PAGE>
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Summary Financial Information
(dollar amounts expressed in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
December 31, Years Ended March 31,
------------------------ ------------------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---------- ----------- ------------ ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Gross income:
Gain on sale of receivables....... $ 133,773 $ 101,031 $ 146,529 $ 67,512 $ 49,671 $ 18,587 $ 11,418
Interest.......................... 109,967 61,335 91,737 42,929 20,707 11,385 16,130
Net servicing income.............. 32,386 20,266 29,298 9,304 3,989 1,842 1,191
Other income (loss)............... 4,652 2,227 4,252 2,252 162 (147) (41)
--------- --------- ---------- --------- --------- --------- ---------
Total gross income............. $ 280,778 $ 184,859 $ 271,816 $ 121,997 $ 74,529 $ 31,667 $ 28,698
========= ========= ========== ========= ========= ========= =========
Income before income tax expense
and minority interest............. $ 122,787 $ 89,176 $ 126,536 $ 56,988 $ 35,286 $ 12,149 $ 7,765
Income tax expense.................. 49,192 34,689 49,096 22,168 13,726 4,640 2,948
Minority interest of subsidiary..... (379) 3,310 3,310 8,728 5,076 1,600 744
--------- --------- ---------- --------- --------- --------- ---------
Net income.......................... $ 73,974 $ 51,177 $ 74,130 $ 26,092 $ 16,484 $ 5,909 $ 4,073
========= ========= ========== ========= ========= ========= =========
Primary and fully dilutive earnings
per common share (pro forma at
March 31, 1996 only).............. $ 1.68 $ 2.00
Ratio of earnings to fixed charges (a) 2.54x 2.68x 2.65x 2.63x 3.49x 2.62x 1.55x
<CAPTION>
As of December 31, 1996 As of March 31,
---------------------------
As
Actual Adjusted (b) 1996
------------ ------------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.............. $ 39,043 $ 34,735 $ 32,479
Excess spread receivables (interest-
only and residual certificates)...... 338,012 338,012 293,218
Receivables held for sale.............. 481,596 481,596 303,679
Total assets........................... 1,542,738 1,540,738 892,540
Notes payable to affiliates............ 202,000 -- 324,000
Due to affiliates...................... 40,245 40,245 13,734
8 3/8% Senior Notes Due 2003............ 299,170 299,170 --
7 1/2% Senior Notes Due 2002........... -- 200,000
Total liabilities...................... 1,167,444 1,165,444 597,721
Minority interest of subsidiary........ 1,234 1,234 --
Stockholders' equity (c)............... 374,060 374,060 294,819
<CAPTION>
Nine Months Ended
December 31, Years Ended March 31,
-------------------------- ----------------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Face value of loans serviced (at
period end)................... $5,699,145 $3,427,190 $3,863,575 $2,192,190 $1,105,393 $ 484,857 $ 314,260
Securitization and sales volume:
ContiMortgage.............. 2,407,554 1,400,270 2,030,270 1,292,691 772,324 272,544 187,720
Non-ContiMortgage.......... 922,008 1,372,680 1,962,680 995,000 418,000 426,000 921,000
---------- ---------- ---------- ---------- ---------- --------- ---------
Total securitization and
sales volume......... $3,329,562 $2,772,950 $3,992,950 $2,287,691 $1,190,324 $ 698,544 $1,108,720
Loan Loss Data (d):
Delinquency rate (at period
end) (e)...................... 4.17% 3.73% 2.51% 1.64% 0.97% 1.20% 3.68%
Default rate (at period end) (f). 4.38% 2.04% 3.54% 1.16% 0.81% 1.70% 2.46%
Net losses as a percentage of
average amount outstanding.... 0.18%(g) 0.09%(g) 0.13% 0.08% 0.15% 0.26% 0.27%
</TABLE>
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(a) 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.
(b) The as adjusted balance sheet data as of December 31, 1996 reflects the
offering of the Old Notes, net of estimated expenses of such offering and
of the Exchange Offer, and the repayment of the Intercompany Debt. See
"Capitalization."
(c) The Company paid cash dividends to Continental Grain of $305 in fiscal year
1996.
(d) Loan loss data represents data for the home equity loan servicing portfolio
of ContiMortgage only. See "Business--Home Equity Loan Origination and
Servicing."
(e) The delinquency percentage represents, as a percentage of the aggregate
principal balance of loans in ContiMortgage's servicing portfolio 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.
(f) The default percentage represents, as a percentage of the aggregate
principal balance of loans in the Company's portfolio as of the relevant
date, the dollar value of delinquent payments on home equity loans in
foreclosure, bankruptcy, real estate owned or forbearance.
(g) This percentage is based on data for the nine months ended December 31,
1996 and 1995 and is not necessarily indicative of an annualized
percentage.
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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 is
significantly leveraged. At March 31, 1996 and December 31, 1996, on an "as
adjusted basis" to give effect to the Offering of the Old Notes and repayment of
the Intercompany Debt, the aggregate outstanding consolidated indebtedness
(including the current maturities thereof) of the Company would have been
approximately $499 million and $499 million, respectively. See "Capitalization."
In addition, at March 31, 1996 and December 31, 1996, the Company's subsidiaries
had $272 million and $108 million of total liabilities to which the Notes are
effectively subordinated and the Company had approximately $91 million and $155
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 Indenture contains certain covenants
which could limit the Company's operating and financial flexibility. See
"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 December 31,
1996, the aggregate committed and uncommitted sale capacity under its Purchase
and Sale Facilities was $2.0 billion and $950 million, respectively and the
Company had utilized $1.3 billion 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 Cash Flows and Capital Needs--Dependence on Purchase and
Sale Facilities."
Ability to Service Debt; Negative Cash Flows 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 the nine months ended December
31, 1996 and fiscal 1996, 1995 and 1994 was $155.2 million, $300.5 million,
$35.3 million and $32.4 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 federal tax obligations under a tax
sharing agreement with Continental Grain (the "Tax Sharing Agreement") and,
where necessary, direct payments of its federal and state tax obligations; (vii)
interest and principal payments under the 8 3/8% Senior Notes, the Credit
Facility, the Notes and the costs of the Company's Purchase and Sale Facilities;
and (viii) Strategic Acquisitions and investments in Strategic Alliance clients.
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, cash servicing income, net interest income,
draws under the Credit Facility and further issuances of debt (subject to the
covenants of the Company's existing debt) and equity.
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 primarily
relied on four monoline insurance companies to provide guarantees on outstanding
senior interests in the related REMIC, owner trust or grantor trust to
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enable it to obtain an AAA/Aaa rating for such interests. An 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.
Dependence on Purchase and Sale Facilities
In order to fund new loan and asset originations and purchases, the
Company is dependent upon its ability to sell loans and other assets through
CSAF III and CSAF IV under the Purchase and Sale Facilities with certain
financial institutions. The Purchase and Sale Facilities allow CSAF III and CSAF
IV 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 CSAF III or CSAF IV into an account held by the
financial institution on behalf of CSAF III or CSAF IV, against which the
financial institution may set off any losses incurred in the resale of such
assets. In each Purchase and Sale Facility the financial institution has granted
CSAF III and CSAF IV a right of first refusal based on a bona fide third-party
offer to repurchase the loans and other assets purchased by the financial
institution under the facility. CSAF III and CSAF IV also have a call option
that may be exercised at any time to repurchase assets that are substantially
similar. Unless waived, each Purchase and Sale Facility will terminate upon the
occurrence of certain events, which include: (i) failure of CSAF III or CSAF IV
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 CSAF III or CSAF IV or the
Company (as guarantor); and (iii) certain bankruptcy events of CSAF III or CSAF
IV or the Company (as guarantor). The Company has guaranteed CSAF III's and CSAF
IV's obligations under the Purchase and Sale Facilities.
As of December 31, 1996, the Company had $2.0 billion of committed and an
additional $950 million of uncommitted capacity under the Purchase and Sale
Facilities and had utilized $1.3 billion of such capacity. The Company utilized
the Purchase and Sale Facilities to sell and repurchase assets totaling $4.8
billion, $5.7 billion, $2.5 billion and $1.2 billion in the nine months ended
December 31, 1996 and fiscal 1996, 1995, and 1994, respectively. 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 Certain Debt Obligations on the Company
Effect of the Senior Notes Due 2003
In August 1996, the Company issued $300 million aggregate principal amount
of 8 3/8% Senior Notes, due 2003. The indenture pursuant to which the 8 3/8%
Senior Notes were issued (the "Indenture") also places certain restrictions on
the Company which may limit the Company's operating flexibility. Such
restrictions include the following: (i) limitations on indebtedness; (ii)
limitations on liens;
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(iii) limitations on restricted payments such as dividends, repurchases of the
Company's stock and repurchase of subordinated obligations; (iv) limitations on
restrictions on distributions from subsidiaries; (v) limitations on sales of
assets and subsidiary stock; and (vi) limitations on merger and consolidation.
Upon receiving investment grade ratings from Moody's Investors Service, Inc. and
Standard & Poor's Ratings Services with respect to the 8 3/8% Senior Notes, all
restrictions described above, other than the limitations on liens, will be
suspended. No assurance can be given that the 8 3/8% Senior Notes will receive
investment grade ratings at any time in the future.
In addition, upon a "change of control," the holders of the 8 3/8% Senior
Notes may cause the Company to repurchase the 8 3/8% Senior Notes. A "change of
control" as defined in the Indenture includes the occurrence of: (i) the
acquisition of 35% of the outstanding Common Stock by a person other than
Continental Grain or its shareholders at a time when Continental Grain or its
shareholders own less than such amount owned by such greater than 35%
shareholder; (ii) a change in the composition of a majority of the Board of
Directors during any two consecutive years; and (iii) certain mergers and
consolidations or sale of all or substantially all of the assets of the Company.
The occurrence of an event of default under the Indenture or a "change of
control" could have a material adverse effect upon the Company. See "Description
of Certain Indebtedness and Financing Arrangements" and "Description of the New
Notes--Change of Control."
Effect of Credit Facility
The Company's $200 million Credit Facility contains a number of
restrictive covenants including: (i) limitations on indebtedness; (ii)
limitations on liens; (iii) minimum net worth requirements; (iv) limitations on
restrictions on distributions from subsidiaries; (v) limitations on sales of
assets and subsidiary stock; and (vi) limitations on merger and consolidations.
The Credit Facility also includes a monthly asset coverage test to determine
availability under the Credit Facility. Currently the Company has full use of
the Credit Facility based on this test. See "Description of Certain Indebtedness
and Financing Arrangements."
Effect of Continental Grain's Debt Agreements
Continental Grain's debt agreements with its lenders 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.
Certain of the Continental Grain Debt Agreements require the consent of the
lenders in connection with any equity financing by the Company. 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 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 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.
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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 (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 December 31, 1996, the Company's consolidated balance sheet reflected
Excess Spread Receivables of $338.0 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
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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
for the nine months ended December 31, 1996 and in fiscal 1996 and 1995
aggregated $96.5 million, $54.5 million and $50 million, respectively. 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 $338.0 million of Excess Spread Receivables at December 31,
1996, $95.2 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, for the nine months ended December 31, 1996 and for fiscal
years 1996, 1995 and 1994, the Company sold without recourse $58.1 million,
$53.5 million, $26.3 million and $17.6 million, respectively, 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 Indenture, the Credit Facility, 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.
Significance of Servicing Income
At December 31, 1996, the Company had a $5.7 billion servicing portfolio
on which it earned servicing fees for its obligations/performance as servicer of
its servicing portfolio of approximately 50 basis points (per annum), or $21.4
million of cash income for the nine months ended December 31, 1996. 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. If prepayments on this portfolio were to significantly exceed
management's estimate, there would be a material adverse effect on the Company's
future cash flow. In addition, 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
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.
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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. In a similar manner, the Company also finances the related
Excess Spread, prior to the related securitization, of certain Strategic
Alliance clients. As of December 31, 1996 and March 31, 1996, the total
committed amount of such financings was $66.1 million and $57.6 million,
respectively, and the amount outstanding in connection with such financings was
$32.7 million and $32.4 million, respectively. The financed Excess Spread
Receivables are generated through securitizations of home equity and home
improvement 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 or Excess Spread 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 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 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
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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 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.
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, terms provided and interest rates
charged to borrowers. Heightened competition could contribute to higher
prepayments. 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.
For the nine months ended December 31, 1996, 78% of the total home equity
loans purchased and originated by ContiMortgage were wholesale loans. Although
the Company has recently diversified its origination capabilities with the
acquisition of home equity companies with retail capabilities, 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.
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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 exceed the loss assumption made by the Company in
valuing the Excess Spread received from its securitizations. 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 December 31, 1996,
credit-enhancement amounts (in the form of deposit accounts and
overcollateralization levels) aggregated approximately $173.1 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 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 Cash
Flows and Capital Needs--Dependence on Purchase and Sale Facilities" and
"--Excess Spread Receivables."
Concentration of Operations
For the nine months ended December 31, 1996, approximately 49.0% (by
dollar volume) of the home equity loans originated by the Company were secured
by properties located in six states (Michigan, Ohio, Illinois, New York, New
Jersey and Pennsylvania). Although the Company has expanded its mortgage
origination network outside these states, the Company's origination business is
likely to remain concentrated in these states for the near future. In addition,
a substantial majority of the loans in the existing securitization pools are
secured by properties located in these states. 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 these states.
Right to Terminate Servicing
At December 31, 1996 and March 31, 1996, approximately 79% and 89% (by
dollar volume), respectively, 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.
The delinquency rates with respect to five of the Company-sponsored pools has
exceeded this rate, and although there can be no assurance that the Company will
not have its servicing rights terminated, the Company presently does not expect
such a termination will occur. There can be no assurance that
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delinquency rates with respect to other 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."
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 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,
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<PAGE>
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 Common
Stock.
Control of the Company
Continental Grain currently owns approximately 81% of the Company's
outstanding Common Stock. If the Primary Common Stock Offering is completed,
Continental Grain will continue to be the Company's largest stockholder, owning
approximately 76% of the Company's outstanding Common Stock (approximately 75%
if the underwriters of the Primary Common Stock Offering exercise their
over-allotment options in full). On April 2, 1997 the Company announced that it
had postponed the Primary Common Stock Offering. On that date Continental Grain
announced that it had postponed its planned transaction under which the Forward
Contract would be entered into with ContiFinancial Trust pursuant to which
shares of Common Stock of the Company owned by Continental Grain might have been
distributed to holders of STRYPES issued by the Trust. Nevertheless, if the
Primary Common Stock Offering is completed and the Forward Contract (even
assuming the maximum number of shares of Common Stock are delivered thereunder),
Continental Grain will continue to be able to elect all of the directors of the
Company and to determine the outcome of any matter submitted to a vote of the
Company's stockholders for approval. Except to the extent that it may deliver
shares of Common Stock in satisfaction of its obligations under the Forward
Contract, Continental Grain has advised the Company that its current intention
is to continue to hold all shares of Common Stock beneficially owned by it.
However, there can be no assurance that Continental Grain will not decide to
sell all or a portion of its holdings at some future date.
Consequences of a Failure to Exchange Old Notes
The Old Notes have not been registered under the Securities Act or any
state securities laws and therefore may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or pursuant to an
exemption therefrom or in a transaction not subject thereto, and in each case in
compliance with certain other conditions and restrictions. Old Notes which
remain outstanding after consummation of the Exchange Offer will continue to
bear a legend reflecting such restrictions on transfer. In addition, upon
consummation of the Exchange Offer, holders of Old Notes which remain
outstanding will not be entitled to any rights to have such Old Notes registered
under the Securities Act or to any similar rights under the Registration Rights
Agreement (subject to certain limited exceptions). The Company does not intend
to register under the Securities Act any Old Notes which remain outstanding
after consummation of the Exchange Offer (subject to such limited exceptions, if
applicable).
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<PAGE>
To the extent that Old Notes are tendered and accepted in the Exchange
Offer, a holder's ability to sell untendered Old Notes could be adversely
affected. In addition, although the Old Notes have been designated for trading
in the Private Offerings, Resale and Trading through Automatic Linkages
("PORTAL") market, to the extent that Old Notes are tendered and accepted in
connection with the Exchange Offer, any trading market for Old Notes which
remain outstanding after the Exchange Offer could be adversely affected.
The New Notes and any Old Notes which remain outstanding after
consummation of the Exchange Offer will constitute a single series of debt under
the Indenture and, accordingly, will vote together as a single class for
purposes of determining whether holders of the requisite percentage in
outstanding principal amount thereof have taken certain actions or exercised
certain rights under the Indenture. See "Description of the New
Notes--Amendments and Waivers."
The Old Notes provide that, if the Exchange Offer is not consummated by
August 8, 1997, the interest rate borne by the Old Notes will increase by 0.50%
per annum commencing on August 10, 1997 until the Exchange Offer is consummated.
See "Description of the Old Notes." Upon consummation of the Exchange Offer,
holders of Old Notes will not be entitled to any increase in the interest rate
thereon or any further registration rights under the Registration Rights
Agreement, except under limited circumstances. See "Description of the Old
Notes."
Absence of Public Market
The Old Notes were issued to, and the Company believes the Old Notes are
currently owned by, a relatively small number of beneficial owners. The Old
Notes have not been registered under the Securities Act and will be subject to
restrictions on transferability if they are not exchanged for the New Notes.
Although the New Notes generally may be resold or otherwise transferred by the
holders (who are not affiliates of the Company ) without compliance with the
registration requirements under the Securities Act, they will constitute a new
issue of securities with no established trading market. The Company has been
advised by the Initial Purchasers that the Initial Purchasers presently intend
to make a market in the New Notes. However, the Initial Purchasers are not
obligated to do so and any market-making activity with respect to the New Notes
may be discontinued at any time without notice. In addition, such market-making
activity will be subject to the limits imposed by the Securities Act and the
Exchange Act and may be limited during the Exchange Offer. Accordingly, no
assurance can be given that an active public or other market will develop for
the New Notes or the Old Notes or as to the liquidity of or the trading market
for the New Notes or the Old Notes. If an active public market does not develop,
the market price and liquidity of the New Notes may be adversely affected.
If a public trading market develops for the New Notes, future trading
prices will depend on many factors, including, among other things, prevailing
interest rates, the Company's results and the market for similar securities.
Depending on prevailing interest rates, the market for similar securities and
other factors, including the financial condition of the Company, the New Notes
may trade at a discount.
Notwithstanding the registration of the New Notes in the Exchange Offer,
holders who are "affiliates" (as defined under Rule 405 of the Securities Act)
of the Company may publicly offer for sale or resell the New Notes only in
compliance with the provisions of Rule 144 under the Securities Act or pursuant
to another effective registration statement.
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes, where such Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. See "Plan of Distribution."
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Exchange Offer Procedures
Issuance of the New Notes in exchange for Old Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Company of such
Old Notes, a properly completed and duly executed Letter of Transmittal and all
other required documents. Therefore, holders of the Old Notes desiring to tender
such Old Notes in exchange for New Notes should allow sufficient time to ensure
timely delivery. The Company is under no duty to give notification of defects or
irregularities with respect to the tenders of Old Notes for exchange.
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<PAGE>
USE OF PROCEEDS FROM SALE OF OLD NOTES
The Company will not receive any cash proceeds from the issuance of the
New Notes offered hereby. In consideration for issuing the New Notes in exchange
for Old Notes as described in this Prospectus, the Company will receive Old
Notes in like principal amount. The Old Notes surrendered in exchange for the
New Notes will be retired and cancelled. Accordingly, the issuance of the New
Notes will not result in any change in the indebtedness of the Company.
The net proceeds to the Company from the sale of the Old Notes was
approximately $197.7 million. The Company used all of such net proceeds, along
with other available funds, to repay to Continental Grain (i) the Indenture Note
which has an aggregate principal amount of $125 million, matures on February 14,
2001 and bears interest at a rate of 7.96% per annum and (ii) the Four Year Note
which has an aggregate principal amount of $80 million (which includes $3
million of capitalized accrued interest for the six months ended February 14,
1997), matures on February 14, 2000 and bears interest at a rate of 8.02% per
annum. See "Description of Certain Indebtedness and Financing
Arrangements--Certain Indebtedness" and "Capitalization."
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<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of December 31, 1996, and as adjusted to give effect to (i) the sale
by the Company of the Old Notes and (ii) the application of the estimated net
proceeds therefrom. The issuance of the New Notes in exchange for the Old Notes
pursuant to the Exchange Offer will have no effect on the capitalization of the
Company. See "Use of Proceeds from Sale of Old Notes," "Description of Certain
Indebtedness and Financing Arrangements" and the Consolidated Financial
Statements incorporated herein by reference.
<TABLE>
<CAPTION>
As of December 31, 1996
-----------------------
Actual As Adjusted
------ -----------
(dollars in thousands)
<S> <C> <C>
Current portion of long-term debt:
Capitalized leases ............................................ $ 284 $ 284
========= =========
Long-term debt:
Capitalized leases ............................................ 303 303
Four Year Note ................................................ 77,000 --
Indenture Note ................................................ 125,000 --
8 3/8% Senior Notes Due 2003 (a) .............................. 299,170 299,170
7 1/2% Senior Notes due 2002 .................................. -- 200,000
--------- ---------
Total long-term debt ...................................... $ 501,473 $ 499,473
--------- ---------
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;
44,380,949 shares issued and outstanding .................. 444 444
Paid-in capital ............................................... 294,742 294,742
Treasury stock ................................................ (713) (713)
Retained earnings ............................................. 96,622 96,622
Deferred compensation ......................................... (17,035) (17,035)
--------- ---------
Total stockholders' equity ................................ 374,060 374,060
--------- ---------
Total capitalization .................................. $ 875,533 $ 873,533
========= =========
</TABLE>
- ----------
(a) See "Description of Certain Indebtedness and Financing Arrangements."
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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, non-prime and sub-prime auto loans and leases,
and timeshare loans. For the nine months ended December 31, 1996 and the year
ended March 31, 1996, the Company originated or purchased $2.8 billion and $2.3
billion, respectively, of home equity loans through ContiMortgage. In addition,
for the same periods, the Company securitized or sold $922 million and $2.0
billion, 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 across the United States; (ii) expanding its broker loan network to
complement its existing wholesale loan network; (iii) adding new loan products;
(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. Through December 31, 1996,
ContiMortgage completed 25 AAA/Aaa-rated REMIC securitizations totalling $6.3
billion. As of December 31, 1996, ContiMortgage had a servicing portfolio of
$5.7 billion.
