As filed with the Securities and Exchange Commission on March 26, 1997
Registration No. 333-____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ContiFinancial Corporation
(Exact name of registrant as specified in its charter)
Delaware 6162 13-3852588
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
------------------------
277 Park Avenue
New York, New York 10172
(212) 207-2800
(Address, including zip code, and telephone
number, including area code, of
registrant's principal executive offices)
------------------------
Alan L. Langus, Esq.
Chief Counsel
ContiFinancial Corporation
277 Park Avenue
New York, New York 10172
(212) 207-2822
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
Copies to:
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
------------------------
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:
|_|
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================================
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)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <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>
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these Securities has been filed with the
Securities and Exchange Commission. These Securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these Securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED MARCH , 1997
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 __________, 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 , 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 __ 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 , 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 , 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 , 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. IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY
, 1997.
----------
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
Available Information......................................................
Incorporation of Certain Documents by Reference............................
Prospectus Summary.........................................................
Summary Financial Information..............................................
Risk Factors...............................................................
Use of Proceeds from Sale of Old Notes.....................................
Capitalization.............................................................
Business...................................................................
Regulation.................................................................
Description of Certain Indebtedness and Financing Arrangements.............
Summary Financial Data.....................................................
The Exchange Offer.........................................................
Description of the New Notes...............................................
Description of the Old Notes...............................................
Book Entry Form of the Notes...............................................
Certain Federal Income Tax Consequences....................................
Erisa Considerations.......................................................
Plan of Distribution.......................................................
Special Note Regarding Forward-Looking Statements..........................
Legal Matters .............................................................
Experts....................................................................
5
<PAGE>
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."
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS
PARTICIPATING IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN
ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS IN THE NEW NOTES PURSUANT TO EXEMPTIONS
FROM RULES 101 THROUGH 104 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Commission's regional offices located at 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
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should be directed to ContiFinancial Corporation, 277 Park Avenue, New York, New
York 10172, Attention: Chief Counsel or by telephone at (212) 207-2800.
7
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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.
The Company, through its subsidiary, ContiTrade, provides financing and
asset securitization structuring expertise, and through its subsidiary,
ContiFinancial Services, provides placement services.
- --------------------------------------------------------------------------------
8
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- --------------------------------------------------------------------------------
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 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
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9
<PAGE>
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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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10
<PAGE>
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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.
- --------------------------------------------------------------------------------
11
<PAGE>
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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"). The Company expects to complete its Primary
Common Stock Offering in April 1997.
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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12
<PAGE>
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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 _____,
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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13
<PAGE>
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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
arrangement or understanding with any
person to participate, in a
- --------------------------------------------------------------------------------
14
<PAGE>
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 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
15
<PAGE>
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.
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."
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16
<PAGE>
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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
denominations of $1,000 and integral
multiples thereof.
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17
<PAGE>
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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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18
<PAGE>
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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). Simultaneous with the Primary Common Stock
Offering, Continental Grain plans to enter into a forward purchase contract (the
"Forward Contract") with ContiFinancial Trust, a Delaware business trust (the
"Trust") pursuant to which 2,800,000 shares (or 3,220,000 shares if the
underwriters of the Structured Yield Product Exchangeable for Stock(sm)
("STRYPES") exercise their over-allotment option) of Common Stock currently
owned by Continental Grain may be distributed to holders of the STRYPES issued
by the Trust upon conclusion of the term of the Trust in April, 2000 or upon
earlier dissolution of the Trust in certain circumstances. Upon satisfaction of
the Forward Contract, assuming Continental Grain delivers to the Trust the
maximum number of shares of Common Stock subject thereto, and assuming no other
sales of the Company's Common Stock by Continental Grain,
- ----------
(sm) Service Mark of Merrill Lynch & Co., Inc.
19
<PAGE>
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Continental Grain would own approximately 70% of the outstanding Common Stock
(or approximately 69% of the outstanding Common Stock if the over-allotment
options granted to the underwriters of the Primary Common Stock Offering and to
the underwriters of the STRYPES are exercised in full). It is planned that the
STRYPES will be offered in a public offering simultaneous with the Primary
Common Stock Offering.
Neither the Company's Common Stock nor the STRYPES will be offered
hereby. The Company's Common Stock will be offered only by a separate prospectus
relating to the Common Stock. The STRYPES are offered only by the STRYPES
prospectus. This Prospectus only relates to the New Notes.
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. Except to the extent that Continental Grain may deliver shares to
satisfy its obligations under the Forward Contract, 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."
20
<PAGE>
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
</TABLE>
As of December 31, 1996
----------------------- As of
As March 31,
Actual Adjusted(b) 1996
---------- ---------- --------
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
<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>
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>
- --------------------------------
(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.
21
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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.
22
<PAGE>
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
23
<PAGE>
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;
24
<PAGE>
(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.
25
<PAGE>
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
26
<PAGE>
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.
27
<PAGE>
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
28
<PAGE>
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
30
<PAGE>
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). If the Forward Contract is entered into and
satisfied, assuming Continental Grain delivers to the Trust the maximum number
of shares of Common Stock subject thereto, and assuming no other sales of the
Company's Common Stock by Continental Grain, Continental Grain would own
approximately 70% of the outstanding Common Stock (or approximately 69% of the
outstanding Common Stock if the over-allotment options granted to the
underwriters of the Primary Common Stock Offering and to the underwriters of the
STRYPES are exercised in full). As a result, upon completion of the Primary
Common Stock Offering and upon satisfaction of 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
, 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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<PAGE>
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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<PAGE>
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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<PAGE>
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
40
<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.
41
<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.
42
<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
43
<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."
44
<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.
45
<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
46
<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.
47
<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.
48
<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.
49
<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 Years Ended March 31,
December 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.
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<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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<PAGE>
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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<PAGE>
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%
53
<PAGE>
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
55
<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.
56
<PAGE>
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.
57
<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.
58
<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,
59
<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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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 , 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 ,
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, 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 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 , 1997 (the date of original
issuance of such Old Notes). Interest on the New Notes will be payable
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semiannually 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 , 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
450 West 33rd Street
New York, New York 10001
Confirm By Telephone:
(212) ___-____
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Facsimile Transmissions:
(Eligible Institutions Only)
(212) ___-____
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 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,
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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 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."
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Change Of Control
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder shall have the right to require that the Company
repurchase such Holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase (subject to the right of Holders of record on the relevant record
date to receive interest due on the relevant interest payment date):
(i) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act), other than the Permitted Holders, is or
becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5
under the Exchange Act, except that such person shall be deemed to have
"beneficial ownership" of all shares that any such person has the right
to acquire, whether such right is exercisable immediately or only after
the passage of time), directly or indirectly, of more than 35% of the
total voting power of the Voting Stock of the Company; provided,
however, that the Permitted Holders beneficially own (as defined in
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 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
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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.
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.
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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:
(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.
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(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;
(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
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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 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.
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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 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
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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 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,
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securities or otherwise pursuant to, or the funding of, employment arrangements,
stock options and stock ownership plans approved by the Board of Directors,
(iii) the grant of stock options or similar rights to employees and directors of
the Company pursuant to plans approved by the Board of Directors, (iv) loans or
advances to employees in the ordinary course of business in accordance with the
past practices of the Company or its Restricted Subsidiaries, but in any event
not to exceed $10 million in aggregate principal amount outstanding at any one
time, (v) the payment of reasonable fees to directors of the Company and its
Restricted Subsidiaries who are not employees of the Company or its Restricted
Subsidiaries, (vi) any Affiliate Transaction between the Company and a
Consolidated Restricted Subsidiary or between Consolidated Restricted
Subsidiaries and (vii) transactions pursuant to any agreement as in existence as
of the Issue Date between the Company or its Restricted Subsidiaries and
Continental Grain or one of its Subsidiaries.
Merger and Consolidation. The Company shall not consolidate with or
merge with or into, or convey, transfer or lease, in one transaction or a series
of related transactions, all or substantially all its assets to, any Person,
unless: (i) the resulting, surviving or transferee Person (the "Successor
Company") shall be a Person organized and existing under the laws of the United
States of America, any State thereof or the District of Columbia and the
Successor Company (if not the Company) shall expressly assume, by an indenture
supplemental thereto, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under the Notes
and the Indenture; (ii) immediately after giving effect to such transaction (and
treating any Indebtedness which becomes an 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.
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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 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
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for any remedy available to the Trustee or of exercising any trust or power
conferred on the Trustee. The Trustee, however, may refuse to follow any
direction that conflicts with law or the Indenture or that the Trustee
determines is unduly prejudicial to the rights of any other Holder of a Note or
that would involve the Trustee in personal liability.
The Indenture provides that if a Default occurs and is continuing and
is known to the Trustee, the Trustee must mail to each Holder of the Notes
notice of the Default within 90 days after it occurs. Except in the case of a
Default in the payment of principal of or interest on any Note, the Trustee may
withhold notice if and so long as a committee of its trust officers determines
that withholding notice is not opposed to the interest of the Holders of the
Notes. In addition, the Company is required to deliver to the Trustee, within
120 days after the end of each fiscal year, a certificate indicating whether the
signers thereof know of any Default that occurred during the previous year. The
Company also is required to deliver to the Trustee, within 30 days after the
occurrence thereof, written notice of any event which would constitute certain
Defaults, their status and what action the Company is taking or proposes to take
in respect thereof.
Amendments and Waivers
Subject to certain exceptions, the Indenture may be amended with the
consent of the Holders of a majority in principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange for the Notes) and any past default or compliance with any provisions
may also be waived with the consent of the Holders of a majority in principal
amount of the Notes then outstanding. However, without the consent of each
Holder of an outstanding Note affected thereby, no amendment may, among other
things, (i) reduce the amount of Notes whose Holders must consent to an
amendment, (ii) reduce the rate of or extend the time for payment of interest on
any Note, (iii) reduce the principal of or extend the Stated Maturity of any
Note, (iv) 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.
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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.
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.
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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.
"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
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Indebtedness represented by such obligation shall be the capitalized amount of
such obligation determined in accordance with GAAP; and the Stated Maturity
thereof shall be the date of the last payment of rent or any other amount due
under such lease prior to the first date upon which such lease may be terminated
by the lessee without payment of a penalty.
"Capital Stock" of any Person means any and all shares, interests,
rights to purchase, warrants, options, participations or other equivalents of or
interests or membership interests in (however designated) equity of such Person,
including any Preferred Stock, but excluding any debt securities convertible
into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Leverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of all Indebtedness of the Company and its
Restricted Subsidiaries on a consolidated basis, excluding (A) Permitted
Warehouse Indebtedness and (B) Hedging Obligations permitted to be Incurred
pursuant to clause (b)(6) of the covenant described under "-- Limitation on
Indebtedness" to (ii) the Consolidated Net Worth of the Company.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income: (i) any net income of any
Person if such Person is not a Restricted Subsidiary, except that (A) subject to
the exclusion contained in clause (iv) below, the Company's equity in the net
income of any such Person for such period shall be included in such Consolidated
Net Income up to the aggregate amount of cash actually distributed by such
Person during such period to the Company or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or other
distribution 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.
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"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company for which financial statements are available, as
(i) the par or stated value of all outstanding Capital Stock of the Company plus
(ii) paid-in capital or capital surplus relating to such Capital Stock plus
(iii) any retained earnings or earned surplus less (A) any accumulated deficit,
(B) any amounts attributable to Disqualified Stock and (C) any amounts
attributable to deferred compensation appropriately classified as net worth in
accordance with GAAP.
"Consolidated Restricted Subsidiary" means a Restricted Subsidiary (i)
80% of the Capital Stock and 80% of the Voting Stock of which is owned by the
Company or one or more Consolidated Restricted Subsidiaries and (ii) which is
treated as a consolidated subsidiary for the purpose of the Company's U.S.
Federal income tax reporting.
"Continental Grain" means Continental Grain Company, a Delaware
corporation.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time
or both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital
Stock which by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable) or upon the happening of any event
(i) matures or is mandatorily redeemable pursuant to a sinking fund obligation
or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in each case in whole or in part on or prior to the first anniversary of the
Stated Maturity of the Notes; provided, however, that any Capital Stock that
would 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
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Accounting Principles Board of the American Institute of Certified Public
Accountants, (ii) in the statements and pronouncements of the Financial
Accounting Standards Board, (iii) in such other statements by such other entity
as approved by a significant segment of the accounting profession, and (iv) in
the rules and regulations of the SEC governing the inclusion of financial
statements (including pro forma financial statements) in periodic reports
required to be filed pursuant to Section 13 of the Exchange Act, including
opinions and pronouncements in staff accounting bulletins and similar written
statements from the accounting staff of the SEC and releases of the Emerging
Issues Task Force.
"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness or other obligation
of any Person and any obligation, direct or indirect, contingent or otherwise,
of such Person (i) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Indebtedness or other obligation of such Person
(whether arising by virtue of partnership arrangements, or by agreements to
keep-well, to purchase assets, goods, securities or services, to take-or-pay or
to maintain financial statement conditions or otherwise) or (ii) entered into
for the purpose of assuring in any other manner the obligee of such Indebtedness
or other obligation of the payment thereof or to protect such obligee against
loss in respect thereof (in whole or in part); provided, however, that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning. The term "Guarantor" shall mean any Person Guaranteeing
any obligation.
"Hedging Obligations" of any Person means the obligations of such
Person pursuant to any Interest Rate Agreement, Currency Agreement or such other
agreement designed to mitigate risks of fluctuations in value of assets owned,
financed or sold, or of liabilities incurred or assumed, in either case in the
ordinary course of business of the Company or its Restricted Subsidiaries.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become
liable for; provided, however, that any Indebtedness or Capital Stock of a
Person existing at the time such Person becomes a 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
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contractual claim (if any) that the purchaser thereof could have as of such date
against such Person if the amounts anticipated at the time of such sale to be
received by such purchaser in connection with such Excess Spread Receivables are
not received by such purchaser; (viii) all obligations of the type referred to
in clauses (i) through (vii) of other Persons and all dividends of other Persons
for the payment of which, in either case, such Person is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise, including by means
of any Guarantee; (ix) all obligations of the type referred to in clauses (i)
through (viii) of other Persons secured by any Lien on any property or asset of
such Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value of such
property or assets or the amount of the obligation so secured and (x) to the
extent not otherwise included in this definition, Hedging Obligations of such
Person. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date.
Notwithstanding the foregoing, any securities issued in a securitization by a
special purpose owner trust or similar entity formed by or on behalf of a Person
and to which Receivables or Excess Spread Receivables have been sold or
otherwise transferred by or on behalf of such Person or its Subsidiaries shall
not be treated as Indebtedness of such Person or its Subsidiaries under the
Indenture, regardless of whether such securities are treated as indebtedness for
tax purposes.
"Interest Rate Agreement" means any interest rate swap agreement,
interest rate cap agreement, repurchase agreement, futures contract or other
financial agreement or arrangement designed to protect the Company or any
Restricted Subsidiary against fluctuations in interest rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as trade accounts on the balance sheet of the lender) or other
extensions of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary", the definition of "Restricted Payment" and the
covenant described under "-- Certain Covenants -- Limitation on Restricted
Payments", (i) "Investment" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of 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
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(ii) any claim (whether direct or indirect through subordination or other
structural encumbrance) against any Excess Spread Receivables sold unless the
seller is not liable for any losses thereon.
"Net Available Cash" from an Asset Disposition means cash payments
received therefrom (including any cash payments received by way of deferred
payment of principal pursuant to a note or installment receivable or otherwise,
but only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring Person of Indebtedness or other
obligations relating to such properties or assets or received in any other
noncash form) in each case net of (i) all legal, title and recording tax
expenses, commissions and other fees and expenses incurred, and all Federal,
state, provincial, foreign and local taxes required to be accrued as a liability
under GAAP, as a consequence of such Asset Disposition, (ii) all payments made
on any Indebtedness which is secured by any assets subject to such Asset
Disposition, in accordance with the terms of any Lien upon or other security
agreement of any kind with respect to such assets, or which must by its terms,
or in order to obtain a necessary consent to such Asset Disposition, or by
applicable law be, repaid out of the proceeds from such Asset Disposition, (iii)
all distributions and other payments required to be made to minority interest
holders in Subsidiaries or joint ventures as a result of such Asset Disposition
and (iv) the deduction of appropriate amounts provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated with the
property or other assets disposed in such Asset Disposition and retained by the
Company or any Restricted Subsidiary after such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital
Stock, means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Permitted Holders" means lineal descendants of Jules Fribourg,
including any individual legally adopted; spouses of such descendants; trusts,
the beneficiaries of which are any of the foregoing; partnerships, corporations,
or other entities in which any of the foregoing (individually or collectively)
has a controlling interest; and charitable organizations established by any of
the foregoing.
"Permitted Investment" means an Investment by the Company or any
Restricted Subsidiary in (i) a Restricted Subsidiary or a Person that will, upon
the making of such Investment, become a Restricted Subsidiary; provided,
however, that the primary business of such Restricted Subsidiary is a Related
Business; (ii) a Strategic Alliance Client to the extent such Investment
consists of options, warrants or other securities that are convertible or
exchangeable for equity securities of such Strategic Alliance Client and is
received by the Company or a Restricted Subsidiary without the payment of any
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
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Person to the extent such Investment represents the non-cash portion of the
consideration received for an Asset Disposition as permitted pursuant to the
covenant described under "-- Certain Covenants -- Limitation on Sales of Assets
and Subsidiary Stock"; (x) Receivables; (xi) a Strategic Alliance Client to the
extent such Investment consists of (A) Indebtedness of such Strategic Alliance
Client that is secured by Receivables owned by such Strategic Alliance Client in
an aggregate principal amount at any time outstanding not to exceed 100% of the
aggregate market value of such Receivables; provided, however, that such
Receivables are eligible to be characterized under GAAP as held for sale on the
balance sheet of such Strategic Alliance Client and such Indebtedness has not
been outstanding in excess of 364 days; and (B) Indebtedness of such Strategic
Alliance Client that is secured by Excess Spread Receivables owned by such
Strategic Alliance Client; provided, however, that such Excess Spread
Receivables are attributed solely to one or more "pools" of Receivables that
were securitized in one or more transactions in which the Company or its
Restricted Subsidiaries either acted as underwriters or placement agent or
provided all or a portion of the financing for such "pool" prior to such
securitization; and (xii) Excess Spread Receivables; provided, however, that
such Excess Spread Receivables represent interests in one or more "pools" of
Receivables that were securitized in one or more transactions in which the
Company or its Restricted Subsidiaries acted as sponsor, underwriter or
placement agent or provided all or a portion of the financing for such "pool"
prior to such securitization.
"Permitted Liens" means, with respect to any Person, (a) pledges or
deposits by such Person under worker's compensation laws, unemployment insurance
laws or similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of Indebtedness) or leases to
which such Person is a party, or deposits to secure public or statutory
obligations of such Person or deposits of cash or United States government bonds
to secure surety or appeal bonds to which such Person is a party, or deposits as
security for contested taxes or import duties or for the payment of rent, in
each case Incurred in the ordinary course of business; (b) Liens imposed by law,
such as carriers', warehousemen's and mechanics' Liens, in each case for sums
not yet due or being contested in good faith by appropriate proceedings or other
Liens arising out of judgments or awards against such Person with respect to
which such Person shall then be proceeding with an appeal or other proceedings
for review; (c) Liens for property taxes not yet subject to penalties for
non-payment or which are being contested in good faith and by appropriate
proceedings; (d) Liens in favor of issuers of surety bonds or letters of credit
issued pursuant to the request of and for the account of such Person in the
ordinary course of its business; provided, however, that such letters of credit
do not constitute Indebtedness; (e) minor survey exceptions, minor encumbrances,
easements or reservations of, or rights of others for, licenses, rights of way,
sewers, electric lines, telegraph and telephone lines and other similar
purposes, or zoning or other restrictions as to the use of real property or
Liens incidental to the conduct of the business of such Person or to the
ownership of its properties which were not Incurred in connection with
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
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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 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
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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 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
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connection with any merger or consolidation involving such Person) or similar
payment to the direct or indirect holders of its Capital Stock (other than (A)
dividends or distributions payable solely in its Capital Stock (other than
Disqualified Stock), (B) dividends or distributions payable solely to the
Company or a Restricted Subsidiary and (C) pro rata dividends or other
distributions made by a Subsidiary that is not a Wholly Owned Subsidiary to
minority stockholders (or owners of an equivalent interest in the case of a
Subsidiary that is an entity other than a corporation)), (ii) the purchase,
redemption or other acquisition or retirement for value of any Capital Stock of
the Company held by any Person or of any Capital Stock of a Restricted
Subsidiary held by any Affiliate of the Company (other than a Restricted
Subsidiary), including the exercise of any option to exchange any Capital Stock
(other than into Capital Stock of the Company that is not Disqualified Stock),
(iii) the purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment of any Subordinated Obligations (other than the
purchase, repurchase or other acquisition of Subordinated Obligations purchased
in anticipation of satisfying a sinking fund obligation, principal installment
or final maturity, in each case due within one year of the date of acquisition)
or (iv) the making of any Investment (other than a Permitted Investment) in any
Person.
"Restricted Subsidiary" means any Subsidiary of the Company that is not
an Unrestricted Subsidiary.
"SEC" means the Securities and Exchange Commission.
"Senior Indebtedness" means (i) Indebtedness of any Person, whether
outstanding on the Issue Date or thereafter Incurred and (ii) accrued and unpaid
interest (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company to the extent post-
filing interest is allowed in such proceeding) in respect of (A) indebtedness of
such Person for money borrowed and (B) indebtedness evidenced by notes,
debentures, bonds or other similar instruments for the payment of which such
Person is responsible or liable unless, in the case of either clause (i) or
(ii), in the instrument creating or evidencing the same or pursuant to which the
same is outstanding, it is provided that such obligations are subordinate in
right of payment to the Notes; provided, however, that Senior Indebtedness shall
not include (1) any obligation of such Person to any Subsidiary of such Person,
(2) any liability for Federal, state, local or other taxes owed or owing by such
Person, (3) any accounts payable or other liability to trade creditors arising
in the ordinary course of business (including guarantees thereof or instruments
evidencing such liabilities), (4) any obligation in respect of Capital Stock of
such Person or (5) that portion of any Indebtedness which at the time of
Incurrence is Incurred in violation of the Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be
a "Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"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.
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"Subordinated Obligation" means any Indebtedness of the Company
(whether outstanding on the Issue Date or thereafter Incurred) which is
subordinate or junior in right of payment to the Notes pursuant to a written
agreement to that effect.
"Subsidiary" means, in respect of any Person, any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of shares of Capital Stock or other interests (including
partnership interests) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by (i) such Person,
(ii) such Person and one or more Subsidiaries of such Person or (iii) one or
more Subsidiaries of such Person.
"Temporary Cash Investments" means any of the following: (i) any
investment in direct obligations of the United States of America or any agency
thereof or obligations guaranteed by the United States of America or any agency
thereof, (ii) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 180 days of the date of acquisition
thereof issued by a bank or trust company that is not an Affiliate of the
Company and which is organized under the laws of the United States of America,
any state thereof or any foreign country recognized by the United States, and
which bank or trust company has capital, surplus and undivided profits
aggregating in excess of $50,000,000 (or the foreign currency equivalent
thereof) and has outstanding debt which is rated "A" (or such similar equivalent
rating) or higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor, (iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above, (iv)
investments in commercial paper, maturing not more than 90 days after the date
of acquisition, issued by a corporation (other than an Affiliate of the Company)
organized and in existence under the laws of the United States of America or any
foreign country recognized by the United States of America with a rating at the
time as of which any investment therein is made of "P-1" (or higher) according
to Moody's Investors Service, Inc. or "A-1" (or higher) according to Standard
and Poor's Ratings Group, and (v) investments in securities with maturities of
six months or less from the date of acquisition issued or fully guaranteed by
any state, commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A" by
Standard & Poor's Ratings Group or "A" by Moody's Investors Service, Inc.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that
at the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary
of the Company (including any newly acquired or newly formed Subsidiary) to be
an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries
owns any Capital Stock or Indebtedness of, or holds any Lien on any property of,
the Company or any other Subsidiary of the Company that is not a Subsidiary of
the Subsidiary to be so designated; provided, however, that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, such designation would be permitted
under the covenant described under "-- Certain Covenants -- Limitation on
Restricted Payments". The Board of Directors may designate 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.
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"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests or membership interests) of such
Person then outstanding and normally entitled (without regard to the occurrence
of any contingency) to vote in the election of directors, managers or trustees
thereof.
"Warehouse Facility" means any funding arrangement with a financial
institution or other lender or purchaser exclusively to finance the purchase or
origination of Receivables by the Company, a Subsidiary of the Company or a
Strategic Alliance Client for the purpose of pooling such Receivables prior to
securitization or sale in the ordinary course of business, including purchase
and sale facilities pursuant to which the Company or a Subsidiary of the Company
sells Receivables or debt of a Strategic Alliance Client secured by Receivables
owned or financed by such Strategic Alliance Client to a financial institution
and retains a right of first refusal upon the subsequent resale of such
Receivables or debt by such financial institution.
