UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 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
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(Commission File Number)
ContiFinancial Corporation
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(Exact name of registrant as specified in its charter)
Delaware 13-3852588
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(State of other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
277 Park Avenue
New York, New York 10172
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 207-2800
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock New York Stock Exchange
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(Title of each Class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. _______
As of June 9, 1997 the aggregate market value of the voting stock held by
non-affiliates of the registrant was $356,431,735.
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The Company had 47,623,984 shares of common stock outstanding as of
June 9, 1997. -----------
Document incorporated by reference:
The information required by Part III, Items 10,11,12 and 13, is
incorporated by reference to ContiFinancial Corporation's proxy statement
which will be filed with the Securities and Exchange Commission not more
than 120 days after March 31, 1997.
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Page 2
ContiFinancial Corporation
Table of Contents
PART I.
Page
Item 1. Business ..................................................... 3
Item 2. Properties ................................................... 22
Item 3. Legal Proceedings ............................................ 22
Item 4. Submission of Matters to a Vote of Security Holders .......... 22
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters .......................................... 23
Item 6. Selected Financial Data ...................................... 24
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 26
Item 8. Financial Statements and Supplementary Data .................. 40
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ..................................... 67
PART III.
Item 10. Directors and Executive Officers of the Registrant ........... 68
Item 11. Executive Compensation ....................................... 68
Item 12. Security Ownership of Certain Beneficial Owners and ........ 68
Management
Item 13. Certain Relationships and Related Transactions ............... 68
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K ......................................................... 68
Signatures .................................................. 70
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Page 3
Item I. Business.
General
ContiFinancial Corporation together with its subsidiaries, (collectively, the
"Company" or "ContiFinancial"), engages in the consumer and commercial finance
business by originating and servicing primarily home equity loans and providing
financing and asset securitization structuring and placement services to
originators of a broad range of loans, leases, receivables and other assets.
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,
franchisee loans, commercial/multi-family loans, non-prime and sub-prime auto
loans and leases, and timeshare loans. For the years ended March 31, 1997 and
1996, the Company originated or purchased $3.9 billion and $2.3 billion,
respectively, of home equity loans through its subsidiary, ContiMortgage
Corporation ("ContiMortgage") of which $3.6 billion and $2.0 billion,
respectively, of these loans were securitized or sold. For the same periods, the
Company securitized or sold $0.7 billion and $0.2 billion of commercial real
estate loans, respectively, and $0.6 billion and $1.8 billion, respectively, of
loans and other assets for its clients. In addition, during the year ended March
31, 1997, the Company securitized and sold $43.5 million of auto loans
originated by its subsidiary Triad Financial Corporation ("Triad").
Through ContiMortgage, acquired in 1990, 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 has devoted 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, and (iv) investing in information services and
collection technologies.
There are two distinct factors that 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 Services L.L.C. ("ContiTrade") and ContiFinancial Services
Corporation ("ContiFinancial Services") to focus exclusively on providing
warehouse financing, hedging and securitization structuring and placement
services. This specific industry expertise enables the Company to minimize its
financing costs and interest rate exposure and maximize the proceeds and profits
from its securitizations and its growing servicing portfolio. From March 1991
through March 31, 1997, ContiMortgage has completed 27 AAA/Aaa-rated Real Estate
Mortgage Investment Conduit ("REMIC") securitizations totaling $7.6 billion. As
of March 31, 1997, ContiMortgage had a servicing portfolio of $6.4 billion.
During 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 100% of the outstanding stock of California Lending Group,
Inc. d/b/a United Lending Group, Inc. ("ULG"), a west coast-based home equity
lender specializing in retail originations through direct mail and telemarketing
throughout the United States, and Royal Mortgage Partners, L.P., d/b/a Royal
MortgageBanc ("Royal"), a California-based wholesale and retail originator of
home equity loans. In December 1996, the Company purchased Resource One Consumer
Discount Company, Inc. ("Resource One"), a Pennsylvania-based home equity lender
specializing in retail origination through direct mail, television,
telemarketing, referrals and other sources to generate loan inquires directly
from borrowers throughout the eastern and mid-western states. Collectively,
ContiMortgage, ContiWest (defined below), ULG, Royal and Resource One are
referred to as the "Home Equity Companies". In each case the companies acquired
were former Strategic Alliances (as discussed below) or ContiMortgage loan
origination sources.
3
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During the year ended March 31, 1997, the Company organized ContiWest
Corporation ("ContiWest"), a Nevada corporation, 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
corporation which the Company had previously had a Strategic Alliance (as
discussed below) relationship. 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 the 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.
The Company, through its subsidiary ContiTrade, provides financing and asset
securitization structuring expertise and through its subsidiary ContiFinancial
Services, provides placement services. In this area, ContiTrade's management and
execution of ContiMortgage's financing, hedging and securitization needs has
served as a model for the Company's strategic alliances with originators of a
broad range of consumer and commercial loans and other assets ("Strategic
Alliances"). The Company's strategy is to replicate its success with
ContiMortgage by (i) targeting classes of consumer and commercial loans, leases,
receivables and other assets, which 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,
receivables and other assets, and (iii) securing from these originators a
consistent flow of securitizable assets. The Company offers Strategic Alliance
clients complete balance sheet liability management, including warehouse
financing, interest rate hedging services and the structuring and placement of
asset portfolios in the form of asset-backed securities. This allows the
management of its Strategic Alliance clients to focus on expanding and improving
asset origination and servicing.
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 are 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 subordinated classes of
securitizations owned by its clients. 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 (collectively, "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.
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 March 31, 1997: 28 home equity loan
securitizations representing $2.3 billion (for clients other than
ContiMortgage), 19 equipment lease securitizations for $1.5 billion, five
adjustable rate mortgage securitizations for $642 million, seven Title I home
improvement loan securitizations for $245 million, six franchisee loan
securitizations for $312 million, seven commercial/multi-family whole loan
portfolio sales for $1.0 billion, five non-prime and sub-prime auto
securitizations for $292 million and one small business loan securitization for
$20 million.
4
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The Company currently has nine active Strategic Alliances, three specialize in
commercial loans and leases, two specialize in home equity loans, two focus on
auto loans and the remainder focus on other asset classes.
Home Equity Loan Origination and Servicing
Through ContiMortgage, the Company is a leading originator, purchaser, seller
and servicer of non-conventional 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 $3.9 billion for
the year ended March 31, 1997, representing a 90% annual compound growth rate.
In September 1996, the Company organized ContiWest to better administer and
underwrite the Company's origination portfolio.
The Company's home equity strategy is to continue its strong growth through
geographic expansion, diversification of origination sources and investments in
origination, servicing and collection information technology. One means of
implementing this strategy was through the acquisitions of ULG, Royal and
Resource One, as well as the organization of ContiWest. Royal and Resource One
provide a retail branch network throughout the west, the mid-west and the
northeast United States which complements ContiMortgage's and ContiWest's
wholesale and small broker origination sources. ULG originates home equity loans
and home improvement loans nationally through direct mail and telemarketing.
The source and geographic expansion that ULG, Royal and Resource One provide
allows the Company to channel its home equity loan products to ContiMortgage
which has been designated as the servicing and sales platform for the Company.
The full implementation of this home equity 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.
Loan Production
Origination. ContiMortgage's and ContiWest's principal loan product is a
non-conforming home equity loan with a fixed principal amount 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 factors and that cannot be
marketed to agencies, such as Ginnie Mae, Fannie Mae and Freddie Mac. 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 obtains its loans through two primary
sources in 48 states: wholesale, which represents loans purchased from mortgage
bankers and commercial banks; and broker, which represents loans referred by
brokers.
For fiscal year 1997, wholesale purchases 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 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 fiscal 1997, ContiMortgage and ContiWest purchased
loans from approximately 160 wholesale sources with no one source accounting for
more than 10% and the top five wholesale sources accounting for 19% of total
wholesale loan production.
5
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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 Sates
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, telemarketing, referrals and other sources throughout
the eastern and mid-western states. 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.
Underwriting. All home equity loans are underwritten to the Company's mortgage
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 which vary from the
underwriting guidelines. However, any variations from guidelines must be
approved by a senior underwriter or by an executive officer of ContiMortgage 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. Management estimates that the current average home
equity loan purchased or originated by ContiMortgage is approximately $64,000.
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 by owner-occupied properties, including one- to
four-family and small multifamily 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
("CLTV") of the first and second mortgages generally may not exceed 85%. If a
prior mortgage exists, the Company first 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 CLTV 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. The credit report should
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.