The Company, through its subsidiary, ContiTrade, provides financing and
asset securitization structuring expertise and through its subsidiary,
ContiFinancial Services, provides 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
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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, 1996 and 1995, services provided by ContiTrade to Strategic
Alliance clients contributed $108.5 million and $14.8 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 incorporated by reference herein. The Company currently
holds four 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 December 31, 1996: 27 home equity loan
securitizations representing $2.1 billion (for clients other than
ContiMortgage), 18 equipment lease securitizations for $1.4 billion, five
adjustable rate mortgage securitizations for $642 million, seven Title I home
improvement loan securitizations for $245 million, five franchise loan
securitizations for $312 million, five commercial/multi-family whole loan
portfolio sales for $712 million, four sub-prime auto securitizations for $248
million and one small business loan securitization for $20 million. The Company
currently has 12 active Strategic Alliances. Two specialize in home equity
loans, two focus on auto loans and leases, three concentrate on equipment leases
and the remainder focus on other asset classes.
In certain circumstances where the Company has had a business or a
Strategic Alliance relationship, the Company has acquired some or all of the
equity of consumer finance companies that would broaden the Company's product
lines, diversify its origination capabilities and further its growth strategy.
In the third quarter of fiscal 1997, the Company acquired four such enterprises
- -- ULG, Royal, Resource One and Triad. See "Prospectus Summary--Recent
Developments."
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 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
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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 24.7%
or $38.6 billion, of the $156.0 billion asset-backed securities issued in
calendar 1996.
The Company's Strategy
The Company's strategy is to continue its strong growth in the consumer
and commercial finance business through geographic expansion of its home equity
loan business, diversification of origination capabilities, Strategic Alliance
activities, selected acquisition opportunities ("Strategic Acquisitions") and
investments in origination, servicing and collection information systems and
technology. The Company seeks to become the most efficient low cost provider of
non-conforming home equity loans underwritten in accordance with sound criteria
and which perform with excellent delinquency, default and loss experience.
Further, where prudent and appropriate, the Company will diversify into business
lines which are otherwise under-served by the market presently and which can
benefit from the lower cost of funds and discipline provided through
securitization as well as from the Company's approach to growth in originations,
servicing and collections as successfully applied to ContiMortgage.
The Company is implementing its home equity loan growth strategy through
the use of ContiMortgage as an origination, underwriting, servicing and sales
platform. The Company channels its home equity loan products from the wholesale
and small broker markets through ContiMortgage with its centralized
underwriting, servicing and collections which are utilized by ContiMortgage's
regional offices as well as the Company's home equity lending subsidiaries.
Direct retail production through branch systems has been implemented by the
acquisition of Royal and Resource One which combined have 36 branch offices
located throughout the west, the mid-west and the northeast United States. ULG,
another recent acquisition, originates home equity loans and home improvement
loans nationally through direct mail and telemarketing. The full implementation
of this growth strategy, through the completion of additional Strategic
Alliances and Strategic Acquisitions, will allow the Company to build its market
share by building a broad national penetration of all origination channels of
the home equity market in the United States.
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. The Company currently has 12 active
Strategic Alliances. In addition, the Company may, from time to time, make an
equity or subordinated debt investment in a Strategic Alliance client.
In addition to substantial loan, lease, and receivable originations from
Strategic Alliance clients, the Company originated in excess of $1 billion in
commercial mortgage loans since fiscal 1995. The Company plans to expand its
market share in multi-family, healthcare, and self-storage facilities and
broaden its array of loan products in the commercial mortgage market sector.
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As a key part of its growth strategy to diversify into asset classes that
can benefit from securitization, the Company has formed five Strategic Alliances
with originators of non-prime and sub-prime auto loans since fiscal 1995.
Management believes that this market benefits significantly from securitization
through reduced cost of funds, and the discipline which the regular
securitization process brings to the origination, underwriting, servicing, and
collection of auto loans and losses. Consequently, after closely monitoring the
performance and development of its Strategic Alliances in this industry, the
Company acquired 56.0% of the outstanding common stock of Triad, a former
Strategic Alliance. The Company's strategy is to apply to Triad the same
disciplined approach to underwriting, credit, servicing and collections as had
been applied to ContiMortgage. The Company believes that its strategy with
respect to Triad, combined with prudent growth, will create a significant market
presence in the non-prime automobile finance industry.
The Company's strategy with respect to Strategic Acquisitions is an
extension of its Strategic Alliance strategy, which the Company believes
provides it with a unique capability to analyze and select acquisition
opportunities. Specifically, the Company has targeted the acquisition of
companies with which it has significant experience as either a Strategic
Alliance or as a broker/loan originator which has been selling home equity loans
to ContiMortgage and which will enhance the Company's geographic diversification
product or method of origination. This focused approach on existing
relationships using the considerable static pool data and analysis (loan
characteristics, demographics, delinquencies, losses and prepayments) allows the
Company to better judge: (i) the management team; (ii) the quality of the
origination and underwriting; (iii) the ability to pass rating agency and/or
financial guarantor scrutiny; and (iv) product consistency.
The Company has sought to align itself with management teams which have
consistently delivered securitizable product and which have demonstrated
performance histories consistent with the Company's emphasis on quality
originations rather than volume.
The Strategic Acquisitions are deliberately structured to motivate the
respective management teams to achieve goals consistent with those of the
Company, with an emphasis on operating efficiencies and immediate accretion to
earning per share. The Company's four Strategic Acquisitions to date have all
included the following characteristics: (i) a purchase price providing for a
modest upfront payment; (ii) subsequent installments based upon profit
performance (i.e., net income, not volume); and (iii) management long-term
incentives with attractive upside if successful in achieving agreed upon goals.
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.
In September 1996, the Company organized ContiWest Corporation to better
administer and underwrite the Company's origination portfolio.
Loan Production
Origination. ContiMortgage's and ContiWest'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. Currently, over 90% of originations are secured by a first
lien mortgage. 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
39
<PAGE>
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, ContiWest's
headquarters in Las Vegas, Nevada and five regional offices nationwide.
ContiMortgage and ContiWest obtain their 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 and ContiWest. 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 the nine months ended December 31, 1996, wholesale originations
accounted for approximately 78% of ContiMortgage's and ContiWest'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 and ContiWest's underwriting
guidelines and fund those loans in their own name, wholesale sources deliver
pre-approved loan packages to ContiMortgage and ContiWest 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 the nine
months ended December 31, 1996, ContiMortgage and ContiWest purchased loans from
over 100 wholesale sources with no one source accounting for more than 10% and
the top five wholesale sources accounting for 20% of total wholesale loan
production.
40
<PAGE>
The following table illustrates the sources of ContiMortgage's and
ContiWest's loan production:
Sources of Loan Originations and Purchases
<TABLE>
<CAPTION>
As of December 31, As of March 31,
------------------ ------------------------------------
1996 1996 1995 1994
---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Independent Mortgage Brokers:
Principal Balance .................. $ 621,319 $ 574,354 $ 304,196 $144,897
Number of Loans .................... 9,054 8,465 4,862 2,112
Average Principal Balance per Loan . $ 68.6 $ 67.9 $ 62.6 $ 68.6
Wholesale Correspondents:
Principal Balance .................. $2,138,755 $1,737,117 $1,024,779 $641,913
Number of Loans .................... 33,896 28,268 17,759 10,390
Average Principal Balance per Loan . $ 63.1 $ 61.5 $ 57.7 $ 61.8
Total Loan Originations and Purchases:
Principal Balance .................. $2,760,074 $2,311,471 $1,328,975 $786,810
Number of Loans .................... 42,950 36,733 22,621 12,502
Average Principal Balance per Loan . $ 64.3 $ 62.9 $ 58.7 $ 62.9
</TABLE>
Towards achieving its strategic objective of expanding and diversifying
its sources of home equity loan production, the Company recently acquired three
home equity lenders involved in retail home equity loan production. In November
1996, the Company purchased ULG, a West Coast-based home equity lender
specializing in retail origination via direct mail and telemarketing throughout
the United States and Royal, a California-based wholesale and retail originator
of home equity loans. In December 1996, the Company purchased Resource One, a
Pennsylvania-based home equity lender specializing in retail origination via
direct mail, television, and telemarketing throughout the eastern and
mid-western states. Combined, ULG, Royal and Resource One originated
approximately $636 million of home equity loans and home improvement loans in
calendar year 1996. The Company will securitize most of the home equity loans
originated by these new subsidiaries through ContiMortgage. The Company believes
these operations will contribute significantly to the Company's home equity loan
production growth in the future.
41
<PAGE>
The Company's current origination volumes by state are delineated as
follows:
Geographic Distribution of U.S. Loan Originations and Purchases
Nine Months Ended
December 31, 1996 Year Ended March 31,
------------------ -------------------------------
1996 1995 1994
---- ---- ----
States:
Michigan ............. 15% 11% 7% 5%
Ohio ................. 8 8 7 6
Illinois ............. 7 7 7 6
New York ............. 7 9 10 16
New Jersey ........... 6 9 12 14
Pennsylvania ......... 5 7 8 8
North Carolina ....... 5 5 7 6
California ........... 5 2 0 0
Florida .............. 4 5 7 6
Maryland ............. 4 5 4 4
Massachusetts ........ 3 4 4 3
Indiana .............. 3 4 4 3
Georgia .............. 2 3 4 5
Connecticut .......... 2 2 2 2
Virginia ............. 2 2 2 1
South Carolina ....... 2 2 2 2
All other States ..... 20 15 13 13
--- --- --- ---
Total ........... 100% 100% 100% 100%
=== === === ===
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 a chief executive officer of
ContiMortgage or ContiWest.
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 or ContiWest. Management estimates that the current average home
equity loan purchased or originated by ContiMortgage and ContiWest is
approximately $65,000. ContiMortgage and ContiWest primarily purchase or
originate non-purchase money first or second mortgage loans although
ContiMortgage and ContiWest have 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
42
<PAGE>
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, ContiWest 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
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 December 31, 1996, through CSAF III and CSAF IV, the Company had
$2.0 billion of committed and an additional $950 million of uncommitted sale
capacity under its Purchase and Sale Facilities. The Purchase and Sale
Facilities allow CSAF III and CSAF IV to sell, with limited recourse, interests
in designated pools of loans and other assets. The Company utilized the
facilities to sell assets totalling $4.8 billion, $5.7 billion, $2.5 billion,
$1.2 billion in the nine months ended December 31, 1996 and fiscal years 1996,
1995 and 1994, respectively. As of December 31, 1996, the Company had utilized
$1.3 billion of the sale capacity under the Purchase and Sale Facilities. See
"Risk Factors--Ability to Service Debt; Negative Cash Flows and Capital
Needs--Dependence on Purchase and Sale Facilities."
43
<PAGE>
Loan Securitization
General. The primary funding strategy of the Company is to securitize
loans purchased or originated. The Company's origination sources: ContiMortgage,
ContiWest, ULG, Royal and Resource One (collectively, the "Home Equity
Companies"), benefit from the reduced cost of funds and greater leverage
provided through securitization. Through December 31, 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 25 AAA/Aaa-rated REMIC securitizations totalling $6.3 billion.
Management has structured the operations and processes of the Home Equity
Companies specifically for the purpose of efficiently originating and
underwriting for securitization in order to meet the requirements of rating
agencies, credit enhancers and AAA/Aaa-rated REMIC pass-through investors.
Additionally, the Company has determined that it is most efficient to have one
home equity servicing and sales platform. Consequently, the Company has
designated ContiMortgage to be the servicing provider for the Home Equity
Companies. ContiMortgage is one of the leading servicers of non-conforming home
equity loans in the United States. Since June 1994, ContiMortgage has completed
11 public REMIC securitizations for $5.2 billion and is a recognized and
respected name in the asset-backed market. The Company plans to leverage off
this market presence by securitizing the production of the Home Equity Companies
through ContiMortgage. ContiMortgage generally seeks to enter the public
securitization market at a minimum 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 Fitch Investors Service, L.P.
and Aaa from Moody's Investors Service, Inc.
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.
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.
44
<PAGE>
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, 1996 and 1995 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. In the nine months ended December
31, 1996, ContiMortgage and ContiWest sold $453 million of home equity loans in
whole loan sales generating $22.9 million of cash proceeds.
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 December
31, 1996, ContiMortgage's servicing portfolio has increased to 93,372 loans with
an outstanding balance of $5.7 billion. As the servicing portfolio grows, the
Company expects to recognize increasing economies of scale and cash flow. As of
December 31, 1996, ContiMortgage's $5.7 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
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
161 employees, is organized into three divisions (two collection divisions and
one default division), each led by a collection
45
<PAGE>
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 five 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 five 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.
Technology. ContiMortgage believes that the effective use of technology
will lead to greater servicing efficiencies and economies of scale, thus
reducing costs and increasing overall profitability. ContiMortgage uses
technology in the areas of origination processing, loan servicing and investor
reporting, collections and foreclosure management. As part of ContiMortgage's
technology strategy, management is continually evaluating system requirements to
ensure adequate systems and processing capacity are available.
46
<PAGE>
ContiMortgage uses an IBM AS/400 computer system to serve as the hardware
platform for its origination and servicing software. The mortgage origination
system used by ContiMortgage provides database management and automated document
production necessary for loan originating and processing. The system provides
distributed processing to ContiMortgage's regional offices and ContiWest,
centralized management over its databases, and automatically produces all
necessary mortgage documents.
The Company's computer system provides all the standard processing
functions necessary to service a loan and report loan activity. The system
provides information on mortgage originations and pipeline processing, funding
and wiring of funds to closing agents, and automated loan delivery including
REMIC processing and reporting.
The system also provides an on-line collections system that automatically
prompts collectors to make collection calls and logs and displays the results of
previous conversations with borrowers regarding their delinquency history. In
fiscal 1997, ContiMortgage integrated the on-line collections system with a
state of the art predictive power dialer. The predictive dialer is a tool which
utilizes past payment history and other information to determine when the
customer needs to be called, the type of collection call to be made and then
provides collectors with an automated connection to that borrower. Further, the
predictive dialer is used for all borrowers 5 to 60 days delinquent. Upon
transfer of a delinquent account to the default status, The Problem Loan System
establishes and monitors all actions of the foreclosure process and prompts
foreclosure staff to execute appropriate actions on the appropriate date.
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 December 31, At March 31,
-------------------- ------------------------------------------------------------------------------------
1996 1996 1995 1994 1993
-------------------- -------------------- -------------------- -------------------- --------------------
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.............. 93,372 $5,699,145 65,121 $3,863,575 38,740 $2,192,190 20,146 $1,105,393 11,093 $484,857
Delinquency percentage(a)
30-59 days........... 3.31% 3.09% 2.01% 1.81% 0.89% 0.83% 0.57% 0.51% 0.54% 0.49%
60-89 days........... 0.74% 0.72% 0.48% 0.47% 0.30% 0.36% 0.18% 0.19% 0.29% 0.27%
90 days and over..... 0.33% 0.36% 0.15% 0.23% 0.44% 0.45% 0.30% 0.27% 0.42% 0.44%
Total delinquency.. 4.38% 4.17% 2.64% 2.51% 1.63% 1.64% 1.05% 0.97% 1.25% 1.20%
Total delinquency
amount........... 4,088 $237,642 1,721 $97,082 633 $35,980 199 $10,036 139 $5,794
Default percentage(b)
Foreclosure........... 2.51% 2.62% 2.30% 2.42% 0.42% 0.46% 0.50% 0.53% 0.68% 0.83%
Bankruptcy............ 1.12% 1.12% 0.78% 0.74% 0.39% 0.41% 0.26% 0.23% 0.54% 0.69%
Real estate owned..... 0.43% 0.49% 0.11% 0.13% 0.09% 0.09% 0.05% 0.05% 0.15% 0.18%
Forbearance........... 0.14% 0.15% 0.24% 0.25% 0.20% 0.20% N/A N/A N/A N/A
Total default....... 4.20% 4.38% 3.43% 3.54% 1.10% 1.16% 0.81% 0.81% 1.37% 1.70%
Total default amount 3,926 $249,714 2,232 $136,796 426 $25,486 177 $9,615 152 $8,263
</TABLE>
At March 31,
----------------------
1992
---------------------
Number of Principal
Loans Balance
---------- ---------
Portfolio.............. 8,797 $307,164
Delinquency percentage(a)
30-59 days........... 1.82% 2.08%
60-89 days........... 0.59% 0.77%
90 days and over..... 0.54% 0.83%
Total delinquency.. 2.95% 3.68%
Total delinquency
amount........... 260 $11,596
Default percentage(b)
Foreclosure........... 0.66% 1.14%
Bankruptcy............ 0.51% 0.89%
Real estate owned..... 0.18% 0.43%
Forbearance........... N/A N/A
Total default....... 1.35% 2.46%
Total default amount 119 $7,755
- ----------
(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.
48
<PAGE>
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>
Nine Months
Ended
December 31, Years Ended March 31,
------------ ----------------------------------------------------------------
1996 1996 1995 1994 1993 1992
------------ ---------- ---------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average Amount
Outstanding (a) ............. $4,472,732 $2,858,790 $1,663,865 $745,351 $396,910 $237,979
Net Losses (b) ................ $ 8,211 $ 3,781 $ 1,313 $ 1,108 $ 1,076 $ 911
Net Losses after Recoveries (c) $ 8,170 $ 3,686 $ 1,308 $ 1,108 $ 1,036 $ 647
Net Losses as a Percentage of
Average Amount Outstanding .. 0.18%(d) 0.13% 0.08% 0.15% 0.26% 0.27%
</TABLE>
- ----------
(a) The average of the aggregate 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).
(d) This percentage is based on data for the nine months ended December 31,
1996 and is not necessarily indicative of an annualized percentage.
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.
49
<PAGE>
The following chart generally outlines certain parameters of the credit
grades of ContiMortgage's and ContiWest'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 but Pays the majority of Marginal credit history Designed to provide a
might have some minor accounts on time but which is offset by other borrower with poor
delinquency. has some 30- and/or positive attributes. credit history an
60-day delinquency. opportunity to correct
past credit problems
through lower monthly
payments.
- ------------------------------------------------------------------------------------------------------------------------------------
Existing Mortgage Current at application Current at application Cannot exceed four 30- Must be paid in full
Loans time and a maximum of time and a maximum day delinquencies or one from loan proceeds and
two 30-day of three 30-day 60-day delinquencies in no more than 119 days'
delinquencies in the past delinquencies in the the past 12 months. delinquency.
12 months. past 12 months.
- ------------------------------------------------------------------------------------------------------------------------------------
Non-Mortgage Credit Major credit and Major credit and Major credit and Major and minor credit
installment debt should installment debt can installment debt can delinquency is
be current but may exhibit some minor 30- exhibit some minor 30- acceptable, but must
exhibit some minor 30- and/or 60-day and/or 90-day demonstrate some
day delinquency. Minor delinquency. Minor delinquency. Minor payment regularity.
credit may exhibit some credit may exhibit up credit may exhibit more
minor delinquency. to 90-day delinquency. serious delinquency.
- ------------------------------------------------------------------------------------------------------------------------------------
Bankruptcy Filings Charge-offs, judgments, Discharged more than Discharged more than Discharged prior to
liens, and former two years with two years with closing.
bankruptcies are reestablished credit. reestablished credit.
unacceptable.
- ------------------------------------------------------------------------------------------------------------------------------------
Debt Service-to- Generally not to exceed Generally not to Generally not to exceed Generally not to exceed
Income Ratio 45%. exceed 45%. 45%. 50%.
- ------------------------------------------------------------------------------------------------------------------------------------
Maximum Loan-to-
Value Ratio:
- ------------------------------------------------------------------------------------------------------------------------------------
Owner Occupied Generally 80% (or 90%) Generally 80% (or Generally 75% (or 85%) Generally 65% (or
for a 1 to 4 family 85%) for a 1 to 4 for a 1 to 4 family 70%) for a 1 to 4
dwelling residence; 70% family dwelling dwelling residence; 65% family dwelling.
for a condominium. residence; 65% for a for a condominium.
condominium.
- ------------------------------------------------------------------------------------------------------------------------------------
Non-Owner Generally 70% for a 1 Generally 65% for a 1 Generally 65% for a 1 N/A
Occupied to 2 family dwelling, to 2 family dwelling, to 2 family dwelling,
65% for a 3 to 4 family. 60% for a 3 to 4 65% for a 3 to 4 family.
family.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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The following tables illustrate the mix of credit grades of loans in the
Company's servicing portfolio as of December 31, 1996 and March 31, 1996:
ContiMortgage Servicing Portfolios as of December 31, 1996
Total Weighted Weighted
Credit Grade (dollars in % of Average Average
- ------------ thousands) Total Coupon Loan-to-Value
---------- ----- ----- -------------
"A" Loan ................... $3,042,155 53.4% 10.58% 75.58%
"B" Loan ................... 1,568,530 27.5 11.55 74.07
"C" Loan ................... 828,932 14.5 12.68 70.42
"D" Loan ................... 216,511 3.8 14.44 57.47
Other ...................... 43,017 0.8 13.60 57.15
---------- ----- ----- -----
Total ................. $5,699,145 100.0% 11.32% 73.59%
ContiMortgage Servicing Portfolios as of March 31, 1996
Total Weighted Weighted
Credit Grade (dollars in % of Average Average
- ------------ thousands) Total Coupon Loan-to-Value
---------- ----- ----- -------------
"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%
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The following tables show how the mix of credit grades of loans that the
Company originated has changed for the nine months ended December 31, 1996 and
fiscal 1996, 1995 and 1994:
ContiMortgage and ContiWest Loan Originations by Credit Grade
For Nine Months Ended December 31, 1996
Total Weighted Weighted
Credit Grade (dollars in % of Average Average
- ------------ thousands) Total Coupon Loan-to-Value
---------- ----- ----- -------------
"A" Loan ................... $1,408,849 51.1% 11.69% 77.3%
"B" Loan ................... 742,601 26.9 11.53 74.8
"C" Loan ................... 476,073 17.2 12.42 71.2
"D" Loan ................... 119,719 4.3 14.22 59.4
Other ...................... 12,832 0.5 12.66 57.7
---------- ----- ----- -----
Total ................. $2,760,074 100.0% 11.89% 74.7%
For Year Ended March 31, 1996
Total Weighted Weighted
Credit Grade (dollars in % of Average Average
- ------------ thousands) Total Coupon Loan-to-Value
---------- ----- ----- -------------
"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%
For Year Ended March 31, 1995
Total Weighted Weighted
Credit Grade (dollars in % of Average Average
- ------------ thousands) Total Coupon Loan-to-Value
---------- ----- ----- -------------
"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% 70.9%
For Year Ended March 31, 1994
Total Weighted Weighted
Credit Grade (dollars in % of Average Average
- ------------ thousands) Total Coupon Loan-to-Value
---------- ----- ----- -------------
"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% 70.1%
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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 structure 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
$12.9 billion of asset-backed securities representing 102 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 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.
