UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to_________
1-14074
--------------------------------------------
(Commission File Number)
ContiFinancial Corporation
-------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3852588
------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
277 Park Avenue
New York, New York 10172
- --------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 207-2800
---------------------
no change
--------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
-- -----
The Company had 47,623,984 shares of common stock outstanding as of
----------
August 7, 1997.
<PAGE>
<TABLE>
<CAPTION>
CONTIFINANCIAL CORPORATION
Consolidated Balance Sheets
as of June 30, 1997 and March 31, 1997
(dollars in thousands, except share data)
(unaudited)
June 30, March 31,
1997 1997
---- ----
Assets
------
<S> <C> <C>
Cash and cash equivalents ........................... $ 111,146 $ 51,200
Restricted cash ..................................... 464 464
Securities purchased under agreements to resell ..... 504,572 223,962
Interest-only and Residual Certificates ............ 516,707 445,005
Capitalized servicing fees receivable ............... 35,079 29,353
Trade receivables:
Receivables held for sale ........................ 695,045 625,545
Other receivables ................................ 152,567 87,353
Allowance for loan losses ........................ (2,768) (3,747)
------ ------
Total trade receivables, net ...................... 844,844 709,151
------- -------
Premises and equipment, net of accumulated
depreciation of $5,112 and $4,298 as of
June 30, 1997 and March 31, 1997, respectively ...... 8,920 7,789
Cost in excess of equity acquired ................... 47,909 48,200
Other assets ........................................ 36,893 30,674
------ ------
Total assets .................................. $ 2,106,534 $ 1,545,798
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
- ------------
Accounts payable and accrued expenses ............... $ 94,031 $ 87,770
Securities sold but not yet purchased ............... 496,897 225,131
Trade receivables sold under agreements to repurchase 306,042 251,539
Due to affiliates ................................... 16,149 36,367
Short-term borrowed funds ........................... 130,000 25,000
Long-term debt ...................................... 498,823 498,817
Other liabilities ................................... 24,538 12,102
------ ------
Total liabilities ............................. 1,566,480 1,136,726
--------- ---------
Commitments and contingencies
Minority interest of subsidiary ..................... 1,319 1,288
Stockholders' equity:
Preferred stock (par value $0.01 per share;
25,000,000 shares authorized; none issued
at June 30, 1997 and March 31, 1997) .......... -- --
Common stock (par value $0.01 per share;
250,000,000 shares authorized; 47,623,984
and 44,390,335 shares issued at
June 30, 1997 and March 31, 1997, respectively) 476 444
Paid-in capital .................................. 397,984 295,029
Retained earnings ................................ 155,525 128,652
Treasury Stock (17,509 and 27,931 shares of
common stock, at cost, as of June 30 1997
and March 31, 1997, respectively) ............. (368) (586)
Deferred Compensation ........................... (14,882) (15,755)
------- -------
Total stockholders' equity .................... 538,735 407,784
------- -------
Total liabilities and stockholders' equity .... $ 2,106,534 $ 1,545,798
=========== ===========
The accompanying notes to the unaudited condensed consolidated financial
statements are an integral part of these statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
CONTIFINANCIAL CORPORATION
Consolidated Statements of Income
for the three months ended June 30, 1997 and 1996
(dollars in thousands, except share data)
(unaudited)
Three Months
Ended June 30
-------------
<S> <C> <C>
Gross income 1997 1996
---- ----
Gain on sale of receivables ............... $ 64,340 $ 31,166
Interest .................................. 49,679 28,515
Net servicing income ...................... 15,973 9,073
Other income .............................. 4,031 1,009
------- ------
Total gross income ..................... 134,023 69,763
------- ------
Expenses
Compensation and benefits ................. 30,234 12,408
Interest (includes $6,226 to affiliates for
the three months ended June 30, 1996) ... 35,863 19,662
Provision for loan losses ................. 1,311 219
General and administrative ................ 21,070 4,779
------ -----
Total expenses ......................... 88,478 37,068
------ ------
Income before income taxes and
minority interest ......................... 45,545 32,695
Income taxes ................................. 18,641 13,262
------ ------
Income before minority interest .............. 26,904 19,433
Minority interest of subsidiary .............. 31 --
---------- -----------
Net income ............................. $ 26,873 $ 19,433
=========== ===========
Primary and fully diluted earnings
per common share .......................... $ 0.59 $ 0.44
=========== ===========
Fully diluted weighted average number
of shares outstanding ..................... 45,588,626 44,043,368
========== ==========
Primary weighted average number of shares
outstanding ................................ 45,425,103 43,898,281
========== ==========
The accompanying notes to the unaudited condensed consolidated financial
statements are an integral part of these statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
CONTIFINANCIAL CORPORATION
Condensed Consolidated Statements of Cash Flows
for the three months ended June 30, 1997 and 1996
(dollars in thousands)
(unaudited)
Three Months
Ended June 30,
-------------
<S> <C> <C>
1997 1996
---- ----
Net cash used in operating activities ........... $(109,202) $ (1,948)
--------- ---------
Cash flows from investing activities:
Acquisition of unconsolidated subsidiaries .. (5,603) --
Purchase of property and equipment .......... (1,945) (57)
------ ---
Cash used in investing activities ..... (7,548) (57)
------ ---
Cash flows from financing activities:
Net decrease in due to affiliates ........... (29,376) (5,555)
Increase in short-term borrowed funds ....... 105,000 --
Proceeds from equity offering ............... 100,778 --
Proceeds from exercise of options ........... 288 --
Other, net .................................. 6 --
------ ------
Net cash provided by (used in)
financing activities .................... 176,696 (5,555)
------- ------
Net increase (decrease) in cash and cash
equivalents ................................. 59,946 (7,560)
Cash and cash equivalents at beginning of period 51,200 32,479
------ ------
Cash and cash equivalents at end of period ...... $ 111,146 $ 24,919
========= =========
The accompanying notes to the unaudited condensed consolidated financial
statements are an integral part of these statements.