6
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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 and/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 LTV ratio
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-appraisals of
property (field or desk) and review of original appraisal, (iii) employment and
income verification and (iv) legal document review to ensure that the
appropriate documents are in place.
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 March 31, 1997, ContiMortgage has completed 27
AAA/Aaa-rated REMIC securitizations totaling $7.6 billion. Management has
structured the operations and processes of the Home Equity Companies
specifically for the purpose of efficiently originating, underwriting, and
servicing (ContiMortgage only) loans for securitization in order to meet the
requirements of rating agencies, credit enhancers and AAA/Aaa-rated REMIC
pass-through investors. The Company generally seeks to enter the public home
equity securitization market on a quarterly basis.
In a securitization, the Company sells the loans that it has originated or
purchased 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 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 and an estimate of annual future credit losses related to the
loans or other assets securitized (the "Excess Spread"). The majority of the
Company's gross income is recognized as gain on sale of loans or other assets,
which represents the present 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 March 31, 1997 and 1996 is interest-only or residual
certificates. Consequently, the Company's Consolidated Balance Sheets designate
Excess Spread Receivable as "interest-only and residual certificates."
The purchasers of the pass-through certificates receive a credit-enhanced
security. Credit enhancement is generally achevied by the Company's
subordination of their Excess Spread in the form of overcollateralization or
spread account structured in two forms: (i) subordination of subsidiary class of
bonds to senior classes; or (ii) an insurance policy by an AA/Aaa-rated monoline
insurance company. As a result, each offering of the senior REMIC pass-through
certificates has received ratings of AAA from Standard & Poor's Ratings Group
and Fitch Investor Services, L.P. and Aaa from Moody's Investors Service.
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The pooling and servicing agreements that govern the distribution of cash flows
from the loans included in the REMIC trusts 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 over collateralization of the REMIC
trust, 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 over collateralization, as applicable, the
monoline insurance company policy will pay any further losses experienced by
holders of the senior interests in the related REMIC trust or a subordinate
class will bear the loss. To date, there have been no calls 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, the Company actively hedges interest
rate exposure through the use of United States Treasury securities and futures
contracts.
Whole Loan Sales. From time to time, the Company will sell loans on a whole loan
or loan participation basis when and where pricing is more attractive than that
available through securitization. For the year ended March 31, 1997,
ContiMortgage and ContiWest sold $452.6 million of home equity loans in whole
loan sales or loan participations. Because cash is received when the loans are
sold, the full gain on sale is recorded at the time of sale.
Loan Servicing
Overview. The Company generally retains the right to service the home equity
loans it originates or purchases. Servicing includes collecting payments from
borrowers, remitting payments to investors who have purchased the loans,
investor reporting, accounting for principal and interest, contacting delinquent
borrowers, conducting foreclosure proceedings and disposing of foreclosed
properties. As of March 31, 1997, ContiMortgage serviced 104,568 loans in 48
states with an outstanding balance of $6.4 billion, up 66% from March 31, 1996.
ContiMortgage has developed a sophisticated computer-based mortgage servicing
operation that it believes enables it 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. The monthly investor-reporting package includes
a trial balance, accrued interest report, remittance report, and delinquency
reports.
ContiMortgage is a Fannie Mae and Freddie Mac approved seller/servicer. As such,
ContiMortgage is subject to a thorough due diligence 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.
As of March 31, 1997, ContiMortgage's $6.4 billion servicing portfolio was
earning a servicing fee of approximately 50 basis points per annum.
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
8
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account, out of principal and interest payments on over collateralized amounts
or, if necessary, from the related monoline insurance company policy.
Collections. The ContiMortgage collection department is organized into three
divisions (two collection divisions and one default division), each led by a
collection supervisor. The collection divisions are 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 with balances over $100,000. 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 foreclosure 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 been 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 procedures 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.
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Credit Quality of Home Equity Loan Servicing Portfolio.
The following table illustrates ContiMortgage's delinquency and
charge-off experience with respect to its home equity loan portfolio:
Delinquency and Default Experience of
ContiMortgage's Servicing Portfolio
of Home Equity Loans
--
<TABLE>
<CAPTION>
At March 31
1997 1996 1995 1994 1993
Principal Principal Principal Principal Principal
Balance Balance Balance Balance Balance
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Portfolio ......... $ 6,423,376 $ 3,863,575 $ 2,192,190 $ 1,105,393 $ 484,857
Delinquency
percentage (1)
30-59 days ...... 2.18% 1.81% 0.83% 0.51% 0.49%
60-89 days ...... 0.68% 0.47% 0.36% 0.19% 0.27%
90 days and over 0.38% 0.23% 0.45% 0.27% 0.44%
Total delinquency 3.24% 2.51% 1.64% 0.97% 1.20%
Total delinquency
amount ...... $ 208,084 $ 97,082 $ 35,980 $ 10,036 $ 5,794
Default percentage
(2)
Foreclosure ..... 2.90% 2.42% 0.46% 0.53% 0.83%
Bankruptcy ...... 1.15% 0.74% 0.41% 0.23% 0.69%
Real estate owned 0.52% 0.13% 0.09% 0.05% 0.18%
Forbearance ..... 0.13% 0.25% 0.20% N/A N/A
Total default ... 4.70% 3.54% 1.16% 0.81% 1.70%
Total default
amount ...... $ 302,164 $ 136,796 $ 25,486 $ 9,615 $ 8,263
---------------
(1) The delinquency percentages represent the percent of the portfolio
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.
(2) The default percentages represent the percent of the portfolio
balance of home equity loans in foreclosure, bankruptcy, real estate
owned or forbearance.
</TABLE>
10
<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>
Years Ended March 31,
(dollars in thousands)
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Average Amount Outstanding (1) ..... $ 4,845,30 $ 2,858,790 $1,663,865 $ 745,351 $ 396,910
Net losses (2) ................... $ 12,767 $ 3,781 $ 1,313 $ 1,108 $ 1,076
Net Losses after Recoveries (3) .. $ 12,719 $ 3,686 $ 1,308 $ 1,108 $ 1,036
Net Losses as a percentage
of average amount outstanding ... 0.26% 0.13% 0.08% 0.15% 0.26%
----------
(1) The average of the aggregate principal balances of the home equity
loans outstanding on the last business day of each month during the
year.
(2) Actual losses incurred on liquidated properties for each respective
period. Losses include all principal, foreclosure costs and all
accrued interest.
(3) Net losses after recoveries from deficiency judgments (net of
expenses).
</TABLE>
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.
11
<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
"A" CREDIT "B" CREDIT "C" CREDIT "D" CREDIT
GRADE GRADE GRADE GRADE
General Has good Pays the Marginal Designed to
Repayment credit but majority of credit provide a
might have accounts on history borrower
some minor time but has which is with poor
delinquency. some 30- offset by credit
and/or other history an
60-day positive opportunity
delinquency. attributes. to correct
past credit
problems
through
lower
monthly
payments.
Existing Current at Current at Cannot Must be paid
Mortgage Loans application application exceed four in full from
time and a time and a 30-day loan
maximum of maximum of delinquencies proceeds and
two 30-day three 30-day or one no more than
delinquencies delinquencies 60-day 119 days'
in the past in the past delinquency delinquency.
12 months. 12 months. in the past
12 months.
Non-Mortgage Major credit Major credit Major credit Major and
Credit and and and minor credit
installment installment installment delinquency
debt should debt can debt can is
be current exhibit some exhibit some acceptable,
but may minor minor but must
exhibit some 30-and/or 30-and/or demonstrate
minor 30-day 60-day 90-day some payment
delinquency. delinquency. delinquency. regularity.
Minor credit Minor credit Minor credit
may exhibit may exhibit may exhibit
some minor up to 90-day more serious
delinquency. delinquency. delinquency.
Bankruptcy Charge-offs, Discharged Discharged Discharged
Filings judgments, more than more than prior to
liens, and two years two years closing.
former with with
bankruptcies reestablished reestablished
are credit. credit.
unacceptable.
Debt Generally Generally Generally Generally
Service-to- not to not to not to not to
Income Ratio exceed 45%. exceed 45%. exceed 45%. exceed 50%.