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<PAGE>
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 December 31, 1996 and March 31, 1996, through
ContiTrade, the Company had committed $1.2 billion and $982 million,
respectively, of financing to its third party clients, of which $614 million and
$425 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 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 a
loan conduit. 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 a conduit for commercial/multi-family mortgages ("ContiMAP").
The Company's role is to provide capital through warehouse financing and/or the
54
<PAGE>
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 ContiMAP. The Company had previously also operated an
adjustable rate mortgage conduit which has been recently closed due to the
strategic acquisition of Royal, previously the major participant of the conduit.
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 or Excess Spread 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 December 31,
1996 and March 31, 1996, the total committed amount of such financings was $66.1
million and $57.6 million, respectively, and the amount outstanding of such
financing was $32.7 million and $32.4 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 $12.9 billion of securitized assets representing 102
transactions both for ContiMortgage and other clients.
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 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 $5.0 billion of certain
asset-backed securities.
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.
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Asset Classes
Since 1991, the range of the Company's products has included home equity
loans, adjustable rate mortgages, equipment leases, Title I home improvement
loans, franchise loans, commercial/multi-family loans, non-prime and sub-prime
auto loans and leases, small business loans and timeshare loans.
The following table illustrates the Company's securitization volume and
the addition of its new asset classes:
The Company's Securitization Volume
by Asset Classes
<TABLE>
<CAPTION>
Nine Months
Ended Total By
December 31, Years Ended March 31, Asset Class
----------- ------------------------------------------ -----------
1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Home equity loans:
ContiMortgage ............ $2,408 $2,030 $1,293 $ 772 $273 $ 188 $ 6,964
Other .................... 250 755 340 60 148 519 2,072
------ ------ ------ ------ ---- ------ -------
Total .................... $2,658 $2,785 $1,633 $ 832 $421 $ 707 $ 9,036
Commercial/multi-family
loans ................... 437 186 89 -- -- -- 712
Title I home improvement
loans ................... -- -- 149 96 -- -- 245
ARMs ...................... -- 505 101 36 -- -- 642
Equipment leasing ......... 167 190 179 178 278 402 1,394
Franchise loans ........... 21 145 98 48 -- -- 312
Sub-prime auto ............ 47 162 39 -- -- -- 248
Small business loans ...... -- 20 -- -- -- -- 20
------ ------ ------ ------ ---- ------ -------
Total securitization volume $3,330 $3,993 $2,288 $1,190 $699 $1,109 $12,609
====== ====== ====== ====== ==== ====== =======
</TABLE>
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 25 securitizations
for $6.3 billion through December 31, 1996, the Company also provided its
services to other clients, resulting in 27 securitizations for $2.1 billion
since 1991 through December 31, 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.
As part of its strategy of working closely with its Strategic Alliances
and utilizing that relationship as a basis for monitoring growth and asset
performance, the Company acquired ULG, a former Strategic Alliance.
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<PAGE>
Commercial/Multi-Family Loans. In 1993, the Company established a
commercial real estate conduit, ContiMAP, to satisfy a need in the marketplace
for the financing of $0.5 to $25 million loans secured by commercial properties,
such as multi-family dwellings, self storage facilities, assisted living and
other health related facilities, retail and industrial buildings.
ContiMAP 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 correspondent relationships
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. In total, the Company has securitizations and sales
totaling $712 million, representing 5 transactions. The Company's strategy is to
grow ContiMAP by continuing to add additional qualified commercial lenders and
by continuing to enhance its product offerings.
Title I and Conventional Home Improvement Loans. Home improvement loans
represent loans to homeowners, a portion of which may be guaranteed by the U.S.
Government in the case of Title I home improvement loans 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 Title I and conventional 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 and
conventional home improvement loan securitizations for $245 million through
December 31, 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.
The Company, through its newly acquired subsidiary, ULG, also originates
Title I and conventional home improvement loans through retail origination
channels. ULG currently obtains home improvement loan inquiries through a direct
mail and telemarketing approach, reaching borrowers not contacted by the
Company's other Strategic Alliance.
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 which is primarily an ARM market; and
(iii) offer its current Strategic Alliance clients an outlet for a new product
to offer its borrowers. The Company's ARM Conduit allowed 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. In
1996, the Company acquired Royal, the largest contributor to the ARM Conduit.
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.
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<PAGE>
As of December 31, 1996, the equipment lease business line had resulted in
the Company structuring and placing 18 securitizations on behalf of 10 issuers
representing $1.4 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.
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 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. The Company's first
securitization of this asset class was in January 1994 for $48 million and was
rated A- by Duff and Phelps Credit Rating Co. 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 $312 million of
franchise loans financed, securitized and placed by the Company have experienced
no losses.
Non-Prime and Sub-Prime Auto Loans and Leases. Non-prime and 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 non-prime and sub-prime credit borrower. Non-prime auto loans and leases are
originated to primarily "B" and "C" credit grade borrowers as opposed to
sub-prime auto loans which are usually issued on a discount basis to "C-" and
"D" credit grade borrowers.
In November 1993, the Company established a Strategic Alliance with an
auto finance company with extensive management experience in originating,
underwriting and servicing securitized non-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.
Since fiscal 1995, the Company has formed five Strategic Alliances with
originators of non-prime and sub-prime auto loans. Management believes that this
market benefits significantly from securitization through reduced cost of funds,
and the discipline which the regular securitization process brings to the
origination, underwriting, servicing, collection and monitoring of non-prime and
sub-prime auto loans. Consequently, given the Company's experience in this
industry, and having closely monitored the development of its Strategic
Alliances, in November 1996, the Company purchased 53.5% of the common stock of
Triad Financial Corporation, a California-based auto finance company
specializing in origination of non-prime auto finance contracts for used and new
vehicles. Triad has relationships with approximately 1,600 dealerships in 15
states, with California currently representing approximately 50% of loan
originations. Triad's originations for the calendar year 1996 were $85 million.
As with ContiMortgage, Triad utilizes centralized origination, underwriting and
servicing techniques. In January 1997, the Company purchased an additional 2.5%
of Triad. ContiFinancial will eventually acquire the remaining outstanding stock
of Triad.
The Company believes that significant opportunities still exist in the
non-prime and 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
discipline which the regular securitization process brings to the origination,
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<PAGE>
underwriting, servicing, collection and monitoring of auto loans and leases;
(iii) consolidation in the industry; and (iv) the Company's ability to identify
strong management teams and provide its unique mix of products and services.
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 1997.
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 four Strategic
Alliance Equity Interests. Based on its prior experience, the Company does not
anticipate that any Strategic Alliance Equity Interest that it holds or 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, terms provided and interest rates
charged to borrowers. Heightened competition could contribute to higher
prepayments. 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
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<PAGE>
not face increased competition from traditional financial institutions
attempting to enter into the Company's market.
In fiscal 1996, 78% 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 December 31, 1996 the Company had an aggregate of 1,346 employees. None
of the Company's employees is represented by a labor union. The Company believes
that its relations with its employees are good.
Legal Proceedings
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
operations of the Company.
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
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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 $1.4 million, $0.4 million and $0.2 million in
prepayment fee revenue in fiscal 1996, 1995 and 1994, 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 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
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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.
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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DESCRIPTION OF CERTAIN INDEBTEDNESS AND FINANCING ARRANGEMENTS
Certain Indebtedness
Senior Notes Due 2003
In August 1996, the Company issued $300 million aggregate principal amount
of 8 3/8% Senior Notes, due 2003. The Indenture contains a number of significant
restrictive covenants including: (i) limitations on indebtedness; (ii)
limitations on liens; (iii) limitations on restricted payments such as
dividends, repurchases of the Company's stock and repurchase of subordinated
obligations; (iv) limitations on restrictions on distributions from
subsidiaries; (v) limitations on sales of assets and subsidiary stock; and (vi)
limitations on merger and consolidation. Upon receiving investment grade ratings
from Moody's Investors Service, Inc. and Standard & Poor's Ratings Services with
respect to the 8 3/8% Senior Notes, except for the limitations on liens, all
other restrictions described above will be suspended. No assurance can be given
that the Company will receive an investment grade rating at any time in the
future. The Indenture also contains customary events of default relating to the
Company and its subsidiaries. The 8 3/8% Senior Notes are redeemable at the
option of the holders of the 8 3/8% Senior Notes upon the occurrence of a
"change of control." A "change of control" as defined in the Indenture includes
the occurrence of: (i) the acquisition of 35% of the outstanding Common Stock by
a person other than Continental Grain or its shareholders at a time when
Continental Grain or its shareholders own less than such amount owned by such
greater than 35% shareholder; (ii) a change in the composition of a majority of
the Board of Directors during any two consecutive years; and (iii) certain
mergers and consolidations or sale of all or substantially all of the assets of
the Company.
Credit Facility
In January 1997, the Company entered into the Credit Facility, a $200
million unsecured revolving credit facility lead-managed by Credit Suisse and
Dresdner Bank, with participation by a group of twelve other major U.S. and
foreign banks. The Company has the option of several interest rate pricing
alternatives under this three-year facility, including those based on LIBOR and
the federal funds rates. The Credit Facility also contains a number of
restrictive covenants including (i) limitations on indebtedness; (ii)
limitations on liens; (iii) minimum net worth requirements; (iv) limitations on
restrictions on distributions from subsidiaries; (v) limitations on sales of
assets and subsidiary stock; and (vi) limitations on merger and consolidations.
The Credit Facility also includes a monthly asset coverage test to determine
availability under the Credit Facility. Currently the Company has full use of
the facility based on this test.
Financing Arrangements
Through CSAF III and CSAF IV, as of December 31, 1996 the Company had $2.0
billion of committed and an additional $950 million of uncommitted sale capacity
under its Purchase and Sale Facilities. The Purchase and Sale Facilities allow
CSAF III and CSAF IV to sell, with limited recourse, interests in designated
pools of loans and other assets. Under these agreements, CSAF III or CSAF IV
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 CSAF III or CSAF IV into an
account held by the financial institution on behalf of CSAF III or CSAF IV,
against which the financial institution may set off any
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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 CSAF III or CSAF IV 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 CSAF III and CSAF IV a right of first refusal based on a
bona fide offer from a third-party to repurchase the loans and other assets
purchased by the financial institution under the facility. CSAF III and CSAF IV
also have a call option that can be exercised at any time to repurchase assets
that are substantially similar. 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 February 1997 and June 1998. The Company has
guaranteed CSAF III's and CSAF IV'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 CSAF III or CSAF
IV 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 CSAF III or CSAF IV or the
Company (as guarantor); and (iii) certain bankruptcy events of CSAF III or CSAF
IV or the Company (as guarantor). The Company utilized the facilities to sell
assets totaling $5.7 billion, $2.5 billion and $1.2 billion in fiscal years
1996, 1995 and 1994, respectively. As of December 31, 1996, the aggregate
committed and uncommitted sale capacity under its Purchase and Sale Facilities
was $2.0 billion and $950 million, respectively and the Company had utilized
$1.3 billion of such capacity. See "Risk Factors--Ability to Service Debt;
Negative Cash Flows and Capital Needs--Dependence on Purchase and Sale
Facilities."
THE EXCHANGE OFFER
Purpose of the Exchange Offer
In connection with the sale of the Old Notes, the Company entered into the
Registration Rights Agreement with the Initial Purchasers, pursuant to which the
Company agreed to file and to use its best efforts to cause to become effective
with the Commission a registration statement with respect to the exchange of the
Old Notes for New Notes. A copy of the Registration Rights Agreement has been
filed as an Exhibit to the Registration Statement of which this Prospectus is a
part.
The Exchange Offer is being made to satisfy the contractual obligations of
the Company under the Registration Rights Agreement. The form and terms of the
New Notes are the same as the form and terms of the Old Notes except that (i)
the New Notes have been registered under the Securities Act and therefore are
not subject to certain transfer restrictions applicable to the Old Notes and
will not be entitled to registration rights or other rights under the
Registration Rights Agreement, (ii) the New Notes are issuable in minimum
denominations of $1,000 compared to minimum denominations of $100,000 for the
Old Notes and (iii) the New Notes will not provide for any increase in the
interest rate thereon. In that regard, the Old Notes provide that, if the
Exchange Offer is not consummated by August 8, 1997, the interest rate borne by
the Old Notes will increase by 0.50% per annum commencing on August 10, 1997
until the Exchange Offer is consummated. See "Description of the Old Notes."
Upon consummation of the Exchange Offer, holders of Old Notes will not be
entitled to any increase in the interest rate thereon or any further
registration rights under the Registration Rights Agreement, except under
limited circumstances. See "Risk Factors--Consequences of a Failure to Exchange
Old Notes" and "Description of the Old Notes."
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The Exchange Offer is not being made to, nor will the Company accept
tenders for exchange from, holders of Old Notes in any jurisdiction in which the
Exchange Offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction.
Unless the context requires otherwise, the term "holder" with respect to
the Exchange Offer means any person in whose name the Old Notes are registered
on the books of the Company or any other person who has obtained a properly
completed bond power from such holder, or any person whose Old Notes are held of
record by The Depository Trust Company ("DTC") who desires to deliver such Old
Notes by book-entry transfer at DTC.
Terms of the Exchange Offer
The Company hereby offers, upon the terms and subject to the conditions
set forth in this Prospectus and in the accompanying Letter of Transmittal, to
exchange up to $200,000,000 aggregate principal amount of New Notes for a like
aggregate principal amount of Old Notes properly tendered on or prior to the
Expiration Date and not properly withdrawn in accordance with the procedures
described below. The Company will issue, promptly after the Expiration Date, an
aggregate principal amount of up to $200,000,000 of New Notes in exchange for a
like principal amount of outstanding Old Notes tendered and accepted in
connection with the Exchange Offer. Holders may tender their Old Notes in whole
or in part in a principal amount of $1,000 or any integral multiple thereof.
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered. As of the date of this Prospectus, $200,000,000
aggregate principal amount of Old Notes is outstanding.
Holders of Old Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer. Old Notes which are not tendered for or are
tendered but not accepted in connection with the Exchange Offer will remain
outstanding and be entitled to the benefits of the Indenture, but will not be
entitled to any further registration rights under the Registration Rights
Agreement, except under limited circumstances. See "Risk Factors--Consequences
of a Failure to Exchange Old Notes" and "Description of Old Securities."
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof promptly after the Expiration
Date.
Holders who tender Old Notes in connection with the Exchange Offer will
not be required to pay brokerage commissions or fees or, subject to the
instructions in the Letter of Transmittal, transfer taxes with respect to the
exchange of Old Notes in connection with the Exchange Offer. The Company will
pay all charges and expenses, other than certain applicable taxes described
below, in connection with the Exchange Offer. See "--Fees and Expenses."
NEITHER THE COMPANY NOR THE BOARD OF DIRECTORS OF THE COMPANY MAKES ANY
RECOMMENDATION TO HOLDERS OF OLD NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING ALL OR ANY PORTION OF THEIR OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. HOLDERS
OF OLD NOTES MUST MAKE THEIR OWN DECISION WHETHER TO TENDER PURSUANT TO THE
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EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF OLD NOTES TO TENDER BASED ON
SUCH HOLDERS OWN FINANCIAL POSITION AND REQUIREMENTS.
Expiration Date; Extensions; Amendments
The term "Expiration Date" means 5:00 p.m., New York City time, on June
11, 1997 unless the Exchange Offer is extended by the Company (in which case the
term "Expiration Date" shall mean the latest date and time to which the Exchange
Offer is extended).
The Company expressly reserves the right in its sole and absolute
discretion, subject to applicable law, at any time and from time to time, to (i)
delay the acceptance of the Old Notes for exchange, (ii) terminate the Exchange
Offer (whether or not any Old Notes have theretofore been accepted for exchange)
if the Company determines, in its sole and absolute discretion, that any of the
events or conditions referred to under "--Conditions to the Exchange Offer" have
occurred or exist or have not been satisfied, (iii) extend the Expiration Date
of the Exchange Offer and retain all Old Notes tendered pursuant to the Exchange
Offer, subject, however, to the right of holders of Old Notes to withdraw their
tendered Old Notes as described under "--Withdrawal Rights," and (iv) waive any
condition or otherwise amend the terms of the Exchange Offer in any respect. If
the Exchange Offer is amended in a manner determined by the Company to
constitute a material change, or if the Company waives a material condition of
the Exchange Offer, the Company will promptly disclose such amendment by means
of a prospectus supplement that will be distributed to the holders of the Old
Notes, and the Company will extend the Exchange Offer to the extent required by
Rule 14e-1 under the Exchange Act.
Any such delay in acceptance, extension, termination or amendment will be
followed promptly by oral or written notice thereof to the Exchange Agent and by
making a public announcement thereof, and such announcement in the case of an
extension will be made no later than 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date. Without limiting
the manner in which the Company may choose to make any public announcement and
subject to applicable law, the Company shall have no obligation to publish,
advertise or otherwise communicate any such public announcement other than by
issuing a release to an appropriate news agency.
Acceptance for Exchange and Issuance of New Notes
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will exchange, and will issue to the Exchange Agent, New Notes for Old
Notes validly tendered and not withdrawn (pursuant to the withdrawal rights
described under "--Withdrawal Rights") promptly after the Expiration Date.
In all cases, delivery of New Notes in exchange for Old Notes tendered and
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of (i) Old Notes or a book-entry
confirmation of a book-entry transfer of Old Notes into the Exchange Agent's
account at DTC, (ii) the Letter of Transmittal (or facsimile thereof), properly
completed and duly executed, with any required signature guarantees, and (iii)
any other documents required by the Letter of Transmittal.
The term "book-entry confirmation" means a timely confirmation of a
book-entry transfer of Old Notes into the Exchange Agent's account at DTC.
Subject to the terms and conditions of the Exchange Offer, the Company
will be deemed to have accepted for exchange, and thereby exchanged, Old Notes
validly tendered and not withdrawn as, if and
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when the Company gives oral or written notice to the Exchange Agent of the
Company's acceptance of such Old Notes for exchange pursuant to the Exchange
Offer. The Exchange Agent will act as agent for the purpose of receiving tenders
of Old Notes, Letters of Transmittal and related documents, and as agent for
tendering holders for the purpose of receiving Old Notes, Letters of Transmittal
and related documents and transmitting New Notes to validly tendering holders.
Such exchange will be made promptly after the Expiration Date. If for any reason
whatsoever, acceptance for exchange or the exchange of any Old Notes tendered
pursuant to the Exchange Offer is delayed (whether before or after the Company's
acceptance for exchange of Old Notes) extends the Exchange Offer or is unable to
accept for exchange or exchange Old Notes tendered pursuant to the Exchange
Offer, then, without prejudice to the Company's rights set forth herein, the
Exchange Agent may, nevertheless, on behalf of the Company and subject to Rule
14e-1(c) under the Exchange Act, retain tendered Old Notes and such Old Notes
may not be withdrawn except to the extent tendering holders are entitled to
withdrawal rights as described under "--Withdrawal Rights."
Pursuant to the Letter of Transmittal, a holder of Old Notes will warrant
and agree in the Letter of Transmittal that it has full power and authority to
tender, exchange, sell, assign and transfer Old Notes, that the Company will
acquire good, marketable and unencumbered title to the tendered Old Notes, free
and clear of all liens, restrictions, charges and encumbrances, and the Old
Notes tendered for exchange are not subject to any adverse claims or proxies.
The holder also will warrant and agree that it will, upon request, execute and
deliver any additional documents deemed by the Company or the Exchange Agent to
be necessary or desirable to complete the exchange, sale, assignment, and
transfer of the Old Notes tendered pursuant to the Exchange Offer.
Procedures for Tendering Old Notes
Valid Tender. Except as set forth below, in order for Old Notes to be
validly tendered pursuant to the Exchange Offer, a properly completed and duly
executed Letter of Transmittal (or facsimile thereof), with any required
signature guarantees and any other required documents, must be received by the
Exchange Agent at one of its addresses set forth under "--Exchange Agent," and
either (i) tendered Old Notes must be received by the Exchange Agent, or (ii)
such Old Notes must be tendered pursuant to the procedures for book-entry
transfer set forth below and a book-entry confirmation must be received by the
Exchange Agent, in each case on or prior to the Expiration Date, or (iii) the
guaranteed delivery procedures set forth below must be complied with.
If less than all of the Old Notes are tendered, a tendering holder should
fill in the amount of Old Notes being tendered in the appropriate box on the
Letter of Transmittal. The entire amount of Old Notes delivered to the Exchange
Agent will be deemed to have been tendered unless otherwise indicated.
THE METHOD OF DELIVERY OF CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING HOLDER,
AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE
AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL, RETURN RECEIPT REQUESTED,
PROPERLY INSURED, OR AN OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
Book-Entry Transfer. The Exchange Agent will establish an account with
respect to the Old Notes at DTC for purposes of the Exchange Offer within two
business days after the date of this Prospectus. Any financial institution that
is a participant in DTC's book-entry transfer facility system may make a
book-entry delivery of the Old Notes by causing DTC to transfer such Old Notes
into the Exchange Agent's account at DTC in accordance with DTC's procedures for
transfers. However,
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although delivery of Old Notes may be effected through book-entry transfer into
the Exchange Agent's account at DTC, the Letter of Transmittal (or facsimile
thereof), properly completed and duly executed, with any required signature
guarantees and any other required documents, must in any case be delivered to
and received by the Exchange Agent at its address set forth under "--Exchange
Agent" on or prior to the Expiration Date, or the guaranteed delivery procedure
set forth below must be complied with.
DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
Signature Guarantees. Certificates for the Old Notes need not be endorsed
and signature guarantees on the Letter of Transmittal are unnecessary unless (a)
a certificate for the Old Notes is registered in a name other than that of the
person surrendering the certificate or (b) such holder completes the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" in
the Letter of Transmittal. In the case of (a) or (b) above, such certificates
for Old Notes must be duly endorsed or accompanied by a properly executed bond
power, with the endorsement or signature on the bond power and on the Letter of
Transmittal guaranteed by a firm or other entity identified in Rule 17Ad-15
under the Exchange Act as an "eligible guarantor institution," including (as
such terms are defined therein): (i) a bank; (ii) a broker, dealer, municipal
securities broker or dealer or government securities broker or dealer; (iii) a
credit union; (iv) a national securities exchange, registered securities
association or clearing agency; or (v) a savings association that is a
participant in a Securities Transfer Association (an "Eligible Institution"),
unless surrendered on behalf of such Eligible Institution. See Instruction 1 to
the Letter of Transmittal.
Guaranteed Delivery. If a holder desires to tender Old Notes pursuant to
the Exchange Offer and the certificates for such Old Notes are not immediately
available or time will not permit all required documents to reach the Exchange
Agent on or prior to the Expiration Date, or the procedure for book-entry
transfer cannot be completed on a timely basis, such Old Notes may nevertheless
be tendered, provided that all of the following guaranteed delivery procedures
are complied with:
(1) such tenders are made by or through an Eligible Institution;
(2) a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form accompanying the Letter of
Transmittal, is received by the Exchange Agent, as provided below,
on or prior to the Expiration Date; and
(3) the certificates (or a book-entry confirmation) representing all
tendered Old Notes, in proper form for transfer, together with a
properly completed and duly executed Letter of Transmittal (or
facsimile thereof), with any required signature guarantees and any
other documents required by the Letter of Transmittal, are received
by the Exchange Agent within three New York Stock Exchange trading
days after the date of execution of such Notice of Guaranteed
Delivery.
The Notice of Guaranteed Delivery may be delivered by hand, or transmitted
by facsimile or mail to the Exchange Agent and must include a guarantee by an
Eligible Institution in the form set forth in such notice.
Notwithstanding any other provision hereof, the delivery of New Notes in
exchange for Old Notes tendered and accepted for exchange pursuant to the
Exchange Offer will in all cases be made only after timely receipt by the
Exchange Agent of Old Notes, or of a book-entry confirmation with respect to
such Old Notes, and a properly completed and duly executed Letter of Transmittal
(or facsimile thereof), together with any required signature guarantees and any
other documents required by the Letter of
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Transmittal. Accordingly, the delivery of New Notes might not be made to all
tendering holders at the same time, and will depend upon when Old Notes,
book-entry confirmations with respect to Old Notes and other required documents
are received by the Exchange Agent.
The Company's acceptance for exchange of Old Notes tendered pursuant to
any of the procedures described above will constitute a binding agreement
between the tendering holder and the Company upon the terms and subject to the
conditions of the Exchange Offer.
Determination of Validity. All questions as to the form of documents,
validity, eligibility (including time of receipt) and acceptance for exchange of
any tendered Old Notes will be determined by the Company, in its sole
discretion, whose determination shall be final and binding on all parties. The
Company reserves the absolute right, in their sole and absolute discretion, to
reject any and all tenders determined by them not to be in proper form or the
acceptance of which, or exchange for, may, in the opinion of counsel to the
Company, be unlawful. The Company also reserves the absolute right, subject to
applicable law, to waive any of the conditions of the Exchange Offer as set
forth under "--Conditions to the Exchange Offer" or any condition or
irregularity in any tender of Old Notes of any particular holder whether or not
similar conditions or irregularities are waived in the case of other holders.
The interpretation by the Company of the terms and conditions of the
Exchange Offer (including the Letter of Transmittal and the instructions
thereto) will be final and binding. No tender of Old Notes will be deemed to
have been validly made until all irregularities with respect to such tender have
been cured or waived. Neither the Company, any affiliates or assigns of the
Company , the Exchange Agent nor any other person shall be under any duty to
give any notification of any irregularities in tenders or incur any liability
for failure to give any such notification.
If any Letter of Transmittal, endorsement, bond power, power of attorney,
or any other document required by the Letter of Transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and unless waived by the Company,
proper evidence satisfactory to the Company, in its sole discretion, of such
person's authority to so act must be submitted.
A beneficial owner of Old Notes that are held by or registered in the name
of a broker, dealer, commercial bank, trust company or other nominee or
custodian is urged to contact such entity promptly if such beneficial holder
wishes to participate in the Exchange Offer.
Resales of New Notes
The Company is making the Exchange Offer for the New Notes in reliance on
the position of the staff of the Division of Corporation Finance of the
Commission as set forth in certain interpretive letters addressed to third
parties in other transactions. However, the Company has not sought its own
interpretive letter and there can be no assurance that the staff of the Division
of Corporation Finance of the Commission would make a similar determination with
respect to the Exchange Offer as it has in such interpretive letters to third
parties. Based on these interpretations by the staff of the Division of
Corporation Finance of the Commission, and subject to the two immediately
following sentences, the Company believes that New Notes issued pursuant to this
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by a holder thereof (other than a holder who is a
broker-dealer) without further compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such holder's business and that such holder
is not participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such New Notes. However, any holder of Old Notes who is an "affiliate" of the
Company or who intends to participate
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in the Exchange Offer for the purpose of distributing New Notes, or any
broker-dealer who purchased Old Notes from the Company/Initial Purchasers for
resale pursuant to Rule 144A or any other available exemption under the
Securities Act, (a) will not be able to rely on the interpretations of the staff
of the Division of Corporation Finance of the Commission set forth in the
above-mentioned interpretive letters, (b) will not be permitted or entitled to
tender such Old Notes in the Exchange Offer and (c) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or other transfer of such Old Notes unless such sale is
made pursuant to an exemption from such requirements. In addition, as described
below, if any broker-dealer holds Old Notes acquired for its own account as a
result of market-making or other trading activities and exchanges such Old Notes
for New Notes, then such broker-dealer must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of such New
Notes.
Each holder of Old Notes who wishes to exchange Old Notes for New Notes in
the Exchange Offer will be required to represent that (i) it is not an
"affiliate" of the Company , (ii) any New Notes to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes, and (iv) if such holder is not
a broker-dealer, such holder is not engaged in, and does not intend to engage
in, a distribution (within the meaning of the Securities Act) of such New Notes.
Each broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it acquired the Old Notes for its own
account as the result of market-making activities or other trading activities
and must agree that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. Based on the position taken by the staff of the
Division of Corporation Finance of the Commission in the interpretive letters
referred to above, the Company believes that broker-dealers who acquired Old
Notes for their own accounts as a result of market-making activities or other
trading activities ("Participating Broker-Dealers") may fulfill their prospectus
delivery requirements with respect to the New Notes received upon exchange of
such Old Notes (other than Old Notes which represent an unsold allotment from
the original sale of the Old Notes) with a prospectus meeting the requirements
of the Securities Act, which may be the prospectus prepared for an exchange
offer so long as it contains a description of the plan of distribution with
respect to the resale of such New Notes. Accordingly, this Prospectus, as it may
be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer during the period referred to below in connection with resales of
New Notes received in exchange for Old Notes where such Old Notes were acquired
by such Participating Broker-Dealer for its own account as a result of
market-making or other trading activities. Subject to certain provisions set
forth in the Registration Rights Agreement, the Company has agreed that this
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Participating Broker-Dealer in connection with resales of such New Notes
for a period ending 180 days after the Expiration Date (subject to extension
under certain limited circumstances described below) or, if earlier, when all
such New Notes have been disposed of by such Participating Broker-Dealer. See
"Plan of Distribution." Any Participating Broker-Dealer who is an "affiliate" of
the Company may not rely on such interpretive letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction.
In that regard, each Participating Broker-Dealer who surrenders Old Notes
pursuant to the Exchange Offer will be deemed to have agreed, by execution of
the Letter of Transmittal, that, upon receipt of notice from the Company of the
occurrence of any event or the discovery of any fact which makes any statement
contained or incorporated by reference in this Prospectus untrue in any material
respect or which causes this Prospectus to omit to state a material fact
necessary in order to make the statements contained or incorporated by reference
herein, in light of the circumstances under which they were made, not misleading
or of the occurrence of certain other events specified in the Registration
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Rights Agreement, such Participating Broker-Dealer will suspend the sale of New
Notes pursuant to this Prospectus until the Company has amended or supplemented
this Prospectus to correct such misstatement or omission and has furnished
copies of the amended or supplemented Prospectus to such Participating
Broker-Dealer or the Company has given notice that the sale of the New Notes may
be resumed, as the case may be. If the Company gives such notice to suspend the
sale of the New Notes, it shall extend the 180-day period referred to above
during which Participating Broker-Dealers are entitled to use this Prospectus in
connection with the resale of New Notes by the number of days during the period
from and including the date of the giving of such notice to and including the
date when Participating Broker-Dealers shall have received copies of the amended
or supplemented Prospectus necessary to permit resales of the New Notes or to
and including the date on which the Company has given notice that the sale of
New Notes may be resumed, as the case may be.
Withdrawal Rights
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time on or prior to the Expiration Date.
In order for a withdrawal to be effective, a written or facsimile
transmission of such notice of withdrawal must be timely received by the
Exchange Agent at one of its addresses set forth under "--Exchange Agent" on or
prior to the Expiration Date. Any such notice of withdrawal must specify the
name of the person who tendered the Old Notes to be withdrawn, the aggregate
principal amount of Old Notes to be withdrawn, and (if certificates for such Old
Notes have been tendered) the name of the registered holder of the Old Notes as
set forth on the Old Notes, if different from that of the person who tendered
such Old Notes. If Old Notes have been delivered or otherwise identified to the
Exchange Agent, then prior to the physical release of such Old Notes, the
tendering holder must submit the serial numbers shown on the particular Old
Notes to be withdrawn and the signature on the notice of withdrawal must be
guaranteed by an Eligible Institution, except in the case of Old Notes tendered
for the account of an Eligible Institution. If Old Notes have been tendered
pursuant to the procedures for book-entry transfer set forth in "--Procedures
for Tendering Old Notes," the notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawal of Old Notes, in
which case a notice of withdrawal will be effective if delivered to the Exchange
Agent by written, telegraphic, telex or facsimile transmission. Withdrawals of
tenders of Old Notes may not be rescinded. Old Notes properly withdrawn will not
be deemed validly tendered for purposes of the Exchange Offer, but may be
retendered at any subsequent time on or prior to the Expiration Date by
following any of the procedures described above under "--Procedures for
Tendering Old Notes."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all parties.
Neither the Company, any affiliates or assigns of the Company , the Exchange
Agent nor any other person shall be under any duty to give any notification of
any irregularities in any notice of withdrawal or incur any liability for
failure to give any such notification. Any Old Notes which have been tendered
but which are withdrawn will be returned to the holder thereof promptly after
withdrawal.
Interest on New Notes
Each New Note will bear interest at the rate of 7.5% per annum from the
most recent date to which interest has been paid or duly provided for on the Old
Note surrendered in exchange for such New Note or, if no interest has been paid
or duly provided for on such Old Note, from March 12, 1997 (the date of original
issuance of such Old Notes). Interest on the New Notes will be payable
semiannually
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on March 15 and September 15 of each year, commencing on the first such date
following the original issuance date of the New Notes.
Holders of Old Notes whose Old Notes are accepted for exchange will not
receive accrued interest on such Old Notes for any period from and after the
last Interest Payment Date to which interest has been paid or duly provided for
on such Old Notes prior to the original issue date of the New Notes or, if no
such interest has been paid or duly provided for, will not receive any accrued
interest on such Old Notes, and will be deemed to have waived the right to
receive any interest on such Old Notes accrued from and after such Interest
Payment Date or, if no such interest has been paid or duly provided for, from
and after March 12, 1997.
Conditions to the Exchange Offer
Notwithstanding any other provisions of the Exchange Offer, or any
extension of the Exchange Offer, the Company will not be required to accept for
exchange, or to exchange, any Old Notes for any New Notes, and, as described
below, may terminate the Exchange Offer (whether or not any Old Notes have
theretofore been accepted for exchange) or may waive any conditions to or amend
the Exchange Offer, if any of the following conditions have occurred or exists
or have not been satisfied:
(a) there shall occur a change in the current interpretation by the staff
of the Commission which permits the New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes to be offered for resale, resold and otherwise
transferred by holders thereof (other than broker-dealers and any such holder
which is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act provided that such New Notes are acquired in
the ordinary course of such holders' business and such holders have no
arrangement or understanding with any person to participate in the distribution
of such New Notes; or
(b) any action or proceeding shall have been instituted or threatened in
any court or by or before any governmental agency or body with respect to the
Exchange Offer which, in the Company's judgment, would reasonably be expected to
impair the ability of the Company to proceed with the Exchange Offer;
(c) any law, statute, rule or regulation shall have been adopted or
enacted which, in the judgment of the Company, would reasonably be expected to
impair its ability to proceed with the Exchange Offer;
(d) a stop order shall have been issued by the Commission or any state
securities authority suspending the effectiveness of the Registration Statement
or proceedings shall have been initiated or, to the knowledge of the Company ,
threatened for that purpose or any governmental approval has not been obtained,
which approval the Company shall, in its sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby;
(e) trading on the New York Stock Exchange or generally in the United
States over-the-counter market shall have been suspended by order of the
Commission or any other governmental authority which, in the Company's judgment,
would reasonably be expected to impair the ability of the Company to proceed
with the Exchange Offer;
(f) a stop order shall have been issued by the Commission or any state
securities authority suspending the effectiveness of the Registration Statement
or proceedings shall have been initiated or, to the knowledge of the Company,
threatened for that purpose;
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(g) any governmental approval has not been obtained, which approval the
Company shall, in its sole discretion, deem necessary for the consummation of
the Exchange Offer as contemplated hereby; or
(h) any change, or any development involving a prospective change, in the
business or financial affairs of the Company or any of its subsidiaries has
occurred which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer.
If the Company determines in its sole and absolute discretion that any of
the foregoing events or conditions has occurred or exists or has not been
satisfied, it may, subject to applicable law, terminate the Exchange Offer
(whether or not any Old Notes have theretofore been accepted for exchange) or
may waive any such condition or otherwise amend the terms of the Exchange Offer
in any respect. If such waiver or amendment constitutes a material change to the
Exchange Offer, the Company will promptly disclose such waiver or amendment by
means of a Prospectus supplement that will be distributed to the registered
holders of the Old Notes and will extend the Exchange Offer to the extent
required by Rule 14e-1 under the Exchange Act.
Exchange Agent
The Chase Manhattan Bank has been appointed as Exchange Agent for the
Exchange Offer. Delivery of the Letters of Transmittal and any other required
documents, questions, requests for assistance, and requests for additional
copies of this Prospectus or of the Letter of Transmittal should be directed to
the Exchange Agent as follows:
The Chase Manhattan Bank
Corporate Trust Securities Window
55 Water Street
Room 234, North Bldg.
New York, New York 10041
Attn: Carlos Esteves, Tender Processing
Confirm By Telephone:
(212) 638-0828
Facsimile Transmissions:
(Eligible Institutions Only)
(212) 638-7380
Delivery to other than the above addresses or facsimile number will not
constitute a valid delivery.
Fees and Expenses
The Company has agreed to pay the Exchange Agent reasonable and customary
fees for its services and will reimburse it for its reasonable out-of-pocket
expenses in connection therewith. The Company will also pay brokerage houses and
other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus and related documents
to the beneficial owners of Old Notes, and in handling or tendering for their
customers.
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith. If, however, New Notes are to be
delivered to, or are to be issued in the name
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of, any person other than the registered holder of the Old Notes tendered, or if
a transfer tax is imposed for any reason other than the exchange of Old Notes in
connection with the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be payable
by the tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the amount
of such transfer taxes will be billed directly to such tendering holder.
The Company will not make any payment to brokers, dealers or other
nominees soliciting acceptances of the Exchange Offer.
DESCRIPTION OF THE NEW NOTES
General
The Old Notes were issued and the New Notes are to be issued under an
Indenture, dated as of March 1, 1997 (the "Indenture"), between the Company and
The Chase Manhattan Bank, as trustee (the "Trustee"), a copy of the form of
which is available upon request made to the Company. See "Available
Information." The Indenture was not be qualified under the Trust Indenture Act
of 1939, as amended (the "Trust Indenture Act"). See "The Exchange
Offer--Purpose of the Exchange Offer." By its terms, however, the Indenture will
incorporate certain provisions of the Trust Indenture Act, and, upon
consummation of the Exchange Offer, the Indenture will be subject and covered by
the Trust Indenture Act. The following summary of the material provisions of the
Indenture does not purport to be complete and where reference is made to
particular provisions of the Indenture, such provisions, including the
definitions of certain terms, some of which are not otherwise defined herein,
are qualified in their entirety by reference to all of the provisions of the
Indenture and those terms made a part of the Indenture by the Trust Indenture
Act.
The New Notes will mature on March 15, 2002, will be limited to $200
million aggregate principal amount at any one time outstanding (including any
Old Notes that may be exchanged for the New Notes as described under "The
Exchange Offer") and will be unsecured unsubordinated obligations of the
Company. Each New Note will bear interest at the rate set forth on the cover
page hereof from the date of issuance or from the most recent interest payment
date to which interest has been paid, payable semiannually on March 15 and
September 15 in each year, commencing September 15, 1997, to the person in whose
name the New Note (or any predecessor Note) is registered at the close of
business on the March 1 or September 1 next preceding such interest payment
date. For a description of the circumstances under which the interest rate may
be increased from the rate set forth on the cover page of this Prospectus, see
"The Exchange Offer--Purpose of the Exchange Offer."
Principal of and interest on the New Notes will be payable, and the New
Notes will be exchangeable and transferable, at the office of the Trustee
maintained at 450 West 33rd Street, New York, New York, 10001. The New Notes
will be issued only in fully registered form without coupons, in denominations
of $1,000 and any integral multiple thereof. No service charge will be made for
any registration of transfer or exchange of Notes, except in certain
circumstances for any tax or other governmental charge that may be imposed in
connection therewith.
Initially, the Company issued only the Old Notes; however, the Company
will issue New Notes in exchange for a like principal amount of Old Notes in
connection with the Exchange Offer. Upon any such exchange, the Old Notes so
exchanged shall be canceled and shall no longer be deemed outstanding for any
purpose. In no event shall the aggregate principal amount of Old Notes and New
Notes outstanding exceed $200 million. The Old Notes and the New Notes shall be
one class for all purposes
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under the Indenture, including amendments and waivers, and for purposes of the
"Description of the New Notes," all references herein to "Notes" shall be deemed
to refer collectively to Old Notes and any New Notes, unless the context
otherwise requires.
The Notes will not be subject to redemption by the Company prior to
maturity and will not be entitled to the benefit of any sinking fund or other
mandatory redemption obligation prior to maturity.
Ranking
The indebtedness evidenced by the Old Notes is and the New Notes will be
senior unsecured obligations of the Company, rank and 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 December 31, 1996, after giving effect to the issuance of
the Old Notes and the application of the proceeds therefrom, the Company's other
Senior Indebtedness outstanding would have been approximately $299 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 Old Notes and the New Notes.
Therefore, the Old Notes are and the New Notes will be effectively subordinated
to creditors (including trade creditors) and preferred stockholders (if any) of
Subsidiaries of the Company. At December 31, 1996, the total liabilities of the
Company's Subsidiaries were approximately $108 million. In addition, at December
31, 1996, the Restricted Subsidiaries had approximately $155 million of
contingent recourse obligations with respect to the sale of Excess Spread
Receivables and had utilized $1.3 billion 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."
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 Rules 13d-3 and 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
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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 (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.
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The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchasers. 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" under
"--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
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").
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:
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(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.
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;
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(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 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
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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 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
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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
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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 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
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
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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.
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
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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) make any Note payable in money other than that stated in the Note,
(v) impair the right of any Holder of the Notes to receive payment of principal
of and interest on 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 (vi) 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.
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 maturity 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
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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 (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
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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 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
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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 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.
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"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 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.
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"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 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',
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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 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 (I), 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 (1) 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 (2) 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 (1) such aggregate book
value of such subordinated interests and (2) 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; and (II) 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
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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 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.
"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
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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 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 accredited 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-
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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.
"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
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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 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.
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"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.
DESCRIPTION OF THE OLD NOTES
The terms of the Old Notes are identical in all material respects to the
New Notes, except that (i) the Old Notes have not been registered under the
Securities Act, are subject to certain restrictions on transfer and are entitled
to certain registration rights under the Registrations Rights Agreement (which
rights will terminate upon consummation of the Exchange Offer, except under
limited circumstances); (ii) the New Notes are issuable in minimum denominations
of $1,000 and integral multiples thereof compared to minimum denominations of
$100,000 and integral multiples of $1,000 in excess thereof for the Old Notes;
and (iii) the New Notes will not provide for any increase in the interest rate
thereon. In that regard, the Old Notes provide that, if the Exchange Offer is
not consummated by August 8, 1997, the interest rate borne by the Old Notes will
increase by 0.50% per annum commencing on August 10, 1997 until the Exchange
Offer is consummated. Upon the consummation of the Exchange Offer or the
effectiveness of a Shelf Registration Statement, as the case may be, Additional
Interest will cease to accrue. The New Notes are not entitled to any such
Additional Interest. In addition, the Old Notes and the New Notes will
constitute a single series of debt securities under the Indenture. See
Description of the New Notes--General." Accordingly, holders of Old Notes should
review the information set forth under "Risk Factors--Certain Consequences of a
Failure to Exchange Old Notes" and "Description of the New Notes."