</TABLE>
4
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 1997
(dollars in thousands)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
ContiFinancial Corporation and its consolidated subsidiaries (collectively,
"ContiFinancial" or the "Company") have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission and, in the opinion
of management, reflect all normal, recurring adjustments which are necessary
for a fair presentation of the financial position, results of operations, and
cash flows for each period shown. The results for interim periods are not
necessarily indicative of financial results for the full year. These
unaudited condensed consolidated financial statements should be read in
conjunction with the audited Consolidated Financial Statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1997 (the "Annual Report"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings
Per Share ("EPS")" ("SFAS 128") which is effective for both interim and
annual periods ending after December 15, 1997. SFAS 128 simplifies the
standards for computing earnings per share. It replaces the presentation of
primary EPS with a presentation of basic EPS. Basic EPS excludes dilution
and is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. If SFAS
128 had been applied to the results of operations for the three months ended
June 30, 1997 and June 30, 1996 the Company's basic EPS would have been $0.60
(pro forma) and $0.45 (pro forma), respectively, of earnings per common share
based on net income of $26,873 and $19,433, respectively, and
weighted-average number of common shares of 44,757,322 (pro forma) and
43,248,001 (pro forma), respectively. Fully diluted EPS remains the same
under SFAS 128 but will be referred to as diluted EPS.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
("SFAS 130") which is effective for fiscal years beginning after December 15,
1997. SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS 130 requires that all items that are required to
be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. The adoption of this standard is
not expected to have an impact on the Company's financial position or results
of operations.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131") which is effective for
financial statements for periods beginning after December 15, 1997. SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
established standards for related disclosures about products and services,
geographic areas and major customers. The adoption of this standard is not
expected to have an impact on the Company's financial position or results of
operations.
5
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 1997
(dollars in thousands)
3. EQUITY
On June 4, 1997, the Company completed a primary offering of 2,800,000 shares
of common stock and an additional 420,000 shares were purchased by the
underwriters for over-allotments. The proceeds of the offering to the
Company, net of estimated expenses and underwriting discount, were $100,778.
The net proceeds will be used for general corporate purposes including
funding loan originations and purchases, supporting securitization
transactions (including the retention of Excess Spread Receivables -- as
defined on page 9 herein), other working capital needs and to make certain
strategic acquisitions. The completion of the offering reduces Continental
Grain Company's ("Continental Grain") ownership of the Company from
approximately 81% to approximately 75%. The consummation of the public
offering caused the vesting of certain options granted.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This discussion should be read in conjunction with the accompanying unaudited
condensed consolidated financial statements and notes thereto, and the
Company's audited Consolidated Financial Statements and notes thereto
included in the Company's Annual Report. Certain statements under this
caption constitute "forward-looking statements" under federal securities
laws. See "Forward-looking Statements."
General
The Company is engaged in the consumer and commercial finance business by
originating and servicing home equity loans and providing financing and asset
securitization expertise to originators of a broad range of loans, leases
and receivables. Through ContiMortgage Corporation ("ContiMortgage") and the
retail origination subsidiaries, 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. The Company has strategic alliances with
various originators of a broad range of consumer and commercial loans and
other assets ("Strategic Alliances"). Through ContiTrade Services L.L.C.
("ContiTrade") the Company provides financing and asset securitization
structuring expertise, and through ContiFinancial Services Corporation
("ContiFinancial Services"), an NASD registered broker/dealer, the Company
provides placement services. In September 1996, the Company established
ContiWest Corporation, a Nevada corporation, to administer and underwrite a
portion of the Company's origination portfolio.
The Company's Strategic Alliance clients are originators of consumer and
commercial loans, leases and receivables. The Company provides financing and
asset securitization execution and expertise to the Strategic Alliance client
while the client provides a consistent flow of securitizable assets to the
Company. In certain Strategic Alliances, the Company receives interests
("Strategic Alliance Equity Interests") in the Strategic Alliance client.
The realization of value on such Strategic Alliance Equity Interests is
subject to many factors, including the future growth and profitability of the
Strategic Alliance clients and the completion of initial public offerings or
sale of such Strategic Alliance clients.
In the third quarter of fiscal 1997, the Company acquired three home equity
companies and one auto finance company to implement growth strategies of
expanding into the western United States, diversifying into retail
origination and owning other asset origination platforms with which the
Company has significant securitization experience. The four new loan
origination subsidiaries, California Lending Group, Inc. d/b/a United Lending
Group ("ULG"), Royal Mortgage Partners, L.P., d/b/a Royal MortgageBanc
("Royal"), Triad Financial Corporation ("Triad"), and Resource One Consumer
Discount Company, Inc. ("Resource One"), are collectively called the
"Acquisitions".
7
<PAGE>
The following table presents loan portfolio data relating to the three
periods ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
Three Months
Ended June 30,
--------------
<S> <C> <C>
Loan Portfolio Data 1997 1996
- -------------------- ---- ----
(in thousands)
ContiMortgage serviced loan portfolio ........... $7,269,361 $4,256,948
Home equity loan originations:
Wholesale ................................... $1,166,218 $ 678,128
Retail ...................................... 226,013 --
------- -------
Total home equity loan originations ............. $1,392,231 $ 678,128
========== ==========
Commercial loan originations .................... $ 191,806 $ 65,425
Non-prime auto loan originations ................ $ 38,056 $ --
Securitizations and sales:
ContiMortgage and ContiWest ................. $1,265,000 $ 692,954
Commercial real estate ...................... 158,816 193,916
Triad ....................................... 45,881 --
Strategic alliances ......................... 174,200 106,559
------- -------
Total securitizations and sales ................. $1,643,897 $ 993,429
========== ==========
ContiMortgage delinquency and
loan loss data (1): June 30, 1997 March 31, 1997
------------- --------------
Delinquency rate ........................... 3.68% 3.24%
Default rate ............................... 5.05% 4.70%
Three Months Ended
------------------
June 30, 1997 June 30, 1997
------------- -------------
Net losses as a percentage of
average amount outstanding ............. 0.074% 0.051%
(1) Includes home equity loans originated by Royal MortgageBanc, Resource One
and United Lending Group, and serviced by ContiMortgage.
</TABLE>
The delinquency rate on ContiMortgage's servicing portfolio at June 30, 1997 was
3.68%. ContiMortgage's delinquencies increased 44 basis points from the March
31, 1997 rate of 3.24%, of which 51 basis points were in the 30-59 day period.
Delinquencies have fluctuated between 3.02% and 4.18% for the past twelve
months. The default portfolio increased 35 basis points to 5.05% from the March
31, 1997 default percentage of 4.70%. Included in the default total were loans
performing under bankruptcy plans and real estate owned, making up 0.75% and
0.48% of the servicing portfolio, respectively, compared with 0.62% and 0.52%,
respectively, as of March 31, 1997. The modest increase in the default portfolio
is due to the seasoning of ContiMortgage's portfolio.
Net loss for the first quarter of fiscal 1998 was $5.0 million, or 0.074% of
average serviced loans outstanding, as compared with 0.051% for the first
quarter of fiscal 1997. Net losses as a percentage of average serviced home
equity loans outstanding was 0.28% for the twelve months ended June 30, 1997,
as compared with 0.26% for the twelve months ended March 31, 1997.
8
<PAGE>
Certain Accounting Considerations
For a discussion of recent accounting pronouncements, see Note 2 to the
unaudited condensed consolidated financial statements.