Maximum
Loan-to-Value
Ratio:
Owner Occupied Generally Generally Generally Generally
80% (or 90%) 80% (or 85%) 75% (or 85%) 65% (or 70%)
for a 1 to 4 for a 1 to 4 for a 1 to 4 for a 1 to 4
family family family family
dwelling dwelling dwelling dwelling
residence; residence; residence; residence.
70% for a 65% for a 65% for a
condominium. condominium. condominium.
Non-Owner Generally Generally Generally N/A
Occupied 70% for a 1 65% for a 1 65% for a 1
to 2 family to 2 family to 2 family
dwelling, dwelling, dwelling,
65% for a 3 60% for a 3 65% for a 3
to 4 family. to 4 family. to 4 family.
Financing and Asset Securitization Services
General
The Company provides financing and asset securitization execution and expertise
to originators of a broad range of consumer and commercial loans, leases,
receivables and other assets. 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 its
subsidiaries and Strategic Alliance clients. ContiTrade provides financing and
structuring of asset-backed securities. ContiFinancial Services, a National
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<PAGE>
Association of Securities Dealers, Inc. ("NASD") member and broker/dealer,
privately places or underwrites offerings of asset-backed securities on behalf
of the Company and its finance company clients.
Strategy
Understanding the cash flow and credit characteristics associated with each of
the asset classes with which it works, ensuring that each pool of assets is
securitizable prior to funding and controlling its own warehouse take-out risk
through its placement capabilities, allows the Company to assume controlled
risks, support new business, and introduce more securitizable assets to the
institutional marketplace. The Company's strategy is to replicate its success
with ContiMortgage by (i) targeting classes of consumer and commercial loans,
leases, receivables or other assets, which 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, receivables and other assets and (iii) securing from these
originators a consistent flow of securitizable assets. The Company offers
Strategic Alliance clients complete balance sheet liability management,
including warehouse financing, interest rate hedging services and the
structuring and placement of asset portfolios in the form of asset-backed
securities. This allows the management of its Strategic Alliance clients to
focus on expanding and improving asset origination and servicing.
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 are 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. Because of the extensive time and resources that the
Company commits to a Strategic Alliance, the Company only seeks to develop and
maintain a limited number of Strategic Alliance clients in each of its business
lines.
Targeting Opportunities
As described above, the Company seeks to identify consumer and commercial loans,
leases, receivables or other assets which 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.
The due diligence process and the results thereof are outlined in a risk
memorandum. 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 made up 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.
13
<PAGE>
Client Services
The Company provides warehouse financing, whole loan purchasing, hedging, credit
enhancement and Excess Spread Receivables financing services to the Company's
subsidiaries and the Company's Strategic Alliance clients.
Warehouse Financing. The Company makes financing available to its securitization
clients through secured loans or purchase commitments to facilitate the
accumulation of securitizable assets prior to securitization ("warehouse
financing"). As of March 31, 1997, through ContiTrade, the Company had committed
$1.6 billion of financing to its third party clients, of which $566 million was
drawn down. Warehouse financing commitments are typically for a term of one year
or less and are generally 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
registered broker/dealer. The Company utilizes its asset purchase and sale
facilities with certain financial institutions ("Purchase and Sale Facilities")
and a funding agreement under an agreement to repurchase ("Repurchase
Agreement") to finance this warehouse financing.
Whole Loan Purchasing. The Company seeks opportunities to purchase assets for
sale into securitized trusts and to recognize gain on sale. The Company's
Strategic Alliance clients often seek to raise additional cash to cover the
expenses and the negative cash flow associated with securitization. Therefore,
whole loan pools of assets may be purchased by the Company from a Strategic
Alliance client and then securitized under the Company's name or the name of its
Strategic Alliance client. The Company will typically invest its capital in the
transaction through the purchase of loans at a premium and the assumption of
certain costs of securitization.
Conduits. The Company also executes its loan purchase strategy through loan
conduits. Conduits are stand-alone securitization vehicles where the
originator(s), underwriter(s), servicer(s), and seller(s) may all be different
parties coming together to generate loans to be serviced and securitized.
Conduits allow smaller originators to sell their product into a single
securitizable pool, thus benefiting 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
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 was closed in fiscal 1997 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 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
14
<PAGE>
provide such financing only to itsStrategic Alliance clients. In each case, in
return for the financing, the Company will receive ownership participations
either in the Strategic Alliance clients or in the portfolio of loans
securitized. As of March 31, 1997, the total committed amount of such financing
was $64.1 million and the amount outstanding of such financing was $35.6
million.
ContiFinancial Services
Placement of Asset-Backed Securities. Securitization, or structured finance,
expertise is the foundation upon which the Company has built its business and
executes its strategy. Since 1991 through March 31, 1997, the Company has
structured or placed over $13.9 billion of securitized assets representing over
105 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
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 (the "Commission") for up to $5.0 billion in 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.
Purchase and Sale Facilities and Repurchase Agreement
As of March 31, 1997, the Company had $2.3 billion of committed and an
additional $1.1 billion of uncommitted sale capacity under its Purchase and Sale
Facilities. The Purchase and Sale Facilities allow the Company to sell, with
limited recourse, interest in designated pools of loans and other assets. The
Company utilized the facilities to sell assets totaling $7.4 billion, $5.7
billion and $2.5 billion, in the fiscal years 1997, 1996 and 1995, respectively.
As of March 31, 1997 the Company had utilized $842.5 million of the sale
capacity under the Purchase and Sale Facilities.
Due to the implementation of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities" on January
1, 1997 (see Management Discussion and Analysis of Financial Conditions and
Results of Operations - Certain Accounting Considerations), certain of the
assets that the Company has sold under the Purchase and Sale Facilities
subsequent to January 1, 1997 did not qualify for sale treatment under the new
accounting principles and as a result $251.5 million of such assets were
included as Trade Receivables sold under agreements to repurchase (under the
Repurchase Agreement) on the Company's consolidated balance sheets. The new
accounting principle does not in any way effect the ability of the Company to
finance these assets. The Company expects to replace the Purchase and Sale
Facilities with Repurchase Agreements for those asset types which do not qualify
for sale treatment.
15
<PAGE>
Asset Classes
Since 1991, the Company has expanded the scope of its products to include
equipment leases, franchisee loans, commercial/multi-family loans, non-prime and
sub-prime auto loans and leases, and timeshare loans.
The following table illustrates the Company's securitization volume (excluding
ContiMortgage whole loan sales) and the addition of its new asset classes:
The Company's Securitization Volume
by Asset Classes
<TABLE>
<CAPTION>
Total
Years Ended March 31, By
--------------------- Asset
1997 1996 1995 1994 1993 Class
---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Home equity loans
ContiMortgage ....... $ 3,454 $ 2,030 $ 1,293 $ 772 $ 273 $ 7,822
Other ............... 250 755 340 60 148 1,553
--- --- --- -- --- -----
Total ............. $ 3,704 $ 2,785 $ 1,633 $ 832 $ 421 $ 9,375
ARMs .................. -- 505 101 36 -- 642
Equipment leasing ..... 250 190 179 178 278 1,075
Title I home .......... -- -- 149 96 -- 245
improvement loans
Franchisee loans ...... 21 145 98 48 -- 312
Commercial/multi-family
loans (1) ............. 742 186 89 -- -- 1,017
Non-prime and sub-prime
auto loans and leases . 91 162 39 -- -- 292
Small Business Loans -- 20 -- -- -- 20
------ ------ ------ ------ ------ -------
Total securitization
volume.. $ 4,808 $ 3,993 $ 2,288 $ 1,190 $ 699 $12,978
======= ======= ======= ======= ======= =======
- ---------------
(1) Includes two whole-loan sales.
</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 27 securitizations for $7.6 billion from
March 1991 through March 31, 1997, the Company also provided its services to
other clients, resulting in 28 securitizations for $2.3 billion from 1991
through March 31, 1997.
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 Strategic Alliance Equity
Interests.
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.
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
16
<PAGE>
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's strategy is to grow ContiMAP by continuing to
add additional qualified commercial lenders and by continuing to enhance its
product offerings.
Title I 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 higher cost of funds through which these assets
are typically being financed.
The Company executed securitizations, in the form of conduits where it financed
and placed Title I and conventional home improvement loans on behalf of conduit
participants and through a Strategic Alliance with one of the conduit
participants. The Company's strategy is to facilitate the growth of its
Strategic Alliance client through securitizations, 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
Strategic Alliance clients.
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 Strategic Alliance clients an outlet for a new product to offer their
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 fiscal 1997,
the Company acquired Royal, the largest contributor to the ARM conduit and
discontinued the 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. 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.