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 its 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 Initial Purchasers with
respect to Notes placed by the Initial Purchasers 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 Initial Purchasers 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
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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 $100,000 and any integral multiple of $1,000
in excess 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
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.
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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 Initial Purchasers), 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.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following summary describes certain United States federal income tax
considerations to holders of the New Notes who are subject to U.S. net income
tax with respect to the New Notes ("U.S. persons") and who will hold the New
Notes as capital assets. There can be no assurance that the U.S. Internal
Revenue Service (the "IRS") will take a similar view of the purchase, ownership
or disposition of the New Notes. This discussion is based upon the provisions of
the Internal Revenue Code of 1986, as amended, and regulations, rulings and
judicial decisions now in effect, all of which are subject to change. It does
not include any description of the tax laws of any state, local or foreign
governments or any estate or gift tax considerations that may be applicable to
the New Notes or holders thereof. It does not discuss all aspects of federal
income taxation that may be relevant to a particular investor in light of such
investor's particular investment circumstances or to certain types of investors
subject to special treatment under the federal income tax laws (for example,
dealers in securities or currencies, S corporations, financial institutions,
life insurance companies, tax-exempt organizations, taxpayers subject to the
alternative minimum tax and non-U.S. persons) and also does not discuss New
Notes held 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
(including a "conversion transaction") comprised of a New Note and one or more
other investments, or situations in which the functional currency of the holders
is not the U.S. dollar.
Holders of Old Notes contemplating acceptance of the Exchange Offer should
consult their own tax advisors with respect to their particular circumstances
and with respect to the effects of state, local or foreign tax laws to which
they may be subject.
Exchange of Notes
The exchange of Old Notes for New Notes should not be a taxable event to
holders for United States federal income tax purposes. The exchange of Old Notes
for New Notes pursuant to the Exchange Offer should not be treated as an
"exchange" for United States federal income tax purposes because the New Notes
should not be considered to differ materially in kind or extent from the Old
Notes and because the exchange will occur by operation of the terms of the Old
Notes. Accordingly, the New Notes should have the same issue price as the Old
Notes, and a holder should have the same adjusted tax basis and holding period
in the New Notes as the holder had in the Old Notes immediately before the
exchange.
Interest on the New Notes
A holder of a New Note will be required to report interest earned on the
New Note as ordinary interest income for federal income tax purposes in
accordance with the holder's method of tax accounting.
Disposition of New Notes
A holder's tax basis for a New Note generally will be the holder's
purchase price for the Old Note. Upon the sale, exchange, redemption, retirement
or other disposition of a New Note, a holder will recognize gain or loss equal
to the difference (if any) between the amount realized and the holder's tax
basis in the New Note. Such gain or loss will be long-term capital gain or loss
if the New Note has been held for more than one year and otherwise will be
short-term capital gain or loss (with certain exceptions to the characterization
as capital gain if the New Note was acquired at a market discount).
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Backup Withholding
A holder of a New Note may be subject to backup withholding at the rate of
31% with respect to interest paid on the New Note and proceeds from the sale,
exchange, redemption or retirement of the New Note, unless such holder (a) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates that fact or (b) 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 holder
of a New Note who does not provide the Company with the holder's correct
taxpayer identification number may be subject to penalties imposed by the IRS.
A holder of a New Note who is not a U.S. person will generally be exempt
from backup withholding and information reporting requirements, but may be
required to comply with certification and identification procedures in order to
obtain an exemption from backup withholding and information reporting.
Any amount paid as backup withholding will be creditable against the
holder's federal income tax liability.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS
INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A
HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH
RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE NOTES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES
FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
A fiduciary of an employee benefit plan must determine that the purchase
of the Notes is consistent with its fiduciary duties under Section 404 of the
Employee Retirement Income Security Act ("ERISA") and does not result in a
prohibited transaction under Section 406 of ERISA or Section 4975 of the
Internal Revenue Code (the "Code"). "Prohibited transactions" within the meaning
of ERISA and the Code may result if the Notes are acquired by an entity using
the assets of an employee benefit plan with respect to which the Company is a
party in interest, unless the Notes are acquired pursuant to an applicable
exemption. Any employee benefit plan or other entity subject to such provisions
of ERISA or the Code proposing to acquire the Notes should consult with legal
counsel.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account in
connection with the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus, as
it may be amended or supplemented from time to time, may be used by
Participating Broker-Dealers during the period referred to below in connection
with resales of New Notes received in exchange for Old Notes if such Old Notes
were acquired by such Participating Broker-Dealers for their own accounts as a
result of market-making activities or other trading activities. The Company has
agreed that this Prospectus, as it may be amended or supplemented from time to
time, may be used by a Participating Broker-Dealer in connection with resales of
such New Notes for a period ending 180 days after the Expiration Date (subject
to extension under certain limited circumstances described herein) or, if
earlier, when all such New Notes have been disposed of by such Participating
Broker-Dealer. However, a Participating Broker-Dealer who intends to use this
Prospectus in connection with the resale of New Notes received in exchange for
Old Notes pursuant to the Exchange Offer must notify the Company, or cause the
Company to be notified, on or prior to the Expiration Date, that it is a
Participating Broker-Dealer. Such notice may be given in the space provided for
that purpose in the Letter of Transmittal or may be delivered to the Exchange
Agent at the address set forth herein under "The Exchange Offer--Exchange
Agent." See "The Exchange Offer--Resales of New Notes."
The Company will not receive any cash proceeds from the issuance of the
New Notes offered hereby. New Notes received by broker-dealers for their own
accounts in connection with the Exchange Offer may be sold from time to time in
one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Notes or a combination
of such methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or at negotiated prices. Any
such resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any such broker-dealer and/or the purchasers of any such New Notes.
Any broker-dealer that resells New Notes that were received by it for its
own account in connection with the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act, and any profit on any
such resale of New Notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The Letter of Transmittal states that by acknowledging that it will deliver and
by delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
The Initial Purchasers have in the past and each of the Initial Purchasers
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 Bear, Stearns & Co. Inc. and Credit Suisse First Boston Corporation
are purchasers under Purchase and Sale Facilities with the Company. In addition,
an affiliate of Credit Suisse First Boston Corporation has a corporate lending
relationship with Continental Grain.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements under the headings "Summary," and "Business" and
elsewhere in this Prospectus or in the documents incorporated by reference
herein constitute "forward-looking statements" within the meaning of the Reform
Act. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors, which may cause the actual results,
performances or achievements of the Company to be materially different from any
future results, performance or achievements expressed
103
<PAGE>
or implied by such forward-looking statements. There are many important factors
that could cause the Company's actual results to differ materially from those
indicated in the forward-looking statements. Such factors include, but are not
limited to, general economic conditions, including interest rate risk,
prepayment, delinquency and default rates, changes (legislative and otherwise)
in the asset securitization industry, demand for the Company's services, the
impact of certain covenants in loan agreements of the Company and Continental
Grain, the degree to which the Company is leveraged, the Company's needs for
financing, and other risks identified in the Company's filings with the
Commission.
LEGAL MATTERS
The validity of the New Notes being issued in the Exchange Offer will be
passed upon for the Company by Dewey Ballantine, New York, New York.
EXPERTS
The Consolidated Financial Statements incorporated herein by reference
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are incorporated herein in
reliance upon the authority of said firm as experts in giving said report.
104
<PAGE>
GLOSSARY
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 finance
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.
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.
i
<PAGE>
Equipment Leases...................... Leases of assets primarily to commercial
users. Leased assets may include office
equipment and medical equipment.
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 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
ii
<PAGE>
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.
Non-prime Auto Loans and Leases....... Automobile loans or leases secured by
new or used automobiles made generally
to "B" or "C" Credit Grade borrowers.
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.
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.
iii
<PAGE>
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
iv
<PAGE>
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.
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
generally to "C-" or "D" Credit Grade
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.
v
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. 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 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
II-1
<PAGE>
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.
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.
II-2
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT
NO. DESCRIPTION
- ------------------- -----------------------------------------------------------
4.1 Indenture, dated as of March 1, 1997 between the Company
and The Chase Manhattan Bank, as trustee+
4.2 Registration Rights Agreement, dated as of March 7, 1997,
among the Company, Bear, Stearns & Co. Inc. and Credit
Suisse First Boston Corporation+
4.3 Form of Security for 7 1/2% Senior Notes Due 2002
originally issued by the Company on March 12, 1997+
4.4 Form of Security for 7 1/2% Senior Notes Due 2002 to be
issued by the Company and registered under the Securities
Act of 1933*
5.1 Opinion of Dewey Ballantine*
12.1 Computation of Ratios*
23.1 Consent of Dewey Ballantine (included in Exhibit 5.1)*
23.2 Consent of Arthur Andersen LLP+
24.1 Powers of Attorney, included on signature page+
25.1 Statement of Eligibility under the Trust Indenture Act of
1939 on Form T-1 of The Chase Manhattan Bank*
99.1 Form of Letter of Transmittal*
99.2 Form of Notice of Guaranteed Delivery*
99.3 Form of Exchange Agent Agreement*
- ----------
* Filed herewith.
+ Previously filed
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (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 Securities
Act and will be governed by the final adjudication of such issue.
(1) The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder
through use of a prospectus which is a part of this registration
statement, by any person or party is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons
II-3
<PAGE>
who may be deemed underwriters, in addition to the information called for
by the other items of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that is
filed pursuant to paragraph (1) immediately preceding, or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Act and is
used in connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the registration statement and
will not be used until such amendment is effective, and that, for purposes
of determining any liability under the Securities Act of 1933, each such
post-effective amendment 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.
(3) For purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934
(and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in the registration statement 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.
The undersigned Registrants hereby undertake to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
The undersigned Registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired or involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
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, state of New York, on the 6th day of May, 1997.
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, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
II-5
<PAGE>
SIGNATURE TITLE DATE
- ------------------ ---------------------------------------- -----------
* President, Chief Executive Officer and May 6, 1997
- ----------------------- Director (Principal Executive Officer)
James E. Moore
* Senior Vice President and Chief Financial May 6, 1997
- ----------------------- Officer (Principal Financial Officer)
Daniel J. Willett
* Vice President and Controller (Principal May 6, 1997
- ----------------------- Accounting Officer)
Susan E. O'Donovan
* Director and Chairman of the Board May 6, 1997
- -----------------------
James J. Bigham
* Director May 6, 1997
- -----------------------
Paul J. Fribourg
* Director May 6, 1997
- -----------------------
Donald L. Staheli
* Director May 6, 1997
- -----------------------
John W. Spiegel
* Director May 6, 1997
- -----------------------
John P. Tierney
* Director May 6, 1997
- -----------------------
Lawrence G. Weppler
* Director May 6, 1997
- -----------------------
Michael J. Zimmerman
* - By: /s/ JAMES E. MOORE
-----------------------
James E. Moore
Attorney-In-Fact
II-6
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------------------- -------------------------------------------------------
4.1 Indenture, dated as of March 1, 1997 between the Company
and The Chase Manhattan Bank, as trustee+
4.2 Registration Rights Agreement, dated as of March 7, 1997,
among the Company, Bear, Stearns & Co. Inc. and Credit
Suisse First Boston Corporation+
4.3 Form of Security for 7 1/2% Senior Notes Due 2002
originally issued by the Company on March 12, 1997+
4.4 Form of Security for 7 1/2% Senior Notes Due 2002 to be
issued by the Company and registered under the Securities
Act of 1933*
5.1 Opinion of Dewey Ballantine*
12.1 Computation of Ratios*
23.1 Consent of Dewey Ballantine (included in Exhibit 5.1)*
23.2 Consent of Arthur Andersen LLP+
24.1 Powers of Attorney, included on signature page+
25.1 Statement of Eligibility under the Trust Indenture Act of
1939 on Form T-1 of The Chase Manhattan Bank*
99.1 Form of Letter of Transmittal*
99.2 Form of Notice of Guaranteed Delivery*
99.3 Form of Exchange Agent Agreement*
- ----------
*Filed herewith.
+Previously filed.
II-7
Exhibit 4.4
[FORM OF FACE OF SERIES B SECURITY]
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW
YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR
PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR
SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED
OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE.
CUSIP:
No. $
7-1/2 Senior Notes Due 2002
Series B
CONTIFINANCIAL CORPORATION, a Delaware corporation, promises to pay
to , or registered assigns, the principal sum of Dollars on March 15,
2002.
Interest Payment Dates: March 15 and September 15.
Record Dates: March 1 and September 1.
<PAGE>
Additional provisions of this Security are set forth on the other
side of this Security.
Dated:
CONTIFINANCIAL CORPORATION,
by
---------------------------------
Name:
Title:
---------------------------------
Name:
Title:
TRUSTEE'S CERTIFICATE OF [SEAL]
AUTHENTICATION
THE CHASE MANHATTAN BANK, as
Trustee, certifies that this is one of the
Securities referred to in the Indenture.
by
---------------------------------------
Authorized Signatory
2
<PAGE>
[FORM OF REVERSE SIDE OF SERIES B SECURITY]
7-1/2% Senior Note Due 2002
Series B
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 March 15 and September 15 of each year, commencing
September 15, 1997. Interest on the Securities will accrue from the most recent
date to which interest has been paid on this Security (or any predecessor
Security) or, if no interest has been paid, from March 12, 1997. 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. In addition, the Company shall pay
additional interest on the Securities ("Additional Interest") under the
circumstances and to the extent set forth in paragraph 18 hereof on the same
dates on which interest is otherwise payable hereunder.
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 March 1 and September 1 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 coregistrar.
3
<PAGE>
4. Indenture
The Company issued the Securities under an Indenture dated as of March 1,
1997 ("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. ss.ss.
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
$200 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.
All Series A Securities and Series B Securities shall be treated as a
single class of Securities for all purposes hereunder.
5. 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 Securities 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.
6. 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 of any Securities 15
days before an interest payment date.
4
<PAGE>
7. Persons Deemed Owners
The registered Holder of this Security may be treated as the owner of it
for all purposes.
8. 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.
9. 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 maturity.
10. 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 4 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.
11. 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 acceleration or otherwise, or failure by the
Company to 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
5
<PAGE>
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.
12. 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.
13. 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.
14. 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.
6
<PAGE>
15. 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
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).
16. 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. No representation is made as to the accuracy of such
numbers as printed on the Securities and reliance may be placed only on the
other identification numbers placed thereon.
17. 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.
18. Registration Rights Agreement
The Series B Securities were issued pursuant to an exchange offer pursuant
to which 7-1/2% Senior Notes Due 2002 of the Company, in like principal amount
and having substantially identical terms as this Security, were exchanged for
the Series B Securities. The Holders of Securities are entitled to receive
Additional Interest payments:
(i) if (A) neither the Exchange Registration Statement nor the Shelf
Registration has been filed on or prior to the applicable Filing Date or
(B) notwithstanding that the Company has consummated or will consummate an
Exchange Offer, the Company is required to file a Shelf Registration
Statement and such Shelf Registration Statement is not filed on or prior
to the Filing Date applicable thereto, then, commencing on the day after
the Filing Date applicable thereto, Additional Interest shall accrue on
the Notes over and above the stated interest at a rate of 0.50% per annum;
7
<PAGE>
(ii) if (A) neither the Exchange Registration Statement nor the
Shelf Registration is declared effective by the SEC on or prior to the
relevant Effectiveness Date or (B) notwithstanding that the Company has
consummated or will consummate the Exchange Offer, the Company is required
to file a Shelf Registration and such Shelf Registration is not declared
effective by the SEC on or prior to the Effectiveness Date in respect of
such Shelf Registration, then, commencing on the day after such
Effectiveness Date, Additional Interest shall accrue on the Notes included
or which should have been included in such Registration Statement over and
above the stated interest at a rate of 0.50% per annum; and
(iii) if (A) the Company has not exchanged Exchange Notes for all
Notes validly tendered in accordance with the terms of the Exchange Offer
on or prior to the 150th day after the Issue Date or (B) the Exchange
Registration Statement ceases to be effective at any time prior to the
time that the Exchange Offer is consummated or (C) if applicable, the
Shelf Registration has been declared effective and such Shelf Registration
ceases to be effective at any time during the Effectiveness Period, then
Additional Interest shall accrue (over and above any interest otherwise
payable on such Notes) at a rate of 0.50% per annum on (x) the 151st day
after the Issue Date with respect to the Notes validly tendered and not
exchanged by the Company, in the case of (A) above, or (y) the day the
Exchange Registration Statement ceases to be effective in the case of (B)
above, or (z) the day such Shelf Registration ceases to be effective in
the case of (C) above (it being understood and agreed that,
notwithstanding any provision to the contrary, so long as any Note which
is the subject of a Shelf Notice is then covered by an effective Shelf
Registration Statement, no Additional Interest shall accrue on such Note);
provided, however, that the Additional Interest rate on any affected Note
may not exceed at any one time in the aggregate 0.50% per annum; and
provided further, that (1) upon the filing of the Exchange Registration
Statement or a Shelf Registration (in the case of clause (i) above), (2)
upon the effectiveness of the Exchange Registration Statement or the Shelf
Registration (in the case of clause (ii) above), or (3) upon the exchange
of Exchange Notes for all Notes tendered and not validly withdrawn (in the
case of clause (iii)(A) above), or upon the effectiveness of the Exchange
Registration Statement which had ceased to remain effective (in the case
of (iii)(B) above), or upon the effectiveness of the Shelf Registration
which had ceased to remain effective (in the case of (iii)(C) above),
Additional Interest on the affected Notes as a result of such clause (or
the relevant subclause thereof), as the case may be, shall cease to
accrue.
Capitalized terms used in this paragraph 18 but not defined herein or in
the Indenture shall have the meanings ascribed thereto in or pursuant to the
Registration Rights Agreement.
8
Exhibit 5.1
May __, 1997
ContiFinancial Corporation
277 Park Avenue
New York, New York 10172
Ladies and Gentlemen:
We refer to the Registration Statement on Form S-4, Registration No.
333-23963 (the "Registration Statement"), filed by ContiFinancial Corporation, a
Delaware corporation (the "Company"), on March 26, 1977, as amended by Amendment
No. 1 filed on May 6, 1997 with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), relating
to an offer by the Company to exchange up to $200,000,000 aggregate principal
amount of its 7 1/2% Senior Notes Due 2002 (the "New Notes"), which have been
registered under the Act for a like principal amount of its outstanding 7 1/2%
Senior Notes Due 2002 (the "Old Notes").
We have examined and are familiar with originals, or copies
certified or otherwise identified to our satisfaction, of such corporate records
of the Company, certificates of officers of the Company and of public officials
and such other documents as we have deemed appropriate as a basis for the
opinions expressed below.
Based upon the foregoing, it is our opinion that:
1. The Company is a corporation duly organized and validly
existing under the laws of the State of Delaware.
2. Assuming the due execution and delivery of the New Notes on
behalf of the Company, the New Notes will be duly authorized
and, when authenticated by the Trustee in accordance with the
Indenture and delivered to the purchasers thereof against
tender of the Old Notes therefor, will be valid and binding
obligations of the Company, enforceable in accordance with
their respective terms and entitled to the benefits of the
indenture except (i) the enforceability thereof may be limited
by bankruptcy, insolvency or similar laws affecting creditors'
rights generally and (ii) rights of acceleration and the
availability of equitable remedies may be limited by equitable
principles of general applicability.
In expressing the foregoing opinion with respect to the New Notes,
we have assumed, with your consent, (i) the due execution and delivery of the
Indenture by each of the Company and the Trustee and (ii) that the New Notes
will conform as to form to the specimen New Note, which fact we have not
verified by inspection of the individual New Notes.
<PAGE>
We are not members of any bar except that of the State of New York,
and in expressing the opinions set forth above, we are not passing upon the laws
of any jurisdiction other than laws of the State of New York, the Delaware
General Corporation Law and the federal laws of the United States.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to our name under the heading "Legal
Matters" in the Prospectus included in the Registration Statement. In giving
this consent, we do not thereby admit that we come within the category of
persons whose consent is required by the Act or the rules and regulations of the
Commission promulgated thereunder.
Very truly yours,
DEWEY BALLANTINE
2
ContiFinancial Corporation
Exhibit 12.1
Computation of Ratios
<TABLE>
<CAPTION>
Year Ended March 31 9 Mos Ended 9 Mos Ended
------------------------------------------------------- ----------------------------
1992 1993 1994 1995 1996 Dec. 31, 1996 Dec. 31, 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges
Summary
Earnings 19,707 17,078 42,334 77,895 197,996 203,155 137,121
Fixed Charges 12,686 6,529 12,124 29,635 74,770 79,989 51,255
------------------------------------------------------- ----------------------------
Ratio 1.55 2.62 3.49 2.63 2.65 2.54 2.68
======================================================= ============================
Earnings
Pretax Income 7,765 12,149 35,286 56,988 126,536 122,787 89,176
Plus: Interest expense(4)(i)(A) 12,686 6,529 12,124 29,635 74,770 79,989 51,255
Less: Minority Interest(3)(ii) (744) (1,600) (5,076) (8,728) (3,310) 379 (3,310)
------------------------------------------------------- ----------------------------
Total "Earnings" 19,707 17,078 42,334 77,895 197,996 203,155 137,121
======================================================= ============================
Fixed Charges
------------------------------------------------------- ----------------------------
Interest expense(4)(i)(A) 12,686 6,529 12,124 29,635 74,770 79,989 51,255
======================================================= ============================
Percentage of Indebtedness to Total
Capitalization
Long-term debt 60,311 12,463 49,846 114,907 324,000 501,170 395,633
======================================================= ============================
Total capitalization
senior notes 299,170 0
due to affiliates 60,311 12,463 49,846 114,907 0 0 395,633
Notes payable 0 0 0 0 324,000 202,000 0
stockholders' equity 15,430 55,339 71,823 67,915 294,819 374,060 129,092
------------------------------------------------------- ----------------------------
total capitalization 75,741 67,802 121,669 182,822 618,819 875,230 524,725
======================================================= ============================
Ratio 79.63% 18.38% 40.97% 62.85% 52.36% 57.26% 75.40%
Pre-tax Interest Coverage Ratio
Pretax Income 7,765 12,149 35,286 56,988 126,536 122,787 89,176
Interest Expense on Funded Debt 7,921 4,130 5,140 10,234 22,635 24,549 16,587
Ratio 1.98 3.94 7.86 6.57 6.59 6.00 6.38
</TABLE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
-------------------------------------------
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF
A TRUSTEE PURSUANT TO SECTION 305(b)(2) ________
----------------------------------------
THE CHASE MANHATTAN BANK
(Exact name of trustee as specified in its charter)
New York 13-4994650
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)
270 Park Avenue
New York, New York 10017
(Address of principal executive offices) (Zip Code)
William H. McDavid
General Counsel
270 Park Avenue
New York, New York 10017
Tel: (212) 270-2611
(Name, address and telephone number of agent for service)
---------------------------------------------
ContiFinancial Corporation
(Exact name of obligor as specified in its charter)
Delaware 13-3852588
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
277 Park Avenue
New York, N.Y. 10172
(Address of principal executive offices) (Zip Code)
-------------------------------------
7-1/2% Senior Notes Due 2002
(Title of the indenture securities)
----------------------------------------------------------
<PAGE>
GENERAL
Item 1. General Information.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
New York State Banking Department, State House, Albany, New York
12110.