As a fundamental part of its business and financing strategy, the Company sells
substantially all of its loans or other assets through securitization in the
form of Real Estate Mortgage Investment Conduits ("REMIC"), owner trusts or
grantor trusts. In a securitization, the Company sells loans or other assets
that it has originated or purchased to a trust for a cash purchase price and an
interest in the loans or other assets securitized (in the form of the "excess
spread"). The cash purchase price is raised through an offering of pass-through
certificates by the trust. Following the securitization, the purchasers of the
pass-through certificates receive the principal collected or allocated and the
investor pass-through interest rate on the certificate balance, while the
Company receives the excess spread. The excess spread represents, over the life
of the loans or other assets, the excess of the weighted average coupon on each
pool of loans or other assets sold over the sum of the pass-through interest
rate plus a normal servicing fee, a trustee fee, an insurance fee, if
applicable, and an estimate of annual future credit losses related to the loans
or other assets securitized (the "Excess Spread"). These cash flows are
projected over the life of the loans or other assets using prepayment, default,
and interest rate assumptions that market participants would use for similar
financial instruments subject to prepayment, credit and interest rate risk and
are discounted using an interest rate that a purchaser unrelated to the seller
of such a financial instrument would demand. The majority of the Company's gross
income is recognized as gain on sale of loans or other assets, which represents
the value of the Excess Spread less origination and underwriting costs. The
present value of the Excess Spread is the Excess Spread receivable (the "Excess
Spread Receivable"). The Excess Spread Receivable is either a contractual right
or a certificated security generally in the form of an interest-only or residual
certificate. The majority of the Company's Excess Spread Receivable at June 30,
1997 and March 31, 1997, is interest-only and residual certificates.
Consequently, the Company's consolidated balance sheets designate Excess Spread
Receivable as "interest-only and residual certificates."
The Company recognizes the gain on sale of loans or other assets in the
fiscal year in which such loans or other assets are sold, although the
majority of the cash (representing the Excess Spread and servicing fees) is
received by the Company over the life of the loans or other assets.
Concurrent with recognizing such gain on sale, the Company records the Excess
Spread Receivable as an asset on its consolidated balance sheets. The
Excess Spread Receivable is reduced as cash distributions are received from
the securitization.
Due to the fact that the gain recognized in the year of sale is equal to the
present value of the estimated future cash flows from the Excess Spread, the
amount of cash actually received over the lives of the loans or other assets
normally exceeds the gain previously recognized at the time the loans or
other assets were sold and therefore interest income is recognized over the
life of the loans or other assets securitized. In periods subsequent to the
sale, the Company may recognize an increase in fair value of Excess Spread
Receivable as gain on sale of receivables to the extent that estimates of the
loan pools' future remaining lives exceed those originally projected. This
estimate of extended life is performed by reviewing past prepayment
experience and estimating future prepayment experience by considering
numerous factors which include current market assumptions, the interest rate
environment and economic factors. If actual prepayments with respect to sold
loans occur faster or credit experience is worse than projected at the time
such loans were sold, the carrying value of the Excess Spread Receivable may
have to be written down through a charge to earnings in the period of
adjustment.
Additionally, upon sale or securitization of servicing retained mortgages,
the Company capitalizes the cost associated with the right to service
mortgage loans based on its relative fair value. The Company determines
9
<PAGE>
fair value based on the present value of estimated net future cash flows related
to servicing income. The cost allocated to the servicing rights is amortized in
proportion to and over the period of estimated net future servicing fee income.
The Company periodically reviews capitalized servicing fees receivable for
valuation impairment. This review is performed on a disaggregated basis for the
predominant risk characteristics of the underlying loans which are loan type,
loan-to-value ratio and credit quality. The Company generally makes loans to
credit impaired borrowers whose borrowing needs may not be met by traditional
financial institutions due to credit exceptions. The Company has found that
credit impaired borrowers are payment sensitive rather than interest rate
sensitive. As such the Company does not consider interest rates a predominant
risk characteristic for purposes of valuation impairment. Impairment is
recognized in a valuation allowance for each disaggregated stratum in the period
of impairment.
Financial Condition
June 30, 1997
Securities purchased under agreements to resell increased $280.6 million from
$224.0 million at March 31, 1997 to $504.6 million at June 30, 1997. The
Company maintains asset purchase and sale facilities with certain financial
institutions ("Purchase and Sale Facilities"). Receivables held for sale and
loans and other assets sold with recourse under its Purchase and Sale
Facilities are hedged, in part, through the use of United States treasury
securities and futures contracts to reduce exposure to interest rate
fluctuations. Securities purchased under agreements to resell are part of
this hedging strategy. This increase was primarily due to the increase in
the Company's securitization volume and the related receivables held for sale
account.
Interest-only and residual certificates increased $71.7 million from $445.0
million at March 31, 1997 to $516.7 million at June 30, 1997. This increase
represents $81.2 million recorded during fiscal 1997 relating to new
securitizations and recorded interest income of $11.2 million partially
offset by $7.2 million of sales and $13.5 million of collections.
Capitalized servicing fees receivable increased $5.7 million from $29.4
million at March 31, 1997 to $35.1 million at June 30, 1997. This balance
reflects the capitalization of $7.8 million of servicing rights and $1.1
million of prepayment premiums paid partially offset by amortization of $3.2
million.
Trade receivables, net increased $135.6 million from $709.2 million at March
31, 1997 to $844.8 million at June 30, 1997. This increase was due to an
increase in receivables held for sale from $625.5 million as of March 31,
1997 to $695.0 million at June 30, 1997, and an increase in other receivables
from $87.4 million at March 31, 1997 to $152.6 million at June 30, 1997. The
increase in receivables held for sale of $69.5 million was due to the
investment of the net cash proceeds available from the Company's June 4, 1997
primary offering of common stock and the timing of securitizations.
The increase in other receivables of $65.2 million from March 31, 1997 to
June 30, 1997, was primarily due to an increase in short-term receivables
associated with the timing of securitization transactions of $48.7 million.
Additional changes to other receivables were an increase in servicing
advances of $6.0 million and an increase in financed interest-only and
residual certificates of $3.9 million.
Premises and equipment, net increased $1.1 million from $7.8 million at March
31, 1997 to $8.9 million at June 30, 1997. The increase is primarily due to
increased purchases related to the expansion of ContiMortgage's offices.
10
<PAGE>
Cost in excess of equity acquired decreased $0.3 million from $48.2 million
at March 31, 1997 to $47.9 million at June 30, 1997. The decrease was due
to the amortization of the cost in excess of equity acquired which was
recorded upon the purchase of the Acquisitions made by the Company during the
third quarter of fiscal 1997.
Other assets increased $6.2 million from $30.7 million at March 31, 1997 to
$36.9 million at June 30, 1997. Other assets represents prepaid expenses,
margin and other deposits, deferred bond issuance costs, equity investments
in unconsolidated subsidiaries and other investments. This increase is
primarily due to an increase of approximately $5.6 million for equity
investments in unconsolidated subsidiaries.