Franchisee Loans. Franchisee loans represent loans to franchisees of top tier
national restaurant chains and other franchise chains. In the Company's
securitization of franchisee 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
17
<PAGE>
capabilities combined with its unique approach to underwriting and credit
analysis, will provide it with a competitive advantage.
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.
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, a California-based auto finance company specializing in origination of
non-prime auto finance contracts for used and new vehicles. As of March 31,
1997, Triad has relationships with approximately 1,600 dealerships in 15 states,
with California representing approximately 50% of loan originations. As with
ContiMortgage, Triad utilizes centralized origination, underwriting and
servicing techniques. In January 1997, the Company purchased an additional 2.5%
of the common stock of Triad. ContiFinancial has a right and obligation to
purchase the remaining 44% of the common stock of Triad over the next 4.5 years.
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,
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 that
(ii) the lower cost of funds and greater operating leverage from securitization
can be applied successfully.
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 Company's initial public offering, (the "IPO")
were retained by the Company's parent company, Continental Grain Company
("Continental Grain"), and therefore, these assets are not reflected in the
Company's Consolidated Financial Statements included herein. The Company
currently holds Strategic Alliance Equity Interests acquired after the IPO.
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. However, in fiscal 1997, the Company received
$2.7 million of warrant income from the sale of stock warrants in a Strategic
Alliance company. In addition, the Company may, from time to time, make a direct
cash equity or subordinated debt investment in a Strategic Alliance client.
18
<PAGE>
Regulation
General. The Company's businesses are subject to extensive regulation in the
United States at both the Federal and state level. In the Company's home equity
loan and financing businesses, regulated matters include loan origination,
credit activities, maximum interest rates and finance and other charges,
disclosure to customers, the terms of secured transactions, the collection,
repossession and claims-handling procedures utilized by the Company, multiple
qualification and licensing requirements for doing business in various
jurisdictions and other trade practices. As part of the Company's financing and
asset securitization business, ContiFinancial Services is required to register
as a broker/dealer with certain Federal and state securities regulatory agencies
and is a member of the NASD.
Truth in Lending. The Truth in Lending Act ("TILA") and Regulation Z promulgated
thereunder contain disclosure requirements designed to provide consumers with
uniform, understandable information with respect to the terms and conditions of
loans and credit transactions in order to give them the ability to compare
credit terms. TILA also guarantees consumers a three day right to cancel certain
credit transactions including loans of the type originated by the Company.
Management of the Company believes that it is in compliance with TILA in all
material respects. If the Company were found not to be in compliance with TILA,
aggrieved borrowers could have the right to rescind their mortgage loan
transactions and to demand the return of finance charges paid to the Company.
In September 1994, the Riegle Community Development and Regulatory Improvement
Act of 1994 (the "Riegle Act") was enacted. Among other things, the Riegle Act
makes certain amendments to TILA. The Riegle Act generally applies to mortgage
loans (other than mortgage loans to finance the acquisition or initial
construction of a dwelling) with (i) total points and fees upon origination
exceeding eight percent of the loan amount (as adjusted for changes in the
Consumer Price Index) or (ii) an annual percentage rate of more than ten
percentage points higher than comparably maturing United States Treasury
securities ("Covered Loans"). The Company estimates that approximately 10% 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 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 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. 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
19
<PAGE>
the applicant with the name and address of the reporting agency. The Company is
also subject to the Real Estate Settlement Procedures Act of 1974, as amended,
and is required to file an annual report with the Department of Housing and
Urban Development pursuant to the Home Mortgage Disclosure Act.
In addition, the Company is subject to various other federal and state laws,
rules and regulations governing, among other things, the licensing of, and
procedures which must be followed by, mortgage lenders and servicers, and
disclosures which must be made to consumer borrowers. Failure to comply with
such laws may result in civil and criminal liability and may, in some cases,
give consumer borrowers the right to rescind their mortgage loan transactions
and to demand the return of finance charges paid to the Company.
In addition, certain of the loans purchased by the Company, such as Title I home
improvement loans, are insured by an agency of the federal government. Such
loans are subject to extensive government regulation.
Environmental Liability. In the course of its business, the Company may acquire
properties securing loans that are in default. There is a risk that hazardous or
toxic waste could be found on such properties. In such event, the Company could
be held responsible for the cost of cleaning up or removing such waste, and such
cost could exceed the value of the underlying properties.
Broker/Dealer. In the Company's capital management services business,
ContiFinancial Services acts as a placement agent and underwriter for public and
private offerings of asset-backed securities. As a result, ContiFinancial
Services is registered as a broker/dealer with the Securities and Exchange
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,
the NASD and 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 and 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 assure 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 at least 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.
20
<PAGE>
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, its reputation in the
marketplace, its existing client relationships, the ability to commit capital to
client transactions and its mix of market capabilities.
Currently, some traditional financial institutions are aggressively promoting
and pricing home equity loans. The Company does not believe that this trend has
had a material impact on its competitive position because the Company's success
is tied to its emphasis on timely customer service, on attracting borrowers
whose needs are not met by traditional financial institutions and on the equity
value of the property securing various types of loans. Nevertheless, there can
be no assurance that the Company will not face increased competition from
traditional financial institutions attempting to enter into the Company's
market.
In fiscal 1997, 78% of the total home equity loans purchased and originated by
ContiMortgage and ContiWest were wholesale loans. Wholesale loans are expected
to remain a significant part of the Company's home equity loan production
program. As a purchaser of wholesale loans, the Company is exposed to
fluctuations in the volume and cost of wholesale loans resulting from
competition from other purchasers of such loans, market conditions and other
factors.
In its financing and asset securitization business, the Company faces
significant competition from large securities firms, smaller boutique securities
firms, commercial banks, mortgage banks, credit unions, thrift institutions,
credit card issuers and finance companies. Many of the Company's competitors are
substantially larger and have more capital and other resources than the Company.
Employees
At March 31, 1997, the Company had 1,562 employees. None of the Company's
employees are represented by a labor union. The Company believes that its
relations with its employees are good.
21
<PAGE>
Item 2. Properties.
The Company's principal executive offices are located at 277 Park Avenue, New
York, New York, 10172 and are occupied under a sublease with Continental Grain.
The lease on this premises extends through February 28, 2000.
ContiMortgage's current headquarters in Horsham, Pennsylvania, and regional
offices located in Phoenix, Arizona; Orange and Pleasanton, California; Atlanta,
Georgia; Oak Brook, Illinois and Horsham, Pennsylvania are operated under leases
with third parties that expire through April 2001.
ContiMortgage is currently redeveloping a manufacturing facility in Hatboro,
Pennsylvania as its new headquarters. The facility will operate under a lease
with a third party that extends twelve years from the facility's anticipated
completion at the end of calendar 1997.
ContiFinancial Services and ContiTrade occupy office space in Santa Monica,
California under a lease with a third party that expires in September 1999.
ContiWest occupies office space in Las Vegas, Nevada under a lease with a third
party that expires in January 2000. ULG, Resource One, Royal and Triad have
various offices throughout the United States and operate under various leases
with third parties that expire through July 2003.
The Company believes that its present facilities are adequate for its current
needs.
Item 3. Legal Proceedings.
In May 1997, a class action suit was filed in the Court of Common Pleas of the
State of South Carolina naming ContiMortgage as a defendant. On June 6, 1997,
the case was removed to the United States District Court in the District of
South Carolina Florence Division. The complaint alleges violations of a state
notification law by the originator of certain home equity loans purchased by
ContiMortgage. Such law requires the originator to notify, ascertain and comply
with the preferences of borrowers as to the legal counsel employed to represent
such borrowers and as to the insurance agent to furnish the required insurance
in connection with the mortgage. The Company is currently investigating the
allegations. The suit has not yet been certified as a class action. The Company
does not believe the lawsuit will have a material adverse effect on the
consolidated financial position or results of operations of the Company.
In addition, the Company has been named as a defendant in various legal actions
arising from the conduct of its normal business activities. Although the amount
of any liability that could arise with respect to these actions cannot be
accurately predicted, in the opinion of the Company, any such liability will not
have a material adverse effect on the consolidated financial position or results
of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
22
<PAGE>
Part II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
On February 9, 1996, the Company's common stock began trading under the symbol
"CFN" on the New York Stock Exchange. The following table sets forth, for the
period indicated, the high and low closing sale price per share of the Company's
common stock:
Sales Price
-----------
High Low
---- ---
Fiscal Year Ended March 31, 1996:
Fourth Quarter $31.25 $25.50
Fiscal Year Ended March 31, 1997:
First Quarter $33.00 $28.50
Second Quarter $30.25 $23.25
Third Quarter $39.25 $28.875
Fourth Quarter $39.375 $31.00
As of June 9, 1997, the Company had 83 stockholders of record, and approximately
4,550 beneficial owners of its common stock.