Board of Governors of the Federal Reserve System, Washington, D.C.,
20551
Federal Reserve Bank of New York, District No. 2, 33 Liberty Street,
New York, N.Y.
Federal Deposit Insurance Corporation, Washington, D.C., 20429.
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
Item 2. Affiliations with the Obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
-2-
<PAGE>
Item 16. List of Exhibits
List below all exhibits filed as a part of this Statement of Eligibility.
1. A copy of the Articles of Association of the Trustee as now in effect,
including the Organization Certificate and the Certificates of Amendment dated
February 17, 1969, August 31, 1977, December 31, 1980, September 9, 1982,
February 28, 1985, December 2, 1991 and July 10, 1996 (see Exhibit 1 to Form T-1
filed in connection with Registration Statement No. 333-06249, which is
incorporated by reference).
2. A copy of the Certificate of Authority of the Trustee to Commence
Business (see Exhibit 2 to Form T-1 filed in connection with Registration
Statement No. 33-50010, which is incorporated by reference. On July 14, 1996, in
connection with the merger of Chemical Bank and The Chase Manhattan Bank
(National Association), Chemical Bank, the surviving corporation, was renamed
The Chase Manhattan Bank).
3. None, authorization to exercise corporate trust powers being contained
in the documents identified above as Exhibits 1 and 2.
4. A copy of the existing By-Laws of the Trustee (see Exhibit 4 to Form
T-1 filed in connection with Registration Statement No. 333-06249, which is
incorporated by reference).
5. Not applicable.
6. The consent of the Trustee required by Section 321(b) of the Act (see
Exhibit 6 to Form T-1 filed in connection with Registration Statement No.
33-50010, which is incorporated by reference. On July 14, 1996, in connection
with the merger of Chemical Bank and The Chase Manhattan Bank (National
Association), Chemical Bank, the surviving corporation, was renamed The Chase
Manhattan Bank).
7. A copy of the latest report of condition of the Trustee, published
pursuant to law or the requirements of its supervising or examining authority.
8. Not applicable.
9. Not applicable.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the
Trustee, The Chase Manhattan Bank, a corporation organized and existing under
the laws of the State of New York, has duly caused this statement of eligibility
to be signed on its behalf by the undersigned, thereunto duly authorized, all in
the City of New York and State of New York, on the 15th day of April, 1997.
THE CHASE MANHATTAN BANK
By /s/ W. B. Dodge
-------------------------------------
W.B. Dodge
Vice President
-3-
<PAGE>
Exhibit 7 to Form T-1
Bank Call Notice
RESERVE DISTRICT NO. 2
CONSOLIDATED REPORT OF CONDITION OF
The Chase Manhattan Bank
of 270 Park Avenue, New York, New York 10017
and Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System,
at the close of business December 31, 1996, in
accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.
Dollar Amounts
ASSETS in Millions
Cash and balances due from depository institutions:
Noninterest-bearing balances and
currency and coin .............................................. $ 11,509
Interest-bearing balances ...................................... 8,457
Securities: .........................................................
Held to maturity securities ......................................... 3,128
Available for sale securities........................................ 40,534
Federal Funds sold and securities purchased under
agreements to resell in domestic offices of the
bank and of its Edge and Agreement subsidiaries,
and in IBF's:
Federal funds sold ............................................. 9,222
Securities purchased under agreements to resell ................ 422
Loans and lease financing receivables:
Loans and leases, net of unearned income .......... $133,935
Less: Allowance for loan and lease losses ......... 2,789
Less: Allocated transfer risk reserve ............. 16
--------
Loans and leases, net of unearned income,
allowance, and reserve ......................................... 131,130
Trading Assets ...................................................... 49,876
Premises and fixed assets (including capitalized
leases) ........................................................ 2,877
Other real estate owned ............................................. 290
Investments in unconsolidated subsidiaries and
associated companies ........................................... 124
Customer's liability to this bank on acceptances
outstanding .................................................... 2,313
Intangible assets ................................................... 1,316
Other assets ........................................................ 11,231
--------
TOTAL ASSETS ........................................................ $272,429
========
-4-
<PAGE>
LIABILITIES
Deposits
In domestic offices ............................................ $ 87,006
Noninterest-bearing ................................ $ 35,783
Interest-bearing ................................... 51,223
--------
In foreign offices, Edge and Agreement subsidiaries,
and IBF's ...................................................... 73,206
Noninterest-bearing ................................ $ 4,347
Interest-bearing ................................... 68,859
Federal funds purchased and securities sold under agreements
to repurchase in domestic offices of the bank and
of its Edge and Agreement subsidiaries, and in IBF's
Federal funds purchased ........................................ 14,980
Securities sold under agreements to repurchase ................. 10,125
Demand notes issued to the U.S. Treasury ............................ 1,867
Trading liabilities ................................................. 34,783
Other Borrowed money:
With a remaining maturity of one year or less .................. 14,639
With a remaining maturity of more than one year ................ 425
Mortgage indebtedness and obligations under capitalized
leases ......................................................... 40
Bank's liability on acceptances executed and outstanding 2,267
Subordinated notes and debentures ................................... 5,471
Other liabilities ................................................... 11,343
TOTAL LIABILITIES ................................................... 256,152
--------
Limited-Life Preferred stock and related surplus 550
EQUITY CAPITAL
Common stock ........................................................ 1,251
Surplus ............................................................. 10,243
Undivided profits and capital reserves .............................. 4,526
Net unrealized holding gains (Losses)
on available-for-sale securities .................................... (309)
Cumulative foreign currency translation adjustments ................. 16
TOTAL EQUITY CAPITAL ................................................ 15,727
--------
TOTAL LIABILITIES, LIMITED-LIFE PREFERRED
STOCK AND EQUITY CAPITAL ....................................... $272,429
========
I, Joseph L. Sclafani, S.V.P. & Controller of the above-named bank, do hereby
declare that this Report of Condition has been prepared in conformance with the
instructions issued by the appropriate Federal regulatory authority and is true
to the best of my knowledge and belief.
JOSEPH L. SCLAFANI
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us, and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the appropriate Federal regulatory authority and is true and correct.
WALTER V. SHIPLEY )
EDWARD D. MILLER ) DIRECTORS
THOMAS G. LABRECQUE )
-5-
Exhibit 99.1
FORM OF LETTER OF TRANSMITTAL
CONTIFINANCIAL CORPORATION
OFFER TO EXCHANGE ITS
7 1/2% SENIOR NOTES DUE 2002
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
7 1/2% NOTES DUE 2002
================================================================================
THE OFFER AND WITHDRAWAL RIGHTS EXPIRE AT 5:00 PM, NEW YORK CITY
TIME, ON JUNE 11, 1997, UNLESS THE OFFER IS EXTENDED
================================================================================
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
THE CHASE MANHATTAN BANK
BY MAIL/OVERNIGHT DELIVERY/HAND:
The Chase Manhattan Bank
Corporate Trust Securities Window
55 Water Street
Room 234, North Bldg.
New York, New York 10041
Attn: Carlos Esteves, Tender Processing
TO CONFIRM BY TELEPHONE OR FOR INFORMATION:
(212) 638-0828
FACSIMILE TRANSMISSIONS:
(212) 638-7380; (212) 638-7381
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO A
NUMBER OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS
LETTER OF TRANSMITTAL IS COMPLETED.
Capitalized terms used but not defined herein shall have the same meaning
given them in the Prospectus (as defined below).
This Letter of Transmittal is to be completed by holders of Old Notes (as
defined below) either if Old Notes are to be forwarded herewith or if tenders of
Old Notes are to be made by book-entry transfer to an account maintained by The
Chase Manhattan Bank (the "Exchange Agent") at The Depository Trust
<PAGE>
Company ("DTC") pursuant to the procedures set forth in "The Exchange
Offer--Procedures for Tendering Old Notes" in the Prospectus.
Holders of Old Notes whose certificates (the "Certificates") for such Old
Notes are immediately available or who cannot deliver their Certificates and all
other required documents to the Exchange Agent on or prior to the Expiration
Date (as defined in the Prospectus) or who cannot complete the procedures for
book-entry transfer on a timely basis, must tender their Old Notes according to
the guaranteed delivery procedure set forth in "The Exchange Offer--Procedures
for Tendering Old Notes" in the Prospectus.
2
<PAGE>
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE
AGENT.
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
ALL TENDERING HOLDERS COMPLETE THIS BOX
<TABLE>
<CAPTION>
======================================================================================
DESCRIPTION OF OLD NOTES TENDERS
- --------------------------------------------------------------------------------------
PRINCIPAL AMOUNT OF
OLD NOTES TENDERED
PLEASE PRINT NAME AND OLD NOTES TENDERED (IF PRINCIPAL AMOUNT
ADDRESS OF REGISTERED HOLDER CERTIFICATE (ATTACH ADDITIONAL OF OLD NOTES LESS
(PLEASE FILL IN IF BLANK) NUMBER(S)* LIST IF NECESSARY) THAN ALL)**
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
TOTAL AMOUNT TENDERED:
======================================================================================
</TABLE>
- ----------
* Need not be completed by book-entry holders.
** Old Notes may be tendered in whole or in part in denominations of $1,000
and integral multiples thereof, provided that if any Old Notes are
tendered for exchange in part, the untendered principal amount thereof
must be $100,000 or any integral multiple of $1,000 in excess thereof. All
Old Notes held shall be deemed tendered unless a lesser number is
specified in this column.
3
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ ACCOMPANYING INSTRUCTIONS CAREFULLY
|_| CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND
COMPLETE THE FOLLOWING:
Name of Tendering Institution ____________________________________________
Account No. ______________________________________________________________
Transaction Code No. _____________________________________________________
|_| CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY IF
TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED
DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING:
Name(s) of Registered Holder(s) __________________________________________
Window Ticket Number (if any) ____________________________________________
Date of Execution of Notice of Guaranteed Delivery _______________________
Name of Institution which Guaranteed Delivery ____________________________
If Guaranteed Delivery is by Book-Entry Transfer.
Name of Tendering Institution ____________________________________________
DTC Account No. __________________________________________________________
Transaction Code No. _____________________________________________________
|_| CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED OLD NOTES
ARE TO BE RETURNED BY CREDITING THE DTC ACCOUNT NUMBER SET FORTH ABOVE.
|_| CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE OLD NOTES FOR ITS
OWN ACCOUNT AS A RESULT OF MARKET MAKING OR OTHER TRADING ACTIVITIES (A
"PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF
THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name: ___________________________________________________________________
Address: _________________________________________________________________
4
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to ContiFinancial Corporation, a Delaware
corporation (the "Company"), the above described aggregate principal amount of
the Company's 7 1/2 Senior Notes Due 2002 (the "Old Notes") in exchange for a
like aggregate principal amount of the Company's 7 1/2% Senior Notes Due 2002
(the "New Notes") which have been registered under the Securities Act of 1933
(the "Securities Act"), upon the terms and subject to the conditions set forth
in the Prospectus dated March 25, 1997 (as the same may be amended or
supplemented from time to time, the "Prospectus"), receipt of which is
acknowledged, and in this Letter of Transmittal (which, together with the
Prospectus, constitute the "Exchange Offer").
Subject to and effective upon the acceptance for exchange of all or any
portion of the Old Notes tendered herewith in accordance with the terms and
conditions of the Exchange Offer (including, if the Exchange Offer is extended
or amended, the terms and conditions of any such extension or amendment) the
undersigned hereby sells, assigns and transfers to or upon the order of the
Company all right, title and interest in and to such Old Notes as are being
tendered herewith. The undersigned hereby irrevocably constitutes and appoints
the Exchange Agent as its agent and attorney-in-fact (with full knowledge that
the Exchange Agent is also acting as agent of the Company in connection with the
Exchange Offer) with respect to the tendered Old Notes, with full power of
substitution (such power of attorney being deemed to be an irrevocable power
coupled with an interest), subject only to the right of withdrawal described in
the Prospectus, to (i) deliver Certificates for Old Notes to the Company
together with all accompanying evidences of transfer and authenticity to, or
upon the order of, the Company, upon receipt by the Exchange Agent, as the
undersigned's agent, of the New Notes to be issued in exchange for such Old
Notes, (ii) present Certificates for such Old Notes for transfer, and to
transfer the Old Notes on the books of the Company, and (iii) receive for the
account of the Company all benefits and otherwise exercise all rights of
beneficial ownership of such Old Notes, all in accordance with the terms and
conditions of the Exchange Offer.
THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE UNDERSIGNED HAS
FULL POWER AND AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND TRANSFER THE OLD
NOTES TENDERED HEREBY AND THAT, WHEN THE SAME ARE ACCEPTED FOR EXCHANGE, THE
COMPANY WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE THERETO, FREE AND
CLEAR OF ALL LIENS, RESTRICTIONS, CHARGES AND ENCUMBRANCES, AND THAT THE OLD
NOTES TENDERED HEREBY, ARE NOT SUBJECT TO ANY ADVERSE CLAIMS OR PROXIES. THE
UNDERSIGNED WILL, UPON REQUEST, EXECUTE AND DELIVER ANY ADDITIONAL DOCUMENTS
DEEMED BY THE COMPANY OR THE EXCHANGE AGENT TO BE NECESSARY OR DESIRABLE TO
COMPLETE THE EXCHANGE, ASSIGNMENT AND TRANSFER OF THE OLD NOTES TENDERED HEREBY
AND THE UNDERSIGNED WILL COMPLY WITH ITS OBLIGATIONS UNDER THE REGISTRATION
RIGHTS AGREEMENT. THE UNDERSIGNED HAS READ AND AGREES TO ALL OF THE TERMS OF THE
EXCHANGE OFFER.
The name(s) and address(es) of the registered holder(s) of the Old Notes
tendered hereby should be printed above, if they are not already set forth
above, as they appear on the Certificates representing such Old Notes. The
Certificate number(s) and the Old Notes that the undersigned wishes to tender
should be indicated in the appropriate boxes above.
If any tendered Old Notes are not exchanged pursuant to the Exchange Offer
for any reason, or if Certificates are submitted for more Old Notes than are
tendered or accepted for exchange, Certificates for such nonexchanged or
nontendered Old Notes will be returned (or, in the case of Old Notes tendered by
book-entry transfer, such Old Notes will be credited to an account maintained at
DTC), without expense to the tendering holder, promptly following the expiration
or termination of the Exchange Offer.
The undersigned understands that tenders of Old Notes pursuant to any one
of the procedures described in "The Exchange Offer--Procedures for Tendering Old
Notes" in the Prospectus and in the instructions hereto will, upon the Company's
acceptance for exchange of such tendered Old Notes, constitute a binding
agreement between
5
<PAGE>
the undersigned and the Company upon the terms and subject to the conditions of
the Exchange Offer. The undersigned recognizes that, under certain circumstances
set forth in the Prospectus, the Company may not be required to accept for
exchange any of the Old Notes tendered hereby.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, the undersigned hereby directs that the New Notes be issued
int he name(s) of the undersigned or, in the case of a book-entry transfer of
Old Notes, that such New Notes be credited to the account indicated above
maintained at DTC. If applicable, substitute Certificates representing Old Notes
not exchanged or not accepted for exchange will be issued to the undersigned or,
in the case of a book-entry transfer of Old Notes, will be credited to the
account indicated above maintained at DTC. Similarly, unless otherwise indicated
under "Special Delivery Instructions," please deliver New Notes to the
undersigned at the address shown below the undersigned signature.
BY TENDERING OLD NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, THE
UNDERSIGNED HEREBY REPRESENTS AND AGREES THAT (I) THE UNDERSIGNED IS NOT AN
"AFFILIATE" OF THE COMPANY, (II) ANY NEW NOTES TO BE RECEIVED BY THE UNDERSIGNED
ARE BEING ACQUIRED IN THE ORDINARY COURSE OF ITS BUSINESS, (III) THE UNDERSIGNED
HAS NO ARRANGEMENT OR UNDERSTANDING WITH ANY PERSON TO PARTICIPATE IN A
DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES ACT) OF NEW NOTES TO BE
RECEIVED IN THE EXCHANGE OFFER, AND (IV) IF THE UNDERSIGNED IS NOT A
BROKER-DEALER, THE UNDERSIGNED IS NOT ENGAGED IN, AND DOES NOT INTEND TO ENGAGE
IN, A DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES ACT) OF SUCH NEW NOTES.
BY TENDERING OLD NOTES PURSUANT TO THE EXCHANGE OFFER AND EXECUTING THIS LETTER
OF TRANSMITTAL, A HOLDER OF OLD NOTES WHICH IS A BROKER-DEALER REPRESENTS AND
AGREES, CONSISTENT WITH CERTAIN INTERPRETIVE LETTERS ISSUED BY THE STAFF OF THE
DIVISION OF CORPORATION FINANCE OF THE SECURITIES AND EXCHANGE COMMISSION TO
THIRD PARTIES, THAT SUCH OLD NOTES WERE ACQUIRED BY SUCH BROKER-DEALER FOR ITS
OWN ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES
AND IT WILL DELIVER THE PROSPECTUS (AS AMENDED OR SUPPLEMENTED FROM TIME TO
TIME) MEETING THE REQUIREMENTS OF THE SECURITIES ACT IN CONNECTION WITH ANY
RESALE OF SUCH NEW NOTES (PROVIDED THAT, BY SO ACKNOWLEDGING AND BY DELIVERING A
PROSPECTUS, SUCH BROKER-DEALER WILL NOT BE DEEMED TO ADMIT THAT IT IS AN
"UNDERWRITER" WITHIN THE MEANING OF THE SECURITIES ACT).
THE COMPANY HAD AGREED THAT, SUBJECT TO THE PROVISIONS OF THE REGISTRATION
RIGHTS AGREEMENT, THE PROSPECTUS, AS IT MAY BE AMENDED OR SUPPLEMENTED FROM TIME
TO TIME, MAY BE USED BY A PARTICIPATING BROKER-DEALER (AS DEFINED BELOW) IN
CONNECTION WITH RESALES OF NEW NOTES RECEIVED IN EXCHANGE FOR OLD NOTES, WHERE
SUCH OLD NOTES WERE ACQUIRED BY SUCH PARTICIPATING BROKER-DEALER FOR ITS OWN
ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES, FOR
A PERIOD ENDING 180 DAYS AFTER THE EXPIRATION DATE (SUBJECT TO EXTENSION UNDER
CERTAIN LIMITED CIRCUMSTANCES DESCRIBED IN THE PROSPECTUS) OR, IF EARLIER, WHEN
ALL SUCH NEW NOTES HAVE BEEN DISPOSED OF BY SUCH PARTICIPATING BROKER-DEALER. IN
THAT REGARD, EACH BROKER-DEALER WHO ACQUIRED OLD NOTES FOR ITS OWN ACCOUNT AS A
RESULT OF MARKET-MAKING OR OTHER TRADING ACTIVITIES (A "PARTICIPATING
BROKER-DEALER"), BY TENDERING SUCH OLD NOTES AND EXECUTING THIS LETTER OF
TRANSMITTAL, AGREES THAT, UPON RECEIPT OF NOTICE FROM THE COMPANY OF THE
OCCURRENCE OF ANY EVENT OR THE DISCOVERY OF ANY FACT WHICH MAKES ANY STATEMENT
CONTAINED OR INCORPORATED BY REFERENCE IN THE PROSPECTUS UNTRUE IN ANY MATERIAL
RESPECT OR WHICH CAUSES THE PROSPECTUS TO OMIT TO STATE A MATERIAL FACT
NECESSARY IN ORDER TO MAKE THE STATEMENTS CONTAINED OR INCORPORATED BY REFERENCE
THEREIN, IN LIGHT OF THE CIRCUMSTANCES UNDER WHICH THEY WERE MADE, NOT
MISLEADING OR
6
<PAGE>
OF THE OCCURRENCE OF CERTAIN OTHER EVENTS SPECIFIED IN THE REGISTRATION RIGHTS
AGREEMENT, SUCH PARTICIPATING BROKER-DEALER WILL SUSPEND THE SALE OF NEW NOTES
PURSUANT TO THE PROSPECTUS UNTIL THE COMPANY HAS AMENDED OR SUPPLEMENTED THE
PROSPECTUS TO CORRECT SUCH MISSTATEMENT OR OMISSION AND HAS FURNISHED COPIES OF
THE AMENDED OR SUPPLEMENTED PROSPECTUS TO THE PARTICIPATING BROKER-DEALER OR THE
COMPANY HAS GIVEN NOTICE THAT THE SALE OF THE NEW NOTES MAY BE RESUMED, AS THE
CASE MAY BE. IF THE COMPANY GIVES SUCH NOTICE TO SUSPEND THE SALE OF THE NEW
NOTES, IT SHALL EXTEND THE 180-DAY PERIOD REFERRED TO ABOVE DURING WHICH
PARTICIPATING BROKER-DEALERS ARE ENTITLED TO USE THE PROSPECTUS IN CONNECTION
WITH THE RESALE OF NEW NOTES BY THE NUMBER OF DAYS DURING THE PERIOD FROM AND
INCLUDING THE DATE OF THE GIVING OF SUCH NOTICE TO AND INCLUDING THE DATE WHEN
PARTICIPATING BROKER-DEALERS SHALL HAVE RECEIVED COPIES OF THE SUPPLEMENTED OR
AMENDED PROSPECTUS NECESSARY TO PERMIT RESALES OF THE NEW NOTES OR TO AND
INCLUDING THE DATE ON WHICH THE COMPANY HAS GIVEN NOTICE THAT THE SALE OF NEW
NOTES MAY BE RESUMED, AS THE CASE MAY BE.