"Warehouse Indebtedness" means the greater of (x) the consideration
received by the Company or its Restricted Subsidiaries under a Warehouse
Facility and (y) the book value of the assets financed under a Warehouse
Facility with respect to Receivables or debt of a Strategic Alliance Client
secured by Receivables owned or financed by such Strategic Alliance Client until
such time such Receivables or debt are (i) securitized, (ii) repurchased by the
Company or its Restricted Subsidiaries or (iii) sold by the counterparty under
the Warehouse Facility to a Person who is not an Affiliate of the Company.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares and shares held by other
Persons to the extent such shares are required by applicable law to be held by a
Person other than the Company or a Restricted Subsidiary) is owned by the
Company or one or more Wholly Owned Subsidiaries.
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 , 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."
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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 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
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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.
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, 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. If, however, the exchange of the Old Notes for the New Notes were treated
as an exchange for federal income tax purposes, such exchange should constitute
a recapitalization for United States federal income tax purposes. 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 of 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) provide 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
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<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.
105
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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
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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.
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 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 26th day of March, 1997.
CONTIFINANCIAL CORPORATION
By: /s/ JAMES E. MOORE
------------------------------------
Name: James E. Moore
Title: President, Chief Executive
Officer and Director
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James E. Moore, Daniel J. Willett, Jerome
M. Perelson and Alan L. Langus his true and lawful attorneys-in-fact and agents,
each acting alone, with full power of substitution and resubstitution, for him
and his name, place and stead, in any and all capacities, to sign any or all
amendments to this Registration Statement, including post-effective amendments,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, and hereby ratifies and confirms all his said attorneys-in-fact and
agents, each acting alone, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
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.
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<PAGE>
SIGNATURE TITLE DATE
- ----------------------- ------------------------------------- --------------
/s/ JAMES E. MOORE President, Chief Executive Officer March 26, 1997
- ----------------------- and Director (Principal Executive
James E. Moore Officer)
/s/ DANIEL J. WILLETT Senior Vice President and Chief March 26, 1997
- ----------------------- Financial Officer (Principal
Daniel J. Willett Financial Officer)
/s/ SUSAN E. O'DONOVAN Vice President and Controller March 26, 1997
- ----------------------- (Principal Accounting Officer)
Susan E. O'Donovan
/s/ JAMES J. BIGHAM Director and Chairman of the Board March 26, 1997
- -----------------------
James J. Bigham
/s/ PAUL J. FRIBOURG Director March 26, 1997
- -----------------------
Paul J. Fribourg
/s/ DONALD L. STAHELI Director March 26, 1997
- -----------------------
Donald L. Staheli
/s/ JOHN W. SPIEGEL Director March 26, 1997
- -----------------------
John W. Spiegel
/s/ JOHN P. TIERNEY Director March 26, 1997
- -----------------------
John P. Tierney
/s/ LAWRENCE G. WEPPLER Director March 26, 1997
- -----------------------
Lawrence G. Weppler
/s/ MICHAEL J. ZIMMERMA Director March 26, 1997
- -----------------------
Michael J. Zimmerman
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<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.
II-7
EXECUTION COPY
INDENTURE dated as of March 1, 1997, between
CONTIFINANCIAL CORPORATION, a Delaware corporation (the
"Company"), and THE CHASE MANHATTAN BANK, a New York banking
corporation (the "Trustee").
The Company has duly authorized the execution and delivery of this
Indenture to provide for the creation of an issue of 7-1/2% Senior Notes Due
2002 (the "Series A Securities") and, if and when issued pursuant to a
registered exchange offer or, if applicable, a private exchange, for the Series
A Securities, its 7-1/2% Senior Notes Due 2002 (the "Series B Securities" and
together with the Series A Securities, the "Securities"), of substantially the
tenor and amount hereinafter set forth, and to provide therefor the Company has
duly authorized the execution and delivery of this Indenture.
Each party agrees as follows for the benefit of the other party and
for the equal and ratable benefit of the Holders of the Securities:
ARTICLE 1
Definitions and Incorporation by Reference
SECTION 1.01. Definitions.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) used or useful in a Related Business, (ii) the
Capital Stock of a Person that becomes a Restricted Subsidiary as a result of
the acquisition of such Capital Stock by the Company or another Restricted
Subsidiary, (iii) Capital Stock constituting a minority interest in any Person
that at such time is a Restricted Subsidiary; provided, however, that any such
Restricted Subsidiary described in clause (ii) or (iii) above is primarily
engaged in a Related Business or (iv) the Capital Stock or Indebtedness of a
Strategic Alliance Client.
"Affiliate" of any specified Person means any other Person, directly
or indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this
<PAGE>
2
definition, "control" when used with respect to any Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing. For purposes of Sections 3.07 and 3.08 only, "Affiliate" shall also
mean any beneficial owner of Capital Stock representing 5% or more of the total
voting power of the Voting Stock (on a fully diluted basis) of the Company or of
rights or warrants to purchase such Capital Stock (whether or not currently
exercisable) and any Person who would be an Affiliate of any such beneficial
owner pursuant to the first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions) by
the Company or any Restricted Subsidiary, including any disposition by means of
a merger, consolidation or similar transaction (each referred to for the
purposes of this definition as a "disposition"), of (i) any shares of Capital
Stock of a Restricted Subsidiary (other than directors' qualifying shares or
shares required by applicable law to be held by a Person other than the Company
or a Restricted Subsidiary), (ii) all or substantially all the assets of any
division or line of business of the Company or any Restricted Subsidiary, (iii)
any other assets of the Company or any Restricted Subsidiary outside of the
ordinary course of business of the Company or such Restricted Subsidiary, (iv)
any Investment in a Strategic Alliance Client or (v) any Excess Spread
Receivables (other than, in the case of (i), (ii), (iii), (iv) and (v) above,
(x) a disposition by a Restricted Subsidiary to the Company or by the Company or
a Restricted Subsidiary to a Consolidated Restricted Subsidiary, (y) for
purposes of Section 3.07 only, a disposition that constitutes a Restricted
Payment permitted by Section 3.05 or (z) a disposition of assets (including
related assets) for an aggregate consideration of $1.0 million or less).
"Average Life" means, as of the date of determination, with respect
to any Indebtedness or Preferred Stock, the quotient obtained by dividing (i)
the sum of the products of numbers of years from the date of determination to
the dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
<PAGE>
3
"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.
"Change of Control" means the occurrence of any of the following
events:
(i) Any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act), other than the Permitted Holders, is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act, except that such person shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 35% of the total voting power
of the Voting Stock of the Company; provided, however, that the Permitted
Holders beneficially own (as defined in Rule 13d-3 and Rule 13d-5 under
the Exchange Act), directly or indirectly, in the aggregate a lesser
percentage of the total voting power of the Voting Stock of the Company
than such other person and do not have the right or ability by voting
power, contract or otherwise to elect or designate for election a majority
of the Board of Directors (for the purposes of this clause (i), such other
person shall be deemed to beneficially own any Voting Stock of a
corporation held
<PAGE>
4
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
<PAGE>
5
sale of all or substantially all the assets of the
Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means the party named as such in this Indenture until a
successor replaces it and, thereafter, means the successor and, for purposes of
any provision contained herein and required by the TIA, each other obligor on
the indenture securities.
"Consolidated Leverage Ratio" as of any date of determination means
the ratio of (i) the aggregate amount of all Indebtedness of the Company and its
Restricted Subsidiaries on a consolidated basis, excluding (A) Permitted
Warehouse Indebtedness and (B) Hedging Obligations permitted to be Incurred
pursuant to Section 3.03(b)(6) to (ii) the Consolidated Net Worth of the
Company.
"Consolidated Net Income" means, for any period, the net income of
the Company and its consolidated Subsidiaries; provided, however, that there
shall not be included in such Consolidated Net Income: (i) any net income of any
Person if such Person is not a Restricted Subsidiary, except that (A) subject to
the exclusion contained in clause (iv) below, the Company's equity in the net
income of any such Person for such period shall be included in such Consolidated
Net Income up to the aggregate amount of cash actually distributed by such
Person during such period to the Company or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or other
distribution paid to a Restricted Subsidiary, to the limitations contained in
clause (iii) below) and (B) the Company's equity in a net loss of any such
Person for such period shall be included in determining such Consolidated Net
Income; (ii) any net income (or loss) of any Person acquired by the Company or a
Subsidiary in a pooling of interests transaction for any period prior to the
date of such acquisition; (iii) any net income of any Restricted Subsidiary if
such Restricted Subsidiary is subject to restrictions, directly or indirectly,
on the payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that (A) subject to
the exclusion contained in clause (iv) below, the Company's equity in the net
income of any such Restricted Subsidiary for such period shall be
<PAGE>
6
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 Section 3.05 only, there shall be excluded from
Consolidated Net Income any dividends, repayments of loans or advances or other
transfers of assets from any Person to the Company or a Restricted Subsidiary to
the extent such dividends, repayments or transfers increase the amount of
Restricted Payments permitted under Section 3.05(a)(iii)(D).
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company for which financial statements are available, as
(i) the par or stated value of all outstanding Capital Stock of the Company plus
(ii) paid-in capital or capital surplus relating to such Capital Stock plus
(iii) any retained earnings or earned surplus less (A) any accumulated deficit,
(B) any amounts attributable to Disqualified Stock and (C) any amounts
attributable to deferred compensation 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.
<PAGE>
7
"Continental Grain" means Continental Grain Company, a Delaware
corporation.
"Currency Agreement" means in respect of a Person any foreign
exchange contract, currency swap agreement or other similar agreement to which
such Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of
time or both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital
Stock which by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable) or upon the happening of any event
(i) matures or is mandatorily redeemable pursuant to a sinking fund obligation
or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in each case in whole or in part on or prior to the first anniversary of the
Stated Maturity of the Securities; provided, however, that any Capital Stock
that would not constitute Disqualified Stock but for provisions thereof giving
holders thereof the right to require such Person to repurchase or redeem such
Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the first anniversary of the Stated Maturity of the
Securities shall not constitute Disqualified Stock if the "asset sale" or
"change of control" provisions applicable to such Capital Stock are not more
favorable to the holders of such Capital Stock than the provisions in Sections
3.07 and 3.09.
"Eligible Excess Spread Receivables" means Excess Spread Receivables
created after April 2, 1996; provided, however, that Eligible Excess Spread
Receivables shall not include any Excess Spread Receivables created as the
result of the securitization or sale of other Excess Spread Receivables.
"Excess Spread" means, over the life of a "pool" of Receivables that
have been sold by a Person to a trust or other Person in a securitization or
sale, the rights retained by such Person or its Restricted Subsidiaries at or
subsequent to the closing of such securitization or sale to receive cash flows
attributable to such "pool".
<PAGE>
8
"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.
"Exchange Offer" means any exchange pursuant to the Registration
Rights Agreement of Series A Securities for a like principal amount of Series B
Securities.
"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
<PAGE>
9
verb has a corresponding meaning. The term "Guarantor" shall mean any Person
Guaranteeing any obligation.
"Hedging Obligations" of any Person means the obligations of such
Person pursuant to any Interest Rate Agreement, Currency Agreement or such other
agreement designed to mitigate risks of fluctuations in value of assets owned,
financed or sold, or of liabilities incurred or assumed, in either case in the
ordinary course of business of the Company or its Restricted Subsidiaries.
"Holder" or "Securityholder" means the Person in whose name a
Security is registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become
liable for; provided, however, that any Indebtedness or Capital Stock of a
Person existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall be deemed the Incurrence
of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable; (ii) all Capital
Lease Obligations of such Person; (iii) all obligations of such Person issued or
assumed as the deferred purchase price of property, all conditional sale
obligations of such Person and all obligations of such Person under any title
retention agreement (but excluding trade accounts payable and expense accruals
arising in the ordinary course of business); (iv) all obligations of such Person
for the reimbursement of any obligor on any letter of credit, banker's
acceptance or similar credit transaction (other than obligations with respect to
letters of credit securing obligations (other than obligations described in (i)
through (iii) above) entered into in the ordinary course of business of such
Person to the extent such letters of credit are not drawn upon or, if and to the
extent drawn upon, such drawing is reimbursed no later than the tenth Business
Day following
<PAGE>
10
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 against such Person if the amounts anticipated at the time of such sale to
be received by such purchaser in connection with such Excess Spread Receivables
are not received by such purchaser; (viii) all obligations of the type referred
to in clauses (i) through (vii) of other Persons and all dividends of other
Persons for the payment of which, in either case, such Person is responsible or
liable, directly or indirectly, as obligor, guarantor or otherwise, including by
means of any Guarantee; (ix) all obligations of the type referred to in clauses
(i) through (viii) of other Persons secured by any Lien on any property or asset
of such Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value of such
property or assets or the amount of the obligation so secured and (x) to the
extent not otherwise included in this definition, Hedging Obligations of such
Person. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date.
Notwithstanding the foregoing, any securities issued in a securitization by a
special purpose owner trust or similar entity formed by or on behalf of a Person
and to which Receivables or Excess Spread Receivables have been sold or
otherwise transferred by or on behalf of such Person or its Subsidiaries shall
not be treated as Indebtedness of such Person or its Subsidiaries under this
Indenture, regardless of whether such securities are treated as indebtedness for
tax purposes.
"Indenture" means this Indenture as amended or supplemented from
time to time.
"Initial Purchasers" means Bear, Stearns & Co. Inc. and Credit
Suisse First Boston Corporation.
"interest", when used with respect to any Security, means the amount
of all interest accruing on such
<PAGE>
11
Security, including all additional interest payable on the Securities pursuant
to the Registration Rights Agreement.
"Interest Rate Agreement" means any interest rate swap agreement,
interest rate cap agreement, repurchase agreement, futures contract or other
financial agreement or arrangement designed to protect the Company or any
Restricted Subsidiary against fluctuations in interest rates.
"Investment" in any Person means any direct or indirect advance,
loan (other than advances to customers in the ordinary course of business that
are recorded as trade accounts on the balance sheet of the lender) or other
extensions of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary", the definition of "Restricted Payment" and Section
3.05, (i) "Investment" shall include the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value of the net assets
of any Subsidiary of the Company at the time that such Subsidiary is designated
an Unrestricted Subsidiary; provided, however, that upon a redesignation of such
Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue
to have a permanent "Investment" in an Unrestricted Subsidiary equal to an
amount (if positive) equal to (x) the Company's "Investment" in such Subsidiary
at the time of such redesignation less (y) the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets of such Subsidiary at the time of such redesignation; and (ii) any
property transferred to or from an Unrestricted Subsidiary shall be valued at
its fair market value at the time of such transfer, in each case as determined
in good faith by the Board of Directors.
"Investment Grade Rating" means a rating equal to or higher than
Baa3 (or the equivalent) and BBB- (or the equivalent) by Moody's Investors
Service, Inc. (or any successor to the rating agency business thereof) and
Standard & Poor's Ratings Group (or any successor to the rating agency business
thereof), respectively.
<PAGE>
12
"Issue Date" means the date on which the Series A Securities are
originally issued.
"Lien" means (i) any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including any conditional sale or other
title retention agreement or lease in the nature thereof) and (ii) any claim
(whether direct or indirect through subordination or other structural
encumbrance) against any Excess Spread Receivables sold unless the seller is not
liable for any losses thereon.
"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.
<PAGE>
13
"Officer" means the Chairman of the Board, the President, any Senior
Vice President, any Vice President, the Treasurer or the Secretary of the
Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who
is acceptable to the Trustee. The counsel may be an employee of or counsel to
the Company or the Trustee.
"Permitted Holders" means lineal descendants of Jules Fribourg,
including any individual legally adopted; spouses of such descendants; trusts,
the beneficiaries of which are any of the foregoing; partnerships, corporations,
or other entities in which any of the foregoing (individually or collectively)
has a controlling interest; and charitable organizations established by any of
the foregoing.
"Permitted Investment" means an Investment by the Company or any
Restricted Subsidiary in (i) a Restricted Subsidiary or a Person that will, upon
the making of such Investment, become a Restricted Subsidiary; provided,
however, that the primary business of such Restricted Subsidiary is a Related
Business; (ii) a Strategic Alliance Client to the extent such Investment
consists of options, warrants or other securities that are convertible or
exchangeable for equity securities of such Strategic Alliance Client and is
received by the Company or a Restricted Subsidiary without the payment of any
consideration other than the concurrent provision by the Company or such
Restricted Subsidiary to such Strategic Alliance Client of financing or asset
securitization expertise on terms determined by the Company to be fair and
reasonable to the Company or such Restricted Subsidiary from a financial point
of view without taking into consideration any value that may inhere in such
option, warrant or convertible or exchangeable security; (iii) another Person if
as a result of such Investment such other Person is merged or consolidated with
or into, or transfers or conveys all or substantially all its assets to, the
Company or a Restricted Subsidiary; provided, however, that such Person's
primary business is a Related Business; (iv) Temporary Cash Investments; (v)
receivables owing to the Company or any Restricted Subsidiary if created or
acquired in the ordinary course of business and payable or dischargeable in
<PAGE>
14
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 Section
3.07; (x) Receivables; (xi) a Strategic Alliance Client to the extent such
Investment consists of (A) Indebtedness of such Strategic Alliance Client that
is secured by Receivables owned by such Strategic Alliance Client in an
aggregate principal amount at any time outstanding not to exceed 100% of the
aggregate market value of such Receivables; provided, however, that such
Receivables are eligible to be characterized under GAAP as held for sale on the
balance sheet of such Strategic Alliance Client and such Indebtedness has not
been outstanding in excess of 364 days; and (B) Indebtedness of such Strategic
Alliance Client that is secured by Excess Spread Receivables owned by such
Strategic Alliance Client; provided, however, that such Excess Spread
Receivables are attributed solely to one or more "pools" of Receivables that
were securitized in one or more transactions in which the Company or its
Restricted Subsidiaries either acted as underwriters or placement agent or
provided all or a portion of the financing for such "pool" prior to such
securitization; and (xii) Excess Spread Receivables; provided, however, that
such Excess Spread Receivables represent interests in one or more "pools" of
Receivables that were securitized in one or more transactions in which the
Company or its Restricted Subsidiaries acted as sponsor, underwriter or
placement agent or provided all or a portion of the financing for such "pool"
prior to such securitization.
"Permitted Liens" means, with respect to any Person, (a) pledges or
deposits by such Person under worker's compensation laws, unemployment insurance
laws or similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of Indebtedness) or leases to
which such Person is a party, or deposits to secure public or statutory
obligations of such
<PAGE>
15
Person or deposits of cash or United States government bonds to secure surety or
appeal bonds to which such Person is a party, or deposits as security for
contested taxes or import duties or for the payment of rent, in each case
Incurred in the ordinary course of business; (b) Liens imposed by law, such as
carriers', warehousemen's and mechanics' Liens, in each case for sums not yet
due or being contested in good faith by appropriate proceedings or other Liens
arising out of judgments or awards against such Person with respect to which
such Person shall then be proceeding with an appeal or other proceedings for
review; (c) Liens for property taxes not yet subject to penalties for
non-payment or which are being contested in good faith and by appropriate
proceedings; (d) Liens in favor of issuers of surety bonds or letters of credit
issued pursuant to the request of and for the account of such Person in the
ordinary course of its business; provided, however, that such letters of credit
do not constitute Indebtedness; (e) minor survey exceptions, minor encumbrances,
easements or reservations of, or rights of others for, licenses, rights of way,
sewers, electric lines, telegraph and telephone lines and other similar
purposes, or zoning or other restrictions as to the use of real property or
Liens incidental to the conduct of the business of such Person or to the
ownership of its properties which were not Incurred in connection with
Indebtedness and which do not in the aggregate materially adversely affect the
value of said properties or materially impair their use in the operation of the
business of such Person; (f) Liens securing Indebtedness Incurred to finance the
construction, purchase or lease of, or repairs, improvements or additions to,
property of such Person (but excluding Capital Stock of another Person);
provided, however, that the Lien may not extend to any other property owned by
such Person or any of its Subsidiaries at the time the Lien is Incurred, and the
Indebtedness secured by the Lien may not be Incurred more than 180 days after
the later of the acquisition, completion of construction, repair, improvement,
addition or commencement of full operation of the property subject to the Lien;
(g) Liens on Receivables owned by the Company or a Restricted Subsidiary, as the
case may be, to secure Indebtedness permitted under Section 3.03(b)(1) or
Section 3.04(a); (h) Liens on Excess Spread Receivables (or on the Capital Stock
of any Subsidiary of such Person substantially all the assets of which are
Excess Spread Receivables); provided, however, that (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
<PAGE>
16
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 on property at the time such
Person or any of its Subsidiaries acquires the property, including any
acquisition by means of a merger or
<PAGE>
17
consolidation with or into such Person or a Subsidiary of such Person; provided,
however, that such Liens are not created, incurred or assumed in connection
with, or in contemplation of, such acquisition; provided further, however, that
the Liens may not extend to any other property owned by such Person or any of
its Subsidiaries; (l) Liens securing Indebtedness or other obligations of a
Subsidiary of such Person owing to such Person or a Consolidated Restricted
Subsidiary of such Person; (m) Liens (other than on any Excess Spread
Receivables) securing Hedging Obligations; (n) Liens on cash or other assets
(other than Excess Spread Receivables) securing Warehouse Indebtedness (other
than Permitted Warehouse Indebtedness) of the Company or its Restricted
Subsidiaries; and (o) Liens to secure any Refinancing (or successive
Refinancings) as a whole, or in part, of any Indebtedness secured by any Lien
referred to in the foregoing clauses (f), (i), (j) and (k); provided, however,
that (x) such new Lien shall be limited to all or part of the same property that
secured the original Lien (plus improvements to or on such property) and (y) the
Indebtedness secured by such Lien at such time is not increased to any amount
greater than the sum of (A) the outstanding principal amount or, if greater,
committed amount of the Indebtedness described under clauses (f), (i), (j) or
(k), as the case may be, at the time the original Lien became a Permitted Lien
and (B) an amount necessary to pay any fees and expenses, including premiums,
related to such refinancing, refunding, extension, renewal or replacement.
Notwithstanding the foregoing, "Permitted Liens" will not include any Lien
described in clauses (f), (j) or (k) above to the extent such Lien applies to
any Additional Assets acquired directly or indirectly from Net Available Cash
pursuant to Section 3.07.
"Permitted Warehouse Indebtedness" means Warehouse Indebtedness in
connection with a Warehouse Facility; provided, however, that (i) the assets as
to which such Warehouse Indebtedness relates are or, prior to any funding under
the related Warehouse Facility with respect to such assets, were eligible to be
recorded as held for sale on the consolidated balance sheet of the Company in
accordance with GAAP, (ii) such Warehouse Indebtedness will be deemed to be
Permitted Warehouse Indebtedness except to the extent the holders of such
Warehouse Indebtedness have contractual recourse to the Company or its
Restricted Subsidiaries to satisfy claims in respect of such Warehouse
Indebtedness in excess of (A) the realizable value of the assets as to which
such Warehouse Indebtedness relates and (B) any assets
<PAGE>
18
securing such Warehouse Indebtedness, and (iii) any such Indebtedness has not
been outstanding in excess of 364 days.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, limited liability company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any Person,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such Person,
over shares of Capital Stock of any other class of such Person.
"principal" of a Security means the principal of the Security plus
the premium, if any, payable on the Security which is due or overdue or is to
become due at the relevant time.
"Purchase Agreement" means the Purchase Agreement dated March 7,
1997, among the Company and the Initial Purchasers.
"Qualified Institutional Buyer" or "QIB" shall have the meaning
specified in Rule 144A under the Securities Act.
"Rating Agencies" mean Standard & Poor's Ratings Group, a division
of McGraw Hill, Inc., and Moody's Investors Service, Inc. or any successor to
the respective rating agency businesses thereof.
"Receivables" means consumer and commercial loans, leases and
receivables purchased or originated by the Company, any Restricted Subsidiary or
a Strategic Alliance Client in the ordinary course of business; provided,
however, that for purposes of determining the amount of a Receivable at any
time, such amount shall be determined in accordance with GAAP, consistently
applied, as of the most recent practicable date.
"Refinance" means, in respect of any Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue
other Indebtedness in exchange or replacement for, such Indebtedness.
<PAGE>
19
"Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with this Indenture including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal amount (or if
Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced; provided further,
however, that Refinancing Indebtedness shall not include (x) Indebtedness of a
Subsidiary that Refinances Indebtedness of the Company or another Subsidiary or
(y) Indebtedness of the Company or a Restricted Subsidiary that Refinances
Indebtedness of an Unrestricted Subsidiary.
"Registration Rights Agreement" means the Registration Rights
Agreement dated as of March 7, 1997 among the Company and the Initial
Purchasers, as the same may be amended or supplemented or otherwise modified
from time to time in accordance with the terms thereof.
"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
<PAGE>
20
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.
"Rule 144A" means Rule 144A under the Securities Act.
"SEC" means the Securities and Exchange Commission.
"Securities" has the meaning stated in the first recital of this
Indenture.