During fiscal 1995 and during fiscal 1996, prior to the close of its IPO on
February 14, 1996, the Company paid cash dividends to Continental Grain of $30
million and $0.3 million, respectively. The Company has no current intention to
pay cash dividends on its Common Stock. As a holding company, the ability of the
Company to pay dividends is dependent upon the receipt of dividends or other
payments from its subsidiaries. Any future determination as to the payment of
dividends will be at the discretion of the Company's Board of Directors and will
depend upon the Company's operating results, financial condition and capital
requirements, contractual restrictions, general business conditions and such
other factors as the Company's Board of Directors deems relevant. Furthermore,
covenants in the Company's and Continental Grain Company's loan agreements
restrict the payment of dividends by the Company. There can be no assurance that
the Company will have earnings sufficient to pay a dividend on its Common Stock
or that, even if there are sufficient earnings, dividends will be permitted
under applicable law.
23
<PAGE>
Item 6. Selected Financial Data.
SELECTED FINANCIAL DATA
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income Statement Data:
- ----------------------
Gain on sale of receivables ........ $ 210,861 $ 146,529 $ 67,512 $ 49,671 $ 18,587
Interest ........................... 161,402 91,737 42,929 20,707 11,385
Net servicing income ............... 46,340 29,298 9,304 3,989 1,842
Other income ....................... 9,227 4,252 2,252 162 (147)
----- ----- ----- --- ----
Total gross income ............. 427,830 271,816 121,997 74,529 31,667
------- ------- ------- ------ ------
Expenses
Compensation and benefits .......... 82,170 52,203 23,812 14,674 6,870
Interest ........................... 120,636 74,770 29,635 12,124 6,529
Provision for loan losses .......... 3,043 285 1,935 4,499 2,018
General and administrative ......... 44,940 18,022 9,627 7,946 4,101
------ ------ ----- ----- -----
Total expenses ................. 250,789 145,280 65,009 39,243 19,518
------- ------- ------ ------ ------
Income before income taxes and
minority interest .................... 177,041 126,536 56,988 35,286 12,149
Income taxes ......................... 71,341 49,096 22,168 13,726 4,640
Minority interest of subsidiary ...... (304) 3,310 8,728 5,076 1,600
---- ----- ----- ----- -----
Net income ........................... $ 106,004 $ 74,130 $ 26,092 $ 16,484 $ 5,909
============ ============ ============ ============ ============
Primary and fully diluted earnings per
common share (pro forma at
March 31, 1996)(1) ................... $ 2.40 $ 2.00
============ ============
Fully diluted weighted average number
of shares outstanding (pro forma at
March 31, 1996) (1) ................ 44,152,343 37,050,165
========== ==========
Primary weighted average number of
shares outstanding (pro forma at
March 31, 1996) (1) .................. 44,090,095 36,995,631
========== ==========
During fiscal 1995 and 1996, the Company paid cash
dividends to Continental Grain of $30,000 and $305,
respectively.
</TABLE>
<TABLE>
<CAPTION>
As of March 31,
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
Balance Sheet Data:
- -------------------
Interest-only and residual certificates $ 445,005 $ 293,218 $ 143,031 $ 94,491 $ 51,270
Total assets .......................... 1,545,798 892,540 327,742 217,856 76,526
Payables to affiliates ................ 36,367 337,734 114,907 49,846 12,463
Long term debt ........................ 498,817 -- -- -- --
Total liabilities ..................... 1,136,726 597,721 243,579 138,513 18,743
Minority interest of subsidiary ....... 1,288 -- 16,248 7,520 2,444
Stockholders' equity .................. 407,784 294,819 67,915 71,823 55,339
- ----------
(1) Because of the Company's reorganization that occurred in December
1995 and changes in capital structure, per share data for the years
ended March 31, 1995, 1994 and 1993 are not meaningful.
</TABLE>
24
<PAGE>
SELECTED FINANCIAL DATA--(continued)
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Years Ended March 31,
---------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Other Data:
- -----------
ContiMortgage loan originations .......... $3,906,798 $2,311,471 $1,328,158 $ 786,754 $ 282,072
Number of loans serviced (at year end) ... 104,568 65,121 38,740 20,146 11,093
Face value of loans serviced (at year end) $6,423,376 $3,863,575 $2,192,190 $1,105,393 $ 484,857
Securitization and sales volume:
ContiMortgage - Securitization ........ $3,454,259 $2,030,000 $1,258,919 $ 733,182 $194,668
- Whole loan ............ 188,295 270 33,772 39,142 77,876
Commercial real estate
- Securitization 742,529 149,980 -- -- --
- Whole loan -- 36,000 89,000 -- --
Triad ................................. 43,530 -- -- -- --
Strategic alliances ................... 568,401 1,776,700 906,000 418,000 426,000
------- --------- ------- ------- -------
Total securitization and sales volume ...... $4,996,744 $3,992,950 $2,287,691 $1,190,324 $ 698,544
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Years End March 31,
-------------------
<S> <C> <C> <C> <C> <C>
ContiMortgage 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Delinquency and Loan Loss Data (1):
- -----------------------------------
Delinquency rate (at end of year) 3.24% 2.51% 1.64% 0.97% 1.20%
Default rate (at end of year) ... 4.70% 3.54% 1.16% 0.81% 1.70%
Net losses as a percentage of
average amount outstanding .... 0.26% 0.13% 0.08% 0.15% 0.26%
</TABLE>
Triad
Delinquency and Loan Loss Data : Year Ended
------------------------------ - ----------
March 31, 1997
--------------
Portfolio ........................... $ 71,648
Delinquency rate (at end of year) ... 1.17%
Net losses as a percentage of average
amount outstanding (November 1, 1996
through March 31, 1997) ............ 0.60%
(1) Includes home equity loans originated by Royal MortgageBanc,
Resource One and United Lending Group, and serviced by
ContiMortgage.
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<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This discussion should be read in conjunction with "Selected Financial Data" and
the Company's Consolidated Financial Statements and the Notes thereto. 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"), 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, Inc.
("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"), collectively called the "Acquisitions", are
discussed below:
On November 8, 1996, the Company purchased 100% of the outstanding stock of
ULG, a west coast-based home equity lender specializing in retail
originations via direct mail and telemarketing throughout the United
States.
On November 15, 1996, the Company, through its subsidiary ContiMortgage,
purchased 100% of Royal. Royal is a California-headquartered wholesale and
retail originator of fixed and adjustable rate home equity loans.
On November 21, 1996, the Company acquired a 53.5% equity interest in Triad
and an additional 2.5% in January 1997, a California-based non-prime auto
finance company. The Company has the right and obligation to acquire the
remaining common stock of Triad from existing shareholders.
On December 16, 1996, the Company, through its subsidiary ContiMortgage,
purchased 100% of the outstanding stock of Resource One. Resource One,
headquartered in Langhorne, Pennsylvania, is a retail branch home equity
26
<PAGE>
loan originator that utilizes direct mail, television, telemarketing,
referrals and other sources to generate loan inquiries directly from
borrowers.
In each case, the companies acquired were former Strategic Alliances or
ContiMortgate loan origination sources.
The Acquisitions have been accounted for as purchases, and the results of
operations have been included with the Company's results of operations since the
effective acquisition dates. The cumulative purchase price was approximately
$38.0 million, which includes deferred payments of approximately $5.0 million,
resulting in approximately $35.0 million of cost in excess of equity which will
be amortized on a straight-line basis over a 25 year useful life. Certain
acquisition's terms contain payments which are contingent upon future earnings
or employment of key management. Such contingent payments will be recorded as
purchase price or compensation as is appropriate for the nature of the payments.
The Company has a right and obligation to purchase the remaining 44% of the
common stock of Triad over the next 4.5 years. The purchase price will be based
upon the future earnings of Triad and will be recorded when determinable. The
excess of the purchase price over the fair value of the net assets acquired will
be recorded as an increase in cost in excess of equity. The Acquisitions are not
material to the financial position or results of operations of the Company.