Holders of Old Notes whose Old Notes are accepted for exchange will not
receive accrued interest on such Old Notes for any period from and after the
last Interest Payment Date to which interest has been paid or duly provided for
on such Old Notes prior to the original issue date of the New Notes or, if no
such interest has been paid or duly provided for, will not receive any accrued
interest on such Old Notes, and the undersigned waives the right to receive any
interest on such Old Notes accrued from and after such Interest Payment Date or,
if no such interest has been paid or duly provided for, from and after March 12,
1997.
All authority herein conferred or agreed to be conferred in this Letter of
Transmittal shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, personal representatives, trustees in bankruptcy,
legal representatives, successors and assigns of the undersigned. Except as
stated in the Prospectus, this tender is irrevocable.
7
<PAGE>
- ------------------------------------ --------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 6 AND 7) (SEE INSTRUCTIONS 1, 5 AND 6)
To be completed ONLY if the To be completed ONLY if the
New Notes are to be issued in the New Notes are to be sent to someone
name of someone other than the other than the registered holder(s)
registered holder of the Old Notes of the Old Notes whose name(s)
whose name(s) appear(s) above. appear(s) above or such registered
holder(s) at an address other than
that shown above.
Issue New Notes to:
|_| Old Notes not tendered Mail |_| Old Notes not tendered
|_| Exchange Notes, to: |_| Exchange Notes, to:
Name _____________________________ Name _____________________________
(Please Print) (Please Print)
Address __________________________ Address __________________________
__________________________________ __________________________________
(Zip Code) (Zip Code)
Area Code and Area Code and
Telephone Number _______________ Telephone Number _______________
__________________________________ __________________________________
(Taxpayer Identification or (Taxpayer Identification or
Social Security Number(s)) Social Security Number(s))
- ------------------------------------ --------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
HOLDER(S) SIGN HERE
(SEE INSTRUCTIONS 2, 5 AND 6)
(PLEASE COMPLETE SUBSTITUTE FORM W-9 ON PAGE 9)
(NOTE: SIGNATURE(S) MUST BE GUARANTEED IF REQUIRED BY INSTRUCTION 2)
Must be signed by registered holder(s) exactly as name(s) appear(s) on
Certificate(s) for the Old Notes hereby tendered or on a security position
listing, or by any person(s) authorized to become the registered holder(s) by
endorsements and documents transmitted herewith (including such opinions of
endorsements and documents transmitted herewith (including such opinions of
counsel, certifications and other information as may be required by the Company
or the Trustee for the Old Notes to comply with the restrictions on transfer
applicable to the Old Notes). If signature is by an attorney-in-fact, executor,
administrator, trustee, guardian, officer of a corporation or another acting in
a fiduciary capacity or representative capacity, please set forth the signer's
full title. See Instruction 5.
________________________________________________________________________________
Signature(s) of Owner(s)
________________________________________________________________________________
Dated ____________________________________________________________________, 1997
Name(s) ________________________________________________________________________
(Please Print)
________________________________________________________________________________
Capacity (full title) __________________________________________________________
Address ________________________________________________________________________
(Include Zip Code)
Area Code and Telephone No. ____________________________________________________
________________________________________________________________________________
(Tax Identification or Social Security Number(s))
GUARANTEE OF SIGNATURE(S)
(See Instructions 2 and 5)
________________________________________________________________________________
(Authorized Signature)
Date: ____________________________________________________________________, 1997
Name of Firm ___________________________________________________________________
Capacity (full title) __________________________________________________________
(Please Print)
Address ________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Include Zip Code)
Area Code and Telephone No. ____________________________________________________
- --------------------------------------------------------------------------------
9
<PAGE>
TO BE COMPLETED BY ALL TENDERING SECURITYHOLDERS
(SEE INSTRUCTION 9)
PAYER'S NAME: THE CHASE MANHATTAN BANK
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Part I -- Taxpayer Identification Number -- For All TIN:
Accounts Enter your taxpayer identification number in
the appropriate box. For most individuals and sole ---------------
proprietors, this is your Social Security Number. For
SUBSTITUTE other entities, it is your Employer Identification Social Security
Number. If you do not have a number, see "How to Obtain Number
FORM W-9 a TIN" in the enclosed Guidelines.
OR
Department of Note: if the account is in more than one name, see the
the Treasury chart on page 2 of the enclosed Guidelines to determine Employer
Internal Revenue what number to enter. Identification
Service Number
--------------------------------------------------------------------------
Part II -- For Payees Exempt From Backup Withholding
(see enclosed Guidelines). |_| Awaiting TIN
- -------------------------------------------------------------------------------------------------
Certification. -- Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct taxpayer
identification number, or I am waiting for a number to be issued
to me and either (a) I have mailed or delivered an application to
receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration
Office or (b) I intend to mail or deliver an application in the
near future. I understand that if I do not provide a taxpayer
identification number by the time of payment, 31% of all payments
made to me on account of the New Notes shall be retained until I
provide a taxpayer identification number to the Exchange Agent and
that, if I do not provide a taxpayer identification number within
sixty (60) days, such retained amounts shall be remitted to the
Internal Revenue Service (the "IRS") as back-up withholding and
31% of all reportable for payments made to me thereafter will be
withheld and remitted to the IRS until I provide a taxpayer
Payer's Request identification number;
for
Taxpayer (2) I am not subject to backup withholding either because (a) I am
Identification exempt from backup withholding, or (b) I have not been notified by
Number the IRS that I am subject to backup withholding as a result of a
failure to report all interest or dividends, or (c) the IRS has
notified me that I am no longer subject to backup withholding; and
(3) Any other information provided on this form is true, correct and
complete.
Certification Instructions. - You must cross out item (2) above if you
have been notified by the IRS that you are subject to backup
withholding because of underreporting interest or dividends on your tax
return and you have not been notified by the IRS that you are no longer
subject to backup withholding.
--------------------------------------------------------------------------
SIGNATURE _____________________________________ DATE ______________, 1997
- -------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER.
PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR INSTRUCTIONS
10
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. Delivery of Letter of Transmittal and Certificates; Guaranteed Delivery
Procedures. This Letter of Transmittal is to be completed either if (a)
Certificates are to be forwarded herewith or (b) tenders are to be made pursuant
to the procedures for tender by book-entry transfer set forth in "The Exchange
Offer--Procedures for Tendering Old Notes" in the Prospectus. Certificates, or
timely confirmation of a book-entry transfer of such Old Notes into the Exchange
Agent's account at DTC, as well as this Letter of Transmittal (or facsimile
thereof), properly completed and duly executed, with any required signature
guarantees, and any other documents required by this Letter of Transmittal, must
be received by the Exchange Agent at its address set forth herein on or prior to
the Expiration Date. Old Notes may be tendered in whole or in part in the
principal amount of $1,000 and integral multiples of $1,000, provided that, if
any Old Notes are tendered for exchange in part, the untendered principal amount
thereof must be $100,000 or any integral multiple of $1,000 in excess thereof.
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, this Letter of
Transmittal and all other required documents to the Exchange Agent on or prior
to the Expiration Date or (iii) who cannot complete the procedures for delivery
by book-entry transfer on a timely basis, may tender their Old Notes by properly
completing and duly executing a Notice of Guaranteed Delivery pursuant to the
guaranteed delivery procedures set forth in "The Exchange Offer--Procedures for
Tendering Old Notes" in the Prospectus. Pursuant to such procedures: (i) such
tender must be made by or through an Eligible Institution (as defined below);
(ii) a properly completed and duly executed Notice of Guaranteed Delivery,
substantially in the form made available by the Company, must be received by the
Exchange Agent on or prior to the Expiration Date; and (iii) the Certificates
(or a book-entry confirmation (as defined in the Prospectus)) representing all
tendered Old Notes, in proper form for transfer, together with a Letter of
Transmittal (or facsimile thereof), properly completed and duly executed, with
any required signature guarantees and any other documents required by this
Letter of Transmittal, must be received by the Exchange Agent within five New
York Stock Exchange, Inc. trading days after the date of execution of such
Notice of Guaranteed Delivery, all as provided in "The Exchange
Offer--Procedures for Tendering Old Notes" in the Prospectus.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted
by facsimile or mail to the Exchange Agent, and must include a guarantee by an
Eligible Institution in the form set forth in such Notice. For Old Notes to be
properly tendered pursuant to the guaranteed delivery procedure, the Exchange
Agent must receive a Notice of Guaranteed Delivery on or prior to the Expiration
Date. As used herein and in the Prospectus, "Eligible Institution" means a firm
or other entity identified in Rule 17Ad-15 under the Exchange Act as "an
eligible guarantor institution," including (as such terms are defined therein)
(i) a bank; (ii) a broker, dealer, municipal securities broker or dealer or
government securities broker or dealer; (iii) a credit union; (iv) a national
securities exchange, registered securities association or clearing agency; or
(v) a savings association that is a participant in a Securities Transfer
Association.
THE METHOD OF DELIVERY OF CERTIFICATES, THIS LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING HOLDER
AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE
AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED,
PROPERLY INSURED, OR OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
The Company will not accept any alternative, conditional or contingent
tenders. Each tendering holder, by execution of a Letter of Transmittal (or
facsimile thereof), waives any right to receive any notice of the acceptance of
such tender.
2. Guarantee of Signatures. No signature guarantee on this Letter of
Transmittal is required if:
11
<PAGE>
(i) this Letter of Transmittal is signed by the registered holder
(which term, for purposes of this document shall include any participant
in DTC whose name appears on a security position listing as the owner of
the Old Notes) of Old Notes tendered herewith, unless such holder(s) has
completed either the box entitled "Special Issuance Instructions" or the
box entitled "Special Delivery Instructions" above, or
(ii) such Old Notes are tendered for the account of a firm that is
an Eligible Institution.
In all other cases, an Eligible Institution must guarantee the
signature(s) on this Letter of Transmittal. See Instruction 5.
3. Inadequate Space. If the space provided in the box captioned
"Description of Old Notes" is inadequate, the Certificate number(s) and/or the
principal amount of Old Notes and any other required information should be
listed on a separate signed schedule which Is attached to this Letter of
Transmittal.
4. Partial Tenders and Withdrawal Rights. Tenders of Old Notes will be
accepted only in the principal amount of $1,000 and integral multiples thereof,
provided that if any Old Notes are tendered for exchange in part, the untendered
principal amount thereof must be $100,000 or any integral multiple of $1,000 in
excess thereof. If less than all the Old Notes evidenced by any Certificate
submitted are to be tendered, fill in the principal amount of Old Notes which
are to be tendered in the box entitled "Principal Amount of Old Notes Tendered
(if less than all)." In such case, new Certificate(s) for the remainder of the
Old Notes that were evidenced by your old Certificate(s) will only be sent to
the holder of the Old Note, promptly after the Expiration Date. All Old Notes
represented by Certificates delivered to the Exchange Agent will be deemed to
have been tendered unless otherwise indicated.
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time on or prior to the Expiration Date. In order for a withdrawal to be
effective on or prior to that time, a written, telegraphic, telex or facsimile
transmission of such notice of withdrawal must be timely received by the
Exchange Agent at one of its addresses set forth above or in the Prospectus on
or prior to the Expiration Date. Any such notice of withdrawal must specify the
name of the person who tendered the Old Notes to be withdrawn, the aggregate
principal amount of Old Notes to be withdrawn, and (if Certificates for Old
Notes have been tendered) the name of the registered holder of the Old Notes as
set forth on the Certificate for the Old Notes, if different from that of the
person who tendered such Old Notes. If Certificates for the Old Notes have been
delivered or otherwise identified to the Exchange Agent, then prior to the
physical release of such Certificates for the Old Notes, the tendering holder
must submit the serial numbers shown on the particular Certificates for the Old
Notes to be withdrawn and the signature on the notice of withdrawal must be
guaranteed by an Eligible Institution, except in the case of Old Notes tendered
for the account of an Eligible Institution. If Old Notes have been tendered
pursuant to the procedures for book-entry transfer set forth in "The Exchange
Offer--Procedures for Tendering Old Notes," the notice of withdrawal must
specify the name and number of the account at DTC to be credited with the
withdrawal of Old Notes, in which case a notice of withdrawal will be effective
if delivered to the Exchange Agent by written, telegraphic, telex or facsimile
transmission. Withdrawals of tenders of Old Notes may not be rescinded. Old
Notes properly withdrawn will not be deemed validly tendered for purposes of the
Exchange Offer, but may be retendered at any subsequent time on or prior to the
Expiration Date by following any of the procedures described in the Prospectus
under "The Exchange Offer--Procedures for Tendering Old Notes."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all parties.
Neither the Company, any affiliates or assigns of the Company, the Exchange
Agent nor any other person shall be under any duty to give any notification of
any irregularities in any notice of withdrawal or incur any liability for
failure to give any such notification. Any Old Notes which have been tendered
but which are withdrawn will be returned to the holder thereof without cost to
such holder promptly after withdrawal.
5. Signatures on Letter of Transmittal, Assignments and Endorsements. If
this Letter of Transmittal is signed by the registered holder of the Old Notes
tendered hereby, the signature(s) must correspond exactly with the name(s) as
written on the face of the Certificate(s) without alteration, enlargement or any
change whatsoever.
12
<PAGE>
If any of the Old Notes tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal.
If any tendered Old Notes are registered in different name(s) on several
Certificates it will be necessary to complete, sign and submit as many separate
Letters of Transmittal (or facsimiles thereof) as there are different
registrations of Certificates.
If this Letter of Transmittal or any Certificates or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing and must submit proper
evidence satisfactory to the Company, in its sole discretion, of each persons'
authority to so act.
When this Letter of Transmittal is signed by the registered owner(s) of
the Old Notes listed and transmitted hereby, no endorsement(s) of Certificate(s)
or separate bond power(s) are required unless New Notes are to be issued in the
name of a person other than the registered holder(s). Signature(s) on such
Certificate(s) or bond power(s) must be guaranteed by an Eligible Institution.
If this Letter of Transmittal ia signed by a person other than the
registered owner(s) of the Old Notes listed, the Certificates must be endorsed
or accompanied by appropriate bond powers, signed exactly as the name or names
of the registered owner(s) appear(s) on the Certificates, and also be must be
accompanied by each opinions of counsel, certifications and other information as
the Company or the Trustee for the Old Notes may require in accordance with the
restrictions on transfer applicable to the Old Notes. Signatures on such
Certificates or bond powers must be guaranteed by an Eligible Institution.
6. Special Issuance and Delivery Instructions. If New Notes are to be
issued in the name of a person other than the signer of this Letter of
Transmittal, or if New Notes are to be sent to someone other than the signer of
this Letter of Transmittal or to an address other than that shown above, the
appropriate boxes on this Letter of Transmittal should be completed.
Certificates for Old Notes not exchanged will be returned by mail or, if
tendered by book-entry transfer, by crediting the account indicated above
maintained at DTC. See Instruction 4.
7. Irregularities. The Company will determine, in its sole discretion, all
questions as to the form of documents, validity, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Notes, which
determination shall be final and binding on all parties. The Company reserves
the absolute right to reject any and all tenders determined by it not to be in
proper form or the acceptance of which, or exchange for, may, in the view of
counsel to the Company, be unlawful. The Company also reserves the absolute
right, subject to applicable law, to waive any of the conditions of the Exchange
Offer set forth in the Prospectus under "The Exchange Offer--Certain Conditions
to the Exchange Offer" or any conditions or irregularity in any tender of Old
Notes of any particular holder whether or not similar conditions or
irregularities are waived in the case of other holders. The Company's
interpretation of the terms and conditions of the Exchange Offer (including this
Letter of Transmittal and the instructions hereto) will be final and binding. No
tender of Old Notes will be deemed to have been validly made until all
irregularities with respect to such tender have been cured or waived. Neither
the Company, any affiliates or assigns of the Company, the Exchange Agent, nor
any other person shall be under any duty to give notification of any
irregularities in tenders or incur any liability failure to give such
notification.
8. Questions, Requests for Assistance and Additional Copies. Questions and
requests for assistance may be directed to the Exchange Agent at its address and
telephone number set forth on the front of this Letter of Transmittal.
Additional copies of the Prospectus, the Notice of Guaranteed Delivery and the
Letter of Transmittal may be obtained from the Exchange Agent or from your
broker, dealer, commercial bank, trust company or other nominee.
9. 31% Backup Withholding, Substitute Form W-9. Under U.S. Federal income
tax laws, a holder whose tendered Old Notes are accepted for exchange is
required to provide the Exchange Agent with such holder's correct taxpayer
identification number ("TIN") on Substitute Form W-9 above. If the Exchange
Agent is not provided with the correct TIN, the Internal Revenue Service (the
"IRS") may subject the holder or other payee to a $50 penalty. In addition,
payments to
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<PAGE>
such holders or other payees with respect to Old Notes exchanged pursuant to the
Exchange Offer may be subject to 31% backup withholding.
The holder is required to give the Exchange Agent the TIN (e.g., social
security number or employer identification number) of the registered owner of
the Old Notes or of the last transferee appearing on the transfers attached to,
or endorsed on, the Old Notes. If the Old Notes are registered in more than one
name or are not in the name of the actual owner, consult the enclosed Guidelines
for Certification of Taxpayer Identification Number on Substitute Form W-9 for
additional guidance on which number to report.
Certain holders (including, among others, all corporations and certain
foreign individuals) are not subject to these backup withholding and reporting
requirements. In order to satisfy the Exchange Agent that a foreign individual
qualifies as an exempt recipient, such holder must submit a statement, signed
under penalties of perjury, attesting to that holder's exempt status. Such
statements can be obtained from the Exchange Agent. For further information
concerning backup withholding and instructions for completing the Substitute
Form W-9 (including how to obtain a taxpayer's identification number if you do
not have one and how to complete the Substitute Form W-9 if Notes are held in
more than one name), consult the enclosed Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9.
Failure to complete the Substitute Form W-9 will not, by itself, cause Old
Notes to be deemed invalidly tendered, but may require the Exchange Agent to
withhold 31% of the amount of any payments made pursuant to the Offer. Backup
withholding is not an additional federal income tax. Rather, the federal income
tax liability of a person subject to backup withholding will be reduced by the
amount of tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained provided that the required information is furnished to
the Internal Revenue Service.
Backup withholding is not an additional U.S. Federal income tax. Rather,
the U.S. Federal income tax liability of a person subject to backup withholding
will be reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained.
NOTE: FAILURE TO COMPLETE AND RETURN THE SUBSTITUTE FORM W-9 MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER.
PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
10. Lost, Destroyed or Stolen Certificates. If any Certificate(s)
representing Old Notes have been lost, destroyed or stolen, the holder should
promptly notify the Exchange Agent. The holder will then be instructed as to the
steps that must be taken in order to replace the Certificate(s). This Letter of
Transmittal and related documents cannot be processed until the procedures for
replacing Certificate(s) have been followed.
11. Security Transfer Taxes. Holders who tender their Old Notes for
exchange will not be obligated to pay any transfer taxes in connection
therewith. If, however, New Notes are to be delivered to, or are to be issued in
the name of, any person other than registered holder of the Old Notes tendered,
or if a transfer tax is imposed for any reason other than the exchange of Old
Notes in connection with the Exchange Offer, then the amount of any such
transfer tax (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF) AND ALL OTHER
REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE
EXPIRATION DATE.
14
Exhibit 99.2
FORM OF NOTICE OF GUARANTEED DELIVERY
FOR TENDER OF
7 1/2% Senior Notes Due 2002
OF
CONTIFINANCIAL CORPORATION
This Notice of Guaranteed Delivery, or one substantially equivalent to
this form, must be used to accept the Exchange Offer (as defined below) if (i)
the procedures for delivery by book-entry transfer cannot be completed on a
timely basis (ii) certificates for the Company's (as defined below) 7 1/2%
Senior Notes Due 2002 (the "Old Notes") are not immediately available or (iii)
Old Notes, the Letter of Transmittal and all other required documents cannot be
delivered to The Chase Manhattan Bank (the "Exchange Agent") on or prior to the
Expiration Date (as defined in the Prospectus referred to below). This Notice of
Guaranteed Delivery may be delivered by hand, overnight courier or mail, or
transmitted by facsimile transmission, to the Exchange Agent. See "The Exchange
Offer--Procedures for Tendering Old Notes" in the Prospectus.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
THE CHASE MANHATTAN BANK
BY MAIL/OVERNIGHT DELIVERY/HAND:
The Chase Manhattan Bank
Corporate Trust Securities Window
55 Water Street
Room 234, North Bldg.
New York, New York 10041
Attn: Carlos Esteves, Tender Processing
CONFIRM BY TELEPHONE:
(212) 638-0828
FACSIMILE TRANSMISSIONS:
(212) 638-7380; (212) 638-7381
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED DELIVERY VIA A
FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THE
SIGNATURE BOX ON THE LETTER OF TRANSMITTAL.
Ladies and Gentlemen:
The undersigned hereby tenders to ContiFinancial Corporation, a Delaware
corporation (the "Company"), upon the terms and subject to the conditions set
forth in the Prospectus dated March 26, 1997 (as the same may be amended or
supplemented from time to time, the "Prospectus"), and the related Letter of
Transmittal (which together constitute the "Exchange Offer"), receipt of which
is hereby acknowledged, the aggregate principal amount of Old Notes set forth
below pursuant to the guaranteed delivery procedures set forth in the Prospectus
under the caption "The Exchange Offer--Procedures for Tendering Old Notes."