"Securities Act" means the Securities Act of 1933.
"Senior Indebtedness" means (i) Indebtedness of any Person, whether
outstanding on the Issue Date or thereafter Incurred and (ii) accrued and unpaid
interest (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company to the extent post-
filing interest is allowed in such proceeding) in respect of (A) indebtedness of
such Person for money borrowed and (B) indebtedness evidenced by notes,
debentures, bonds or other similar instruments for the payment of which such
Person is responsible or liable unless, in the case of either clause (i) or
(ii), in the instrument creating or evidencing the same or pursuant to
<PAGE>
21
which the same is outstanding, it is provided that such obligations are
subordinate in right of payment to the Securities; provided, however, that
Senior Indebtedness shall not include (1) any obligation of such Person to any
Subsidiary of such Person, (2) any liability for Federal, state, local or other
taxes owed or owing by such Person, (3) any accounts payable or other liability
to trade creditors arising in the ordinary course of business (including
guarantees thereof or instruments evidencing such liabilities), (4) any
obligation in respect of Capital Stock of such Person or (5) that portion of any
Indebtedness which at the time of Incurrence is Incurred in violation of this
Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would
be a "Significant Subsidiary" of the Company within the meaning of Rule 1-02
under Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date
specified in such security as the fixed date on which the final payment of
principal of such security is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof upon the
happening of any contingency unless such contingency has occurred).
"Strategic Alliance Client" means any Person (other than a
Restricted Subsidiary) engaged in a Related Business to which the Company
provides, or reasonably expects to provide, financing or asset securitization
expertise in return for asset-backed underwriting or placement agent
commitments.
"Subordinated Obligation" means any Indebtedness of the Company
(whether outstanding on the Issue Date or thereafter Incurred) which is
subordinate or junior in right of payment to the Securities pursuant to a
written agreement to that effect.
"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
<PAGE>
22
or controlled, directly or indirectly, by (i) such Person, (ii) such Person and
one or more Subsidiaries of such Person or (iii) one or more Subsidiaries of
such Person.
"Temporary Cash Investments" means any of the following: (i) any
investment in direct obligations of the United States of America or any agency
thereof or obligations guaranteed by the United States of America or any agency
thereof, (ii) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 180 days of the date of acquisition
thereof issued by a bank or trust company that is not an Affiliate of the
Company and which is organized under the laws of the United States of America,
any state thereof or any foreign country recognized by the United States, and
which bank or trust company has capital, surplus and undivided profits
aggregating in excess of $50,000,000 (or the foreign currency equivalent
thereof) and has outstanding debt which is rated "A" (or such similar equivalent
rating) or higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor, (iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above, (iv)
investments in commercial paper, maturing not more than 90 days after the date
of acquisition, issued by a corporation (other than an Affiliate of the Company)
organized and in existence under the laws of the United States of America or any
foreign country recognized by the United States of America with a rating at the
time as of which any investment therein is made of "P-1" (or higher) according
to Moody's Investors Service, Inc. or "A-1" (or higher) according to Standard
and Poor's Ratings Group, and (v) investments in securities with maturities of
six months or less from the date of acquisition issued or fully guaranteed by
any state, commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A" by
Standard & Poor's Ratings Group or "A" by Moody's Investors Service, Inc.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. ss.ss.
77aaa-77bbbb) as in effect on the date of this Indenture.
<PAGE>
23
"Trustee" means the party named as such in this Indenture until a
successor replaces it and, thereafter, means the successor.
"Trust Officer" means the Chairman of the Board, the President, any
vice president, any assistant vice president, the secretary, any assistant
secretary, the treasurer, any assistant treasurer, the cashier, any assistant
cashier, any trust officer or assistant trust officer of the Trustee assigned by
the Trustee to administer its corporate trust matters.
"Uniform Commercial Code" means the New York Uniform Commercial Code
as in effect from time to time.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company
that at the time of determination shall be designated an Unrestricted Subsidiary
by the Board of Directors in the manner provided below and (ii) any Subsidiary
of an Unrestricted Subsidiary. The Board of Directors may designate any
Subsidiary of the Company (including any newly acquired or newly formed
Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary or any of
its Subsidiaries owns any Capital Stock or Indebtedness of, or holds any Lien on
any property of, the Company or any other Subsidiary of the Company that is not
a Subsidiary of the Subsidiary to be so designated; provided, however, that
either (A) the Subsidiary to be so designated has total assets of $1,000 or less
or (B) if such Subsidiary has assets greater than $1,000, such designation would
be permitted under Section 3.05. The Board of Directors may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that
immediately after giving effect to such designation (x) the Company could Incur
$1.00 of additional Indebtedness under Section 3.03(a) and (y) no Default shall
have occurred and be continuing. Any such designation by the Board of Directors
shall be evidenced by the Company to the Trustee by promptly filing with the
Trustee a copy of the board resolution giving effect to such designation and an
Officers' Certificate certifying that 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
<PAGE>
24
United States of America is pledged and which are not callable at the issuer's
option.
"Voting Stock" of a Person means all classes of Capital Stock or
other interests (including partnership interests or membership interests) of
such Person then outstanding and normally entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers or
trustees thereof.
"Warehouse Facility" means any funding arrangement with a financial
institution or other lender or purchaser exclusively to finance the purchase or
origination of Receivables by the Company, a Subsidiary of the Company or a
Strategic Alliance Client for the purpose of pooling such Receivables prior to
securitization or sale in the ordinary course of business, including purchase
and sale facilities pursuant to which the Company or a Subsidiary of the Company
sells Receivables or debt of a Strategic Alliance Client secured by Receivables
owned or financed by such Strategic Alliance Client to a financial institution
and retains a right of first refusal upon the subsequent resale of such
Receivables or debt by such financial institution.
"Warehouse Indebtedness" means the greater of (x) the consideration
received by the Company or its Restricted Subsidiaries under a Warehouse
Facility and (y) the book value of the assets financed under a Warehouse
Facility with respect to Receivables or debt of a Strategic Alliance Client
secured by Receivables owned or financed by such Strategic Alliance Client until
such time such Receivables or debt are (i) securitized, (ii) repurchased by the
Company or its Restricted Subsidiaries or (iii) sold by the counterparty under
the Warehouse Facility to a Person who is not an Affiliate of the Company.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the
Capital Stock of which (other than directors' qualifying shares and shares held
by other Persons to the extent such shares are required by applicable law to be
held by a Person other than the Company or a Restricted Subsidiary) is owned by
the Company or one or more Wholly Owned Subsidiaries.
<PAGE>
25
SECTION 1.02. Other Definitions.
Defined in
Term Section
---- -------
"Affiliate Transaction" ................ 3.08
"Bankruptcy Law" ....................... 5.01
"covenant defeasance option" ........... 7.01(b)
"Covenant Termination" ................. 3.14
"Custodian" ............................ 5.01
"Event of Default" ..................... 5.01
"legal defeasance option" .............. 7.01(b)
"Legal Holiday" ........................ 9.08
"Offer" ................................ 3.07
"Offer Amount" ......................... 3.07
"Offer Period" ......................... 3.07
"Paying Agent" ......................... 2.03
"Purchase Date" ........................ 3.07
"Registrar"............................. 2.03
"Successor Company" .................... 4.01
SECTION 1.03. Incorporation by Reference of Trust Indenture Act.
Upon the issuance of the Series B Securities, if any, or the effectiveness of
the Shelf Registration Statement (as defined in the Registration Rights
Agreement), this Indenture will be subject to the mandatory provisions of the
TIA which are incorporated by reference in and made a part of this Indenture.
The following TIA terms have the following meanings:
"Commission" means the SEC.
"indenture securities" means the Securities.
"indenture security holder" means a Securityholder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Company and any
other obligor on the indenture securities.
All other TIA terms used in this Indenture that are defined by the
TIA, defined by TIA reference to another
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26
statute or defined by SEC rule have the meanings assigned to them by such
definitions.
SECTION 1.04. Rules of Construction. Unless the context otherwise
requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) "including" means including without limitation;
(5) words in the singular include the plural and words in the plural
include the singular;
(6) unsecured Indebtedness shall not be deemed to be subordinate or
junior to Secured Indebtedness merely by virtue of its nature as unsecured
Indebtedness;
(7) the principal amount of any noninterest bearing or other
discount security at any date shall be the principal amount thereof that
would be shown on a balance sheet of the issuer dated such date prepared
in accordance with GAAP and accretion of principal on such security shall
be deemed to be the Incurrence of Indebtedness;
(8) the principal amount of any Preferred Stock shall be (i) the
maximum liquidation value of such Preferred Stock or (ii) the maximum
mandatory redemption or mandatory repurchase price with respect to such
Preferred Stock, whichever is greater; and
(9) all references to the date the Securities were originally issued
shall refer to the date the Series A Securities were originally issued.
ARTICLE 2
The Securities
SECTION 2.01. Form and Dating. The Series A Securities and the
Trustee's certificate of authentication
<PAGE>
27
shall be substantially in the form of Exhibit A which is hereby incorporated in
and expressly made a part of this Indenture. The Series B Securities and the
Trustee's Certificate of Authentication shall be substantially in the form of
Exhibit B, which is hereby incorporated in and expressly made a part of this
Indenture. The Securities may have notations, legends or endorsements required
by law, stock exchange rule, agreements to which the Company is subject, if any,
or usage (provided that any such notation, legend or endorsement is in a form
acceptable to the Company). Each Security shall be dated the date of its
authentication. The terms of the Securities set forth in Exhibit A and Exhibit B
are part of the terms of this Indenture.
The Series A Securities are being offered and sold by the Company
pursuant to the Purchase Agreement.
SECTION 2.02. Execution and Authentication. Two Officers shall sign
the Securities for the Company by manual or facsimile signature. The Company's
seal shall be impressed, affixed, imprinted or reproduced on the Securities and
may be in facsimile form.
If an Officer whose signature is on a Security no longer holds that
office at the time the Trustee authenticates the Security, the Security shall be
valid nevertheless.
A Security shall not be valid until an authorized signatory of the
Trustee manually signs the certificate of authentication on the Security. The
signature shall be conclusive evidence that the Security has been authenticated
under this Indenture.
The Trustee shall authenticate and deliver Series A Securities for
original issue in an aggregate principal amount of $200,000,000, upon a written
order of the Company signed by two Officers or by an Officer and either an
Assistant Treasurer or an Assistant Secretary of the Company. Such order shall
specify the amount of the Securities to be authenticated and the date on which
the original issue of Securities is to be authenticated. Upon a written order of
the Company signed by two Officers or by an Officer and either an Assistant
Treasurer or an Assistant Secretary of the Company, the Trustee shall
authenticate for original issue Series B Securities in an aggregate principal
amount not to exceed $200,000,000; provided that such
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28
Series B Securities shall be issuable only upon the valid surrender for
cancelation of Series A Securities of a like aggregate principal amount in
accordance with the Exchange Offer or a private exchange pursuant to the
Registration Rights Agreement. The aggregate principal amount of Securities
outstanding at any time may not exceed $200,000,000 except as provided in
Section 2.07. All Series A Securities and Series B Securities shall be treated
as a single class of Securities for all purposes hereunder.
The Trustee may appoint an authenticating agent reasonably
acceptable to the Company to authenticate the Securities. Unless limited by the
terms of such appointment, an authenticating agent may authenticate Securities
whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as any Registrar, Paying Agent or agent
for service of notices and demands.
SECTION 2.03. Registrar and Paying Agent. The Company shall maintain
an office or agency where Securities may be presented for registration of
transfer or for exchange (the "Registrar") and an office or agency where
Securities may be presented for payment (the "Paying Agent"). The Registrar
shall keep a register of the Securities and of their transfer and exchange. The
Company may have one or more co-registrars and one or more additional paying
agents. The term "Paying Agent" includes any additional paying agent.
The Company shall enter into an appropriate agency agreement with
any Registrar, Paying Agent or co-registrar not a party to this Indenture, which
shall incorporate the terms of the TIA, if applicable as provided in Section
1.03. The agreement shall implement the provisions of this Indenture that relate
to such agent. The Company shall notify the Trustee of the name and address of
any such agent. If the Company fails to maintain a Registrar or Paying Agent,
the Trustee shall act as such and shall be entitled to appropriate compensation
therefor pursuant to Section 6.07. The Company or any of its domestically
incorporated Wholly Owned Subsidiaries may act as Paying Agent, Registrar,
co-registrar or transfer agent.
The Company initially appoints the Trustee as Registrar and Paying
Agent in connection with the Securities.
<PAGE>
29
SECTION 2.04. Paying Agent To Hold Money in Trust. By 11:00 a.m.,
New York time, on each due date of the principal and interest on any Security,
the Company shall deposit with the Paying Agent a sum sufficient to pay such
principal and interest when so becoming due. The Company shall require each
Paying Agent (other than the Trustee) to agree in writing that the Paying Agent
shall hold in trust for the benefit of Securityholders or the Trustee all money
held by the Paying Agent for the payment of principal of or interest on the
Securities and shall notify the Trustee of any default by the Company in making
any such payment. If the Company or a Subsidiary of the Company acts as Paying
Agent, it shall segregate the money held by it as Paying Agent and hold it as a
separate trust fund. The Company at any time may require a Paying Agent to pay
all money held by it to the Trustee and to account for any funds disbursed by
the Paying Agent. Upon complying with this Section, the Paying Agent shall have
no further liability for the money paid to the Trustee.
SECTION 2.05. Securityholder Lists. The Trustee shall preserve in as
current a form as is reasonably practicable the most recent list available to it
of the names and addresses of Securityholders. If the Trustee is not the
Registrar, the Company shall furnish to the Trustee, in writing at least five
Business Days before each interest payment date and at such other times as the
Trustee may request in writing, a list in such form and as of such date as the
Trustee may reasonably require of the names and addresses of Securityholders.
SECTION 2.06. Transfer and Exchange. The Securities shall be issued
in registered form and shall be transferable only upon the surrender of a
Security for registration of transfer. When a Security is presented to the
Registrar or a co-registrar with a request to register a transfer, the Registrar
shall register the transfer as requested if the requirements of Section 8-401(1)
of the Uniform Commercial Code are met. When Securities are presented to the
Registrar or a co-registrar with a request to exchange them for an equal
principal amount of Securities of other denominations, the Registrar shall make
the exchange as requested if the same requirements are met. To permit
registration of transfers and exchanges, the Company shall execute and the
Trustee shall authenticate Securities at the Registrar's or co-registrar's
request. The Company may require payment of a sum sufficient to pay all taxes,
assessments or other governmental charges in connection with
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30
any transfer or exchange pursuant to this Section. The Company shall not be
required to make and the Registrar need not register transfers or exchanges of
Securities for a period of 15 days before an interest payment date.
Prior to the due presentation for registration of transfer of any
Security, the Company, the Trustee, the Paying Agent, the Registrar or any
co-registrar may deem and treat the person in whose name a Security is
registered as the absolute owner of such Security for the purpose of receiving
payment of principal of and interest on such Security and for all other purposes
whatsoever, whether or not such Security is overdue, and none of the Company,
the Trustee, the Paying Agent, the Registrar or any co-registrar shall be
affected by notice to the contrary.
All Securities issued upon any transfer or exchange pursuant to the
terms of this Indenture, including any exchange pursuant to an Exchange Offer or
the private exchange, will evidence the same debt and will be entitled to the
same benefits under this Indenture as the Securities surrendered upon such
transfer or exchange and no such transfer or exchange shall constitute a
repayment of any obligation nor create any new obligation of the Company.
SECTION 2.07. Replacement Securities. If a mutilated Security is
surrendered to the Registrar or if the Holder of a Security claims that the
Security has been lost, destroyed or wrongfully taken, the Company shall issue
and the Trustee shall authenticate a replacement Security if the requirements of
Section 8-405 of the Uniform Commercial Code are met and the Holder satisfies
any other reasonable requirements of the Trustee. If required by the Trustee or
the Company, such Holder shall furnish an indemnity bond sufficient in the
judgment of the Company and the Trustee to protect the Company, the Trustee, the
Paying Agent, the Registrar and any co-registrar from any loss which any of them
may suffer if a Security is replaced. The Company and the Trustee may charge the
Holder for their expenses in replacing a Security.
Every replacement Security is an additional obligation of the
Company.
SECTION 2.08. Outstanding Securities. Securities outstanding at any
time are all Securities authenticated by the Trustee except for those canceled
by it, those delivered to it for cancellation and those described in this
Section
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31
as not outstanding. A Security does not cease to be outstanding because the
Company or an Affiliate of the Company holds the Security.
If a Security is replaced pursuant to Section 2.07, it ceases to be
outstanding unless the Trustee and the Company receive proof satisfactory to
them that the replaced Security is held by a bona fide purchaser.
If the Paying Agent segregates and holds in trust, in accordance
with this Indenture, on a maturity date money sufficient to pay all principal
and interest payable on that date with respect to the Securities (or portions
thereof) maturing,then on and after that date such Securities (or portions
thereof) cease to be outstanding and interest on them ceases to accrue.
SECTION 2.09. Temporary Securities. Until definitive Securities are
ready for delivery, the Company may prepare and the Trustee shall authenticate
temporary Securities. Temporary Securities shall be substantially in the form of
definitive Securities but may have variations that the Company considers
appropriate for temporary Securities. Without unreasonable delay, the Company
shall prepare and the Trustee shall authenticate definitive Securities and
deliver them in exchange for temporary Securities.
SECTION 2.10. Cancelation. The Company at any time may deliver
Securities to the Trustee for cancellation. The Registrar and the Paying Agent
shall forward to the Trustee any Securities surrendered to them for registration
of transfer, exchange or payment. The Trustee and no one else shall cancel and
destroy (subject to the record retention requirements of the Exchange Act) all
Securities surrendered for registration of transfer, exchange, replacement in
the event of a mutilated security, payment or cancellation and deliver a
certificate of such destruction to the Company unless the Company directs the
Trustee to deliver canceled Securities to the Company. The Company may not issue
new Securities to replace Securities it has redeemed, paid or delivered to the
Trustee for cancellation.
SECTION 2.11. Defaulted Interest. If the Company defaults in a
payment of interest on the Securities, the Company shall pay defaulted interest
(plus interest on such defaulted interest to the extent lawful) in any lawful
manner. The Company may pay the defaulted interest to the
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32
persons who are Securityholders on a subsequent special record date. The Company
shall fix or cause to be fixed any such special record date (which shall be no
less than 10 days prior to the payment date) and payment date to the reasonable
satisfaction of the Trustee and shall promptly mail to each Securityholder a
notice that states the special record date, the payment date and the amount of
defaulted interest to be paid, which notice shall be mailed not less than 10
days prior to such special record date.
SECTION 2.12. CUSIP Numbers. The Company in issuing the Securities
may use "CUSIP" numbers (if then generally in use).
SECTION 2.13. Global Securities. (a) The Securities issued on the
Issue Date shall be issued in the form of one or more permanent global
Securities in definitive, fully registered form without interest coupons with
the global securities legend set forth in Exhibit A and Exhibit B hereto (each,
a "Global Security"), which shall be deposited on behalf of the purchasers of
the Securities with the Trustee, at its New York office, as custodian for The
Depository Trust Company ("DTC" and, together with any successor depositary
hereunder, the "Depositary") or with such other Custodian as the Depositary may
direct, and registered in the name of the Depositary or a nominee of the
Depositary.
Members of, or participants in, the Depositary ("Agent Members")
shall have no rights under this Indenture with respect to any Global Security
held on their behalf by the Depositary or by the Trustee as the custodian of the
Depositary or under such Global Security, and the Depositary may be treated by
the Company, the Trustee and any agent of the Company or the Trustee as the
absolute owner of such Global Security for all purposes whatsoever.
Notwithstanding the foregoing, nothing herein shall prevent the Company, the
Trustee or any agent of the Company or the Trustee from giving effect to any
written certification, proxy or other authorization furnished by the Depositary
or impair, as between the Depositary and its Agent Members, the operation of
customary practices of such Depositary governing the exercise of the rights of a
holder of a beneficial interest in any Global Security.
(b) A Global Security deposited with the Depositary or with the
Trustee as custodian for the Depositary shall be transferred to the beneficial
owners
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33
thereof in the form of certificated Securities in an aggregate principal amount
equal to the principal amount of such Global Security, in exchange for such
Global Security, only if (i) the Depositary notifies the Company that it is
unwilling or unable to continue as Depositary for such Global Security or if at
any time such Depositary ceases to be a "clearing agency" registered under the
Exchange Act and a successor depositary is not appointed by the Company within
90 days of such notice, or (ii) an Event of Default has occurred and is
continuing or (iii) the Company, in its sole discretion, notifies the Trustee in
writing that it elects to cause the issuance of certificated Securities under
this Indenture.
Any Global Security that is transferable to the beneficial owners
thereof pursuant to this Section shall be surrendered by the Depositary to the
Trustee located in the Borough of Manhattan, The City of New York, to be so
transferred, without charge, and the Trustee shall authenticate and deliver,
upon such transfer of each portion of such Global Security, an equal aggregate
principal amount of certificated Securities of authorized denominations.
(c) The registered Holder of a Global Security may grant proxies and
otherwise authorize any Person, including Agent Members and Persons that may
hold interests through Agent Members, to take any action which a Holder is
entitled to take under this Indenture or the Securities.
(d) In the event of the occurrence of either of the events specified
in Section 2.13(b), the Company will promptly make available to the Trustee a
reasonable supply of certificated Securities (bearing the restricted securities
legend set forth in Exhibit A in the case of the Series A Securities).
SECTION 2.14. Special Transfer Provision. Unless and until (i) a
Series A Security or, in the case of a Series B Security issued in connection
with a private exchange offer, such Series B Security, is sold under an
effective registration statement or (ii) a Series A Security is exchanged for a
Series B Security in connection with an effective registration statement, in
each case pursuant to the Registration Rights Agreement, each holder of the
Series A Security or a beneficial interest in the Series A Security shall be
deemed to have represented and agreed that (i) it is a QIB, is aware that the
sale to it was made in reliance on Rule 144A and acquired the Series A Security
for
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34
its own account or for the account of another QIB; (ii) that the Securities have
not been registered under the Securities Act and that (A) such Series A Security
may be offered, resold, pledged or otherwise transferred only (1) to the Company
or any of its subsidiaries, (2) in accordance with rule 144A to a Qualified
Institutional Buyer, (3) pursuant to the exemption from registration provided by
Rule 144 under the Securities Act (if available), or (4) pursuant to an
effective registration statement under the Securities Act, and (B) the purchaser
will, and each subsequent holder is required to, provide to any person
purchasing any of the Series A Securities or the Series B Securities issued in a
private exchange offer from such purchaser or subsequent holder a notice
advising such purchase that resales of such Securities are restricted as set
forth in (A) above; (iii) the purchaser understands that the certificates
evidencing such Securities will, unless otherwise agreed by the Company and the
holder thereof, bear a restricted security legend set forth in Exhibit A.
ARTICLE 3
Covenants
SECTION 3.01. Payment of Securities. The Company shall promptly pay
the principal of and interest on the Securities on the dates and in the manner
provided in the Securities and in this Indenture. Principal and interest shall
be considered paid on the date due if on such date the Trustee or the Paying
Agent holds in accordance with this Indenture money sufficient to pay all
principal and interest then due. The Company shall pay interest on overdue
principal at the rate specified therefor in the Securities, and it shall pay
interest on overdue installments of interest at the same rate to the extent
lawful.
SECTION 3.02. SEC Reports. Notwithstanding that the Company may not
be required to remain subject to the reporting requirements of Section 13 or
15(d) of the Exchange Act, the Company shall file with the SEC and provide the
Trustee and Securityholders with such annual reports and such information,
documents and other reports as are specified in Sections 13 and 15(d) of the
Exchange Act and applicable to a U.S. corporation subject to such Sections, such
information, documents and other reports to be so filed and provided at the time
specified for the filing of such information, documents and reports under such
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35
Sections. The Company also shall comply with the other provisions of TIA ss.
314(a).
SECTION 3.03. Limitation on Indebtedness. (a) The Company shall not
Incur, directly or indirectly, any Indebtedness if, on the date of such
Incurrence and after giving effect thereto, the Consolidated Leverage Ratio
exceeds 2.5 to 1.0.