Certain Accounting Considerations
As a fundamental part of its business and financing strategy, the Company sells
substantially all of its loans or other assets through securitization in the
form of REMICs, owner trusts or grantor trusts. In a securitization, the Company
sells loans or other assets that it has originated or purchased to a trust for a
cash purchase price and an interest in the loans or other assets securitized (in
the form of the "excess spread"). The cash purchase price is raised through an
offering of pass-through certificates by the trust. Following the
securitization, the purchasers of the pass-through certificates receive the
principal collected and the investor pass-through interest rate on the
certificate balance, while the Company receives the excess spread . The excess
spread represents, over the life of the loans or other assets, the excess of the
weighted average coupon on each pool of loans or other assets sold over the sum
of the pass-through interest rate plus a normal servicing fee, a trustee fee, an
insurance fee and an estimate of annual future credit losses related to the
loans or other assets securitized (the "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 March 31,
1997 and 1996 is interest-only and residual certificates. Consequently, the
Company's consolidated balance sheets designate Excess Spread Receivable as
"interest-only and residual certificates."
The Company recognizes the gain on sale of loans or other assets in the fiscal
year in which such loans or other assets are sold, although cash (representing
the Excess Spread and servicing fees) is received by the Company over the life
of the loans or other assets. Concurrent with recognizing such gain on sale, the
Company records the Excess Spread Receivable as an asset on its consolidated
balance sheets. The Excess Spread Receivable is reduced as cash distributions
are received from the securitization.
27
<PAGE>
Due to the fact that the gain recognized in the year of sale is equal to the
present value of the estimated future cash flows from the Excess Spread, the
amount of cash actually received over the lives of the loans or other assets
normally exceeds the gain previously recognized at the time the loans or other
assets were sold and therefore interest income is recognized over the life of
the loans or other assets securitized. In periods subsequent to the sale, the
Company may recognize an increase in fair value of Excess Spread Receivable as
gain on sale of receivables to the extent that estimates of the loan pools'
future remaining lives exceed those originally projected. This estimate of
extended life is performed by reviewing past prepayment experience and
estimating future prepayment experience by considering numerous factors which
include current market assumptions, the interest rate environment and economic
factors. If actual prepayments with respect to sold loans occur faster or credit
experience is worse than projected at the time such loans were sold, the
carrying value of the Excess Spread Receivable may have to be written down
through a charge to earnings in the period of adjustment.
Additionally, upon sale or securitization of servicing retained mortgages, the
Company capitalizes the cost associated with the right to service mortgage loans
based on its relative fair value. The Company determines fair value based on the
present value of estimated net future cash flows related to servicing income.
The cost allocated to the servicing rights is amortized in proportion to and
over the period of estimated net future servicing fee income. The Company
periodically reviews capitalized servicing fees receivable for valuation
impairment. This review is performed on a disaggregated basis for the
predominant risk characteristics of the underlying loans which are loan type,
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.
On January 1, 1997, the Company adopted the Financial Accounting Standards
Board's ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" ("SFAS 125") which addresses the accounting for transfers of
financial assets in which the transferor has some continuing involvement either
with the assets transferred or with the transferee. A transfer of financial
assets in which the transferor surrenders control over those assets is accounted
for as a sale to the extent that consideration other than beneficial interest in
the transferred assets is received in exchange. SFAS 125 requires that
liabilities and derivatives incurred or obtained by transferors as part of a
transfer of financial assets be initially measured at fair value, if
practicable. In addition, SFAS 125 requires that servicing assets and
liabilities be subsequently measured by the amortization over their estimated
life and assessment of asset impairment be based on such assets' fair value.
SFAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. The adoption of this standard did not have a material
impact on the Company's results of operations. However, certain of the assets
that the Company had sold under the Purchase and Sale Facilities subsequent to
January 1, 1997 did not qualify for sale treatment under SFAS 125 and as a
result $251.5 million of such assets were included as trade receivables sold
under agreements to repurchase on the Company's consolidated balance sheets.
SFAS 125 does not in any way effect the ability of the Company to finance these
assets. The Company expects to replace the Purchase and Sale Facilities with
repurchase agreements for those asset types which do not qualify for sale
treatment.
28
<PAGE>
Financial Condition
March 31, 1997
Securities purchased under agreements to resell increased $44.1 million from
$179.9 million at March 31, 1996 to $224.0 million at March 31, 1997. The
Company hedges, in part, its interest rate exposure on its receivables held for
sale and loans and other assets sold, with recourse, under its Purchase and Sale
Facilities, through the use of United States Treasury securities and futures
contracts. Securities purchased under agreements to resell are part of this
hedging strategy. This increase was due primarily to the increase in the
Company's securitization volume in fiscal 1997 as compared to fiscal 1996.
Interest-only and residual certificates increased $151.8 million from $293.2
million at March 31, 1996 to $445.0 million at March 31, 1997. Excluding $15.2
million of interest-only and residual certificates relating to the Acquisitions,
the March 31, 1997 balance increased by $136.6 million from March 31, 1996. This
increase represents $251.1 million recorded during fiscal 1997 relating to new
securitizations and recorded interest income of $33.7 million partially offset
by $96.5 million of sales and $51.7 million of collections.
Capitalized servicing fees receivable increased $17.7 million from $11.7 million
at March 31, 1996 to $29.4 million at March 31, 1997. This balance reflects the
capitalization of $24.0 million of servicing rights and $1.4 million of
prepayment premiums paid partially offset by amortization of $7.7 million.
Trade receivables, net increased $356.9 million from $352.3 million at March 31,
1996 to $709.2 million at March 31, 1997. Excluding $51.3 million of trade
receivables, net relating to the Acquisitions, the March 31, 1997 balance
increased by $305.6 million from March 31, 1996. This increase was primarily due
to an increase in receivables held for sale from $303.7 million as of March 31,
1996 to $574.3 million at March 31, 1997, and partially due to the increase in
other receivables from $50.5 million at March 31,1996 to $85.7 million at March
31, 1997. The increase in receivables held for sale was primarily due to the
adoption of SFAS 125 on January 1, 1997. As of March 31, 1997, $251.5 million of
receivables held for sale under the Purchase and Sale Facilities were
categorized as financing under SFAS 125 and classified as "Trade receivables
sold under agreements to repurchase". In addition to the SFAS 125
classification, there was an additional increase of $19.1 million of receivables
held for sale due to an overall increase in securitization volume from fiscal
1996 to fiscal 1997.
The increase in other receivables of $35.2 million from fiscal 1996 to fiscal
1997 was primarily due to an increase in servicing advances of $16.8 million and
an increase in short-term receivables of $17.2 million. The increase in
servicing advances was due to advances made by ContiMortgage on loans in the
servicing system. ContiMortgage, as servicer, is contractually liable to pay the
REMIC for certain delinquencies and then collects the past due amounts from the
borrower. This increase is because of an overall dollar increase in
delinquencies from fiscal 1996 to fiscal 1997. The increase in short-term
receivables is due to timing differences in receiving loan payments from third
party intermediaries.
Premises and equipment, net increased $3.8 million from $3.9 million at March
31, 1996 to $7.7 million at March 31, 1997. Excluding $3.4 million of premises
and equipment relating to the Acquisitions, the March 31, 1997 balance decreased
by $0.4 million from March 31, 1996. This decrease was primarily as a result of
office equipment acquisitions which were more than offset by the normal periodic
depreciation of owned equipment.
Cost in excess of equity increased $33.6 million from $14.6 million at March 31,
1996 to $48.2 million at March 31, 1997. The increase was primarily due to the
costs in excess of equity recorded upon the purchase of the Acquisitions made by
the Company during the third quarter of fiscal 1997.
29
<PAGE>
Other assets increased $26.8 million from $3.9 million at March 31, 1996 to
$30.7 million at March 31, 1997. Excluding the effects of the Acquisitions,
March 31, 1997 other assets increased by $24.4 million from March 31, 1996.
Other assets represents prepaid expenses, margin and other deposits, deferred
bond issuance costs and other investments. This increase is primarily due to an
increase of approximately $12.0 million of deferred issuance costs on the 8
3/8% and 7 1/2% Senior Notes (defined below), $3.7 million of prepaid shelf
registration and servicing fees and an increase of $4.3 million in escrow
deposits.