Aggregate Principal Amount Tendered: Name(s) of Registered Holder(s):
___________________________________ _________________________________________
Certificate No(s). (if available): Address(es):
___________________________________ _________________________________________
If Old Notes will be tendered by _________________________________________
book-entry transfer, provide the
following information: Area Code and Telephone Number(s): ______
DTC Account Number: _______________ _________________________________________
Date: _____________________________ Signature(s): ___________________________
_________________________________________
_________________________________________
THE GUARANTEE ON THE REVERSE SIDE MUST BE COMPLETED
<PAGE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm or other entity identified in Rule 17Ad-15 under
the Securities Exchange Act of 1934, as amended, as an "eligible guarantor
institution," including (as such terms are defined therein): (1) bank; (2) a
broker, dealer, municipal securities broker, municipal securities dealer,
government securities broker, government securities dealer; (3) a credit union;
(4) a national securities exchange, registered securities association or
clearing agency; or (5) a savings association that is a participant in a
Securities Transfer Association recognized program (each of the foregoing being
referred to as an "Eligible Institution"), hereby guarantees to deliver to the
Exchange Agent, at one of its addresses set forth above, either the Old Notes
tendered hereby in proper form for transfer, or confirmation of the book-entry
transfer of such Old Notes to the Exchange Agent's account at The Depository
Trust Company ("DTC"), pursuant to the procedures for book-entry transfer set
forth in the Prospectus, in either case together with one or more properly
completed and duly executed Letter(s) of Transmittal (or facsimile thereof) and
any other required documents within three New York Stock Exchange trading days
after the date of execution of this Notice of Guaranteed Delivery.
The undersigned acknowledges that it must deliver the Letter(s) of
Transmittal and the Old Notes tendered hereby to the Exchange Agent within the
time period set forth above and that failure to do so could result in a
financial loss to the undersigned.
Name of Firm: _____________________ _________________________________________
(Authorized Signature)
Address: __________________________ Title: __________________________________
___________________________________ Name: ___________________________________
(Zip Code) (Please type or print)
Date: ___________________________________
Area Code and
Telephone Number: _________________
NOTE: DO NOT SEND OLD NOTES WITH THIS NOTICE OF GUARANTEED DELIVERY. ACTUAL
SURRENDER OF OLD NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, A
PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL AND ANY OTHER
REQUIRED DOCUMENTS.
Exhibit 99.3
FORM OF EXCHANGE AGENT AGREEMENT
_______, 1997
The Chase Manhattan Bank
450 West 33rd Street
New York, New York 10001
Ladies and Gentlemen:
ContiFinancial Corporation (the "Company"), a Delaware corporation, hereby
appoints The Chase Manhattan Bank ("Chase") to act as exchange agent (the
"Exchange Agent") in connection with an exchange offer by the Company to
exchange up to $200,000,000 aggregate principal amount of its 7 1/2% Senior
Notes Due 2002 (the "New Notes"), which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), for a like principal
amount of its outstanding 7 1/2% Senior Notes Due 2002 (the "Old Notes" and
together with the New Notes, the "Notes"). The terms and conditions of the
exchange offer are set forth in a Prospectus dated March 25, 1997 (as the same
may be amended or supplemented from time to time, the "Prospectus") and in the
related Letter of Transmittal, which together constitute the "Exchange Offer."
The registered holders of the Notes are hereinafter referred to as the
"Holders." Capitalized terms used herein and not defined shall have the
respective meanings described thereto in the Prospectus.
On the basis of the representations, warranties and agreements of the
Company and Chase contained herein and subject to the terms and conditions
hereof, the following sets forth the agreement between the Company and Chase as
Exchange Agent for the Exchange Offer:
1. Appointment and Duties as Exchange Agent.
a. The Company hereby authorizes Chase to act as Exchange Agent in
connection with the Exchange Offer and Chase agrees to act as Exchange Agent in
connection with the Exchange Offer. As Exchange Agent, Chase will perform those
services as are outlined herein or which are customarily performed by an
exchange agent in connection with an exchange offer of like nature, including,
but not limited to, accepting tenders of Old Notes, assisting the Company in the
preparation of the documentation necessary to effect the transactions herein
contemplated (without assuming responsibility for such documentation, unless
such information has been furnished to the Company in writing by Chase) and
communicating generally regarding the Exchange Offer with brokers, dealers,
commercial banks, trust companies and other persons, including Holders of the
Old Notes.
<PAGE>
b. The Company acknowledges and agrees that Chase has been retained
pursuant to this Agreement to act solely as Exchange Agent in connection with
the Exchange Offer, and in such capacity, Chase shall perform such duties as are
outlined herein and which are specifically set forth in the section of the
Prospectus captioned "The Exchange Offer" and in the Letter of Transmittal;
provided, however, that in no way will Chase's general duty to act in good faith
and without gross negligence or willful misconduct be discharged by the
foregoing.
c. Chase will examine each of the Letters of Transmittal and certificates
for Old Notes and any other documents delivered or mailed to Chase by or for
Holders of the Old Notes, and any book-entry confirmations (as defined in the
section of the Prospectus captioned "The Exchange Offer--Acceptance For Exchange
and Issuance of New Notes") received by Chase with respect to the Old Notes, to
ascertain whether: (i) the Letters of Transmittal and any such other documents
are duly executed and properly completed in accordance with the instructions set
forth therein and that such book-entry confirmations are in due and proper form
and contain the information required to be set forth therein, and (ii) the Old
Notes have otherwise been properly tendered. In each case where the Letters of
Transmittal or any other documents have been improperly completed or executed or
where book-entry confirmations are not in due and proper form or omit certain
information, or any of the certificates for Old Notes are not in proper form for
transfer or some other irregularity in connection with the tender or acceptance
of the Old Notes exists, Chase will endeavor, subject to the terms and
conditions of the Exchange Offer, to advise the tendering Holders of the
irregularity, and if such irregularity is not corrected, to advise the Company
of the same, and to take any other action as may be necessary or advisable to
cause such irregularity to be corrected. Notwithstanding the above, Chase shall
not be under any duty to give any notification of any irregularities in tenders
or incur any liability for failure to give any such notification.
d. With the approval of the President, any Senior Vice President, any
Executive Vice President, any Vice President or the Treasurer or any Assistant
Treasurer of the Company, (such approval, if given orally, to be confirmed in
writing) or any other party designated by any such officer, Chase is authorized
to waive any irregularities in connection with any tender of Old Notes pursuant
to the Exchange Offer.
e. Tenders of Old Notes may be made only as set forth in the Letter of
Transmittal and in the section of the Prospectus captioned "The Exchange Offer"
and Old Notes shall be considered properly tendered only when tendered in
accordance with such procedures set forth therein. Notwithstanding the
provisions of this paragraph, Old Notes which the President, any Senior Vice
President, any Executive Vice President, any Vice President or the Treasurer,
any Assistant Treasurer or any other designated officer of the Company, shall
approve (such approval, if given orally, to be confirmed in writing in an
Officers' Certificate) as having been properly tendered shall be considered to
be properly tendered.
f. Chase shall advise the Company with respect to any Old Notes received
as soon as possible after 5:00 p.m., New York City time, on June 11, 1997 and
accept its instructions with respect to disposition of such Old Notes.
g. Chase shall ensure (i) that Old Notes tendered in part are tendered in
principal amounts of $1,000 and integral multiples thereof and that if any Old
Notes are tendered or exchange in part, the untendered principal amount thereof
is $100,000 or any integral multiple of $1,000 in excess thereof; and (ii) that
Chase shall deliver certificates for Old Notes tendered
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<PAGE>
in part to the transfer agent for split-up and shall return any untendered Old
Notes or Old Notes which have not been accepted by the Company to the Holders
promptly after the expiration or termination of the Exchange Offer.
h. Upon acceptance by the Company of any Old Notes duly tendered pursuant
to the Exchange Offer (such acceptance, if given orally, to be confirmed in
writing), Chase will cause New Notes in exchange therefor to be issued as
promptly as possible (subject to receipt from the Company of appropriate
certificates under the related Indenture) and Chase will deliver such New Notes
on behalf of the Company at the rate of $1,000 principal amount of New Notes for
each $1,000 principal amount of Old Notes tendered as promptly as possible after
acceptance by the Company of the Old Notes for exchange and notice (such notice,
if given orally, to be confirmed in writing) of such acceptance by the Company;
provided, however, that in all cases, Old Notes tendered pursuant to the
Exchange Offer will be exchanged only after timely receipt by Chase of
certificates for such Old Notes (or a book-entry confirmation), a properly
completed and duly executed Letter of Transmittal (or facsimile thereof) with
any required signature guarantees and any other required documents. Chase shall
issue New Notes only in denominations of $1,000 or any integral multiple thereof
unless otherwise instructed by the Company in writing.
i. Tenders pursuant to the Exchange Offer are irrevocable, except that,
subject to the terms and the conditions set forth in the Prospectus and the
Letter of Transmittal, Old Notes tendered pursuant to the Exchange Offer may be
withdrawn at any time on or prior to the Expiration Date in accordance with the
terms of the Exchange Offer.
j. Notice of any decision by the Company not to exchange any Old Notes
tendered shall be given by the Company either orally (if given orally, to be
confirmed in writing) or in a written notice.
k. If, pursuant to the Exchange Offer, the Company does not accept for
exchange all or part of the Old Notes tendered because of an invalid tender, the
occurrence of certain other events set forth in the Prospectus under the caption
"The Exchange Offer--Conditions to the Exchange Offer" or otherwise, Chase
shall, upon notice from the Company (such notice if given orally, to be
confirmed in writing), promptly after the expiration or termination of the
Exchange Offer return such certificate for unaccepted Old Notes (or effect
appropriate book-entry transfer), together with any related required documents
and the Letters of Transmittal relating thereto that are in Chase's possession,
to the persons who deposited such certificates.
l. Chase is not authorized to pay or offer to pay any concessions,
commissions or solicitation fees to any broker, dealer, commercial bank, trust
company or other nominee or to engage or use any person to solicit tenders.
m. As Exchange Agent, Chase:
(i) shall have no duties or obligations other than those
specifically set forth in the Prospectus, the Letter of Transmittal or
herein or as may be subsequently agreed to in writing by Chase and the
Company;
(ii) will make no representations and will have no responsibilities
as to the validity, sufficiency, value or genuineness of any of the
certificates for the Old Notes
3
<PAGE>
deposited pursuant to the Exchange Offer and will not be required to and
will make no representation as to the validity, value or genuineness of
the Exchange Offer; provided, however, that in no way will Chase's general
duty to act in good faith and without gross negligence or willful
misconduct be limited by the foregoing;
(iii) shall not be obligated to take any legal action hereunder
which might in Chase's reasonable judgment involve any expense or
liability, unless Chase shall have been furnished with reasonable
indemnity from the Company satisfactory to Chase;
(iv) may reasonably rely on and shall be fully authorized and
protected in acting in reliance upon any certificate, instrument, opinion,
notice, letter, telegram, facsimile or other document or security
delivered to Chase and reasonably believed by Chase to be genuine and to
have been signed by the proper party or parties;
(v) may reasonably act upon any tender, statement, request, comment,
agreement or other instrument whatsoever not only as to its due execution
and validity and effectiveness of its provisions, but also as to the truth
and accuracy of any information contained therein, which Chase believes in
good faith to be genuine and to have been signed or represented by a
proper person or persons acting in a fiduciary or representative capacity
(so long as proper evidence of such fiduciary's or representative's
authority so to act is submitted to Chase) and Chase examines and
reasonably concludes that such evidence properly establishes such
authority;
(vi) may rely on and shall be protected in acting upon written or
oral instructions from the President, any Senior Vice President, any
Executive Vice President, any Vice President, the Treasurer, any Assistant
Treasurer or any other designated officer of the Company;
(vii) may consult with its own counsel with respect to any questions
relating to Chase's duties and responsibilities and the written opinion of
such counsel shall be full and complete authorization and protection in
respect of any action taken, suffered or omitted to be taken by Chase
hereunder in good faith and in accordance with the written opinion of such
counsel; and
(viii) shall not advise any person tendering Old Notes pursuant to
the Exchange Offer as to whether to tender or refrain from tendering all
or any portion of its Old Notes or as to the market value, decline or
appreciation in market value of any Old Notes that may or may not occur as
a result of the Exchange Offer or as to the market value of the New Notes.
Chase shall take such action as may from time to time be requested by the
Company (and such other action as Chase may reasonably deem appropriate)
to furnish copies of the Prospectus, Letter of Transmittal and the Notice
of Guaranteed Delivery or such other forms as may be approved from time to
time by the Company, to all persons requesting such documents and to
accept and comply with telephone requests for information relating to the
Exchange Offer, provided that such information shall relate only to the
procedures for tendering into (or withdrawing from) the Exchange Offer.
The Company will furnish you with copies of such documents at your
request.
n. Chase shall advise orally and promptly thereafter confirm in writing to
the Company and such other person or persons as the Company may request, daily
(and more
4
<PAGE>
frequently during the week immediately preceding the Expiration Date and if
otherwise reasonably requested) up to and including the Expiration Date, the
aggregate principal amount of Old Notes which have been duly tendered pursuant
to and in compliance with the terms of the Exchange Offer and the items received
by Chase pursuant to the Exchange Offer and this Agreement, separately reporting
and giving cumulative totals as to items properly received and items improperly
received. In addition, Chase will also provide, and cooperate in making
available to the Company, or any such other person or persons upon request (such
request if made orally, to be confirmed in writing) made from time to time, such
other information as the Company may reasonably request. Such cooperation shall
include, without limitation, the granting by Chase to the Company, and such
person or persons as the Company may request, access to those persons on Chase's
staff who are responsible for receiving tenders, in order to ensure that
immediately prior to the Expiration Date the Company shall have received
adequate information in sufficient detail to enable the Company to decide
whether to extend the Exchange Offer. Chase shall prepare a final list of all
persons whose tenders were accepted, the aggregate principal amount of Old Notes
tendered, the aggregate principal amount of Old Notes accepted and deliver said
list to the Company.
o. Letters of Transmittal, book-entry confirmations and Notices of
Guaranteed Delivery shall be stamped by Chase as to the date and the time of
receipt thereof and shall be preserved by Chase for a period of time at least
equal to the period of time Chase preserves other records pertaining to the
transfer of securities, or one year, whichever is longer, and thereafter shall
be delivered by Chase to the Company. Chase shall dispose of unused Letters of
Transmittal and other surplus materials by returning them to the Company.
p. Chase hereby expressly waives any lien, encumbrance or right of set-off
whatsoever that Chase may have with respect to funds deposited with it for the
payment of transfer taxes by reasons of amounts, if any, borrowed by the
Company, or any of its subsidiaries or affiliates pursuant to any loan or credit
agreement with Chase.
2. Compensation. The Company shall compensate Chase for its services as Exchange
Agent in the amount of $5000; provided, further, that Chase reserves the right
to receive reimbursement from the Company for any reasonable out-of-pocket
expenses incurred as Exchange Agent in performing the services described herein,
including, reimbursement for the fees and disbursements of its legal counsel in
connection therewith.
3. Indemnification.
a. The Company hereby agrees to protect, defend, indemnify and hold
harmless Chase against and from any and all costs, losses, liabilities, expenses
(including reasonable counsel fees and disbursements) and claims imposed upon or
asserted against Chase on account of any action taken or omitted to be taken by
Chase in connection with its acceptance of or performance of its duties under
this Agreement and the documents related thereto as well as the reasonable costs
and expenses of defending itself against any claim or liability arising out of
or relating to this Agreement and the documents related thereto. This
indemnification shall survive the release, discharge, termination, and/or
satisfaction of this Agreement. Anything in this Agreement to the contrary
notwithstanding, the Company shall not be liable for indemnification or
otherwise for any loss, liability, cost or expense to the extent arising out of
Chase's bad faith, gross negligence or willful misconduct. Chase shall notify
the Company by letter of the written assertion of a claim against Chase or of
any other action commenced against Chase for which
5
<PAGE>
Chase may seek indemnification from the Company promptly after Chase shall have
received any such written assertion or shall have been served with a summons in
connection therewith. Failure by Chase to so notify the Company shall not
relieve the Company of its obligations hereunder. The Company shall be entitled
to participate at its own expense in the defense of any such claim or other
action and Chase shall be entitled to retain its own counsel to defend any
action or claim against Chase; provided, however, the fees and expenses of such
counsel shall be paid by Chase unless (i) the employment of such counsel shall
have been authorized in writing by the Company, (ii) the Company shall not have
employed counsel to have charge of the defense of such action within 10 days
after notice of commencement of the action, or (iii) Chase shall have reasonably
concluded that there may be many defenses available to it which are different
from or additional to those available to the Company, in any of which events
such fees and expenses shall be paid by the Company.
b. The Company shall not be liable for any settlement of any claim or
action in respect of which indemnification could be sought in accordance with
the indemnification provision of this Agreement (whether or not Chase or the
Company or any of its directors, officers and controlling persons is an actual
or potential party to such claim, action or proceeding), except with its written
consent, which consent shall not be unreasonably withheld.
4. Tax Information.
a. Chase shall arrange to comply with all requirements under the tax laws
of the United States, including those relating to missing Tax Identification
Numbers, and shall file any appropriate reports with the Internal Revenue
Service. The Company understands that Chase is required, in certain instances,
to deduct 31% with respect to interest paid on the New Notes and proceeds from
the sale, exchange, redemption or retirement of the New Notes from Holders who
have not supplied their correct Taxpayer Identification Number or required
certification. Such funds will be turned over by Chase to the Internal Revenue
Service.
b. Chase shall notify the Company of the amount of any transfer taxes
payable in respect of the exchange of Old Notes and, upon receipt of written
approval from the Company shall deliver or cause to be delivered, in a timely
manner, to each governmental authority to which any transfer taxes are payable
in respect of the exchange of Old Notes, a check in the amount of all transfer
taxes so payable, and the Company shall reimburse Chase for the amount of any
and all transfer taxes payable in respect of the exchange of Old Notes;
PROVIDED, HOWEVER, that Chase shall reimburse the Company for amounts refunded
to it in respect of its payment of any such transfer taxes, at such time as such
refund is received by Chase.
5. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York applicable to contracts
executed in and to be performed in that state.
6. Notices. Any communication or notice provided for hereunder shall be in
writing and shall be given (and shall be deemed to have been given upon receipt)
by delivery in person, telecopy, or overnight delivery or by registered or
certified mail (postage prepaid, return receipt requested) to the applicable
party at the addresses indicated below:
6
<PAGE>
If to the Company:
ContiFinancial Corporation
277 Park Avenue
New York, New York 10172
Attention: Chief Counsel
With a copy to:
Dewey Ballantine
1301 Avenue of the Americas
New York, New York 10019-6092
Telecopier No.: (212) 259-6333
Attention: Mark R. Baker, Esq.
If to The Chase Manhattan Bank
The Chase Manhattan Bank
450 West 33rd Street
New York, New York 10001
Telecopier No.: (212) 946-8158
Attention: Corporate Trust Department
With a copy to:
Kelley Drye & Warren LLP
101 Park Avenue
New York, New York 10178
Attention: David Retter, Esq.
or, as to each party, at such other address as shall be designated by such party
in a written notice complying as to delivery with the terms of this Section.
7. Parties in Interest. This Agreement shall be binding upon and inure solely to
the benefit of each party hereto and nothing in this Agreement, express or
implied, is intended to or shall confer upon any other person any right, benefit
or remedy of any nature whatsoever under or by reason of this Agreement. Without
limitation to the foregoing, the parties hereto expressly agree that no holder
of Old Notes or New Notes shall have any right, benefit or remedy of any nature
whatsoever under or by reason of this Agreement.
8. Counterparts; Severability. This Agreement may be executed in one or more
counterparts, and by different parties hereto on separate counterparts, each of
which when so executed shall be deemed an original, and all of such counterparts
shall together constitute one and the same agreement. If any term or other
provision of this Agreement or the application thereof is invalid, illegal or
incapable of being enforced by any rule of law, or public policy, all other
provisions of this Agreement shall nevertheless remain in full force and effect
so long as
7
<PAGE>
the economic or legal substance of the agreements contained herein is not
affected in any manner adverse to any party. Upon such determination that any
term or provision or the application thereof is invalid, illegal or
unenforceable, the parties hereto shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as closely as
possible in a mutually acceptable manner in order that the agreements contained
herein may be performed as originally contemplated to the fullest extent
possible.
9. Captions. The descriptive headings contained in this Agreement are included
for convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
10. Entire Agreement; Amendment. This Agreement constitutes the entire
understanding of the parties hereto with respect to the subject matter hereof.
This Agreement may not be amended or modified nor may any provision hereof be
waived except in writing signed by each party to be bound thereby.
11. Termination. This Agreement shall terminate upon the earlier of (a) the 90th
day following the expiration, withdrawal, or termination of the Exchange Offer,
(b) the close of business on the date of actual receipt of written notice by
Chase from the Company stating that this Agreement is terminated, (c) one year
following the date of this Agreement, or (d) the time and date on which this
Agreement shall be terminated by mutual consent of the parties hereto.
12. Miscellaneous. Chase hereby acknowledges receipt of the Prospectus and the
Letter of Transmittal and the Notice of Guaranteed Delivery and further
acknowledges that it has examined each of them. Any inconsistency between this
Agreement, on the one hand, and the Prospectus and the Letter of Transmittal and
the Notice of Guaranteed Delivery (as they may be amended or supplemented from
time to time), on the other hand, shall be resolved in favor of the latter three
documents, except with respect to the duties, liabilities and indemnification of
Chase as Exchange Agent which shall be controlled by this Agreement.
8
<PAGE>
Kindly indicate your willingness to act as Exchange Agent and
Chase's acceptance of the foregoing provisions by signing in the space provided
below for that purpose and returning to the Company a copy of this Agreement so
signed, whereupon this Agreement and Chase's acceptance shall constitute a
binding agreement between Chase and the Company.
Very truly yours,
CONTIFINANCIAL CORPORATION
By:
------------------------------------
Name:
-----------------------------
Title: Authorized Signatory
By:
------------------------------------
Name:
-----------------------------
Title: Authorized Signatory
Accepted and agreed to as of
the date first written above:
THE CHASE MANHATTAN BANK
By:
------------------------------------
Name:
-----------------------------
Title:
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9