Accounts payable and accrued expenses increased $6.2 million from $87.8
million at March 31, 1997 to $94.0 million at June 30, 1997. The balance
increased primarily due to an increase in accrued taxes payable of $27.0
million, and accrued interest payable of $10.0 million offset by a decrease
in accrued incentive amounts of $27.1 million and accrued securitization
expenses of $4.0 million. See due to affiliates discussion below for a
discussion of accrued taxes payable. The increase in accrued interest
payable and the decreases in accrued incentive amounts and accrued
securitization expenses were due to timing differences relating to the
payments of these liabilities.
Securities sold but not yet purchased increased $271.8 million from $225.1
million at March 31, 1997 to $496.9 million at June 30, 1997. Receivables
held for sale and loans and other assets sold, with recourse, under the
Company's Purchase and Sale Facilities are hedged, in part, through the use
of United States Treasury securities and futures contracts to reduce exposure
to interest rate fluctuations. Securities sold but not yet purchased are
part of this hedging strategy. This increase was primarily due to the
increase in the Company's securitization volume and the related receivables
held for sale account.
Trade receivables sold under agreements to repurchase increased $54.5 million
from $251.5 million at March 31, 1997 to $306.0 million at June 30, 1997.
This increase is due to the increase in receivables held for sale during the
three months ended June 30, 1997.
Due to affiliates decreased $20.3 million from $36.4 million at March 31,
1997 to $16.1 million at June 30, 1997. The decrease is primarily due to the
effect of the June 4, 1997 primary stock offering which reduced Continental
Grain's ownership of the Company from approximately 81% to approximately
75%. When the Company was 81% owned by Continental Grain, the Company's
Federal income taxes were prepared on a consolidated basis with Continental
Grain and such liabilities were paid through the due to affiliates account.
Since Continental Grain's ownership percentage has been reduced to
approximately 75%, taxes are now accrued and paid directly by the Company.
Short-term borrowed funds represents borrowings from a $200.0 million
unsecured revolving credit facility the Company entered into on January 8,
1997. At June 30, 1997 and March 31, 1997, $130.0 million and $25.0 million
of drawings under this line were outstanding, respectively. These borrowings
were used for general corporate purposes. For further discussion see
"Liquidity and Capital Resources".
There were no material changes in long-term debt from March 31, 1997 to June
30, 1997.
Other liabilities increased $12.4 million from $12.1 million at March 31,
1997 to $24.5 million at June 30, 1997. The increase is primarily due to a
net increase in deferred compensation payable of $10.6 million under the
terms of incentive plans and an increase in deferred income of $1.8 million.
Stockholders' equity increased $130.9 million from $407.8 million at March
31, 1997 to $538.7 million at June 30, 1997. The increase was due to the
June 4, 1997 completion of the primary offering of common stock with
11
<PAGE>
net proceeds of $100.8 million, net income of $26.9 million, the amortization of
deferred compensation and a deferred compensation tax adjustment of $3.0 million
and the exercise of stock options of $0.2 million.
Results of Operations
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
The Company's total gross income increased from $69.8 million for the three
months ended June 30, 1996 to $134.0 million for the three months ended June
30, 1997, representing a 92% increase. During the first quarter of fiscal
1998, gross income increased by $37.0 million, or 53%, exclusive of the
Acquisitions. Net income increased from $19.4 million for the three months
ended June 30, 1996 to $26.9 million for the three months ended June 30,
1997, representing a 38% increase. Net income for the three months ended
June 30, 1997 increased by $4.2 million, or 22%, exclusive of the
Acquisitions.
On a percentage basis, the following table sets forth the composition of the
Company's results as a percentage of total gross income for the periods
indicated:
Three Months
Ended June 30,
--------------
Gross income 1997 1996
---- ----
Gain on sale of receivables ................. 48.00% 44.67%
Interest .................................... 37.07% 40.87%
Net servicing income ........................ 11.92% 13.01%
Other income ................................ 3.01% 1.45%
---- ----
Total gross income ....................... 100.00% 100.00%
------ ------
Expenses
Compensation and benefits ................... 22.56% 17.79%
Interest .................................... 26.76% 28.18%
Provision for loan losses ................... 0.98% 0.31%
General and administrative .................. 15.72% 6.85%
----- ----
Total expenses ............................ 66.02% 53.13%
----- -----
Income before income taxes and
minority interest ........................... 33.98% 46.87%
Income taxes ................................. 13.91% 19.01%
----- -----
Income before minority interest .............. 20.07% 27.86%
Minority interest of subsidiary .............. 0.02% 0.00%
---- ----
Net income ................................ 20.05% 27.86%
===== =====
The Company's move into retail origination has resulted in a change in the
profile of the income statement. Retail origination expenses focus heavily
on compensation and benefits and general and administrative expenses, whereas
with wholesale originators, such as ContiMortgage, costs of origination in
the form of origination points are netted against gain on sale of
receivables. As retail origination grows, the Company anticipates a related
increase in operating expenses, largely offset by higher income from
origination points and other cash income included in gain on sale results.
Income. The increase in total gross income was due to a greater volume of
loans originated as a result of the expansion of the Company's wholesale and
broker home equity loan origination sources and the move into retail
originations.
12
<PAGE>
The following table sets forth information regarding the components of the
Company's total gross income in each of the three month periods ended June
30:
Three Months
Ended June 30,
---------------
1997 1996
---- ----
(in thousands)
Gain on sale of receivables .................. $ 64,340 $ 31,166
Interest ..................................... 49,679 28,515
Net servicing income ......................... 15,973 9,073
Other income ................................. 4,031 1,009
----- -----
Total gross income ........................ $134,023 $ 69,763
======== ========
Gain on sale of receivables was the primary component of total gross income,
comprising 48% and 45% of total gross income in the three months ended June
30, 1997 and 1996, respectively. Gain on sale of receivables increased $33.2
million, or 106%, in the three months ended June 30, 1997 as compared to the
corresponding period in 1996. During the first quarter of fiscal 1998, gain
on sale of receivables increased by $8.9 million or 29%, exclusive of the
Acquisitions.
Gain on sale of receivables represents income primarily from the structuring
and sale of pools of home equity loans originated by ContiMortgage, the
retail origination companies and Strategic Alliance clients of the Company in
REMIC S, owner trusts and grantor trusts. In addition, gains on sale of
receivables are earned upon whole loan sales and upon securitization of
commercial and multi-family loans, home improvement loans, franchisee loans,
prime and non-prime auto loans and equipment leases which are sold into
REMICs and whole loan and other trust structures.
The increase in income earned from gain on sale of receivables was due to an
increased volume of loans and leases structured partially offset by a
decreased gain on sale percentage. The Company structured and sold $1.4
billion of mortgages, loans and leases, exclusive of the Acquisitions, in the
three months ended June 30, 1997, an increase of $0.6 billion from the three
months ended June 30, 1996, which contributed $16.3 million of the increase
in gain on sale of receivables.