Accounts payable and accrued expenses increased $14.3 million from $73.5 million
at March 31, 1996 to $87.8 million at March 31, 1997. Excluding $6.6 million of
accounts payable and accrued expenses relating to the Acquisitions, the March
31, 1997 balance increased by $7.7 million from March 31, 1996. The balance
increased primarily due to an increase in accrued taxes payable of $14.6
million, incentive accruals of approximately $5.5 million, accruals for
securitization obligations of $4.1 million, accrued interest payable of $3.1
million, accrued pension and health care costs of approximately $1.5 million
offset by a decrease in accrued amounts payable under the Company's Purchase and
Sale Facilities of approximately $20.8 million. The increases in accrued taxes
payable, and accruals for securitization obligations were due to increased
securitization volume, producing higher net income in fiscal 1997. The increase
in incentive accruals in fiscal 1997 as compared to fiscal 1996 was due to the
deferral of payments. The increase in accrued pension and healthcare costs was
due to an increase in the number of employees (excluding the Acquisitions) to
703 in fiscal 1997 as compared to 455 employees in fiscal 1996. The decrease in
accrued amounts payable under the Company's Purchase and Sale Facilities was due
to a timing difference in the amounts payable under these obligations.
Securities sold but not yet purchased increased $44.4 million from $180.7
million at March 31, 1996 to $225.1 million at March 31, 1997. The Company
hedges, in part, its interest rate exposure on its receivables held for sale and
loans and other assets sold with recourse under its Purchase and Sale Facilities
through the use of United States Treasury securities and futures contracts.
Securities sold but not yet purchased are part of this hedging strategy. This
increase was due primarily to the increase in the Company's securitization
volume in fiscal 1997 from fiscal 1996.
Payables to affiliates decreased $301.3 million from $337.7 million at March 31,
1996 to $36.4 million at March 31, 1997. In connection with the Company's IPO on
February 14, 1996, Continental Grain Company ("Continental Grain") provided
financing with three notes totaling $324.0 million. These notes were refinanced
principally with the net proceeds of the Senior Notes, as defined below. The
remaining balance of Payables to affiliates at March 31, 1997 represents amounts
due under a services agreement and a tax sharing agreement with Continental
Grain.
Short-term borrowed funds represents borrowings from a $200.0 million unsecured
revolving credit facility the Company entered into on January 8, 1997. At March
31, 1997, $25.0 million of drawings under this line were outstanding.
On August 14, 1996, the Company issued the $300.0 million 8 3/8% unsecured
senior notes due 2003 (the "8 3/8% Senior Notes") and on March 12, 1997, the
Company issued the $200.0 million unsecured 7 1/2% senior notes due 2002 (the "7
1/2% Senior Notes") (collectively the "Senior Notes"), resulting in $498.5
million of the balance sheet increase in Long-term debt from March 31, 1996. The
Senior Notes were issued at a discount which is being amortized over the life of
the Senior Notes. The remaining $0.3 million of long-term debt represents
amounts payable under a long term capitalized lease.
Other liabilities increased $6.3 million from $5.8 million at March 31, 1996 to
$12.1 million at March 31, 1997. Excluding the effects of the Acquisitions,
March 31, 1997 other liabilities increased by $5.9 million from March 31, 1996.
The increase is primarily due to the accrual of contingent payments relating to
the Acquisitions.
30
<PAGE>
Stockholders' equity increased $113.0 million from $294.8 million at March 31,
1996 to $407.8 million at March 31, 1997 due to net income of $106.0 million,
the amortization of deferred compensation of $6.7 million and the exercise of
stock options of $0.3 million. Excluding the effect of the Acquisitions, March
31, 1997, stockholders' equity increased by $109.4 million from March 31, 1996.
Results of Operations
Year Ended March 31, 1997 Compared to Year Ended March 31, 1996 and Year Ended
March 31, 1995
The Company's total gross income increased $156.0 million or 57% to $427.8
million in fiscal 1997 as compared to $271.8 million of total gross income in
fiscal 1996 which in turn increased $149.8 million or 123% from total gross
income of $122.0 million for fiscal 1995. Excluding the effects of the
Acquisitions, fiscal 1997 gross income increased by $123.9 million from fiscal
1996. The Company's total expenses as a percentage of total gross income
increased to 59% in fiscal 1997 from 53% in fiscal 1996 and fiscal 1995. As a
result, net income for fiscal 1997 increased $79.9 million or 306% to $106.0
million compared to net income of $26.1 million in fiscal 1995. Excluding the
Acquisitions during the third quarter of fiscal 1997, net income increased by
$76.3 million from fiscal 1995.
On a percentage basis, the following table sets forth the composition of the
Company's results as a percentage of total gross income for the periods
indicated:
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------
<S> <C> <C> <C>
Gross income 1997 1996 1995
---- ---- ----
Gain on sale of receivables ................. 49.28% 53.91% 55.34%
Interest .................................... 37.73% 33.75% 35.19%
Net servicing income ........................ 10.83% 10.78% 7.63%
Other income ................................ 2.16% 1.56% 1.84%
---- ---- ----
Total gross income ....................... 100.00% 100.00% 100.00%
------ ------ ------
Expenses
Compensation and benefits ................... 19.21% 19.21% 19.52%
Interest .................................... 28.20% 27.51% 24.29%
Provision for loan losses ................... 0.71% 0.10% 1.59%
General and administrative .................. 10.50% 6.63% 7.89%
----- ---- ----
Total expenses ............................ 58.62% 53.45% 53.29%
----- ----- -----
Income before income taxes and minority interest 41.38% 46.55% 46.71%
Income taxes ................................... 16.67% 18.06% 18.17%
Minority interest .............................. -0.07% 1.22% 7.15%
---- ---- ----
Net income ............................... 24.78% 27.27% 21.39%
===== ===== =====
</TABLE>
31
<PAGE>
Income. The increase in total gross income was due to a greater volume of loans
originated as a result of the expansion of the Company's wholesale and broker
origination sources. The following table sets forth information regarding the
components of the Company's total gross income in each of the last three fiscal
years ending on March 31:
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Gain on sale of receivables $210,861 $146,529 $ 67,512
Interest .................. 161,402 91,737 42,929
Net servicing income ...... 46,340 29,298 9,304
Other income .............. 9,227 4,252 2,252
----- ----- -----
Total gross income ........ $427,830 $271,816 $121,997
======== ======== ========
</TABLE>
Gain on sale of receivables was the primary component of total gross income,
comprising 49%, 54% and 55% of total gross income in fiscal 1997, 1996 and 1995,
respectively. Gain on sale of receivables increased $64.3 million or 44% in
fiscal 1997 as compared to fiscal 1996 which in turn increased by $79.0 million
or 117% from fiscal 1995. Excluding $26.5 million of gain on sale of receivables
relating to the Acquisitions, the fiscal 1997 balance increased by $37.8 million
or 26% from fiscal 1996. Gain on sale of receivables as a percentage of total
gross income was lower in fiscal 1997 due to an increased outstanding balance of
interest earning assets resulting in increased interest income.
Gain on sale of receivables represents income primarily from the structuring and
sale of pools of home equity loans originated by ContiMortgage and Strategic
Alliance clients of the Company in REMICs, 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, self-storage facilities,
Title I home improvement loans, franchisee loans, 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, leases and other assets structured and an increased
gain on sale percentage. Excluding contributions from the Acquisitions, the
Company structured and sold $4.9 billion of mortgages, loans and leases in
fiscal 1997, an increase of $0.9 billion from fiscal 1996, which contributed
$32.7 million of the increase in gain on sale of receivables, and structured and
sold $4.0 billion of mortgages, loans and leases in fiscal 1996, an increase of
$1.7 million from fiscal 1995, which contributed $62.6 million of the increase
in gain on sale of receivables.
The gain on sale percentage represents the differential between the interest
rate earned on underlying securitized loans, leases or other assets and the
pass-through rate paid to the securitization investors during the estimated life
of the loans, leases or other assets. The increase in the gain on sale
percentage was primarily due to the type of assets securitized and changes in
the yield curve. The larger gain on sale percentage in fiscal 1997 as compared
to fiscal 1996 was partially due to an increased proportion of ContiMortgage
securitizations which yield higher gain on sale percentages than securitizations
and placements for Strategic Alliance clients. In fiscal 1997, ContiMortgage
securitizations represented 75% of total volume as compared to 51% for fiscal
1996 and 57% for fiscal 1995. This contributed to a gain of 13 basis points in
Excess Spread or a $5.1 million increase in gain on sale of receivables in
fiscal 1997 as compared to fiscal 1996. The combination of the $32.7 million
increase due to increased volume and the $5.1 million increase due to an
increase in the percentage of ContiMortgage assets securitized resulted in a
total increase in gain on sale of receivables from fiscal 1996 to fiscal 1997 of
$37.8 million.