(b) Notwithstanding Section 3.03(a), the Company may Incur any or
all of the following Indebtedness:
(1) Permitted Warehouse Indebtedness;
(2) Indebtedness owed to and held by the Company or a
Consolidated Restricted Subsidiary; provided, however, that any
subsequent issuance or transfer of any Capital Stock which results
in any such Consolidated Restricted Subsidiary ceasing to be a
Consolidated Restricted Subsidiary or any subsequent transfer of
such Indebtedness (other than to the Company or another Consolidated
Restricted Subsidiary) shall be deemed, in each case, to constitute
the Incurrence of such Indebtedness by the Company;
(3) the Securities;
(4) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2) or (3) of this Section
3.03(b));
(5) Refinancing Indebtedness in respect of Indebtedness
Incurred pursuant to Section 3.03(a) or pursuant to clause (3) or
(4) or this clause (5) of this Section 3.03(b);
(6) Hedging Obligations directly related to: (i) Indebtedness
Incurred (or reasonably expected to be Incurred) and permitted to be
Incurred by the Company or the Restricted Subsidiaries pursuant to
this Indenture; (ii) Receivables held by the Company or its
Restricted Subsidiaries pending sale or securitization; (iii)
Receivables of the Company or its Restricted Subsidiaries that have
been sold pursuant to a Warehouse Facility; (iv) Receivables with
respect to which the Company reasonably expects to purchase or
commit to
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36
purchase, finance or accept as collateral; or (v) Excess Spread
Receivables and other assets owned or financed by the Company or its
Restricted Subsidiaries in the ordinary course of business;
provided, however, that such Hedging Obligations are eligible to
receive hedge accounting treatment in accordance with GAAP as
applied by the Company as of the Issue Date; and
(7) Indebtedness in an aggregate principal amount which,
together with the principal amount of all other Indebtedness of the
Company outstanding on the date of such Incurrence (other than
Indebtedness permitted by clauses (1) through (6) above of this
Section 3.03(b) or Section 3.03(a) does not exceed $40.0 million.
(c) Notwithstanding Section 3.03(a) and Section 3.03(b), the Company
shall not Incur any Indebtedness if the proceeds thereof are used,
directly or indirectly, to Refinance any Subordinated Obligations unless
such Indebtedness shall be subordinated to the Securities to at least the
same extent as such Subordinated Obligations.
(d) For purposes of determining compliance with this Section 3.03,
(i) in the event that an item of Indebtedness meets the criteria of more
than one of the types of Indebtedness described above, the Company, in its
sole discretion, will classify such item of Indebtedness and only be
required to include the amount and type of such Indebtedness in one of the
above clauses and (ii) an item of Indebtedness may be divided and
classified in more than one of the types of Indebtedness described above.
SECTION 3.04. Limitation on Indebtedness and Preferred Stock of
Restricted Subsidiaries. The Company shall not permit any Restricted Subsidiary
to Incur, directly or indirectly, any Indebtedness or Preferred Stock except:
(a) Permitted Warehouse Indebtedness;
(b) Indebtedness or Preferred Stock issued to and held by the
Company or a Consolidated Restricted Subsidiary; provided, however, that
any subsequent issuance or transfer of any Capital Stock which results
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37
in any such Consolidated Restricted Subsidiary ceasing to be a
Consolidated Restricted Subsidiary or any subsequent transfer of such
Indebtedness or Preferred Stock (other than to the Company or a
Consolidated Restricted Subsidiary) shall be deemed, in each case, to
constitute the issuance of such Indebtedness or Preferred Stock by the
issuer thereof;
(c) Indebtedness or Preferred Stock of a Subsidiary Incurred and
outstanding on or prior to the date on which such Subsidiary was acquired
by the Company (other than Indebtedness or Preferred Stock Incurred in
connection with, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Subsidiary became a Subsidiary or was
acquired by the Company); provided, however, that on the date of such
acquisition and after giving effect thereto, the Company would have been
able to Incur at least $1.00 of Indebtedness pursuant to Section 3.03(a);
(d) Indebtedness or Preferred Stock outstanding on the Issue Date
(other than Indebtedness described in clause (a), (b) or (c) of this
Section 3.04); and
(e) Refinancing Indebtedness Incurred in respect of Indebtedness or
Preferred Stock referred to in clause (c) or (d) of this Section 3.04 or
this clause (e); provided, however, that to the extent such Refinancing
Indebtedness directly or indirectly Refinances Indebtedness or Preferred
Stock of a Subsidiary described in clause (c) of this Section 3.04, such
Refinancing Indebtedness shall be Incurred only by such Subsidiary.
SECTION 3.05. Limitation on Restricted Payments. (a) The Company
shall not, and shall not permit any Restricted Subsidiary, directly or
indirectly, to make a Restricted Payment if at the time the Company or such
Restricted Subsidiary makes such Restricted Payment: (i) a Default shall have
occurred and be continuing (or would result therefrom); (ii) the Company is not
able to Incur an additional $1.00 of Indebtedness pursuant to Section 3.03(a);
or (iii) the aggregate amount of such Restricted Payment and all other
Restricted Payments since the Issue Date would exceed the sum of: (A) 25% of the
Consolidated Net Income accrued during the period (treated
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38
as one accounting period) from the beginning of the fiscal quarter during which
the Issue Date occurs to the end of the most recent fiscal quarter prior to the
date of such Restricted Payment for which financial statements are available
(or, in case such Consolidated Net Income shall be a deficit, minus 100% of such
deficit); (B) the aggregate Net Cash Proceeds received by the Company from the
issuance or sale of its Capital Stock (other than Disqualified Stock) subsequent
to the Issue Date (other than an issuance or sale to a Subsidiary of the Company
and other than an issuance or sale to an employee stock ownership plan or to a
trust established by the Company or any of its Subsidiaries for the benefit of
their employees); (C) the amount by which Indebtedness of the Company is reduced
on the Company's balance sheet upon the conversion or exchange (other than by a
Subsidiary of the Company) subsequent to the Issue Date, of any Indebtedness of
the Company convertible or exchangeable for Capital Stock (other than
Disqualified Stock) of the Company (less the amount of any cash, or the fair
value of any other property, distributed by the Company upon such conversion or
exchange); (D) an amount equal to the sum of (i) the net reduction in
Investments in any Person resulting from dividends or repayments of loans or
advances, in each case to the Company or any Restricted Subsidiary from such
Person, and (ii) the portion (proportionate to the Company's equity interest in
such Subsidiary) of the fair market value of the net assets of an Unrestricted
Subsidiary at the time such Unrestricted Subsidiary is designated a Restricted
Subsidiary; provided, however, that the foregoing sum in this clause (D) shall
not exceed, in the case of any Person, the amount of Investments made since the
Issue Date by the Company or any Restricted Subsidiary in such Person and
treated as a Restricted Payment; and (E) $15 million.
(b) The provisions of Section 3.05(a) shall not prohibit: (i) any
purchase or redemption of Capital Stock or Subordinated Obligations of the
Company made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Company (other than Disqualified Stock
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
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39
clause (iii)(B) of Section 3.05(a); (ii) any purchase, repurchase, redemption,
defeasance or other acquisition or retirement for value of Subordinated
Obligations made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Indebtedness of the Company which is permitted to be
Incurred pursuant to Section 3.03; provided, however, that such purchase,
repurchase, redemption, defeasance or other acquisition or retirement for value
shall be excluded in the calculation of the amount of Restricted Payments; (iii)
dividends paid within 60 days after the date of declaration thereof if at such
date of declaration such dividend would have complied with this Section 3.05;
provided, however, that at the time of payment of such dividend, no other
Default shall have occurred and be continuing (or result therefrom); provided
further, however, that such dividend shall be included in the calculation of the
amount of Restricted Payments; (iv) any purchase of Capital Stock of the Company
made from time to time to meet the Company's obligations under its employee
stock ownership and option plans; provided, however, that such purchase shall be
excluded in the calculation of the amount of Restricted Payments; (v) the
exercise or conversion of an option, warrant or other security convertible or
exchangeable for an equity security of a Strategic Alliance Client in connection
with a substantially simultaneous sale or other disposition by the Company or a
Restricted Subsidiary of such equity security; provided, however, that the
exercise price or other consideration paid by the Company or a Restricted
Subsidiary in connection with such exercise or conversion shall be excluded from
the calculation of the amount of Restricted Payments.
SECTION 3.06. Limitation on Restrictions on Distributions from
Restricted Subsidiaries. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any consensual encumbrance or restriction on
the ability of any Restricted Subsidiary (a) to pay dividends or make any other
distributions on its Capital Stock to the Company or a Restricted Subsidiary or
pay any Indebtedness owed to the Company, (b) to make any loans or advances to
the Company or (c) transfer any of its property or assets to the Company,
except: (i) any encumbrance or restriction pursuant to an agreement in effect at
or entered into on the Issue Date; (ii) any encumbrance or restriction with
respect to a Restricted Subsidiary pursuant to an agreement applicable to such
Restricted Subsidiary on or prior to the date on which
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40
such Restricted Subsidiary was acquired by the Company (other than an agreement
entered into in connection with, or in anticipation of, the transaction or
series of related transactions pursuant to which such Restricted Subsidiary
became a Restricted Subsidiary or was acquired by the Company) and outstanding
on such date; (iii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to any other agreement contained in any amendment to an
agreement referred to in clause (i) or (ii) of this Section 3.06 or this clause
(iii); provided, however, that the encumbrances and restrictions with respect to
such Restricted Subsidiary contained in any such agreement or amendment are no
less favorable to the Securityholders than encumbrances and restrictions with
respect to such Restricted Subsidiary contained in the agreements referred to in
clauses (i) or (ii) of this Section 3.06, as the case may be; (iv) any such
encumbrance or restriction consisting of customary non assignment provisions in
leases governing leasehold interests to the extent such provisions restrict the
transfer of the lease or the property leased thereunder; (v) in the case of
clause (c) above, restrictions contained in security agreements or mortgages
securing Indebtedness of a Restricted Subsidiary to the extent such restrictions
restrict the transfer of the property subject to such security agreements or
mortgages; and (vi) any restriction with respect to a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or disposition of all
or substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition.
SECTION 3.07. Limitation on Sales of Assets and Subsidiary Stock.
(a) The Company shall not, and shall not permit any Restricted Subsidiary to,
directly or indirectly, consummate any Asset Disposition unless (i) the Company
or such Restricted Subsidiary receives consideration at the time of such Asset
Disposition at least equal to the fair market value (including as to the value
of all non-cash consideration), as determined in good faith by the Board of
Directors, of the shares and assets subject to such Asset Disposition and at
least 85% of the consideration thereof received by the Company or such
Restricted Subsidiary is in the form of cash or cash equivalents and (ii) an
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
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(y) prepay, repay, redeem or purchase Senior Indebtedness of the Company or any
Indebtedness of a Restricted Subsidiary, as the case may be (other than in
either case Indebtedness owed to the Company or an Affiliate of the Company), in
either case within 180 days from the later of the date of such Asset Disposition
or the receipt of such Net Available Cash; (B) second, to the extent of the
balance of such Net Available Cash after application in accordance with clause
(A), to make an offer to the holders of the Securities (and to holders of other
Senior Indebtedness designated by the Company) to purchase Securities (and such
other Senior Indebtedness) pursuant to and subject to the conditions contained
in this Section 3.07; and (C) third, to the extent of the balance of such Net
Available Cash after application in accordance with clauses (A) and (B) to (x)
the acquisition by the Company or any Restricted Subsidiary of Additional Assets
or (y) the prepayment, repayment or purchase of Indebtedness (other than any
Disqualified Stock) of the Company (other than Indebtedness owed to an Affiliate
of the Company), in each case within 180 days from the later of the receipt of
such Net Available Cash and the date the offer described in clause (b) below is
consummated; provided, however, that in connection with any prepayment,
repayment or purchase of Indebtedness pursuant to clause (A), (B) or (C) above,
the Company or such Restricted Subsidiary shall retire such Indebtedness and
shall cause the related loan commitment (if any) to be permanently reduced in an
amount equal to the principal amount so prepaid, repaid or purchased, and (iii)
at the time of such Asset Disposition no Default shall have occurred and be
continuing (or would result therefrom). Notwithstanding the foregoing provisions
of this Section 3.07(a), the Company and the Restricted Subsidiaries shall not
be required to apply any Net Available Cash in accordance with this Section
3.07(a) except to the extent that the aggregate Net Available Cash from all
Asset Dispositions which are not applied in accordance with this paragraph
exceeds $10 million. Pending application of Net Available Cash pursuant to this
Section 3.07(a), such Net Available Cash shall be invested in Temporary Cash
Investments.
For the purposes of this Section 3.07(a), the following are deemed
to be cash or cash equivalents: (x) the assumption of Indebtedness of the
Company or any Restricted Subsidiary, and the release of the Company and its
continuing Restricted Subsidiaries from all liability on such Indebtedness, in
connection with such Asset Disposition
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and (y) securities received by the Company or any Restricted Subsidiary from the
transferee that are promptly converted by the Company or such Restricted
Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase
of the Securities (and other Senior Indebtedness) pursuant to Section
3.07(a)(ii)(B) above, the Company will be required to purchase Securities
tendered pursuant to an offer (the "Offer") by the Company for the Securities
(and other Senior Indebtedness) at a purchase price of 100% of their principal
amount (without premium) plus accrued but unpaid interest (or, in respect of
such other Senior Indebtedness, such lesser price, if any, as may be provided
for by the terms of such Senior Indebtedness) in accordance with the procedures
(including prorating in the event of oversubscription) set forth in this Section
3.07. If the aggregate purchase price of Securities (and any other Senior
Indebtedness) tendered pursuant to such offer is less than the Net Available
Cash allotted to the purchase thereof, the Company will be required to apply the
remaining Net Available Cash in accordance with Section 3.07(a)(ii)(C). The
Company shall not be required to make such an offer to purchase Securities (and
other Senior Indebtedness) pursuant to this Section 3.07 if the Net Available
Cash available therefor is less than $10 million (which lesser amount shall be
carried forward for purposes of determining whether such an offer is required
with respect to any subsequent Asset Disposition).
(c) (1) Promptly, and in any event within 10 days after the Company
becomes obligated to make an Offer, the Company shall be obligated to deliver to
the Trustee and send, by first-class mail to each Holder, a written notice
stating that the Holder may elect to have his Securities purchased by the
Company either in whole or in part (subject to prorationing as hereinafter
described in the event the Offer is oversubscribed) in integral multiples of
$1,000 of principal amount, at the applicable purchase price. The notice shall
specify a purchase date not less than 30 days nor more than 60 days after the
date of such notice (the "Purchase Date") and shall contain such information
concerning the business of the Company which the Company in good faith believes
will enable such Holders to make an informed decision (which at a minimum will
include (i) the most recently filed Annual Report on Form 10-K (including
audited consolidated financial statements) of the Company, the most recent
subsequently filed Quarterly Report on Form 10-Q and any Current Report on Form
8-K of the Company filed
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43
subsequent to such Quarterly Report, other than Current Reports describing Asset
Dispositions otherwise described in the offering materials (or corresponding
successor reports), (ii) a description of material developments in the Company's
business subsequent to the date of the latest of such Reports, and (iii) if
material, appropriate pro forma financial information) and all instructions and
materials necessary to tender Securities pursuant to the Offer, together with
the information contained in clause (3).
(2) Not later than the date upon which written notice of an Offer is
delivered to the Trustee as provided below, the Company shall deliver to the
Trustee an Officers' Certificate as to (i) the amount of the Offer (the "Offer
Amount"), (ii) the allocation of the Net Available Cash from the Asset
Dispositions pursuant to which such Offer is being made and (iii) the compliance
of such allocation with the provisions of Section 3.07(a). On such date, the
Company shall also irrevocably deposit with the Trustee or with a Paying Agent
(or, if the Company is acting as its own Paying Agent, segregate and hold in
trust) in cash an amount equal to the Offer Amount to be held for payment in
accordance with the provisions of this Section. Upon the expiration of the
period for which the Offer remains open (the "Offer Period"), the Company shall
deliver to the Trustee for cancellation the Securities or portions thereof which
have been properly tendered to and are to be accepted by the Company. The
Trustee shall, on the Purchase Date, mail or deliver payment to each tendering
Holder in the amount of the purchase price. In the event that the aggregate
purchase price of the Securities delivered by the Company to the Trustee is less
than the Offer Amount, the Trustee shall deliver the excess to the Company
immediately after the expiration of the Offer Period for application in
accordance with this Section.
(3) Holders electing to have a Security purchased will be required
to surrender the Security, with an appropriate form duly completed, to the
Company at the address specified in the notice at least three Business Days
prior to the Purchase Date. Holders will be entitled to withdraw their election
if the Trustee or the Company receives not later than one Business Day prior to
the Purchase Date, a telegram, facsimile transmission or letter setting forth
the name of the Holder, the principal amount of the Security which was delivered
by the Holder for purchase by the Company and a statement that such Holder is
withdrawing his election to have such Security purchased. If at the
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44
expiration of the Offer Period the aggregate principal amount of Securities
surrendered by Holders exceeds the Offer Amount, the Company shall select the
Securities to be purchased on a pro rata basis (with such adjustments as may be
deemed appropriate by the Company so that only Securities in denominations of
$100,000 or integral multiples of $1,000 thereof, in the case of the Series A
Securities, or $1,000, or integral multiples thereof, in the case of Series B
Securities, shall be purchased). Holders whose Securities are purchased only in
part will be issued new Securities equal in principal amount to the unpurchased
portion of the Securities surrendered.
(4) At the time the Company delivers Securities to the Trustee which
are to be accepted for purchase, the Company will also deliver an Officers'
Certificate stating that such Securities are to be accepted by the Company
pursuant to and in accordance with the terms of this Section and confirming that
the Company has complied with all the provisions of this Section 3.07. A
Security shall be deemed to have been accepted for purchase at the time the
Trustee, directly or through an agent, mails or delivers payment therefor to the
surrendering Holder.
(d) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Securities pursuant to this
Section. To the extent that the provisions of any securities laws or regulations
conflict with provisions of this Section, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under this Section by virtue thereof.
SECTION 3.08. Limitation on Affiliate Transactions. (a) The Company
shall not, and shall not permit any Restricted Subsidiary to, enter into or
permit to exist any transaction (including the purchase, sale, lease or exchange
of any property, employee compensation arrangements or the rendering of any
service) with any Affiliate of the Company (an "Affiliate Transaction") unless
the terms thereof (1) are no less favorable to the Company or such Restricted
Subsidiary than those that could be obtained at the time of such transaction in
arm's-length dealings with a Person who is not such an Affiliate, (2) if such
Affiliate Transaction involves an amount in excess of $2.0 million, (i) are set
forth in writing and (ii) have
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45
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 Section 3.08(a) shall not prohibit (i) any
Restricted Payment permitted to be made pursuant to Section 3.05 or any
Permitted Investment, (ii) any issuance of securities, or other payments, awards
or grants in cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans approved by the
Board of Directors, (iii) the grant of stock options or similar rights to
employees and directors of the Company pursuant to plans approved by the Board
of Directors, (iv) loans or advances to employees in the ordinary course of
business in accordance with the past practices of the Company or its Restricted
Subsidiaries, but in any event not to exceed $10 million in aggregate principal
amount outstanding at any one time, (v) the payment of reasonable fees to
directors of the Company and its Restricted Subsidiaries who are not employees
of the Company or its Restricted Subsidiaries, (vi) any Affiliate Transaction
between the Company and a Consolidated Restricted Subsidiary or between
Consolidated Restricted Subsidiaries and (vii) transactions pursuant to any
agreement as in existence as of the Issue Date between the Company or its
Restricted Subsidiaries and Continental Grain or one of its Subsidiaries.
SECTION 3.09. Change of Control. (a) Upon a Change of Control, each
Holder shall have the right to require that the Company repurchase such Holder's
Securities at a purchase price in cash equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of purchase
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date), in accordance with
the terms contemplated in Section 3.09(b).
(b) Within 30 days following any Change of Control, the Company
shall mail a notice to each Holder with a copy to the Trustee stating:
(1) that a Change of Control has occurred and that such Holder has
the right to require the Company to
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46
purchase such Holder's Securities at a purchase price in cash equal to
101% of the principal amount thereof plus accrued and unpaid interest, if
any, to the date of purchase (subject to the right of Holders of record on
the relevant record date to receive interest on the relevant interest
payment date);
(2) the circumstances and relevant facts regarding such Change of
Control (including information with respect to pro forma results of
operations, cash flow and capitalization after giving effect to such
Change of Control);
(3) the repurchase date (which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed); and
(4) the instructions determined by the Company, consistent with this
Section, that a Holder must follow in order to have its Securities
purchased.
(c) Holders electing to have a Security purchased will be required
to surrender the Security, with an appropriate form duly completed, to the
Company at the address specified in the notice at least three Business Days
prior to the purchase date. Holders will be entitled to withdraw their election
if the Trustee or the Company receives not later than one Business Day prior to
the purchase date, a telegram, facsimile transmission or letter setting forth
the name of the Holder, the principal amount of the Security which was delivered
by the Holder for purchase by the Company and a statement that such Holder is
withdrawing his election to have such Security purchased.
(d) On the purchase date, all Securities purchased by the Company
under this Section shall be delivered by the Trustee for cancellation, and the
Company shall pay the purchase price plus accrued and unpaid interest, if any,
to the Holders entitled thereto.
(e) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Securities pursuant to this
Section. To the extent that the provisions of any securities laws or regulations
conflict with provisions of this Section, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to
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47
have breached its obligations under this Section by virtue thereof.
SECTION 3.10. Limitation on Liens. The Company shall not, and shall
not permit any Restricted Subsidiary to, directly or indirectly, Incur or permit
to exist any Lien of any nature whatsoever on any of its properties (including
Capital Stock of a Restricted Subsidiary), whether owned at the Issue Date or
thereafter acquired, other than Permitted Liens, without effectively providing
that the Securities shall be secured equally and ratably with (or prior to) the
obligations so secured for so long as such obligations are so secured.
SECTION 3.11. Limitation on Investment Company Status. The Company
shall not take any action, or otherwise permit to exist any circumstance, that
would require the Company to register as an "investment company" under the
Investment Company Act of 1940, as amended.
SECTION 3.12. Compliance Certificate. The Company shall deliver to
the Trustee within 120 days after the end of each fiscal year of the Company an
Officers' Certificate stating that in the course of the performance by the
signers of their duties as Officers of the Company they would normally have
knowledge of any Default and whether or not the signers know of any Default that
occurred during such period. If they do, the certificate shall describe the
Default, its status and what action the Company is taking or proposes to take
with respect thereto. The Company also shall comply with TIA ss. 314(a)(4).
SECTION 3.13. Further Instruments and Acts. Upon request of the
Trustee, the Company will execute and deliver such further instruments and do
such further acts as may be reasonably necessary or proper to carry out more
effectively the purpose of this Indenture.
SECTION 3.14. Certain Covenants Suspended. The covenants set forth
above in this Article 3 will be applicable to the Company, except that in the
event that at any time (i) the ratings assigned to the Securities by both of the
Rating Agencies are Investment Grade Ratings and (ii) no Default has occurred
and is continuing under this Indenture, the Company and its Restricted
Subsidiaries will no longer be subject to the provisions of Sections 3.03, 3.04,
3.05, 3.06, 3.07 and 3.08 and clause (iii) of Section 4.01 (the termination of
such Sections being herein
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48
called the "Covenant Termination"). The Company will deliver to the Trustee an
Officer's Certificate confirming the occurrence of the Covenant Termination.
ARTICLE 4
Successor Company
SECTION 4.01. When Company May Merge or Transfer Assets. The Company
shall not consolidate with or merge with or into, or convey, transfer or lease,
in one transaction or a series of related transactions, all or substantially all
its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor
Company") shall be a Person organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia
and the Successor Company (if not the Company) shall expressly assume, by
an indenture supplemental hereto, executed and delivered to the Trustee,
in form satisfactory to the Trustee, all the obligations of the Company
under the Securities and this Indenture;
(ii) immediately after giving effect to such transaction (and
treating any Indebtedness which becomes an obligation of the Successor
Company or any Subsidiary as a result of such transaction as having been
Incurred by the Successor Company or such Subsidiary at the time of such
transaction), no Default shall have occurred and be continuing;
(iii) immediately after giving effect to such transaction, the
Successor Company would be able to incur an additional $1.00 of
Indebtedness pursuant to Section 3.03(a);
(iv) immediately after giving effect to such transaction, the
Successor Company shall have Consolidated Net Worth in an amount which is
not less than the Consolidated Net Worth of the Company immediately prior
to such transaction; and
(v) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger
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49
or transfer and such supplemental indenture (if any) comply with this
Indenture.
The Successor Company shall be the successor to the Company and
shall succeed to, and be substituted for, and may exercise every right and power
of, the Company under this Indenture, but the predecessor Company in the case of
a lease of all or substantially all its assets shall not be released from the
obligation to pay the principal of and interest on the Securities.
Notwithstanding the foregoing clauses (ii), (iii) and (iv), any
Restricted Subsidiary may consolidate with, merge into or transfer all or part
of its properties and assets to the Company.