The gain on sale percentage, computed as the ratio of gain on sale gross
income divided by the dollar volume of loans securitized, decreased by 87
basis points from 3.69% for the three months ended June 30, 1996 to 2.82% for
the three months ended June 30, 1997. The primary reasons for the decline
were twofold: (1) origination costs or premiums paid for loans increased by
74 basis points, reducing the Excess Spread component of the gain on sale
calculation; and (2) the average life on ContiMortgage securitizations
declined by 0.3 years in the first quarter of fiscal 1998 compared to the
corresponding period in fiscal 1997 due to an increase in prepayment speed
assumptions used by the Company in valuing the Excess Spread Receivable.
Securities sold were executed at more favorable investor yields and efficient
securitization structures in the three months ended June 30, 1997, than in
the comparable period in 1996, generating a 30 basis point increase in Excess
Spread, partially offsetting the declines in Excess Spread and average life.
These changes resulted in a $7.4 million decline in gain on sale of
receivables.
The combination of the $16.3 million increase due to increased volume and the
$7.4 million decrease due to a decline in ContiMortgage Excess Spread
resulted in a net increase in gain on sale of receivables from the three
months ended June 30, 1996 to the corresponding period in 1997 of $8.9
million.
13
<PAGE>
Interest income increased $21.2 million, or 74%, for the three months ended
June 30, 1997 from the corresponding period in 1996. Interest income
increased by $19.1 million, or 67%, exclusive of the Acquisitions. Interest
income represents interest earned on loans originated or purchased by the
Company during the period from their origination or purchase until the actual
sale of the loans, as well as the recognition of the increased value of the
discounted Excess Spread Receivables over time. The interest earned on loans
originated and purchased contributed $15.1 million to the increase between
the three months ended June 30, 1996 and 1997. The increase in interest
earned on loans originated and purchased was primarily due to a $646.4
million increase in the average balance of loans originated and purchased
but not yet securitized during the periods. The recognition of the increased
value of the discounted Excess Spread Receivables over time accounted for
$4.0 million of the increase in interest income which was due to the increase
in the average investment in Excess Spread Receivables in the three months
ended June 30, 1997 as compared to the corresponding period in 1996.
Net servicing income increased $6.9 million, or 76%, for the three months
ended June 30, 1997 compared to the corresponding period in 1996 due to the
increase in the size of the servicing portfolio and the volume of loan sales
and securitizations. Net servicing income increased by $6.4 million, or 70%,
exclusive of the Acquisitions. The Company's loan servicing portfolio
increased $3.0 billion from $4.3 billion to $7.3 billion at June 30, 1996 as
compared to June 30, 1997, contributing to a $2.6 million increase in net
servicing income between the three months ending June 30, 1996 and 1997
Additionally, net servicing income increased by $3.8 million in the first
quarter of fiscal 1998 as compared to the first quarter of fiscal 1997 due to
capitalized servicing income associated with the 83% increase in the
ContiMortgage and ContiWest home equity loan sales and securitizations for
the three months ended June 30, 1997 as compared to the corresponding period
in 1996.
Other income increased $3.0 million, or 300%, for the three month period
ended June 30, 1997 compared to the corresponding period in 1996. Other
income increased by $2.6 million, or 254%, exclusive of the Acquisitions.
Other income consists primarily of "purchase premium refunds" on warehouse
advances and for the three months ended June 30, 1997, miscellaneous income.
"Purchase premium refunds" are received from certain origination sources
related to loans that prepay within a contractually set time period. Upon
origination of a loan, the Company will pay a wholesale originator a purchase
premium for the loan or pools of loans. The Company negotiates agreements
with wholesale originators that stipulate that a portion of such purchase
premium will be repaid if individual loans are repaid within a contractually
set time period. The income from "purchase premium refunds" increased by
approximately $0.9 million due to the increase in ContiMortgage origination
volume. The miscellaneous income received during the three months ended June
30, 1997 consists of $1.1 million of income received in connection with the
termination of a strategic alliance agreement.
Expenses. Total expenses for the three months ended June 30, 1997 increased
$51.4 million or 139% from the corresponding period in 1996. Total expenses
increased by $28.0 million, or 75%, exclusive of the Acquisitions. This
increase in total expenses was due to the increase in number of employees,
and costs associated with increased loan volume.
14
<PAGE>
The following table sets forth the components of the Company's expenses
for the three months ended June 30, 1997 and 1996.
Three Months
Ended June 30,
---------------
1997 1996
---- ----
(in thousands)
Compensation and benefits .................... $30,234 $12,408
Interest ..................................... 35,863 19,662
Provision for loan losses .................... 1,311 219
General and administrative ................... 21,070 4,779
------ -----
Total expenses ........................... $88,478 $37,068
======= =======
Compensation and benefits expense increased $17.8 million, or 144 %, for the
three months ended June 30, 1997 compared to the corresponding period in
1996. Of this increase in compensation and benefits, $12.3 million was due
to the addition of 974 employees from the Acquisitions. Compensation and
benefits expense increased by $5.5 million, or 44%, exclusive of the
Acquisitions. This increase was primarily due to the addition of new
personnel. On June 30, 1997, the Company had 770 employees, exclusive of the
Acquisitions, as compared to 515 employees on June 30, 1996, a 50% increase,
which primarily contributed to a $5.9 million increase in salary and benefits
partially offset by a $0.4 million decrease in total incentive compensation.
Incentive compensation is calculated under provisions of certain formula
based plans. Total incentive compensation decreased due to changes in certain
components of these formula based plans.
Interest expense increased $16.2 million, or 82%, to $35.9 million for the
three months ended June 30, 1997 as compared to $19.7 million for the
corresponding period in 1996. Interest expense increased by $15.9 million,
or 81%, to $35.6 million exclusive of the Acquisitions. This increase was
primarily a result of an increase in long-term and short-term borrowings,
trade receivables sold under agreements to repurchase and sales under the
Company's Purchase and Sale Facilities. Average borrowings increased by $0.9
billion for the three months ended June 30, 1997, as compared to the
corresponding period in 1996.
Provision for loan losses increased to $1.3 million for the three months
ended June 30, 1997 as compared to $0.2 million for the three months ended
June 30, 1996. Provision for loan losses remained comparable exclusive of
the Acquisitions. Provision for loan losses is recorded in sufficient
amounts to maintain an allowance at a level considered adequate to cover
anticipated losses resulting from liquidation of receivables held for sale
and receivables sold with limited recourse under the Purchase and Sale
Facilities, prior to securitization.
General and administrative expenses increased $16.3 million or 341% for the
three months ended June 30, 1997 compared to the corresponding period in
1996. Of this increase in general and administrative expenses, $9.7
million was attributable to the retail origination operations of the
Acquisitions. General and administrative expenses increased by $6.6 million,
or 139%, exclusive of the Acquisitions. Part of the increase was due to a
$1.7 million increase in costs associated with underwriting, originating and
servicing higher loan volumes. In the three months ended June 30, 1997,
origination volume increased 72% as compared to the three months ended June
30, 1996 exclusive of the Acquisitions. The remaining increase in general and
administrative expenses of approximately $2.8 million was primarily due to
the increase in the number of employees to 770 on June 30, 1997, exclusive of
employees from the Acquisitions, from 515 on June 30, 1996.
Income Taxes. The Company's provision for income taxes was $18.6 million and
$13.3 million for the three months ended June 30, 1997 and 1996,
respectively. The increase in taxes of 40% for the three months ended
15
<PAGE>
June 30, 1997 compared to the corresponding period in 1996 was related to the
increase in income before taxes and minority interest over the same period.
The effective tax rate for each of the three month periods remained
consistent at 41%.
Liquidity and Capital Resources
In a securitization, the Company recognizes a gain on the sale of loans or
assets securitized upon the closing of the securitization, but does not
receive the majority of 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. This negative cash flow has been partially offset by the
Company's move into retail origination which resulted in an increase in the
cash received from securitization through origination points and other cash
income included in the gain on sale results. The Company incurs significant
expenses in connection with a securitization and incurs both current and
deferred tax liabilities as a result of the gain on sale. Therefore, the
Company requires continued access to short and long term external sources of
cash to fund its operations. The Company's primary cash requirements are
expected to include the funding of: (i) mortgage, loan and lease originations
and purchases pending their pooling and sale; (ii) the points and expenses
paid in connection with the acquisition of wholesale loans; (iii) fees and
expenses incurred in connection with its securitization program; (iv) over
collateralization or reserve account requirements in connection with loans
and leases pooled and sold; (v) ongoing administrative and other operating
expenses; (vi) payments related to tax obligations; (vii) interest and
principal payments under the Company's long-term debt and short-term borrowed
funds; (viii) the costs of the Purchase and Sale Facilities and the funding
agreement under an agreement to repurchase (the "Repurchase Agreement"); and
(ix) the cost of any new acquisitions that the Company may pursue and
deferred purchase price commitments on existing acquisitions.
As a result of its growing securitization program, the Company has operated,
and expects to continue to operate, on a negative cash flow basis. The
Company securitized and sold in the secondary market $1.6 billion of loans in
the three months ended June 30, 1997 compared to $1.0 billion in the three
months ended June 30, 1996. The Company used $109.2 million of cash in
operations during the three months ended June 30, 1997.
During the life of the REMICs, owner trusts or grantor trusts, the Company
subordinates to the rights of holders of senior interests a portion of the
Excess Spread otherwise due to the Company as a credit enhancement to support
the sale of senior interests. The terms of the REMICs, owner trusts and
grantor trusts generally require that the Excess Spread otherwise payable to
the Company during the early months of the trusts be used to increase the
cash reserve account, or to repay the senior interests in order to increase
over collateralization to specified maximums. The value of such "deposit"
accounts is included in the value of Excess Spread Receivables and the
related gain on sale of receivables, net of necessary reserves for credit
losses, if applicable.
In addition, increased use of securitization transactions as a funding source
by the Company has resulted in a significant increase in the amount of gain
on sale of receivables recognized by the Company. During the three months
ended June 30, 1997, the Company recognized gain on sale of receivables in
the amount of $64.3 million compared to $31.2 million for the corresponding
period in 1996. The recognition of gain on sale of receivables will have a
negative impact on the cash flows of the Company to the extent the Company is
required to pay state and Federal income taxes on these amounts in the period
recognized, notwithstanding that the Company does not receive the cash
representing the gain until later periods as the related loans are repaid or
otherwise collected.
The Company's primary sources of liquidity are sales of loans, leases and
other assets through securitization, the sale of loans, leases and other
assets under the Purchase and Sale Facilities and Repurchase Agreement,
16
<PAGE>
the issuance of shares of common stock, the issuance of long-term debt and the
unsecured revolving credit facility. While the Company sells Excess Spread
Receivables from time to time, there is no liquid market for such Excess
Spread Receivables.
The Company had $2.6 billion of committed sale capacity under its Purchase
and Sale Facilities and Repurchase Agreements with various financial
institutions as of June 30, 1997. The Purchase and Sale Facilities allow the
Company to sell, with limited recourse, interests in designated pools of
loans and other assets. On March 31, 1997, the Company entered into the
Repurchase Agreement. The Repurchase Agreement allows the Company to sell
receivables held for sale to a financial institution under an agreement that
the Company will repurchase the assets. These facilities generally have one
year renewable terms (one Purchase and Sale Facility has a two-year term),
all of which will expire between October 1997 and July 1998. On June 30,
1997, the Company utilized $995.5 million of the capacity under the Purchase
and Sale Facilities and Repurchase Agreements. The Company currently
anticipates that it will be able to renew these facilities when they expire
and to obtain additional facilities.
The Company has sold Excess Spread Receivables, with limited recourse, to
provide cash to fund the Company's securitization program. At June 30, 1997,
$132.2 million of these sales were outstanding. Under the recourse provisions
of the agreements, the Company is responsible for losses incurred by the
purchaser within an agreed-upon range. The Company's performance obligations
in these transactions are guaranteed by Continental Grain for an agreed-upon
fee. Although the Company intends to continue to pursue opportunities to sell
Excess Spread Receivables, no assurance can be given that such opportunities
will be available in the future.
On June 4, 1997, the Company completed a primary offering of 2,800,000 shares
of common stock and an additional 420,000 shares were purchased by the
underwriters for over allotments. The net proceeds of the offering to the
Company were $100.8 million which were used by the company for general
corporate purposes including funding loan originations and purchases,
supporting securitization transactions (including the retention of Excess
Spread Receivables), other working capital needs and to make certain
strategic acquisitions.
In anticipation of growth in the Company's future operations, additional
financing sources will be required. The Company currently has commitments
for financing through the unsecured revolving credit facility, however, there
can be no assurance that the Company will be successful in consummating
additional financing transactions in the future on terms that the Company
would consider to be favorable. Furthermore, no assurance can be given that
Continental Grain will provide such financing if the Company is unable to
obtain third party financing or that the terms of the Continental Grain debt
agreements will permit the Company to obtain such financing.
Forward-looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q which are
not historical fact, may be deemed to be forward-looking statements under the
federal securities laws. 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, interest rate risk, prepayment speeds,
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, its needs for financing, and
other risks identified in the Company's Securities and Exchange Commission
filings. In addition, it should be noted that past financial and operational
performance of the Company is not necessarily indicative of future financial
and operational performance.