ARTICLE 5
Defaults and Remedies
SECTION 5.01. Events of Default. An "Event of Default" occurs if:
(1) the Company defaults in any payment of interest on any Security
when the same becomes due and payable, and such default continues for a
period of 30 days;
(2) the Company (i) defaults in the payment of the principal of any
Security when the same becomes due and payable at its Stated Maturity,
upon declaration or otherwise, or (ii) fails to purchase Securities when
required pursuant to this Indenture or the Securities;
(3) the Company fails to comply with Section 4.01;
(4) the Company fails to comply with Section 3.02, 3.03, 3.04, 3.05,
3.06, 3.07, 3.08, 3.09, 3.10 or 3.11 (other than a failure to purchase
Securities when required under Section 3.07 or 3.09) and such failure
continues for 30 days after the notice specified below;
(5) the Company fails to comply with any of its agreements in the
Securities or this Indenture (other than those referred to in (1), (2),
(3) or (4) above) and such failure continues for 60 days after the notice
specified below;
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50
(6) Indebtedness of the Company or any Significant Subsidiary is not
paid within any applicable grace period after final maturity or is
accelerated by the holders thereof because of a default and the total
amount of such Indebtedness unpaid or accelerated exceeds $10,000,000 or
its foreign currency equivalent at the time;
(7) the Company or any Significant Subsidiary pursuant to or within
the meaning of any Bankruptcy Law:
(A) commences a voluntary case;
(B) consents to the entry of an order for relief against it in
an involuntary case;
(C) consents to the appointment of a Custodian of it or for
any substantial part of its property; or
(D) makes a general assignment for the benefit of its
creditors;
or takes any comparable action under any foreign laws relating to
insolvency;
(8) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that:
(A) is for relief against the Company or any Significant
Subsidiary in an involuntary case;
(B) appoints a Custodian of the Company or any Significant
Subsidiary or for any substantial part of its property; or
(C) orders the winding up or liquidation of the Company or any
Significant Subsidiary;
or any similar relief is granted under any foreign laws and the order or
decree remains unstayed and in effect for 60 days; or
(9) except for the Wellington Litigation (as defined in the
Prospectus dated August 14, 1996 relating to the offering of the Company's
8-3/8% Senior Notes Due 2003), any judgment or decree for the payment
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51
of money in excess of $10,000,000 or its foreign currency equivalent at
the time is entered against the Company or any Significant Subsidiary and
is not discharged or satisfied and either (A) an enforcement proceeding
has been commenced by any creditor upon such judgment or decree or (B)
there is a period of 60 days following the entry of such judgment or
decree during which such judgment or decree is not discharged, satisfied,
waived or the execution thereof stayed.
The foregoing will constitute Events of Default whatever the reason
for any such Event of Default and whether it is voluntary or involuntary or is
effected by operation of law or pursuant to any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body.
The term "Bankruptcy Law" means Title 11, United States Code, or any
similar Federal or state law for the relief of debtors. The term "Custodian"
means any receiver, trustee, assignee, liquidator, custodian or similar official
under any Bankruptcy Law.
A Default under clause (4), (5) or (9) of this Section 5.01 is not
an Event of Default until the Trustee or the Holders of at least 25% in
principal amount of the Securities notify the Company of the Default and the
Company does not cure such Default within the time specified after receipt of
such notice. Such notice must specify the Default, demand that it be remedied
and state that such notice is a "Notice of Default".
The Company shall deliver to the Trustee, within 30 days after the
occurrence thereof, written notice in the form of an Officers' Certificate of
any Event of Default under clause (6) of this Section 5.01 and any event which
with the giving of notice or the lapse of time would become an Event of Default
under clause (4), (5) or (9) of this Section 5.01, its status and what action
the Company is taking or proposes to take with respect thereto.
SECTION 5.02. Acceleration. If an Event of Default (other than an
Event of Default specified in Section 5.01(7) or (8) with respect to the
Company) occurs and is continuing, the Trustee by notice to the Company, or the
Holders of at least 25% in principal amount of the Securities by notice to the
Company and the Trustee, may declare the principal of and accrued but unpaid
interest on
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52
all the Securities to be due and payable. Upon such a declaration, such
principal and interest shall be due and payable immediately. If an Event of
Default specified in Section 5.01(7) or (8) with respect to the Company occurs
and is continuing, the principal of and interest on all the Securities shall
ipso facto become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any Securityholders. The Holders of a
majority in principal amount of the Securities by notice to the Trustee may
rescind an acceleration and its consequences if the rescission would not
conflict with any judgment or decree and if all existing Events of Default have
been cured or waived except nonpayment of principal or interest that has become
due solely because of acceleration. No such rescission shall affect any
subsequent Default or impair any right consequent thereto.
SECTION 5.03. Other Remedies. If an Event of Default occurs and is
continuing, the Trustee may pursue any available remedy to collect the payment
of principal of or interest on the Securities or to enforce the performance of
any provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not possess
any of the Securities or does not produce any of them in the proceeding. A delay
or omission by the Trustee or any Securityholder in exercising any right or
remedy accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative.
SECTION 5.04. Waiver of Past Defaults. The Holders of a majority in
principal amount of the Securities by notice to the Trustee may waive an
existing Default and its consequences except (i) a Default in the payment of the
principal of or interest on a Security or (ii) a Default in respect of a
provision that under Section 8.02 cannot be amended without the consent of each
Securityholder affected. When a Default is waived, it is deemed cured, but no
such waiver shall extend to any subsequent or other Default or impair any
consequent right.
SECTION 5.05. Control by Majority. The Holders of a majority in
principal amount of the Securities may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. However, the
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53
Trustee may refuse to follow any direction that conflicts with law or this
Indenture or, subject to Section 6.01, that the Trustee determines is unduly
prejudicial to the rights of other Securityholders or would involve the Trustee
in personal liability; provided, however, that the Trustee may take any other
action deemed proper by the Trustee that is not inconsistent with such
direction. Prior to taking any action hereunder, the Trustee shall be entitled
to indemnification satisfactory to it in its sole discretion against all losses
and expenses caused by taking or not taking such action.
SECTION 5.06. Limitation on Suits. A Securityholder may not pursue
any remedy with respect to this Indenture or the Securities unless:
(1) the Holder gives to the Trustee written notice stating that an
Event of Default is continuing;
(2) the Holders of at least 25% in principal amount of the
Securities make a written request to the Trustee to pursue the remedy;
(3) such Holder or Holders offer to the Trustee reasonable security
or indemnity against any loss, liability or expense;
(4) the Trustee does not comply with the request within 60 days
after receipt of the request and the offer of security or indemnity; and
(5) the Holders of a majority in principal amount of the Securities
do not give the Trustee a direction inconsistent with the request during
such 60-day period.
A Securityholder may not use this Indenture to prejudice the rights
of another Securityholder or to obtain a preference or priority over another
Securityholder.
SECTION 5.07. Rights of Holders To Receive Payment. Notwithstanding
any other provision of this Indenture, the right of any Holder to receive
payment of principal of and interest on the Securities held by such Holder, on
or after the respective due dates expressed in the Securities, or to bring suit
for the enforcement of any such payment on or after such respective dates, shall
not be impaired or affected without the consent of such Holder.
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54
SECTION 5.08. Collection Suit by Trustee. If an Event of Default
specified in Section 5.01(1) or (2) occurs and is continuing, the Trustee may
recover judgment in its own name and as trustee of an express trust against the
Company for the whole amount then due and owing (together with interest on any
unpaid interest to the extent lawful) and the amounts provided for in Section
6.07.
SECTION 5.09. Trustee May File Proofs of Claim. The Trustee may file
such proofs of claim and other papers or documents as may be necessary or
advisable in order to have the claims of the Trustee and the Securityholders
allowed in any judicial proceedings relative to the Company, its creditors or
its property and, unless prohibited by law or applicable regulations, may vote
on behalf of the Holders in any election of a trustee in bankruptcy or other
Person performing similar functions, and any Custodian in any such judicial
proceeding is hereby authorized by each Holder to make payments to the Trustee
and, in the event that the Trustee shall consent to the making of such payments
directly to the Holders, to pay to the Trustee any amount due it for the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and its counsel, and any other amounts due the Trustee under Section
6.07.
SECTION 5.10. Priorities. If the Trustee collects any money or
property pursuant to this Article 5, it shall pay out the money or property in
the following order:
FIRST: to the Trustee for amounts due under Section 6.07;
SECOND: to Securityholders for amounts due and unpaid on the
Securities for principal and interest, ratably, without preference or
priority of any kind, according to the amounts due and payable on the
Securities for principal and interest, respectively; and
THIRD: to the Company.
The Trustee may fix a record date and payment date for any payment
to Securityholders pursuant to this Section. At least 15 days before such record
date, the Company shall mail to each Securityholder and the Trustee a notice
that states the record date, the payment date and amount to be paid.
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55
SECTION 5.11. Undertaking for Costs. In any suit for the enforcement
of any right or remedy under this Indenture or in any suit against the Trustee
for any action taken or omitted by it as Trustee, a court in its discretion may
require the filing by any party litigant in the suit of an undertaking to pay
the costs of the suit, and the court in its discretion may assess reasonable
costs, including reasonable attorneys' fees, against any party litigant in the
suit, having due regard to the merits and good faith of the claims or defenses
made by the party litigant. This Section does not apply to a suit by the
Trustee, a suit by a Holder pursuant to Section 5.07 or a suit by Holders of
more than 10% in principal amount of the Securities.
SECTION 5.12. Waiver of Stay or Extension Laws. The Company (to the
extent it may lawfully do so) shall not at any time insist upon, or plead, or in
any manner whatsoever claim or take the benefit or advantage of, any stay or
extension law wherever enacted, now or at any time hereafter in force, which may
affect the covenants or the performance of this Indenture; and the Company (to
the extent that it may lawfully do so) hereby expressly waives all benefit or
advantage of any such law, and shall not hinder, delay or impede the execution
of any power herein granted to the Trustee, but shall suffer and permit the
execution of every such power as though no such law had been enacted.
ARTICLE 6
Trustee
SECTION 6.01. Duties of Trustee. (a) If an Event of Default has
occurred and is continuing, the Trustee shall exercise such of the rights and
powers vested in it by this Indenture and use the same degree of care and skill
in their exercise as a prudent Person would exercise or use under the
circumstances in the conduct of such Person's own affairs.
(b) Except during the continuance of an Event of Default:
(1) the Trustee undertakes to perform such duties and only such
duties as are specifically set forth in this Indenture and no implied
covenants or obligations shall be read into this Indenture against the
Trustee; and
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56
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness
of the opinions expressed therein, upon certificates or opinions furnished
to the Trustee and conforming to the requirements of this Indenture.
However, the Trustee shall examine the certificates and opinions to
determine whether or not they conform to the requirements of this
Indenture.
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act or its own wilful misconduct,
except that:
(1) this paragraph does not limit the effect of paragraph (b) of
this Section;
(2) the Trustee shall not be liable for any error of judgment made
in good faith by a Trust Officer unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts; and
(3) the Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 5.05.
(d) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b) and (c) of this Section.
(e) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Company.
(f) Money held in trust by the Trustee need not be segregated from
other funds except to the extent required by law.
(g) No provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur financial liability in the
performance of any of its duties hereunder or in the exercise of any of its
rights or powers, if it shall have reasonable grounds to believe that repayment
of such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
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57
(h) Every provision of this Indenture relating to the conduct or
affecting the liability of or affording protection to the Trustee shall be
subject to the provisions of this Section and to the provisions of the TIA.
SECTION 6.02. Rights of Trustee. (a) The Trustee may rely on any
document reasonably believed by it to be genuine and to have been signed or
presented by the proper Person. The Trustee need not investigate any fact or
matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may require
an Officers' Certificate or an Opinion of Counsel. The Trustee shall not be
liable for any action it takes or omits to take in good faith in reliance on the
Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents.
(d) The Trustee shall not be liable for any action it takes or omits
to take in good faith which it believes to be authorized or within its rights or
powers; provided, however, that the Trustee's conduct does not constitute wilful
misconduct or negligence.
(e) The Trustee may consult with nationally recognized counsel with
expertise in trust indenture matters, and the advice or opinion of such counsel
with respect to legal matters relating to this Indenture and the Securities
shall be full and complete authorization and protection from liability in
respect to any action taken, omitted or suffered by it hereunder in good faith
and in accordance with the advice or opinion of such counsel.
SECTION 6.03. Individual Rights of Trustee. The Trustee in its
individual or any other capacity may become the owner or pledgee of Securities
and may otherwise deal with the Company or its Affiliates with the same rights
it would have if it were not Trustee. Any Paying Agent, Registrar, co-registrar
or co-paying agent may do the same with like rights. However, the Trustee must
comply with Sections 6.10 and 6.11.
SECTION 6.04. Trustee's Disclaimer. The Trustee shall not be
responsible for and makes no representation as to the validity or adequacy of
this Indenture or the Securities, it shall not be accountable for the
Company's use of the proceeds from the Securities, and it shall not be
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58
responsible for any statement of the Company in the Indenture or in any document
issued in connection with the sale of the Securities or in the Securities other
than the Trustee's certificate of authentication.
SECTION 6.05. Notice of Defaults. If a Default occurs and is
continuing and if it is known to the Trustee, the Trustee shall mail to each
Securityholder notice of the Default within 90 days after it occurs. Except in
the case of a Default in payment of principal of or interest on any Security
(including payments pursuant to purchase provisions of such Security, if any),
the Trustee may withhold the notice if and so long as a committee of its Trust
Officers in good faith determines that withholding the notice is in the
interests of Securityholders.
SECTION 6.06. Reports by Trustee to Holders. As promptly as
practicable after each May 15 beginning with the May following the date of this
Indenture, and in any event prior to July 15 in each year, the Trustee shall
mail to each Securityholder a brief report dated as of May 15 that complies with
TIA ss. 313(a) to the extent required thereunder. The Trustee also shall comply
with TIA ss. 313(b).
A copy of each report at the time of its mailing to Securityholders
shall be filed with the SEC and each stock exchange (if any) on which the
Securities are listed. The Company shall notify promptly the Trustee whenever
the Securities become listed on any stock exchange and of any delisting thereof.
SECTION 6.07. Compensation and Indemnity. The Company shall pay to
the Trustee from time to time reasonable compensation for its services. The
Trustee's compensation shall not be limited by any law on compensation of a
trustee of an express trust. The Company shall reimburse the Trustee upon
request for all reasonable out-of-pocket expenses incurred or made by it,
including costs of collection, in addition to the compensation for its services
in connection with its performance of its duties under this Indenture. Such
expenses shall include the reasonable compensation and expenses, disbursements
and advances of the Trustee's agents, counsel, accountants and experts. The
Company shall indemnify the Trustee against any and all loss, liability or
reasonable expense (including reasonable attorneys' fees) incurred by it in
connection with the administration of this trust and the performance of
<PAGE>
59
its duties hereunder. The Trustee shall notify the Company promptly of any claim
for which it may seek indemnity. Failure by the Trustee to so notify the Company
shall not relieve the Company of its obligations hereunder. The Company shall
defend the claim and the Trustee may have separate counsel but the fees and
expenses of such counsel shall be at the expense of the Trustee 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) the Trustee shall have reasonably concluded that there may be defenses
available to it which are different from or additional to the those available to
the Company, in any of which events such fees and expenses shall be paid by the
Company. The Company shall not be liable for any settlement of any claim or
action except with its written consent, which consent shall not be unreasonably
withheld. The Company need not reimburse any expense or indemnify against any
loss, liability or expense incurred by the Trustee through the Trustee's own
wilful misconduct, negligence or bad faith.
To secure the Company's payment obligations in this Section, the
Trustee shall have a lien prior to the Securities on all money or property held
or collected by the Trustee other than money or property held in trust to pay
principal of and interest on particular Securities.
The Company's payment obligations pursuant to this Section shall
survive the discharge of this Indenture. When the Trustee incurs expenses after
the occurrence of a Default specified in Section 5.01(7) or (8) with respect to
the Company, the expenses are intended to constitute expenses of administration
under the Bankruptcy Law.
SECTION 6.08. Replacement of Trustee. The Trustee may resign at any
time by so notifying the Company. The Holders of a majority in principal amount
of the Securities may remove the Trustee by so notifying the Trustee and the
Company and may appoint a successor Trustee.
The Company shall remove the Trustee if:
(1) the Trustee fails to comply with Section 6.10;
(2) the Trustee is adjudged bankrupt or insolvent;
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60
(3) a receiver or other public officer takes charge of the Trustee
or its property; or
(4) the Trustee otherwise becomes incapable of acting.
If the Trustee resigns, is removed by the Company or by the Holders
of a majority in principal amount of the Securities and such Holders do not
reasonably promptly appoint a successor Trustee, or if a vacancy exists in the
office of Trustee for any reason (the Trustee in such event being referred to
herein as the retiring Trustee), the Company shall promptly appoint a successor
Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Securityholders. The retiring Trustee shall promptly transfer all
property held by it as Trustee to the successor Trustee, subject to the lien
provided for in Section 6.07.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee or the Holders of
10% in principal amount of the Securities may petition any court of competent
jurisdiction for the appointment of a successor Trustee.
If the Trustee fails to comply with Section 6.10, any Securityholder
may petition any court of competent jurisdiction for the removal of the Trustee
and the appointment of a successor Trustee.
Notwithstanding the replacement of the Trustee pursuant to this
Section, the Company's obligations under Section 6.07 shall continue for the
benefit of the retiring Trustee.
SECTION 6.09. Successor Trustee by Merger. If the Trustee
consolidates with, merges or converts into, or transfers all or substantially
all its corporate trust business or assets to, another corporation or banking
association, the resulting, surviving or transferee corporation without any
further act shall be the successor Trustee.
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61
In case at the time such successor or successors by merger,
conversion or consolidation to the Trustee shall succeed to the trusts created
by this Indenture any of the Securities shall have been authenticated but not
delivered, any such successor to the Trustee may adopt the certificate of
authentication of any predecessor trustee, and deliver such Securities so
authenticated; and in case at that time any of the Securities shall not have
been authenticated, any successor to the Trustee may authenticate such
Securities either in the name of any predecessor hereunder or in the name of the
successor to the Trustee; and in all such cases such certificates shall have the
full force which it is anywhere in the Securities or in this Indenture provided
that the certificate of the Trustee shall have.
SECTION 6.10. Eligibility; Disqualification. The Trustee shall at
all times satisfy the requirements of TIA ss. 310(a). The Trustee shall have a
combined capital and surplus of at least $50,000,000 as set forth in its most
recent published annual report of condition. The Trustee shall comply with TIA
ss. 310(b); provided, however, that there shall be excluded from the operation
of TIA ss. 310(b)(1) any indenture or indentures under which other securities or
certificates of interest or participation in other securities of the Company are
outstanding if the requirements for such exclusion set forth in TIA ss.
310(b)(1) are met.
SECTION 6.11. Preferential Collection of Claims Against Company. The
Trustee shall comply with TIA ss. 311(a), excluding any creditor relationship
listed in TIA ss. 311(b). A Trustee who has resigned or been removed shall be
subject to TIA ss. 311(a) to the extent indicated.
ARTICLE 7
Discharge of Indenture; Defeasance
SECTION 7.01. Discharge of Liability on Securities; Defeasance. (a)
When (i) the Company delivers to the Trustee all outstanding Securities (other
than Securities replaced pursuant to Section 2.07) for cancellation or (ii) all
outstanding Securities have become due and payable and the Company irrevocably
deposits with the Trustee funds sufficient to pay at maturity all outstanding
Securities, including interest thereon to maturity (other than Securities
replaced pursuant to
<PAGE>
62
Section 2.07), and if in either case the Company pays all other sums payable
hereunder by the Company, then this Indenture shall, subject to Section 7.01(c),
cease to be of further effect. The Trustee shall acknowledge satisfaction and
discharge of this Indenture, other than those surviving obligations set forth in
Section 7.01(c), on demand of the Company accompanied by an Officers'
Certificate and an Opinion of Counsel and at the cost and expense of the
Company.
(b) Subject to Sections 7.01(c) and 7.02, the Company at any time
may terminate (i) all its obligations under the Securities and this Indenture
("legal defeasance option") or (ii) its obligations under Sections 3.02, 3.03,
3.04, 3.05, 3.06, 3.07, 3.08, 3.09, 3.10 and 3.11 and the operation of Section
5.01(6), 5.01(7) (with respect to Significant Subsidiaries), 5.01(8) (with
respect to Significant Subsidiaries) and 5.01(9) and the limitations contained
in clauses (iii) and (iv) of Section 4.01 ("covenant defeasance option"). The
Company may exercise its legal defeasance option notwithstanding its prior
exercise of its covenant defeasance option.
If the Company exercises its legal defeasance option, payment of the
Securities may not be accelerated because of an Event of Default. If the Company
exercises its covenant defeasance option, payment of the Securities may not be
accelerated because of an Event of Default specified in 5.01(4), 5.01(6),
5.01(7) (with respect to Significant Subsidiaries), 5.01(8) (with respect to
Significant Subsidiaries) and 5.01(9) or because of the failure of the Company
to comply with clause (iii) or (iv) of Section 4.01.
Upon satisfaction of the conditions set forth herein and upon
request of the Company, the Trustee shall acknowledge in writing the discharge
of those obligations that the Company terminates.
(c) Notwithstanding clauses (a) and (b) above, the Company's
obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.07, 6.07 and 6.08 and this
Article 7 shall survive until the Securities have been paid in full. Thereafter,
the Company's obligations in Sections 6.07, 7.04 and 7.05 shall survive.
<PAGE>
63
SECTION 7.02. Conditions to Defeasance. The Company may exercise its
legal defeasance option or its covenant defeasance option only if:
(1) the Company irrevocably deposits in trust with the Trustee money
or U.S. Government Obligations for the payment of principal of and
interest on the Securities to maturity;
(2) the Company delivers to the Trustee a certificate from a
nationally recognized firm of independent accountants expressing their
opinion that the payments of principal and interest when due and without
reinvestment on the deposited U.S. Government Obligations plus any
deposited money without investment will provide cash at such times and in
such amounts as will be sufficient to pay principal and interest when due
on all the Securities to maturity;
(3) 123 days pass after the deposit is made and during the 123-day
period no Default specified in Section 5.01(7) or (8) with respect to the
Company occurs which is continuing at the end of the period;
(4) the deposit does not constitute a default under any other
agreement binding on the Company;
(5) the Company delivers to the Trustee an Opinion of Counsel to the
effect that the trust resulting from the deposit does not constitute, or
is qualified as, a regulated investment company under the Investment
Company Act of 1940;
(6) in the case of the legal defeasance option, the Company shall
have delivered to the Trustee an Opinion of Counsel stating that (i) the
Company has received from, or there has been published by, the Internal
Revenue Service a ruling, or (ii) since the date of this Indenture there
has been a change in the applicable Federal income tax law, in either case
to the effect that, and based thereon such Opinion of Counsel shall
confirm that, the Securityholders will not recognize income, gain or loss
for Federal income tax purposes as a result of such defeasance and will be
subject to Federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such defeasance had not
occurred;
<PAGE>
64
(7) in the case of the covenant defeasance option, the Company shall
have delivered to the Trustee an Opinion of Counsel to the effect that the
Securityholders will not recognize income, gain or loss for Federal income
tax purposes as a result of such covenant defeasance and will be subject
to Federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such covenant defeasance had not
occurred; and
(8) the Company delivers to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that all conditions precedent to the
defeasance and discharge of the Securities as contemplated by this Article
7 have been complied with.
SECTION 7.03. Application of Trust Money. The Trustee shall hold in
trust money or U.S. Government Obligations deposited with it pursuant to this
Article 7. It shall apply the deposited money and the money from U.S. Government
Obligations in accordance with this Indenture to the payment of principal of and
interest on the Securities.
SECTION 7.04. Repayment to Company. The Trustee and the Paying Agent
shall promptly turn over to the Company upon request any excess money or
securities held by them at any time.
Subject to any applicable abandoned property law and the right of
the Trustee to publish or mail notice to Securityholders prior to making such
payment to the Company, the Trustee and the Paying Agent shall pay to the
Company upon request any money held by them for the payment of principal or
interest that remains unclaimed for two years, and, thereafter, Securityholders
entitled to the money must look to the Company for payment as general creditors.
SECTION 7.05. Indemnity for Government Obligations. The Company
shall pay and shall indemnify the Trustee against any tax, fee or other charge
imposed on or assessed against deposited U.S. Government Obligations or the
principal and interest received on such U.S. Government Obligations.
SECTION 7.06. Reinstatement. If the Trustee is unable to apply any
money or U.S. Government Obligations in accordance with this Article 7 by reason
of any legal proceeding or by reason of any order or judgment of any
<PAGE>
65
court or governmental authority enjoining, restraining or otherwise prohibiting
such application, the Company's obligations under this Indenture and the
Securities shall be revived and reinstated as though no deposit had occurred
pursuant to this Article 7 until such time as the Trustee or Paying Agent is
permitted to apply all such money or U.S. Government Obligations in accordance
with this Article 7; provided, however, that, if the Company has made any
payment of interest on or principal of any Securities because of the
reinstatement of its obligations, the Company shall be subrogated to the rights
of the Holders of such Securities to receive such payment from the money or U.S.
Government Obligations held by the Trustee or Paying Agent.
ARTICLE 8
Amendments
SECTION 8.01. Without Consent of Holders. The Company, when
authorized by a resolution of its Board of Directors, and the Trustee may amend
this Indenture or the Securities without notice to or consent of any
Securityholder:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to comply with Article 4;
(3) to provide for uncertificated Securities in addition to or in
place of certificated Securities; provided, however, that the
uncertificated Securities are issued in registered form for purposes of
Section 163(f) of the Code or in a manner such that the uncertificated
Securities are described in Section 163(f)(2)(B) of the Code;
(4) to add guarantees with respect to the Securities or to secure
the Securities;
(5) to add to the covenants of the Company for the benefit of the
Holders or to surrender any right or power herein conferred upon the
Company;
(6) to comply with any requirements of the SEC in connection with
qualifying this Indenture under the TIA; or
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66
(7) to make any change that does not adversely affect the rights of
any Securityholder.