17
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
No. Description
11.2 Computation of the Company's earnings per common share
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ContiFinancial Corporation
Date Signature Title
August 14, 1997 /s/ Daniel J. Willett Senior Vice President and
Daniel J. Willett Chief Financial Officer
(Principal Financial Officer)
August 14, 1997 /s/ Susan E.O'Donovan Vice President and Controller
Susan E. O'Donovan (Principal Accounting Officer)
19
<PAGE>
Exhibit 11.1
ContiFinancial Corporation
1st quarter EPS calculation
Primary
Net Income 26,873,000
Weighted Average Shares
1st Quarter 45,425,103
---------------------------
Average 45,425,103
=========
Year-to-date Primary EPS $0.59
=========
Fully Diluted
Net Income 26,873,000
Weighted Average Shares
1st Quarter 45,588,626
---------------------------
Average 45,588,626
=========
Year-to-date Primary EPS $0.59
=========
<PAGE>
Exhibit 11.1
<TABLE>
ContiFinancial Corporation
1st quarter EPS calculation
Primary
Weighted
# of shares weighting Ave. Shares
-------------- --------- ---------
<CAPTION>
<S> <C> <C> <C>
Continental Grain Shares 35,918,421 100% 35,918,421
Shares Issued in IPO 7,130,000 100% 7,130,000
Shares Acquired through exercise of options 1,996 100% 1,996
Shares Aquired Through Accelerated Vesting -8/15/96 1,996 100% 1,996
Shares Aquired Through Accelerated Vesting -8/15/96 53,220 100% 53,220
Shares Aquired Through Accelerated Vesting -11/19/96 3,990 100% 3,990
Shares Acquired through exercise of options - 1/23/97 5,991 100% 5,991
Shares Acquired through exercise of options - 2/19/97 3,395 100% 3,395
Shares Acquired through exercise of options - 4/11/97 11-Apr-97 30-Jun-97 5,328 88% 4,684
Shares Acquired through exercise of options - 4/30/97 30-Apr-97 30-Jun-97 5,326 67% 3,570
Shares Acquired through exercise of options - 5/9/97 09-May-97 30-Jun-97 2,995 57% 1,711
Vested Restricted Stock of former Employees 02-Apr-97 30-Jun-97 5,328 98% 5,211
Vested Restricted Stock of former Employees 11-Apr-97 30-Jun-97 5,321 88% 4,678
Secondary Equity Offering 29-May-97 30-Jun-97 3,220,000.00 35% 1,132,308
Effect of restricted shares:
Effect from April 1- June 30, 1997
Unamortized deferred comp. @ 3/31/97 15,754,726
Unamortized deferred comp. @ 6/30/97 14,415,108
-----------
30,169,834
===========
<S> <C>
Average unamortized def. comp. during the period 15,084,917.00
Tax benefit on assumed exercise:
Total Restricted Shares 1,243,168
Ave. Market Price (4/1-6/30) 32.103
-----------
Value 39,909,422
===========
Tax Effect (40%) 15,963,769
Tax Effect of compensation 10,442,611
-----------
5,521,157.72
--------------
Total Assumed Proceeds 20,606,074.72
==============
Repurchase Shares on Market
Total Assumed Proceeds 20,606,074.72
Ave. Market Price (4/1-6/30) 32.103
--------------
Number of Shares 641,873.80
==============
Incremental Shares Considered to be Outstanding
Restricted Shares 1,243,168
Repurchase Shares 641,873.80
--------------
Incremental Shares 601,294.20 100% 601,294
==============
Effect of Options:
Options Exercised:
Number of Options 5,328
Offering Price 21.11
-----------
Proceeds on exercising options 112,474.08
Tax Effect:
Options Exercised 5,328
Ave. Market Price (from 4/1 - 4/11) 30.200
-----------
Value 160,906
===========
Tax Effect (40.0%) 64,362
Tax Effect of compensation 44,990
-----------
19,372.61
--------------
Total Assumed Proceeds 131,846.69
==============
Repurchase Shares on Market
Total Assumed Proceeds 131,846.69
Ave. Market Price ( from 4/1 - 4/11) 30.200
--------------
Number of Shares 4,365.78
==============
Incremental Shares Considered to be Outstanding
Granted Options 5,328.00
Repurchase Shares 4,365.78
--------------
Incremental Shares 962.22 12% 115
==============
Options Exercised:
Number of Options 5,326
Offering Price 21.11
-----------
Proceeds on exercising options 112,431.86
Tax Effect:
Options Exercised 5,326
Ave. Market Price(from 4/1 - 4/30) 28.989
-----------
Value 154,395
===========
Tax Effect (40.0%) 61,758
Tax Effect of compensation 44,973
-----------
16,785.42
--------------
Total Assumed Proceeds 129,217.28
==============
Repurchase Shares on Market
Total Assumed Proceeds 129,217.28
Ave. Market Price ( from 4/1 - 4/30) 28.989
--------------
Number of Shares 4,457.46
==============
Incremental Shares Considered to be Outstanding
Granted Options 5,326.00
Repurchase Shares 4,457.46
--------------
Incremental Shares 868.54 33% 287
==============
Options Exercised:
Number of Options 2,995
Offering Price 21.11
-----------
Proceeds on exercising options 63,224.45
Tax Effect:
Options Exercised 2,995
Ave. Market Price (from 4/1 - 5/09) 29.300
-----------
value 87,754
===========
Tax Effect (40.0%) 35,101
Tax Effect of compensation 25,290
-----------
9,811.62
--------------
Total Assumed Proceeds 73,036.07
==============
Repurchase Shares on Market
Total Assumed Proceeds 73,036.07
Ave. Market Price (from 4/1 - 5/09) 29.300
--------------
Number of Shares 2,492.70
==============
Incremental Shares Considered to be Outstanding
Granted Options 2,995.00
Repurchase Shares 2,492.70
--------------
Incremental Shares 502.30 43% 216
==============
Options Remaining:
Number of Options, net of cancelled and exercised 2,686,783
Offering Price 21.11
-----------
Proceeds on exercising options 56,717,989.13
Tax Effect:
Options Exercised 2,686,783
Ave. Market Price (from 4/1 - 6/30) 32.103
-----------
Value 86,253,795
===========
Tax Effect (40%) 34,501,518
Tax Effect of compensation 22,687,196
-----------
11,814,322.21
--------------
Total Assumed Proceeds 68,532,311.34
==============
Repurchase Shares on Market
Total Assumed Proceeds 68,532,311.34
Ave. Market Price (from 4/1 - 6/30) 32.103
--------------
Number of Shares 2,134,763.46
==============
Incremental Shares Considered to be Outstanding
Granted Options 2,686,783.00
Repurchase Shares 2,134,763.46
--------------
Incremental Shares 552,019.54 100% 552,020
==============
Weighted Average Shares 45,425,103