After an amendment under this Section becomes effective, the Company
shall mail to Securityholders a notice briefly describing such amendment. The
failure to give such notice to all Securityholders, or any defect therein, shall
not impair or affect the validity of an amendment under this Section.
SECTION 8.02. With Consent of Holders. The Company, when authorized
by a resolution of its Board of Directors, and the Trustee may amend this
Indenture or the Securities without notice to any Securityholder but with the
written consent of the Holders of at least a majority in principal amount of the
Securities. However, without the consent of each Securityholder affected, an
amendment may not:
(1) reduce the amount of Securities whose Holders must consent to an
amendment;
(2) reduce the rate of or extend the time for payment of interest on
any Security;
(3) reduce the principal of or extend the Stated Maturity of any
Security;
(4) make any Security payable in money other than that stated in the
Security; or
(5) make any change in Section 5.04 or 5.07 or the second sentence
of this Section.
It shall not be necessary for the consent of the Holders under this
Section to approve the particular form of any proposed amendment, but it shall
be sufficient if such consent approves the substance thereof.
After an amendment under this Section becomes effective, the Company
shall mail to Securityholders a notice briefly describing such amendment. The
failure to give such notice to all Securityholders, or any defect therein, shall
not impair or affect the validity of an amendment under this Section.
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67
SECTION 8.03. Compliance with Trust Indenture Act. Every amendment
to this Indenture or the Securities shall comply with the TIA as then in effect.
SECTION 8.04. Revocation and Effect of Consents and Waivers. A
consent to an amendment or a waiver by a Holder of a Security shall bind the
Holder and every subsequent Holder of that Security or portion of the Security
that evidences the same debt as the consenting Holder's Security, even if
notation of the consent or waiver is not made on the Security. However, any such
Holder or subsequent Holder may revoke the consent or waiver as to such Holder's
Security or portion of the Security if the Trustee receives the notice of
revocation before the date the amendment or waiver becomes effective. After an
amendment or waiver becomes effective, it shall bind every Securityholder.
The Company may, but shall not be obligated to, fix a record date
for the purpose of determining the Securityholders entitled to give their
consent or take any other action described above or required or permitted to be
taken pursuant to this Indenture. If a record date is fixed, then
notwithstanding the immediately preceding paragraph, those Persons who were
Securityholders at such record date (or their duly designated proxies), and only
those Persons, shall be entitled to give such consent or to revoke any consent
previously given or to take any such action, whether or not such Persons
continue to be Holders after such record date. No such consent shall be valid or
effective for more than 120 days after such record date.
SECTION 8.05. Notation on or Exchange of Securities. If an amendment
changes the terms of a Security, the Trustee may require the Holder of the
Security to deliver it to the Trustee. The Trustee may place an appropriate
notation on the Security regarding the changed terms and return it to the
Holder. Alternatively, if the Company or the Trustee so determines, the Company
in exchange for the Security shall issue and the Trustee shall authenticate a
new Security that reflects the changed terms. Failure to make the appropriate
notation or to issue a new Security shall not affect the validity of such
amendment.
SECTION 8.06. Trustee To Sign Amendments. The Trustee shall sign any
amendment authorized pursuant to this Article 8 if the amendment does not
adversely affect the rights, duties, liabilities or immunities of the Trustee.
<PAGE>
68
If it does, the Trustee may but need not sign it. In signing such amendment the
Trustee shall be entitled to receive indemnity reasonably satisfactory to it and
to receive, and (subject to Section 6.01) shall be fully protected in relying
upon, an Officers' Certificate and an Opinion of Counsel stating that such
amendment is authorized or permitted by this Indenture.
SECTION 8.07. Payment for Consent. Neither the Company nor any
Affiliate of the Company shall, directly or indirectly, pay or cause to be paid
any consideration, whether by way of interest, fee or otherwise, to any Holder
for or as an inducement to any consent, waiver or amendment of any of the terms
or provisions of this Indenture or the Securities unless such consideration is
offered to be paid to all Holders that so consent, waive or agree to amend in
the time frame set forth in solicitation documents relating to such consent,
waiver or agreement.
ARTICLE 9
Miscellaneous
SECTION 9.01. Trust Indenture Act Controls. If any provision of this
Indenture limits, qualifies or conflicts with another provision which is
required to be included in this Indenture by the TIA, the required provision
shall control.
SECTION 9.02. Notices. Any notice or communication shall be in
writing and delivered in person or mailed by first-class mail or sent by
facsimile transmission addressed as follows:
if to the Company:
ContiFinancial Corporation
277 Park Avenue
New York, New York 10172
Facsimile No.: 212-207-2939
Attention of Chief Counsel
<PAGE>
69
if to the Trustee:
The Chase Manhattan Bank
450 West 33rd Street
New York, New York 10172
Facsimile No.: 212-946-8158/9
Attention of Corporate Trust
Administration, 15th Floor
The Company or the Trustee by notice to the other may designate
additional or different addresses for subsequent notices or communications.
Any notice or communication mailed to a Securityholder shall be
mailed to the Securityholder at the Securityholder's address as it appears on
the registration books of the Registrar and shall be sufficiently given if so
mailed within the time prescribed.
Failure to mail a notice or communication to a Securityholder or any
defect in it shall not affect its sufficiency with respect to other
Securityholders. If a notice or communication is mailed in the manner provided
above, it is duly given, whether or not the addressee receives it.
SECTION 9.03. Communication by Holders with Other Holders.
Securityholders may communicate pursuant to TIA ss. 312(b) with other
Securityholders with respect to their rights under this Indenture or the
Securities. The Company, the Trustee, the Registrar and anyone else shall have
the protection of TIA ss. 312(c).
SECTION 9.04. Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Company to the Trustee to take or refrain
from taking any action under this Indenture, the Company shall furnish to the
Trustee:
(1) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of the signers,
all conditions precedent, if any, provided for in this Indenture relating
to the proposed action have been complied with; and
(2) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee stating that, in
<PAGE>
70
the opinion of such counsel, all such conditions precedent have been
complied with.
SECTION 9.05. Statements Required in Certificate or Opinion. Each
certificate or opinion with respect to compliance with a covenant or condition
provided for in this Indenture shall include:
(1) a statement that the individual making such certificate or
opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of such individual, he has made
such examination or investigation as is necessary to enable him to express
an informed opinion as to whether or not such covenant or condition has
been complied with; and
(4) a statement as to whether or not, in the opinion of such
individual, such covenant or condition has been complied with.
SECTION 9.06. When Securities Disregarded. In determining whether
the Holders of the required principal amount of Securities have concurred in any
direction, waiver or consent, Securities owned by the Company or by any Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with the Company shall be disregarded and deemed not to be
outstanding, except that, for the purpose of determining whether the Trustee
shall be protected in relying on any such direction, waiver or consent, only
Securities which the Trustee knows are so owned shall be so disregarded. Also,
subject to the foregoing, only Securities outstanding at the time shall be
considered in any such determination.
SECTION 9.07. Rules by Trustee, Paying Agent and Registrar. The
Trustee may make reasonable rules for action by or a meeting of Securityholders.
The Registrar and the Paying Agent may make reasonable rules for their
functions.
SECTION 9.08. Legal Holidays. A "Legal Holiday" is a Saturday, a
Sunday or a day on which banking institu-
<PAGE>
71
tions are not required to be open in the State of New York. If a payment date is
a Legal Holiday, payment shall be made on the next succeeding day that is not a
Legal Holiday, and no interest shall accrue for the intervening period. If a
regular record date is a Legal Holiday, the record date shall not be affected.
SECTION 9.09. Governing Law. This Indenture and the Securities shall
be governed by, and construed in accordance with, the laws of the State of New
York but without giving effect to applicable principles of conflicts of law to
the extent that the application of the laws of another jurisdiction would be
required thereby.
SECTION 9.10. No Recourse Against Others. A director, officer,
employee or stockholder, as such, of the Company shall not have any liability
for any obligations of the Company under the Securities or this Indenture or for
any claim based on, in respect of or by reason of such obligations or their
creation. By accepting a Security, each Securityholder shall waive and release
all such liability. The waiver and release shall be part of the consideration
for the issue of the Securities.
SECTION 9.11. Successors. All agreements of the Company in this
Indenture and the Securities shall bind its successors. All agreements of the
Trustee in this Indenture shall bind its successors.
SECTION 9.12. Multiple Originals. The parties may sign any number of
copies of this Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement. One signed copy is enough to prove this
Indenture.
SECTION 9.13. Table of Contents; Headings. The table of contents,
cross-reference sheet and headings of the Articles and Sections of this
Indenture have been inserted
<PAGE>
72
for convenience of reference only, are not intended to be considered a part
hereof and shall not modify or restrict any of the terms or provisions hereof.
IN WITNESS WHEREOF, the parties have caused this Indenture to be
duly executed as of the date first written above.
CONTIFINANCIAL CORPORATION,
by ______________________________________
Name:
Title:
by ______________________________________
Name:
Title:
THE CHASE MANHATTAN BANK,
by ______________________________________
Name:
Title:
<PAGE>
EXHIBIT A
[FORM OF FACE OF SERIES A SECURITY]
THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY
ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED
STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED
HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE
SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON
THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY
RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE
BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR
OTHERWISE TRANSFERRED, ONLY (1)(a) TO A PERSON WHOM THE SELLER REASONABLY
BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A UNDER THE
SECURITIES ACT, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER
THE SECURITIES ACT, OR (c) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF
COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY
APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER
APPLICABLE JURISDICTION AND (B) THE HOLDER WILL AND EACH SUBSEQUENT HOLDER IS
REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF
THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE.
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.
<PAGE>
2
CUSIP:
No. $
7-1/2% Senior Notes Due 2002
Series A
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.
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
AUTHENTICATION
THE CHASE MANHATTAN BANK,
as Trustee, certifies
that this is one of
the Securities referred [Seal]
to in the Indenture.
by_______________________________
Authorized Signatory
<PAGE>
3
<PAGE>
4
[FORM OF REVERSE SIDE OF SERIES A SECURITY]
7-1/2% Senior Note Due 2002
Series A
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 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.
<PAGE>
5
3. Paying Agent and Registrar
Initially, The Chase Manhattan Bank, a New York banking corporation
("Trustee"), will act as Paying Agent and Registrar. The Company may appoint and
change any Paying Agent, Registrar or co-registrar without notice. The Company
or any of its domestically incorporated Wholly Owned Subsidiaries may act as
Paying Agent, Registrar or co-registrar.
4. Indenture
The Company issued the Securities under an Indenture dated as of
March 1, 1997 ("Indenture"), between the Company and the Trustee. The terms of
the Securities include those stated in the Indenture and will include 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") to
the extent provided in Section 1.03 of the Indenture. 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
<PAGE>
6
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 $100,000 and whole multiples of $1,000 in excess thereof. 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.
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.
<PAGE>
7
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 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.
<PAGE>
8
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.
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).
<PAGE>
9
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
Pursuant to the Registration Rights Agreement, the Company will be
obligated to consummate an exchange offer pursuant to which the Holder of this
Security shall have the right to exchange this Security for 7-1/2% Senior Notes
Due 2002, Series B, of the Company (the "Series B Securities"), which have been
registered (or, with respect to certain Series B Securities, which will be
entitled to such registration, as set forth in the Registration Rights
Agreement) under the Securities Act, in like principal amount and having
identical terms as this Security. The Holders of Securities shall be entitled to
receive certain 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
<PAGE>
10
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;
(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
<PAGE>
11
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.
<PAGE>
12
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ASSIGNMENT FORM
To assign this Security, fill in the form below:
I or we assign and transfer this Security to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint _________________________ agent to transfer this
Security on the books of the Company. The agent may substitute another to act
for him.
________________________________________________________________________________
Date: __________ Your Signature: _______________________________________________
________________________________________________________________________________
Sign exactly as your name appears on the other side of this Security.
<PAGE>
13
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Security purchased by the Company
pursuant to Section 3.07 or 3.09 of the Indenture, check the box:
|_|
If you want to elect to have only part of this Security purchased by
the Company pursuant to Section 3.07 or 3.09 of the Indenture, state the amount:
$
Date: __________________ Your Signature: _______________________________________
(Sign exactly as your name appears
on the other side of the Security)
Signature Guarantee:____________________________________________________________
(Signature must be guaranteed by a
member firm of the New York Stock
Exchange or a commercial bank or trust
company)
<PAGE>
EXHIBIT B
[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>
2
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
AUTHENTICATION
THE CHASE MANHATTAN BANK,
as Trustee, certifies
that this is one of the [Seal]
Securities referred to in
the Indenture.
by______________________________
Authorized Signatory
<PAGE>
3
[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.
<PAGE>
4
3. Paying Agent and Registrar
Initially, The Chase Manhattan Bank, a New York banking corporation
("Trustee"), will act as Paying Agent and Registrar. The Company may appoint and
change any Paying Agent, Registrar or co-registrar without notice. The Company
or any of its domestically incorporated Wholly Owned Subsidiaries may act as
Paying Agent, Registrar or co-registrar.
4. Indenture
The Company issued the Securities under an Indenture dated as of 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
<PAGE>
5
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.
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
<PAGE>
6
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 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
<PAGE>
7
(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.
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
<PAGE>
8
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;
(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
<PAGE>
9
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
<PAGE>
10
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.
<PAGE>
11
- --------------------------------------------------------------------------------
ASSIGNMENT FORM
To assign this Security, fill in the form below:
I or we assign and transfer this Security to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint _________________________ agent to transfer this
Security on the books of the Company. The agent may substitute another to act
for him.
________________________________________________________________________________
Date: __________ Your Signature: _______________________________________________
________________________________________________________________________________
Sign exactly as your name appears on the other side of this Security.
<PAGE>
12
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Security purchased by the Company
pursuant to Section 3.07 or 3.09 of the Indenture, check the box:
|_|
If you want to elect to have only part of this Security purchased by
the Company pursuant to Section 3.07 or 3.09 of the Indenture, state the amount:
$
Date: __________________ Your Signature: _______________________________________
(Sign exactly as your name appears
on the other side of the Security)
Signature Guarantee:____________________________________________________________
(Signature must be guaranteed by a
member firm of the New York Stock
Exchange or a commercial bank or trust
company)
THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY
ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED
STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED
HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE
SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON
THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY
RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE
BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR
OTHERWISE TRANSFERRED, ONLY (1)(a) TO A PERSON WHOM THE SELLER REASONABLY
BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A UNDER THE
SECURITIES ACT, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER
THE SECURITIES ACT, OR (c) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF
COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY
APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER
APPLICABLE JURISDICTION AND (B) THE HOLDER WILL AND EACH SUBSEQUENT HOLDER IS
REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF
THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE.
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.
<PAGE>
2
CUSIP: 21075VAB3
No. R-1 $200,000,000
7-1/2% Senior Notes Due 2002
Series A
CONTIFINANCIAL CORPORATION, a Delaware corporation, promises to pay
to Cede & Co., or registered assigns, the principal sum of Two hundred million
Dollars on March 15, 2002.
Interest Payment Dates: March 15 and September 15.
Record Dates: March 1 and September 1.
Additional provisions of this Security are set forth on the other
side of this Security.
Dated: March 12, 1997
CONTIFINANCIAL CORPORATION,
by______________________________________
Name: Daniel J. Willett
Title: Senior Vice President
and Chief Financial
Officer
_____________________________________
Name: Susan E. O'Donovan
Title: Vice President and
Controller
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
THE CHASE MANHATTAN BANK,
as Trustee, certifies
that this is one of
the Securities referred [Seal]
to in the Indenture.
by_______________________________
<PAGE>
3
Authorized Signatory
<PAGE>
4
7-1/2% Senior Note Due 2002
Series A
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 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 co-registrar.
<PAGE>
5
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 will include 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") to
the extent provided in Section 1.03 of the Indenture. 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 $100,000 and whole multiples of $1,000 in excess thereof. 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
<PAGE>
6
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.
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.
<PAGE>
7
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 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
<PAGE>
8
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.
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
Pursuant to the Registration Rights Agreement, the Company will be
obligated to consummate an exchange offer pursuant to which the Holder of this
Security shall have the right to exchange this Security for 7-1/2% Senior Notes
Due 2002, Series B, of the Company (the "Series B Securities"),
<PAGE>
9
which have been registered (or, with respect to certain Series B Securities,
which will be entitled to such registration, as set forth in the Registration
Rights Agreement) under the Securities Act, in like principal amount and having
identical terms as this Security. The Holders of Securities shall be entitled to
receive certain 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;
(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)
<PAGE>
10
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.
<PAGE>
11
- --------------------------------------------------------------------------------
ASSIGNMENT FORM
To assign this Security, fill in the form below:
I or we assign and transfer this Security to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint _________________________ agent to transfer this
Security on the books of the Company. The agent may substitute another to act
for him.
________________________________________________________________________________
Date: __________ Your Signature: _______________________________________________
________________________________________________________________________________
Sign exactly as your name appears on the other side of this Security.
<PAGE>
12
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Security purchased by the Company
pursuant to Section 3.07 or 3.09 of the Indenture, check the box:
|_|
If you want to elect to have only part of this Security purchased by
the Company pursuant to Section 3.07 or 3.09 of the Indenture, state the amount:
$
Date: __________________ Your Signature: _______________________________________
(Sign exactly as your name appears
on the other side of the Security)
Signature Guarantee:____________________________________________________________
(Signature must be guaranteed by a
member firm of the New York Stock
Exchange or a commercial bank or trust
company)
EXECUTION VERSION
================================================================================
REGISTRATION RIGHTS AGREEMENT
Dated as of March 7, 1997
Among
CONTIFINANCIAL CORPORATION
and
BEAR, STEARNS & CO. INC.,
and
CREDIT SUISSE FIRST BOSTON CORPORATION
as Initial Purchasers
================================================================================
$200,000,000
7 1/2% SENIOR NOTES DUE 2002
<PAGE>
REGISTRATION RIGHTS AGREEMENT (this "Agreement"),
dated as of March 7, 1997, between CONTIFINANCIAL
CORPORATION, a Delaware corporation (the "Company"), and
BEAR, STEARNS & CO. INC. and CREDIT SUISSE FIRST BOSTON
CORPORATION (the "Initial Purchasers").
This Agreement is being entered into in connection with the Purchase
Agreement, dated the date hereof, between the Company and the Initial Purchasers
(the "Purchase Agreement"), which provides for the sale by the Company to the
Initial Purchasers of $200,000,000 aggregate principal amount of the Company's 7
1/2% Senior Notes Due 2002 (the "Notes"). In order to induce the Initial
Purchasers to enter into the Purchase Agreement, the Company has agreed to
provide the registration rights set forth in this Agreement for the benefit of
the Initial Purchasers and their direct and indirect transferees. The execution
and delivery of this Agreement is a condition to the obligation of the Initial
Purchasers to purchase the Notes under the Purchase Agreement.
The parties hereby agree as follows:
SECTION 1. Definitions. As used in this Agreement, the following
terms shall have the following meanings:
"Additional Interest" shall have the meaning set forth in Section
4(a) hereof.
"Advice" shall have the meaning set forth in the last paragraph of
Section 5 hereof.
"Agreement" shall have the meaning set forth in the first
introductory paragraph hereto.
"Applicable Period" shall have the meaning set forth in Section 2(b)
hereof.
"Closing Date" shall mean the Closing Date set forth in the Purchase
Agreement.
"Company" shall have the meaning set forth in the first introductory
paragraph hereto.
<PAGE>
2
"Effectiveness Date" shall mean, with respect to any Registration
Statement, the 90th day after the Filing Date with respect thereto.
"Effectiveness Period" shall have the meaning set forth in Section
3(a) hereof.
"Event Date" shall have the meaning set forth in Section 4(b)
hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the SEC promulgated thereunder.
"Exchange Notes" shall have the meaning set forth in Section 2(a)
hereof.
"Exchange Offer" shall have the meaning set forth in Section 2(a)
hereof.
"Exchange Registration Statement" shall have the meaning set forth
in Section 2(a) hereof.
"Filing Date" shall mean (a) if no Registration Statement has been
filed by the Company pursuant to this Agreement, the 30th day after the
Issue Date; provided, however, that if a Shelf Notice is given within 10
days of the Filing Date, then the Filing Date with respect to the initial
Shelf Registration shall be the 15th calendar day after the date of the
giving of such Shelf Notice; and (b) in each other case (which may be
applicable notwithstanding the consummation of the Exchange Offer), the
30th day after the delivery of a Shelf Notice.
"Holder" shall mean any holder of a Registrable Note or Registrable
Notes.
"Indemnified Person" shall have the meaning set forth in Section
7(c) hereof.
"Indemnifying Person" shall have the meaning set forth defined in
Section 7(c) hereof.
"Indenture" shall mean the Indenture, dated as of March 1, 1997,
between the Company and The Chase Manhattan Bank, as trustee, pursuant to
which the Notes
<PAGE>
3
are being issued, as amended or supplemented from time to time in
accordance with the terms thereof.
"Initial Purchasers" shall have the meaning set forth in the first
introductory paragraph hereto.
"Inspectors" shall have the meaning set forth in Section 5(o)
hereof.
"Issue Date" shall mean the date on which the original Notes were
soldto the Initial Purchasers pursuant to the Purchase Agreement.
"Majority Holders" shall have the meaning set forth in Section 3(c)
hereof.
"NASD" shall have the meaning set forth in Section 5(s) hereof.
"Notes" shall have the meaning set forth in the second introductory
paragraph hereto.
"Participant" shall have the meaning set forth in Section 7(a)
hereof.
"Participating Broker-Dealer" shall have the meaning set forth in
Section 2(b) hereof.
"Person" shall mean an individual, trustee, corporation,
partnership, limited liability company, joint stock company, trust,
unincorporated association, union, business association, firm or other
legal entity.
"Private Exchange" shall have the meaning set forth in Section 2(b)
hereof.
"Private Exchange Notes" shall have the meaning set forth in Section
2(b) hereof.
"Prospectus" shall mean the prospectus included in any Registration
Statement (including any prospectus subject to completion and a prospectus
that includes any information previously omitted from a prospectus filed
as part of an effective registration statement in reliance upon Rule 430A
promulgated under the
<PAGE>
4
Securities Act), as amended or supplemented by any prospectus supplement,
and all other amendments and supplements to the Prospectus, with respect
to the terms of the offering of any portion of the Registrable Notes
covered by such Registration Statement including posteffective amendments,
and all material incorporated by reference or deemed to be incorporated by
reference in such Prospectus.
"Purchase Agreement" shall have the meaning set forth in the second
introductory paragraph hereto.
"Records" shall have the meaning set forth in Section 5(o) hereof.
"Registrable Notes" shall mean each Note upon original issuance of
the Notes and at all times subsequent thereto, each Exchange Note as to
which Section 2(c)(iv) hereof is applicable upon original issuance and at
all times subsequent thereto and each Private Exchange Note upon original
issuance thereof and at all times subsequent thereto, until in the case of
any such Note, Exchange Note or Private Exchange Note, as the case may be,
the earliest to occur of (i) a Registration Statement (other than, with
respect to any Exchange Note as to which Section 2(c)(iv) hereof is
applicable, the Exchange Registration Statement) covering such Note,
Exchange Note or Private Exchange Note, as the case may be, has been
declared effective by the SEC and such Note (unless such Note was not
tendered for exchange by the Holder thereof), Exchange Note or Private
Exchange Note, as the case may be, has been disposed of in accordance with
such effective Registration Statement, (ii) such Note, Exchange Note or
Private Exchange Note, as the case may be, could be sold in compliance
with Rule 144(k), or (iii) such Note, Exchange Note or Private Exchange
Note, as the case may be, ceases to be outstanding for purposes of the
Indenture.
"Registration Statement" shall mean any registration statement of
the Company, including, but not limited to, the Exchange Registration
Statement, that covers any of the Registrable Notes pursuant to the
provisions of this Agreement, including the Prospectus, amendments and
supplements to such
<PAGE>
5
registration statement, including posteffective amendments, all exhibits,
and all material incorporated by reference or deemed to be incorporated by
reference in such registration statement.
"Rule 144" shall mean Rule 144 promulgated under the Securities Act,
as such Rule may be amended from time to time, or any similar rule (other
than Rule 144A) or regulation hereafter adopted by the SEC providing for
offers and sales of securities made in compliance therewith resulting in
offers and sales by subsequent holders that are not affiliates of an
issuer of such securities being free of the registration and prospectus
delivery requirements of the Securities Act.
"Rule 144A" shall mean Rule 144A promulgated under the Securities
Act, as such Rule may be amended from time to time, or any similar rule
(other than Rule 144) or regulation hereafter adopted by the SEC.
"Rule 415" shall mean Rule 415 promulgated under the Securities Act,
as such Rule may be amended from time to time, or any similar rule or
regulation hereafter adopted by the SEC.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933 and the rules
and regulations of the SEC promulgated thereunder.
"Shelf Notice" shall have the meaning set forth in Section 2(c)
hereof.
"Shelf Registration" shall have the meaning set forth in Section
3(a) hereof.
"TIA" shall mean the Trust Indenture Act of 1939, as amended.
"Trustee" shall mean the trustee under the Indenture and, if
existent, the trustee under any indenture governing the Exchange Notes and
Private Exchange Notes (if any).
<PAGE>
6
"Underwritten registration or underwritten offering" shall mean a
registration in which securities of the Company are sold to an underwriter
for reoffering to the public.
SECTION 2. Exchange Offer. (a) The Company agrees to file with the
SEC no later than the Filing Date an offer to exchange (the "Exchange Offer")
any and all of the Registrable Notes (other than the Private Exchange Notes, if
any) for a like aggregate principal amount of debt securities of the Company,
which are identical in all material respects to the Notes (the "Exchange Notes")
(and which are entitled to the benefits of the Indenture or a trust indenture
which is identical in all material respects to the Indenture (other than such
changes to the Indenture or any such identical trust indenture as are necessary
to comply with any requirements of the SEC to effect or maintain the
qualification thereof under the TIA) and which, in either case, has been
qualified under the TIA), except that the Exchange Notes (other than Private
Exchange Notes, if any) (i) shall have been registered pursuant to an effective
Registration Statement under the Securities Act, (ii) shall contain no
restrictive legend thereon and (iii) shall not contain any requirement by the
Company to pay Additional Interest (other than with respect to periods prior to
the issuance of such Exchange Notes). The Exchange Offer shall be registered
under the Securities Act on the appropriate form (the "Exchange Registration
Statement") and shall comply with all applicable tender offer rules and
regulations under the Exchange Act. The Company agrees to use its best efforts
to (x) cause the Exchange Registration Statement to be declared effective under
the Securities Act on or before the Effectiveness Date; (y) keep the Exchange
Offer open for at least 30 calendar days (or longer if required by applicable
law) after the date that notice of the Exchange Offer is mailed to Holders; and
(z) consummate the Exchange Offer on or prior to the 150th day following the
Issue Date. If after such Exchange Registration Statement is declared effective
by the SEC, the Exchange Offer or the issuance of the Exchange Notes thereunder
is interfered with by any stop order, injunction or other order or requirement
of the SEC or any other governmental agency or court, such Exchange Registration
Statement shall be deemed not to have become effective for purposes of this
Agreement. Each Holder who participates in the Exchange Offer will be required
to represent that any Exchange Notes
<PAGE>
7
received by it will be acquired in the ordinary course of its business, that at
the time of the consummation of the Exchange Offer such Holder will have no
arrangement or understanding with any Person to participate in the distribution
of the Exchange Notes in violation of the provisions of the Securities Act, and
that such Holder is not an affiliate of the Company within the meaning of the
Securities Act. Upon consummation of the Exchange Offer in accordance with this
Section 2, the Company shall have no further obligation to register Registrable
Notes (other than Private Exchange Notes and other than in respect of any
Exchange Notes as to which clause 2(c)(iv) hereof applies) pursuant to Section 3
hereof. No securities other than the Exchange Notes shall be included in the
Exchange Registration Statement.
(b) The Company shall include within the Prospectus contained in the
Exchange Registration Statement a section entitled "Plan of Distribution",
reasonably acceptable to the Initial Purchasers, which shall contain a summary
statement of the positions taken or policies made by the Staff of the SEC with
respect to the potential "underwriter" status of any broker-dealer that is the
beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of Exchange
Notes received by such broker-dealer in the Exchange Offer (a "Participating
Broker-Dealer"), whether such positions or policies have been publicly
disseminated by the Staff of the SEC or such positions or policies, in the
judgment of counsel for the Initial Purchasers, represent the prevailing views
of the Staff of the SEC. Such "Plan of Distribution" section shall also
expressly permit the use of the Prospectus by all Persons subject to the
prospectus delivery requirements of the Securities Act, including all
Participating Broker-Dealers, and include a statement describing the means by
which Participating Broker-Dealers may resell the Exchange Notes.
If any Participating Broker-Dealer participates in the Exchange
Offer and notifies the Company or causes the Company to be notified in writing
that it is a Participating Broker-Dealer prior to or on the last date for which
exchanges are accepted pursuant to the Exchange Offer, the Company shall use its
reasonable efforts to keep the Exchange Registration Statement effective and to
amend and supplement the Prospectus contained therein, in order to
<PAGE>
8
permit such Prospectus to be lawfully delivered by any Participating
Broker-Dealer subject to the prospectus delivery requirements of the Securities
Act for such period of time as is necessary to comply with applicable law in
connection with any resale of the Exchange Notes; provided, however, that such
period shall not exceed 180 days after the last date for which exchanges are
accepted pursuant to the Exchange Offer (or such shorter period when all
Exchange Notes received by Participating Broker-Dealers in exchange for
Registrable Notes acquired for their own account as a result of market-making or
other trading activities have been disposed of by such Participating
Broker-Dealers or such longer period if extended pursuant to the last paragraph
of Section 5 hereof) (the "Applicable Period"); and Participating Broker-Dealers
shall not be authorized by the Company to, and shall not, deliver such
Prospectus after such period in connection with resales contemplated by this
Section 2(b) or otherwise.
If, prior to the last date for which exchanges are accepted pursuant
to the Exchange Offer, the Initial Purchasers hold any Notes acquired by them
and having the status of an unsold allotment in the initial distribution, the
Company shall, upon the request of any of the Initial Purchasers, simultaneously
with the delivery of the Exchange Notes in the Exchange Offer issue and deliver
to the Initial Purchasers in exchange (the "Private Exchange") for such Notes
held by the Initial Purchasers a like principal amount of debt securities of the
Company that are identical in all material respects to the Exchange Notes (the
"Private Exchange Notes") (and which are issued pursuant to the same indenture
as the Exchange Notes) except for the placement of a restrictive legend on such
Private Exchange Notes. The Private Exchange Notes shall, to the extent
permitted, bear the same CUSIP number as the Exchange Notes.
Interest on the Exchange Notes and the Private Exchange Notes will
accrue from the last interest payment date on which interest was paid on the
Notes surrendered in exchange therefor or, if no interest has been paid on the
Notes, from the Issue Date.
<PAGE>
9
In connection with the Exchange Offer, the Company shall:
(i) mail to each Holder a copy of the Prospectus forming part of the
Exchange Registration Statement, together with an appropriate letter of
transmittal and related documents;
(ii) utilize the services of a depositary for the Exchange Offer
with an address in the Borough of Manhattan, The City of New York;
(iii) permit Holders to withdraw tendered Notes at any time prior to
the close of business, New York time, on the last business day on which
the Exchange Offer shall remain open; and
(iv) otherwise comply in all material respects with all applicable
laws, rules and regulations.
As soon as practicable after the close of the Exchange Offer or the
Private Exchange, as the case may be, the Company shall:
(i) accept for exchange all Notes tendered and not validly withdrawn
pursuant to the Exchange Offer or the Private Exchange;
(ii) deliver to the Trustee for cancelation all Notes so accepted
for exchange; and
(iii) cause the Trustee to authenticate and deliver promptly to each
Holder of Notes, either Exchange Notes or Private Exchange Notes, as the
case may be, equal in principal amount to the Notes of such Holder so
accepted for exchange.
The Exchange Notes and the Private Exchange Notes may be issued
under (i) the Indenture or (ii) an indenture identical in all material respects
to the Indenture, which in either event shall provide that (A) the Exchange
Notes shall not be subject to the transfer restrictions applicable to the Notes
or the requirement of the Company to pay Additional Interest thereon and (B) the
Private Exchange Notes shall be subject to the transfer restrictions applicable
to the Notes. The Indenture or such indenture
<PAGE>
10
shall provide that the Exchange Notes, the Private Exchange Notes and the Notes
shall vote and consent together on all matters as one class and that none of the
Exchange Notes, the Private Exchange Notes or the Notes will have the right to
vote or consent as a separate class on any matter.
(c) If (i) because of any change in law or in currently prevailing
interpretations of the Staff of the SEC, the Company is not permitted to effect
an Exchange offer, (ii) the Exchange Offer is not consummated within 150 days of
the Issue Date, (iii) any holder of Private Exchange Notes so requests at any
time after the consummation of the Private Exchange or (iv) in the case of any
Holder that participates in the Exchange Offer, such Holder does not receive
Exchange Notes on the date of the exchange that may be sold without restriction
under federal securities laws (other than due solely to the status of such
Holder as an affiliate of the Company within the meaning of the Securities Act),
then the Company shall promptly deliver written notice thereof (the "Shelf
Notice") to the Trustee and, in the case of clauses (i) and (ii), all Holders,
in the case of clause (iii), the Holders of the Private Exchange Notes and, in
the case of clause (iv), the affected Holder, and shall file a Shelf
Registration pursuant to Section 3 hereof.
SECTION 3. Shelf Registration. If a Shelf Notice is delivered as
contemplated by Section 2(c) hereof, then:
(a) Shelf Registration. The Company shall file with the SEC prior to
the Filing Date a Registration Statement for an offering to be made on a
continuous basis pursuant to Rule 415 covering all the Registrable Notes (the
"Shelf Registration"). The Shelf Registration shall be on Form S-3 or another
appropriate form permitting registration of such Registrable Notes for resale by
Holders in the manner or manners designated by them. The Company shall not
permit any securities other than the Registrable Notes to be included in the
Shelf Registration.
The Company shall use its best efforts to cause the Shelf
Registration to be declared effective under the Securities Act on or prior to
the Effectiveness Date and shall use its reasonable efforts to keep the Shelf
Registration continuously effective under the Securities Act until the date
which is two years from the Issue Date,
<PAGE>
11
subject to extension pursuant to the last paragraph of Section 5 hereof (the
"Effectiveness Period"), or such shorter period ending when all Registrable
Notes covered by the Shelf Registration have been sold in the manner set forth
and as contemplated in the Shelf Registration.
(b) Withdrawal of Stop Orders. If the Shelf Registration ceases to
be effective for any reason at any time during the Effectiveness Period (other
than because of the sale of all the securities registered thereunder), the
Company shall use its best efforts to obtain the prompt withdrawal of any order
suspending the effectiveness thereof.
(c) Supplements and Amendments. The Company shall promptly
supplement and amend the Shelf Registration if required by the rules,
regulations or instructions applicable to the registration form used for such
Shelf Registration, if required by the Securities Act, or if reasonably
requested by the Holders of a majority in aggregate principal amount (the
"Majority Holders") of the Registrable Notes covered by such Registration
Statement or by any underwriter of such Registrable Notes.
SECTION 4. Additional Interest. (a) The Company and the Initial
Purchasers agree that the Holders of Registrable Notes will suffer damages if
the Company fails to fulfill its obligations under Section 2 or Section 3 hereof
and that it would not be feasible to ascertain the extent of such damages with
precision. Accordingly, the Company agrees to pay, as liquidated damages,
additional interest on the Notes ("Additional Interest") under the circumstances
and to the extent set forth below:
(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;
<PAGE>
12
(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, notwith
standing 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) of this Section 4(a)), (2) upon
the effectiveness of the Exchange Registration Statement or the Shelf
Registration (in the
<PAGE>
13
case of clause (ii) of this Section 4(a)), or (3) upon the exchange of Exchange
Notes for all Notes tendered and not validly withdrawn (in the case of clause
(iii)(A) of this Section 4(a)), or upon the effectiveness of the Exchange
Registration Statement which had ceased to remain effective (in the case of
(iii)(B) of this Section 4(a)), or upon the effectiveness of the Shelf
Registration which had ceased to remain effective (in the case of (iii)(C) of
this Section 4(a)), 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.
(b) The Company shall notify the Trustee within three business days
after each and every date on which an event occurs in respect of which
Additional Interest is required to be paid (an "Event Date"). Any amounts of
Additional Interest due pursuant to clauses (a)(i), (a)(ii) or (a)(iii) of this
Section 4 will be payable to the Holders of affected Notes in cash semiannually
on each March 15 and September 15 (to the holders of record on the March 1 and
September 1 immediately preceding such dates), commencing with the first such
date occurring after any such Additional Interest commences to accrue. The
amount of Additional Interest will be determined by multiplying the applicable
Additional Interest rate by the principal amount of the affected Registrable
Notes of such Holders, multiplied by a fraction, the numerator of which is the
number of days such Additional Interest rate was applicable during such period
(determined on the basis of a 360-day year comprised of twelve 30-day months
and, in the case of a partial month, the actual number of days elapsed), and the
denominator of which is 360.
SECTION 5. Registration Procedures. In connection with the filing of
any Registration Statement pursuant to Sections 2 or 3 hereof, the Company shall
effect such registration(s) to permit the sale of the securities covered thereby
in accordance with the intended method or methods of disposition thereof, and
pursuant thereto and in connection with any Registration Statement filed by the
Company hereunder, the Company shall:
(a) prepare and file with the SEC prior to the Filing Date a
Registration Statement or Registration Statements as prescribed by
Sections 2 or 3 hereof, to use its best efforts to cause each such
Registration
<PAGE>
14
Statement to become effective and to use its reasonable efforts to cause
such Registration Statement to remain effective as provided herein;
provided, however, that, if (i) such filing is pursuant to Section 3
hereof, or (ii) a Prospectus contained in an Exchange Registration
Statement filed pursuant to Section 2 hereof is required to be delivered
under the Securities Act by any Participating Broker-Dealer who seeks to
sell Exchange Notes during the Applicable Period, before filing any
Registration Statement or Prospectus or any amendments or supplements
thereto, the Company shall, if requested, furnish to and afford the
Holders of the Registrable Notes covered by such Registration Statement or
each such Participating Broker-Dealer, as the case may be, one counsel
selected by the Majority Holders (the "Majority Counsel") and the managing
underwriters of an underwritten offering (and their counsel, if any) of
Registrable Notes, if any, a reasonable opportunity to review copies of
all such documents (including copies of any documents to be incorporated
by reference therein and all exhibits thereto) proposed to be filed (in
each case at least five business days prior to such filing). The Company
shall not file any Registration Statement or Prospectus or any amendments
or supplements thereto in respect of which the Holders must be afforded an
opportunity to review prior to the filing of such document, if the
Majority Holders of the Registrable Notes covered by such Registration
Statement, or any such Participating Broker-Dealer, as the case may be,
the Majority Counsel, or the managing underwriters (or their counsel, if
any), if any, shall reasonably object;
(b) prepare and file with the SEC such amendments and posteffective
amendments to each Shelf Registration or Exchange Registration Statement,
as the case may be, as may be necessary to keep such Registration
Statement continuously effective for the Effectiveness Period or the
Applicable Period or until consummation of the Exchange Offer, as the case
may be; cause the related Prospectus to be supplemented by any Prospectus
supplement required by applicable law, and as so sup plemented to be filed
pursuant to Rule 424 (or any similar provisions then in force) under the
Securities Act; and comply with the provisions of the Securities Act and
the Exchange Act applicable to it with respect
<PAGE>
15
to the disposition of all securities covered by such Registration
Statement as so amended or in such Prospectus as so supplemented and with
respect to the subsequent resale of any securities being sold by a
Participating Broker-Dealer covered by any such Prospectus; the Company
will be deemed not to have used its reasonable efforts to cause the
Exchange Offer Registration Statement or any Shelf Registration Statement,
as the case may be, to remain effective during the Applicable Period or
the Effectiveness Period, as the case may be, if the Company voluntarily
takes any action that would result in the Holder of Registrable Notes
covered thereby or Participating Broker-Dealers seeking to sell Exchange
Notes not being able to sell such Registrable Notes or Exchange Notes, as
the case may be, during that period unless (i) such action is, in the
reasonable judgment of the Company, required by applicable law (including
any interpretation of the SEC) or (ii) such action is taken by the Company
in good faith and for valid business reasons (not including avoidance of
the Company's obligations hereunder), including the acquisition or
divestiture of assets, so long as the Company promptly complies with the
requirements of Section 5(k) hereof and the last paragraph of this Section
5;
(c) if (i) a Shelf Registration is filed pursuant to Section 3
hereof, or (ii) a Prospectus contained in an Exchange Registration
Statement filed pursuant to Section 2 hereof is required to be delivered
under the Securities Act by any Participating Broker-Dealer who seeks to
sell Exchange Notes during the Applicable Period, notify the selling
Holders of Registrable Notes, or each such Participating Broker-Dealer, as
the case may be, the Majority Counsel and the managing underwriters of an
underwritten offering of Registrable Notes and their counsel, if any,
promptly (but in any event within three business days) (A) when a
Prospectus or any supplement thereto or posteffective amendment has been
filed, and, with respect to a Registration Statement or any posteffective
amendment, when the same has become effective under the Securities Act
(includ ing in such notice a written statement that any Holder may, upon
request, obtain, at the sole expense of the Company, one conformed copy of
such Registration Statement or posteffective amendment including
<PAGE>
16
financial statements and schedules, documents incorporated or deemed to be
incorporated by reference and exhibits), (B) of the issuance by the SEC of
any stop order suspending the effectiveness of a Registration Statement or
of any order preventing or suspending the use of any preliminary
prospectus or the initiation of any proceedings for that purpose, (C) if
at any time when a prospectus is required by the Securities Act to be
delivered in connection with sales of the Registrable Notes or resales of
Exchange Notes by Participating Broker-Dealers upon written notice by any
such Participating Broker-Dealer of a resale, the representations and
warranties of the Company contained in any agreement (including any
underwriting agreement), contemplated by Section 5(n) hereof cease to be
true and correct, (D) of the receipt by the Company of any notification
with respect to the suspension of the qualification or exemption from
qualification of a Registration Statement or any of the Registrable Notes
or the Exchange Notes to be sold by any Participating Broker-Dealer for
offer or sale in any jurisdiction, or the initiation or threatening of any
proceeding for such purpose, (E) of the happening of any event, the
existence of any condition or any information becoming known that makes
any statement made in such Registration Statement or related Prospectus or
any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires the making of
any changes in or amendments or supplements to such Reg istration
Statement, Prospectus or documents so that, in the case of the
Registration Statement, it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and
that in the case of the Prospectus, it will not contain any untrue
statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading, and (F)
of the determination by the Company that a posteffective amendment to a
Registration Statement would be appropriate;
(d) use its reasonable efforts to obtain the with drawal of any
order suspending the effectiveness of the
<PAGE>
17
Registration Statement or the qualification (or exemption from
qualification) of any of the Registrable Notes or the Exchange Notes for
sale in any jurisdiction as soon as practicable;
(e) if a Shelf Registration is filed pursuant to Section 3 and if
requested by the managing underwriter or underwriters (if any), or the
Holders of a majority in principal amount of the Registrable Notes being
sold in connection with an underwritten offering, (i) promptly incorporate
in a prospectus supplement or posteffective amendment such information as
the managing underwriter or underwriters (if any), such Holders, or
counsel for any of them reasonably request to be included therein, (ii)
make all required filings of such prospectus supplement or such
posteffective amendment as soon as practicable after the Company has
received notification of the matters to be incorporated in such prospectus
supplement or posteffective amend ment, and (iii) supplement or make
amendments to such Registration Statement;
(f) if (1) a Shelf Registration is filed pursuant to Section 3
hereof, or (2) a Prospectus contained in an Exchange Registration
Statement filed pursuant to Section 2 hereof is required to be delivered
under the Securities Act by any Participating Broker-Dealer who seeks to
sell Exchange Notes during the Applicable Period, furnish to each selling
Holder of Registrable Notes and to each such Participating Broker-Dealer
who so requests, to the Majority Counsel and to each managing underwriter
of an underwritten public offering of Registrable Notes and their counsel,
if any, at the sole expense of the Company, one conformed copy of the
Registration Statement or Registration Statements and each posteffective
amendment thereto, including financial statements and schedules, and, if
requested, all documents incorporated or deemed to be incorporated therein
by reference and all exhibits;
(g) if (1) a Shelf Registration is filed pursuant to Section 3
hereof, or (2) a Prospectus contained in an Exchange Registration
Statement filed pursuant to Section 2 hereof is required to be delivered
under the Securities Act by any Participating Broker-Dealer who seeks to
sell Exchange Notes during the Applicable
<PAGE>
18
Period, deliver to each selling Holder of Registrable Notes, or each such
Participating Broker-Dealer, as the case may be, the Majority Counsel, and
to the underwriters, if any, and such underwriters' counsel, at the sole
expense of the Company, as many copies of the Prospectus or Prospectuses
(including each form of preliminary prospectus) and each amendment or
supplement thereto and any documents incorporated by reference therein as
such Persons may reasonably request; and, subject to the last paragraph of
this Section 5, the Company hereby consents to the use of such Prospectus
and each amendment or supplement thereto by each of the selling Holders of
Registrable Notes or each such Participating Broker-Dealer, as the case
may be, and the underwriters or agents, if any, and dealers (if any), in
connection with the offering and sale of the Registrable Notes covered by,
or the sale by Participating Broker-Dealers of the Exchange Notes pursuant
to, such Prospectus and any amendment or supplement thereto;
(h) prior to any public offering of Registrable Notes or any
delivery of a Prospectus contained in the Exchange Registration Statement
by any Participating Broker-Dealer who seeks to sell Exchange Notes during
the Applicable Period, use its reasonable efforts to register or qualify
such Registrable Notes (and to cooperate with selling Holders of
Registrable Notes or each such Participating Broker-Dealer, as the case
may be, the Majority Counsel, the managing underwriter or underwriters, if
any, and such underwriters' counsel in connection with the registration or
qualification (or exemption from such registration or qualification) of
such Registrable Notes) for offer and sale under the securities or Blue
Sky laws of such jurisdictions within the United States as any selling
Holder, Participating Broker-Dealer, or the managing underwriter or
underwriters of an underwritten offering of Registrable Notes shall
reasonably request in writing; provided, however, that where Exchange
Notes held by Participating Broker-Dealers or Registrable Notes are
offered other than through an underwritten offering, the Company agrees to
cause its counsel to perform Blue Sky investigations and file
registrations and qualifications required to be filed pursuant to this
Section 5(h); keep each such registration or
<PAGE>
19
qualification (or exemption therefrom) effective during the period such
Registration Statement is required to be kept effective and do any and all
other acts or things reasonably necessary or advisable to enable the
disposition in such jurisdictions of the Exchange Notes held by
Participating Broker-Dealers or the Registrable Notes covered by the
applicable Registration Statement; provided, however, that the Company
shall not be required to (A) qualify generally to do business in any
jurisdiction where it is not then so qualified, (B) take any action that
would subject it to general service of process in any such jurisdiction
where it is not then so subject or (C) subject itself to taxation in
excess of a nominal dollar amount in any such jurisdiction where it is not
then so subject;
(i) if a Shelf Registration is filed pursuant to Section 3 hereof,
cooperate with the selling Holders of Registrable Notes and the managing
underwriter or underwriters, if any, to facilitate the timely preparation
and delivery of certificates representing Registrable Notes to be sold,
which certificates shall not bear any restrictive legends (except any
customary legend borne by securities held through The Depository Trust
Company or any similar depository) and shall be in a form eligible for
deposit with The Depository Trust Company; and enable such Registrable
Notes to be in such denominations (consistent with the provisions of the
Indenture and the officers' certificate establishing the form and terms of
the Notes pursuant to the Indenture) and registered in such names as the
managing underwriter or underwriters, if any, or Holders may reasonably
request;
(j) use its reasonable efforts to cause the Regis trable Notes
covered by the Registration Statement to be registered with or approved by
such other governmental agencies or authorities as may be necessary to
enable the Holders thereof or the underwriter or underwriters, if any, to
dispose of such Registrable Notes, except as may be required solely as a
consequence of the nature of a selling Holder's business, in which case
the Company will cooperate in all reasonable respects with the filing of
such Registration Statement and the granting of such approvals;
<PAGE>
20
(k) if (1) a Shelf Registration is filed pursuant to Section 3
hereof, or (2) a Prospectus contained in an Exchange Registration
Statement filed pursuant to Section 2 hereof is required to be delivered
under the Securities Act by any Participating Broker-Dealer who seeks to
sell Exchange Notes during the Applicable Period, upon the occurrence of
any event contemplated by paragraph 5(c)(ii)(E) or 5(c)(ii)(F) hereof, as
promptly as practicable prepare and (subject to Section 5(a) hereof) file
with the SEC, at the sole expense of the Company, a supplement or
posteffective amendment to the Registration Statement or a supplement to
the related Prospectus or any document incorporated or deemed to be
incorporated therein by reference, or file any other required document so
that, as thereafter delivered to the purchasers of the Registrable Notes
being sold thereunder or to the purchasers of the Exchange Notes to whom
such Prospectus will be delivered by a Participating Broker-Dealer, any
such Prospectus will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading;
(l) use its reasonable efforts to cause the Regis trable Notes
covered by a Registration Statement or the Exchange Notes, as the case may
be, to be rated with the appropriate rating agencies, if so requested by
the Holders of a majority in aggregate principal amount of Registrable
Notes covered by such Registration Statement or the Exchange Notes, as the
case may be, or the managing underwriter or underwriters, if any;
(m) prior to the effective date of the first Registration Statement
relating to the Registrable Notes, (i) provide the Trustee with
certificates for the Registrable Notes or Exchange Notes, as the case may
be, in a form eligible for deposit with The Depository Trust Company and
(ii) provide a CUSIP number for the Registrable Notes or Exchange Notes,
as the case may be;
(n) in connection with any underwritten offering of Registrable
Notes pursuant to a Shelf Registration, negotiate in good faith and enter
into an underwriting
<PAGE>
21
agreement, which shall be in form and scope as is customary in
underwritten offerings of debt securities with similar credit ratings to
the Notes and take all such other actions as are reasonably requested by
the managing underwriter or underwriters in order to facilitate the
registration or the disposition of such Registrable Notes and, in such
connection, (i) make such representations and warranties to, and covenants
with, the underwriters with respect to the business of the Company and its
subsidiaries and the Registration Statement, Prospectus and documents, if
any, incorporated or deemed to be incorporated by reference therein, in
each case, as are customarily made by issuers to underwriters in
underwritten offerings of debt securities with similar credit ratings to
the Notes, and confirm the same in writing if and when requested; (ii)
obtain the written opinion of counsel to the Company (which may be the
Company's General Counsel) and written updates thereof in form, scope and
substance reasonably satisfactory to the managing underwriter or
underwriters, addressed to the underwriters covering the matters
customarily covered in opinions requested in underwritten offerings of
debt securities with similar credit ratings to the Notes and such other
matters as may be reasonably requested by the managing underwriter or
underwriters; (iii) obtain "cold comfort" letters and updates thereof in
form, scope and substance reasonably satisfactory to the managing
underwriter or underwriters from the independent certified public
accountants of the Company (and, if necessary, any other independent
certified public accountants of any subsidiary of the Company or of any
business acquired by the Company for which financial statements and
financial data are, or are required to be, included or incorporated by
reference in the Registration Statement), addressed to each of the
underwriters, such letters to be in customary form and covering matters of
the type customarily covered in "cold comfort" letters in connection with
underwritten offerings of debt securities with similar credit ratings to
the Notes and such other matters as reasonably requested by the managing
underwriter or underwriters; and (iv) if an underwriting agreement is
entered into, the same shall contain indemnification provisions and
procedures no less favorable than those set forth in Section 7 hereof (or
such other provisions
<PAGE>
22
and procedures acceptable to the Majority Holders of Registrable Notes
covered by such Registration Statement and the managing underwriter or
underwriters or agents) with respect to all parties to be indemnified
pursuant to said Section. The above shall be done at the closing under
such underwriting agreement, or as and to the extent required thereunder;
(o) if (1) a Shelf Registration is filed pursuant to Section 3
hereof, or (2) a Prospectus contained in an Exchange Registration
Statement filed pursuant to Section 2 hereof is required to be delivered
under the Securities Act by any Participating Broker-Dealer who seeks to
sell Exchange Notes during the Applicable Period, and to the extent
customary in connection with a due diligence investigation for an offering
of debt securities with a similar credit rating, make available for
inspection by representatives approved by the Majority Holders of such
Registrable Notes being sold, or such Participating Broker-Dealers, as the
case may be, any underwriter participating in any such disposition of
Registrable Notes, if any, one counsel to the underwriters, if any
(collectively, the "Inspectors"), at the offices where normally kept,
during reasonable business hours, all financial and other records,
pertinent corporate documents and instruments of the Company and its
subsidiaries (collectively, the "Records") as shall be reasonably
necessary to enable them to exercise any applicable due diligence
responsibilities. Records which the Company determines, in good faith, to
be confidential and any Records which it notifies the Inspectors are
confidential shall not be disclosed by the Inspectors unless (i) the
disclosure of such Records is necessary to avoid or correct a misstatement
or omission in such Registration Statement, (ii) the release of such
Records is ordered pursuant to a subpoena or other order from a court of
competent jurisdiction, (iii) disclosure of such information is, in the
opinion of counsel for any Inspector, necessary or advisable in connection
with any action, claim, suit or proceeding, directly or indirectly,
involving or potentially involving such Inspector and arising out of,
based upon, relating to, or involving this Agreement, or any transactions
contemplated hereby or arising hereunder, or (iv) the information in such
Records has been made
<PAGE>
23
generally available to the public. Each selling Holder of such Registrable
Securities and each such Participating Broker-Dealer will be required to
agree that information obtained by it as a result of such inspections
shall be deemed confidential and shall not be used by it as the basis for
any market transactions in the securities of the Company unless and until
such information is generally available to the public. Each selling Holder
of such Registrable Notes and each such Participating Broker-Dealer will
be required to further agree that it will, upon learning that disclosure
of such Records is sought in a court of competent jurisdiction, give
notice to the Company and allow the Company to undertake appropriate
action to prevent disclosure of the Records deemed confidential at the
Company's sole expense;
(p) provide an indenture trustee for the Registrable Notes or the
Exchange Notes, as the case may be, and use its reasonable efforts to
cause the Indenture or the trust indenture provided for in Section 2(a)
hereof, as the case may be, to be qualified under the TIA not later than
the effective date of the Exchange Offer or the first Registration
Statement relating to the Registrable Notes; and in connection therewith,
cooperate with the trustee under any such indenture and the Holders of the
Registrable Notes, to effect such changes to such indenture as may be
required for such indenture to be so qualified in accordance with the
terms of the TIA; and execute, and use its reasonable efforts to cause
such trustee to execute, all documents as may be required to effect such
changes, and all other forms and documents required to be filed with the
SEC to enable such indenture to be so qualified in a timely manner;
(q) comply with all applicable rules and regulations of the SEC and
make generally available to its securityholders earnings statements
satisfying the provisions of Section 11(a) of the Securities Act and Rule
158 thereunder (or any similar rule promulgated under the Securities Act)
no later than 45 days after the end of any 12-month period (or 90 days
after the end of any 12-month period if such period is a fiscal year) (i)
commencing at the end of any fiscal quarter in which Registrable Notes are
sold to underwriters in
<PAGE>
24
a firm commitment or best efforts underwritten offering and (ii) if not
sold to underwriters in such an offering, commencing on the first day of
the first fiscal quarter of the Company after the effective date of a
Registration Statement, which statements shall cover said 12-month
periods;
(r) if an Exchange Offer or a Private Exchange is to be consummated,
upon delivery of the Registrable Notes by Holders to the Company (or to
such other Person as directed by the Company) in exchange for the Exchange
Notes or the Private Exchange Notes, as the case may be, the Company shall
mark, or cause to be marked, on such Registrable Notes that such
Registrable Notes are being canceled in exchange for the Exchange Notes or
the Private Exchange Notes, as the case may be; in no event shall such
Registrable Notes be marked as paid or otherwise satisfied;
(s) cooperate with each seller of Registrable Notes covered by any
Registration Statement and each underwriter, if any, participating in the
disposition of such Registrable Notes and their respective counsel in
connection with any filings required to be made with the National
Association of Securities Dealers, Inc. (the "NASD"); and
(t) use its reasonable efforts to take all other steps necessary or
advisable to effect the registration of the Registrable Notes covered by a
Registration Statement contemplated hereby.