First quarter income 26,873,000
Primary Earnings Per Share 0.59
</TABLE>
<PAGE>
Exhibit 11.1
ContiFinancial Corporation
1st quarter EPS calculation
<TABLE>
Fully Diluted
Weighted
# of shares weighting Ave. Shares
-------------- --------- ---------
<S> <C> <C> <C>
Continental Grain Shares 35,918,421 100% 35,918,421
Shares Issued in IPO 7,130,000 100% 7,130,000
Shares Acquired through exercise of options 1,996 100% 1,996
Shares Aquired Through Accelerated Vesting -8/15/96 1,996 100% 1,996
Shares Aquired Through Accelerated Vesting -8/15/96 53,220 100% 53,220
Shares Aquired Through Accelerated Vesting -11/19/96 3,990 100% 3,990
Shares Acquired through exercise of options - 1/23/97 5,991 100% 5,991
Shares Acquired through exercise of options - 2/19/97 3,395 100% 3,395
Shares Acquired through exercise of options - 4/11/97 11-Apr-97 30-Jun-97 5,328 88% 4,684
Shares Acquired through exercise of options - 4/30/97 30-Apr-97 30-Jun-97 5,326 67% 3,570
Shares Acquired through exercise of options - 5/9/97 09-May-97 30-Jun-97 2,995 57% 1,711
Vested Restricted Stock of former Employees 02-Apr-97 30-Jun-97 5,328 98% 5,211
Vested Restricted Stock of former Employees 11-Apr-97 30-Jun-97 5,321 88% 4,678
Secondary Equity Offering 29-May-97 30-Jun-97 3,220,000 35% 1,132,308
Effect of Restricted Shares:
Effect through June 30, 1997
Assumed Proceeds:
Unamortized deferred comp. @ 6/30/97 14,415,108
--------------
Tax benefit on assumed exercise:
Total Restricted Shares 1,243,168
Higher of Ave. Market Price
(for quarter) or ending mkt price 36.500
-----------
Value 45,375,632
===========
Tax Effect (40%) 18,150,253
Tax Effect of compensation 10,442,611
-----------
7,707,641.60
--------------
Total Assumed Proceeds 22,122,749.60
==============
Repurchase Shares on Market
Total Assumed Proceeds 22,122,749.60
Market Price (6/30) 36.500
--------------
Number of Shares 606,102.73
==============
Incremental Shares Considered to be Outstanding
Restricted Shares 1,243,168
Repurchase Shares 606,102.73
--------------
Incremental Shares 637,065.27 100.00% 637,065
==============
Effect of Options:
Options Exercised:
Options Exercised:
Number of Options 5,328
Offering Price 21.11
-----------
Proceeds on exercising options 112,474.08
Tax Effect:
Options Exercised 5,328
Price @ exercise date (4/11)
or avg higher of 20) 30.200
-----------
Value 160,906
===========
Tax Effect (40.0%) 64,362
Tax Effect of compensation 44,990
-----------
19,372.61
--------------
Total Assumed Proceeds 131,846.69
==============
Repurchase Shares on Market
Total Assumed Proceeds 131,846.69
Price @ exercise date (4/11) or avg (higher of 20) 30.200
--------------
Number of Shares 4,365.78
==============
Incremental Shares Considered to be Outstanding
Granted Options 5,328.00
Repurchase Shares 4,365.78
--------------
Incremental Shares 962.22 12% 115
==============
Options Exercised:
Number of Options 5,326
Offering Price 21.11
-----------
Proceeds on exercising options 112,431.86
Tax Effect:
Options Exercised 5,326
Price @ exercise date (4/30)
or avg (higher of 2) 28,989
-----------
Value 154,395
===========
Tax Effect (40.0%) 61,758
Tax Effect of compensation 44,973
-----------
16,785.42
--------------
Total Assumed Proceeds 129,217.28
==============
Repurchase Shares on Market
Total Assumed Proceeds 129,217.28
Price @ exercise date (4/30) or avg (higher of 2) 28.989
--------------
Number of Shares 4,457.46
==============
Incremental Shares Considered to be Outstanding
Granted Options 5,326.00
Repurchase Shares 4,457.46
--------------
Incremental Shares 868.54 33% 287
==============
Options Exercised:
Number of Options 2,995
Offering Price 21.11
-----------
Proceeds on exercising options 63,224.45
Tax Effect:
Options Exercised 2,995
Price @ exercise date(5/9)
pr avg(higher of 2) 32.375
-----------
Value 96,963
===========
Tax Effect (40.0%) 38,785
Tax Effect of compensation 25,290
-----------
13,495.47
--------------
Total Assumed Proceeds 76,719.92
==============
Repurchase Shares on Market
Total Assumed Proceeds 76,719.92
Price @ exercise date(5/9) pr avg(higher of 2) 32.375
--------------
Number of Shares 2,369.73
==============
Incremental Shares Considered to be Outstanding
Granted Options 2,995.00
Repurchase Shares 2,369.73
--------------
Incremental Shares 625.27 43% 269
==============
Options Remaining:
Number of Options 2,686,783
Offering Price 21.11
-----------
Proceeds on exercising options 56,717,989.13
Tax Effect:
Options Exercised 2,686,783
Higher of Ave. Market Price
(for quarter)or ending mkt price 36.500
-----------
Estimated value 98,067,580
===========
Tax Effect (40%) 39,227,032
Tax Effect of compensation 22,687,196
-----------
16,539,836.15
--------------
Total Assumed Proceeds 73,257,825.28
==============
Repurchase Shares on Market
Total Assumed Proceeds 73,257,825.28
Higher of Ave. Market Price (for month) or ending mkt price 36.500
--------------
Number of Shares 2,007,063.71
==============
Incremental Shares Considered to be Outstanding
Granted Options 2,686,783.00
Repurchase Shares 2,007,063.71
--------------
Incremental Shares 679,719.29 100.00% 679,719
==============
Weighted Average Shares 45,588,626
First quarter income 26,873,000
=========
Fully Dilutive Earnings Per Share 0.59
=========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CAPTION>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> JUN-30-1997
<CASH> 111,146
<SECURITIES> 1,021,279
<RECEIVABLES> 879,923
<ALLOWANCES> (2,768)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 14,032
<DEPRECIATION> 5,112
<TOTAL-ASSETS> 2,106,534
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 476
<OTHER-SE> 538,259
<TOTAL-LIABILITY-AND-EQUITY> 2,106,534
<SALES> 0
<TOTAL-REVENUES> 134,023
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 51,304
<LOSS-PROVISION> 1,311
<INTEREST-EXPENSE> 35,863
<INCOME-PRETAX> 45,545
<INCOME-TAX> 18,641
<INCOME-CONTINUING> 26,873
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,873
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.59
</TABLE>