The Company may require each seller of Registrable Notes as to which
any Registration is being effected to furnish to the Company such information
regarding such seller and the distribution of such Registrable Notes as the
Company may, from time to time, reasonably request. The Company may exclude from
such registration the Registrable Notes of any seller who unreasonably fails to
furnish such information within a reasonable time after receiving such request.
Each seller as to which any Shelf Registration is being effected agrees to
furnish promptly to the Company all information required to be disclosed in
order to make the information previously furnished to the Company by such seller
not materially misleading.
<PAGE>
25
Each Holder of Registrable Notes and each Partici pating
Broker-Dealer agrees by acquisition of such Registrable Notes or Exchange Notes
to be sold by such Participating Broker-Dealer, as the case may be, that, upon
actual receipt of any notice from the Company of the happening of any event of
the kind described in Section 5(c)(ii)(B), 5(c)(ii)(D), 5(c)(ii)(E), or
5(c)(ii)(F) hereof, such Holder will forthwith discontinue disposition of such
Registrable Notes covered by such Registration Statement or Prospectus or
Exchange Notes to be sold by such Holder or Participating Broker-Dealer, as the
case may be, until such Holder's or Participating Broker-Dealer's receipt of the
copies of the supplemented or amended Prospectus contemplated by Section 5(k)
hereof, or until it is advised in writing (the "Advice") by the Company that the
use of the applicable Prospectus may be resumed, and has received copies of any
amendments or supplements thereto. In the event the Company shall give any such
notice, each of the Effectiveness Period and the Applicable Period shall be
extended by the number of days during such periods from and including the date
of the giving of such notice to and including the date when each seller of
Registrable Notes covered by such Registration Statement or Exchange Notes to be
sold by such Participating Broker-Dealer, as the case may be, shall have
received (x) the copies of the supplemented or amended Prospectus contemplated
by Section 5(k) hereof or (y) the Advice.
SECTION 6. Registration Expenses. (a) All fees and expenses incident
to the performance of or compliance with this Agreement by the Company shall be
borne by the Company whether or not the Exchange Offer or a Shelf Registration
is filed or becomes effective, including (i) all registration and filing fees
(including (A) fees with respect to filings required to be made with the NASD in
connection with an underwritten offering and (B) fees and expenses of compliance
with state securities or Blue Sky laws (including reasonable fees and
disbursements of counsel in connection with Blue Sky qualifications of the
Registrable Notes or Exchange Notes and determination of the eligibility of the
Registrable Notes or Exchange Notes for investment under the laws of such
jurisdictions (x) where the holders of Registrable Notes are located, in the
case of the Exchange Notes, or (y) as provided in Section 5(h) hereof, in the
case of Registrable Notes or Exchange Notes to be sold by a Participating
Broker-Dealer during the
<PAGE>
26
Applicable Period)), (ii) printing expenses, including expenses of printing
certificates for Registrable Notes or Exchange Notes in a form eligible for
deposit with The Depository Trust Company and of printing prospectuses if the
printing of prospectuses is requested by the managing underwriter or
underwriters, if any, by the Majority Holders of the Registrable Notes included
in any Registration Statement or sold by any Participating Broker-Dealer, as the
case may be, (iii) messenger, telephone and delivery expenses, (iv) fees and
disbursements of counsel for the Company and, subject to the provisions of
Section 6(b) hereof, reasonable fees and disbursements of counsel for the
Majority Holders of Registrable Notes, (v) fees and disbursements of all
independent certified public accountants referred to in Section 5(n)(iii) hereof
(including the expenses of any special audit and "cold comfort" letters required
by or incident to such performance), (vi) rating agency fees, if any, and any
fees associated with making the Registrable Notes or Exchange Notes eligible for
trading through The Depository Trust Company, (vii) Securities Act liability
insurance, if the Company desires such insurance, (viii) fees and expenses of
all other Persons retained by the Company, (ix) internal expenses of the Company
(including all salaries and expenses of officers and employees of the Company
performing legal or accounting duties), (x) the expense of any annual audit,
(xi) the fees and expenses incurred in connection with the listing of the
securities to be registered on any securities exchange, if applicable, and (xii)
the expenses relating to printing, word processing and distributing all
Registration Statements, any underwriting agreement, indentures and any other
documents necessary in order to comply with this Agreement.
(b) The Company shall (i) reimburse the Holders of the Registrable
Notes being registered pursuant to this Agreement for the reasonable fees and
disbursements, in an aggregate amount not to exceed $25,000, of not more than
one counsel (in addition to appropriate local counsel) chosen by the Majority
Holders of the Registrable Notes to be included in such Registration Statement
and (ii) reimburse out-of-pocket expenses (other than legal expenses) of Holders
of Registrable Notes incurred in connection with the registration and sale of
the Registrable Notes pursuant to a Shelf Registration or in connection with the
exchange of Registrable Notes pursuant to the Exchange Offer.
<PAGE>
27
SECTION 7. Indemnification. (a) The Company agrees to indemnify and
hold harmless each Holder of Registrable Notes offered pursuant to a Shelf
Registration Statement and each Participating Broker-Dealer selling Exchange
Notes during the Applicable Period, the affiliates, directors, officers, agents,
representatives and employees of each such Person or its affiliates, and each
other Person, if any, who controls any such Person or its affiliates within the
meaning of either Section 15 of the Securities Act or Section 20(a) of the
Exchange Act (each, a "Participant"), from and against any and all losses,
liabilities, claims, damages and expenses whatsoever as incurred (including
reasonable attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation), joint or several, to which they or any of them may
become subject under the Act, the Exchange Act or otherwise, insofar as such
losses, liabilities, claims, damages or expenses (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of a material fact contained in any Registration Statement pursu ant to which
the offering of such Registrable Notes or Exchange Notes, as the case may be, is
registered, or in any supplement thereto or amendment thereof, or any related
Prospectus, or any supplement thereto or amendment thereof, or any related
preliminary Prospectus, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading; provided, however,
that the Company will not be liable to any Participant in any such case to the
extent but only to the extent that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information relating to such Participant
furnished to the Company in writing by or on behalf of such Participant
expressly for use therein; provided further, however, that such indemnity
agreement with respect to any preliminary Prospectus shall not inure to the
benefit of any Participant from whom the Person asserting any loss, liability,
claim, damage or expense purchased Registrable Notes or Exchange Notes, as the
case may be, if a copy of the Prospectus filed as part of an effective
Registration
<PAGE>
28
Statement (as then amended or supplemented and furnished by the Company to such
Participant) was not sent or given by or on behalf of such Participant to such
Person, if such is required by law, at or prior to the sale of such Registrable
Notes or Exchange Notes, as the case may be, and if such Prospectus (as so
amended or supplemented) would have cured the defect giving rise to such loss,
liability, claim, damage or expense. This indemnity agreement will be in
addition to any liability which the Company may otherwise have, including under
this Agreement.
(b) Each Participant agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors and officers and each Person who
controls the Company within the meaning of Section 15 of the Securities Act or
Section 20(a) of the Exchange Act to the same extent as the foregoing indemnity
from the Company to each Participant, but only (i) with reference to information
relating to such Participant furnished to the Company in writing by or on behalf
of such Participant expressly for use in any Registration Statement or
Prospectus, any amendment or supplement thereto, or any preliminary prospectus
or (ii) with respect to any untrue statement or representation made by such
Participant in writing to the Company.
(c) Promptly after receipt by any Person in respect of which
indemnity may be sought under subsection (a) or (b) above of notice of the
commencement of any action, such Person (the "Indemnified Person") shall, if a
claim in respect thereof is to be made against the Person whom such indemnity
may be sought (the "Indemnifying Person") under such subsection, notify each
Indemnifying Person against whom indemnification is to be sought in writing of
the commencement thereof (but the failure so to notify an Indemnifying Person
shall not relieve it from any liability which it may have under paragraph (a) or
(b) above). In case any such action is brought against any Indemnified Person,
and it notifies an Indemnifying Person of the commencement thereof, the
Indemnifying Person will be entitled to participate therein, and to the extent
it may elect by written notice delivered to the Indemnified Person promptly
after receiving the aforesaid notice from such Indemnified Person, to assume the
defense thereof with counsel satisfactory to such Indemnified Person. Notwith
standing the foregoing, the Indemnified Person or parties
<PAGE>
29
shall have the right to employ its or their own counsel in any such case, but
the fees and expenses of such counsel shall be at the expense of such
Indemnified Person or parties unless (i) the employment of such counsel shall
have been authorized in writing by one of the Indemnifying Persons in connection
with the defense of such action, (ii) the Indemnifying Persons shall not have
employed counsel to take charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
Indemnified Person or Persons shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the Indemnifying Persons (in which case the
Indemnifying Persons shall not have the right to direct the defense of such
action on behalf of the Indemnified Person or Persons), in any of which events
such fees and expenses shall be borne by the Indemnifying Persons (it being
understood that the Indemnifying Person shall not, in connection with any one
such action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the fees and expenses of more than one separate firm of attorneys (in
addition to any local counsel) for all such Indemnified Persons). Anything in
this subsection to the contrary notwithstanding, an Indemnifying Person shall
not be liable for any settlement of any claim or action effected without its
written consent; provided, however, that such consent was not unreasonably
withheld.
(d) In order to provide for contribution in circumstances in which
the indemnification provided for in the preceding paragraphs of this Section 7
is for any reason held to be unavailable from any Indemnifying Person or is
insufficient to hold harmless an Indemnified Person thereunder, each
Indemnifying Person shall contribute to the aggregate losses, claims, damages,
liabilities and expenses of the nature contemplated by such indemnification
provision (including any investigation, legal and other expenses incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claims asserted, but after deducting in the case of losses,
claims, damages, liabilities and expenses suffered by the Company any
contribution received by the Company from persons, other than the Indemnified
Persons, who may also be liable for contribution, including persons who control
the Company
<PAGE>
30
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, officers and directors of the Company) as incurred to which the Indemnified
Party may be subject, in such proportions as is appropriate to reflect the
relative benefits received by the Indemnifying Person or Persons, on the one
hand, and the Indemnified Person or Persons on the other from the offering of
the Notes or, if such allocation is not permitted by applicable law or
indemnification is not available as a result of the Indemnifying Person not
having received notice as provided in the preceding paragraphs of this Section
7, in such proportion as is appropriate to reflect not only the relative
benefits referred to above but also the relative fault of the Indemnifying
Person or Persons, on the one hand, and the Indemnified Person or Persons on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative fault of the parties shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or the Participant
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The parties agree
that it would not be just and equitable if contribution pursuant to this
paragraph (d) were determined by pro rata allocation (even if the Participants
were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations referred
to above. Notwithstanding the provisions of this paragraph (d), (i) in no case
shall a Participant be required to contribute any amount in excess of the amount
by which proceeds received by such Participant from sales of Registrable Notes
or Exchange Securities, as the case may be, exceeds the amount of damages that
such Participant has otherwise been required to pay or has paid by reason of
such untrue statement or alleged untrue statement or omission or alleged
omission, and (ii) no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. Any party
entitled to contribution will, promptly after receipt of notice of commencement
of any action, suit or proceeding against such party in respect of which a claim
<PAGE>
31
for contribution may be made against another party or parties, notify each party
or parties from whom contribution may be sought, but the omission to so notify
such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have under this
paragraph (d) or otherwise. No party shall be liable for contribution with
respect to any action or claim settled without its consent; provided, however,
that such consent was not unreasonably withheld.
SECTION 8. Rule 144 and Rule 144A. The Company covenants that it
will file the reports required to be filed by it under the Securities Act and
the Exchange Act and the rules and regulations adopted by the SEC thereunder in
a timely manner in accordance with the requirements of the Securities Act and
the Exchange Act and, if at any time the Company is not required to file such
reports, it will, upon the request of any Holder of Registrable Notes, make pub
licly available annual reports and such information, documents and other reports
of the type specified in Sections 13 and 15(d) of the Exchange Act. The Company
further covenants for so long as any Registrable Notes remain outstanding, to
make available to any Holder or beneficial owner of Registrable Notes in
connection with any sale thereof and any prospective purchaser of such
Registrable Notes from such Holder or beneficial owner the information required
by Rule 144A(d)(4) under the Securities Act in order to permit resales of such
Registrable Notes pursuant to Rule 144A.
SECTION 9. Underwritten Registration. If any of the Registrable
Notes covered by any Shelf Registration are to be sold in an underwritten
offering, the investment banker or investment bankers and manager or managers
that will manage the offering will be selected by the Majority Holders of such
Registrable Notes included in such offering and reasonably acceptable to the
Company.
No Holder of Registrable Notes may participate in any underwritten
registration hereunder unless such Holder (a) agrees to sell such Holder's
Registrable Notes on the basis provided in any underwriting arrangements
approved by the Persons entitled hereunder to approve such arrangements and (b)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other
<PAGE>
32
documents required under the terms of such underwriting arrangements.
SECTION 10. Miscellaneous. (a) No Inconsistent Agreements. The
Company has not entered, as of the date hereof, and the Company will not, after
the date of this Agreement, enter into any agreement with respect to any of its
securities that is inconsistent with the rights granted to the Holders of
Registrable Notes in this Agreement or otherwise conflicts with the provisions
hereof. The Company has not entered and the Company will not enter into any
agreement with respect to any of its securities which will grant to any Person
piggy-back registration rights with respect to a Registration Statement.
(b) Adjustments Affecting Registrable Notes. The Company will not,
directly or indirectly, take any action with respect to the Registrable Notes as
a class that would adversely affect the ability of the Holders of Registrable
Notes to include such Registrable Notes in a registration undertaken pursuant to
this Agreement.
(c) Amendments and Waivers. The provisions of this Agreement may not
be amended, modified or supplemented, and waivers or consents to departures from
the provisions hereof may not be given, otherwise than with the prior written
consent of the Holders of not less than a majority in aggregate principal amount
of the then outstanding Registrable Notes. Notwithstanding the foregoing, a
waiver or consent to depart from the provisions hereof with respect to a matter
that relates exclusively to the rights of Holders of Registrable Notes whose
securities are being sold pursuant to a Registration Statement and that does not
directly or indirectly affect, impair, limit or compromise the rights of other
Holders of Registrable Notes may be given by Holders of at least a majority in
aggregate principal amount of the Registrable Notes being sold by such Holders
pursuant to such Registration Statement; provided, however, that the provisions
of this sentence may not be amended, modified or supplemented except in
accordance with the provisions of the immediately preceding sentence.
(d) Notices. All notices and other communications (including any
notices or other communica tions to the Trustee) provided for or permitted
hereunder
<PAGE>
33
shall be made in writing by hand-delivery, registered first-class mail, next-day
air courier or facsimile:
(i) if to a Holder of the Registrable Notes or any Participating
Broker-Dealer, at the most current address of such Holder or Participating
Broker-Dealer, as the case may be, set forth on the records of the
registrar under the Indenture, with a copy in like manner to the Initial
Purchasers as follows:
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Facsimile No: (212) 272-2000
Attention: Capital Markets, 4th Floor
Credit Suisse First Boston Corporation
11 Madison Avenue
New York, New York 10010
Facsimile No.: (212) 325-8278
Attention: Investment Banking Department --
Transactions Advisory Group
with a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
Facsimile No: (212) 474-3700
Attention: Kris F. Heinzelman
(ii) if to the Initial Purchasers, at the address
specified in Section 10(d)(i);
(iii) if to the Company, as follows:
ContiFinancial Corporation
277 Park Avenue
New York, New York 10172
Facsimile No.: (212) 207-2937
Attention: General Counsel
<PAGE>
34
with copies to:
Dewey Ballantine
1301 Avenue of the Americas
New York, New York 10019
Facsimile No: (212) 259-6333
Attention: Mark Baker
All such notices and communications shall be deemed to have been
duly given: when delivered by hand, if personally delivered; five business days
after being deposited in the mail, postage prepaid, if mailed; one business day
after being timely delivered to a next-day air courier; and when receipt is
acknowledged by the addressee, if sent by facsimile.
Copies of all such notices, demands or other communications shall be
concurrently delivered by the Person giving the same to the Trustee at the
address and in the manner specified in such Indenture.
(e) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the parties
hereto; provided, however, that this Agreement shall not inure to the benefit of
or be binding upon a successor or assign of a Holder unless and to the extent
such successor or assign holds Registrable Notes.
(f) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(g) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(h) Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York, as applied to contracts
made and performed wholly within the State of New York, without regard to
principles of conflicts of law.
<PAGE>
35
(i) Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their best efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.
(j) Notes Held by the Company or Its Affiliates. Whenever the
consent or approval of Holders of a specified percentage of Registrable Notes is
required hereunder, Registrable Notes held by the Company or its affiliates (as
such term is defined in Rule 405 under the Securities Act) shall not be counted
in determining whether such consent or
<PAGE>
36
approval was given by the Holders of such required percentage.
(k) Third-Party Beneficiaries. Holders of Registrable Notes and
Participating Broker-Dealers are intended third-party beneficiaries of this
Agreement and this Agreement may be enforced by such Persons.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
CONTIFINANCIAL CORPORATION,
by /s/Daniel J. Willett
----------------------------------------
Name: Daniel J. Willett
Title: Senior Vice
President and
Chief Financial
Officer
by /s/Susan E. O'Donovan
----------------------------------------
Name: Susan E. O'Donovan
Title: Vice President and
Controller
BEAR, STEARNS & CO. INC.,
by /s/Lewis A. Sachs
----------------------------------------
Name: Lewis A. Sachs
Title: Senior Managing
Director
CREDIT SUISSE FIRST BOSTON
CORPORATION,
by /s/Joseph Fashano
----------------------------------------
Name: Joseph Fashano
Title: Director
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated May 17, 1996
included in ContiFinancial Corporation's Form 10-K for the year ended March 31,
1996 and to all references to our Firm included in this registration statement.
Arthur Andersen LLP
New York, New York
March 24, 1997