32
<PAGE>
In fiscal 1996 as compared to fiscal 1995, the relationship between interest
rates and maturity caused an increase in the gain on sale percentage. As the
Company originates and sells loans and leases based on the interpolated United
States Treasury interest rate plus a negotiated additional interest spread, the
gain on sale of receivables is affected by unequal movements in interest rates
at various maturities. The interpolated Treasury interest rate is based on the
Company's estimate of the average life of the pool of loans or leases. In fiscal
1996 as compared to fiscal 1995, the yield curve steepened which contributed an
additional 72 basis points to Excess Spread or $16.4 million of the increase in
gain on sale of receivables. The combination of the $16.4 million increase due
to the yield curve and the $62.6 million increase due to increased volume
resulted in a total increase in gain on sale of receivables from fiscal 1995 to
fiscal 1996 of $79.0 million. The gain on sale as a percentage of loans
securitized and sold for fiscal 1997, 1996 and 1995 was 4.2%, 3.7% and 3.0%,
respectively.
Interest income increased $69.7 million or 76% in fiscal 1997 from fiscal 1996
and $48.8 million or 114% in fiscal 1996 from fiscal 1995. Excluding the effects
of the Acquisitions, fiscal 1997 interest income increased by $65.9 million, or
72% from fiscal 1996. Interest income represents interest earned on loans
originated or purchased by the Company during the period from 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 $50.1 million to
the increase between fiscal 1996 and fiscal 1997 and $35.5 million to the
increase between fiscal 1995 and fiscal 1996. The increase in interest earned on
loans originated and purchased was due primarily to the increase in the average
balance of loans originated and purchased but not yet securitized during the
periods, an increase of $715.6 million in fiscal 1997 as compared to fiscal 1996
and an increase of $591.5 million in fiscal 1996 as compared to fiscal 1995. The
recognition of the increased value of the discounted Excess Spread Receivables
over time, due to an increase in interest-only and residual certificates, as
previously discussed, accounted for $12.8 million of the increase in interest
income between fiscal 1996 and fiscal 1997 and $13.3 million of the increase
between fiscal 1995 and fiscal 1996.
Net servicing income increased $17.0 million or 58% in fiscal 1997 compared to
fiscal 1996 and $20.0 million or 215% in fiscal 1996 compared to fiscal 1995 due
to the increase in the size of the servicing portfolio, the volume of loan sales
and securitizations and, in fiscal 1996, a change in accounting principles.
Excluding the effects of the Acquisitions, fiscal 1997 net servicing income
increased by $16.5 million, or 56% from fiscal 1996. The Company's home equity
loan servicing portfolio increased $2.5 billion or 66% to $6.4 billion at March
31, 1997 from March 31, 1996 and $1.7 billion or 76% to $3.9 billion at March
31, 1996 from March 31, 1995 . The growth of the servicing portfolio contributed
$11.9 million of the increase between fiscal 1996 and fiscal 1997, and $8.3
million of the increase between fiscal 1995 and fiscal 1996. Additionally, net
servicing income increased by $4.6 million in fiscal 1997 as compared to fiscal
1996 due to capitalized servicing income associated with the 79% increase in the
ContiMortgage home equity loan sales and securitizations during the same period.
In fiscal 1996 as compared to fiscal 1995 the capitalization of servicing fees
increased servicing income by $11.7 million as servicing fees were not
capitalized in fiscal 1995.
Other income increased $4.9 million or 114% to $9.2 million in fiscal 1997 as
compared to fiscal 1996 and increased $2.0 million or 87% to $4.3 million in
fiscal 1996 as compared to fiscal 1995. Excluding the effects of the
Acquisitions, fiscal 1997 other income increased by $3.7 million or 86% from
fiscal 1996. Other income consists primarily of "purchase premium refunds" and
for fiscal 1997, warrant 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 provide that a portion of
such purchase premium will be repaid if individual loans are repaid within a
contractually set time period. The income from "purchase premium refunds"
33
<PAGE>
increased due to the increase in ContiMortgage origination volume. The fiscal
1997 warrant income received consists of $2.7 million of income from the sale of
stock warrants in a Strategic Alliance company.
Expenses. Total expenses for fiscal 1997 increased $105.5 million or 73% from
fiscal 1996 which in turn increased $80.3 million or 123% from fiscal 1995.
Excluding the effects of the Acquisitions, fiscal 1997 total expenses increased
by $77.0 million or 53% from fiscal 1996. These increases in total expenses were
due to the increase in number of employees and costs associated with increased
mortgage volume and increased interest costs from financing larger balances of
securitizable loans.
The following table sets forth the components of the Company's expenses for each
of the last three fiscal years.
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Compensation and benefits $ 82,170 $ 52,203 $ 23,812
Interest 120,636 74,770 29,635
Provision for loan losses 3,043 285 1,935
General and administrative 44,940 18,022 9,627
------ ------ -----
Total expenses $250,789 $145,280 $ 65,009
======== ======== =========
</TABLE>
Compensation and benefits increased $30.0 million or 57% in fiscal 1997 compared
to fiscal 1996 and increased $28.4 million or 119% in fiscal 1996 as compared to
fiscal 1995. Excluding $16.1 million of compensation and benefits relating to
the Acquisitions, fiscal 1997 compensation and benefits expense increased by
$13.9 million or 27% from fiscal 1996. The increase was primarily due to the
addition of new personnel, changes in and accruals under incentive compensation
plans, vesting of restricted common stock and commissions paid to certain
employees based upon volume of loan originations. On March 31, 1997, the Company
had 1,562 employees, 859 from the Acquisitions, as compared to 455 employees on
March 31, 1996 and 234 employees on March 31, 1995. This increase primarily
contributed to a $14.0 million increase in compensation costs in fiscal 1997
compared to fiscal 1996, excluding the Acquisitions, and a $6.4 million increase
in compensation costs in fiscal 1996 as compared to fiscal 1995. The fiscal 1997
accrual for incentive compensation was $23.2 million as compared to $28.0
million in fiscal 1996 and $12.4 million in fiscal 1995, which contributed to a
$4.8 million decrease in compensation costs in fiscal 1997 compared to fiscal
1996 and a $15.6 million increase in fiscal 1996 compared to fiscal 1995. In
connection with the IPO, shares of "restricted" common stock were granted to
certain key employees. The "restricted" common stock granted, subject to the
employee's continued employment with the Company, generally vests between
February 14, 1996 and March 31, 2000. The expense related to the vesting of
"restricted" common stock increased by $1.7 million to $6.7 million during
fiscal 1997 from fiscal 1996 restricted stock expense of $5.0 million. The
commissions paid to certain ContiMortgage employees increased $3.0 million and
$1.4 million from fiscal 1996 to fiscal 1997 and fiscal 1995 to fiscal 1996,
respectively, associated with increased ContiMortgage origination volume.
Compensation and related expenses represents 19% of total gross income for
fiscal 1997 and 1996 and 20% of total gross income for fiscal 1995.
Interest expense increased $45.9 million or 61% in fiscal 1997 as compared to
fiscal 1996 and increased $45.1 million or 152% in fiscal 1996 as compared to
fiscal 1995. Excluding the effects of the Acquisitions, fiscal 1997 interest
expense increased by $45.3 million or 61% from fiscal 1996. This increase was
primarily a result of interest expense associated with the issuance of the
Senior Notes, the costs of the sale, with limited recourse, of certain Excess
Spread Receivables, increased expenses from the Purchase and Sale Facilities and
an overall increase in the cost of borrowing offset by decreased borrowing from
Continental Grain. The average borrowings from Continental Grain, Purchase and
Sale Facilities, the Senior Notes and Excess Spread Receivables sold with
limited recourse, increased by $621.3 million in fiscal 1997 as compared to
34
<PAGE>
fiscal 1996, resulting in a $43.5 million increase in interest expense, while
such average increased $627.4 million in fiscal 1996, as compared to fiscal 1995
resulting in a $43.0 million increase in interest expense. The increase in
interest rates contributed $1.8 million to the increase in interest expense
between fiscal 1997 as compared to fiscal 1996 and the increase in interest
rates contributed $2.1 million in fiscal 1996 as compared to fiscal 1995.
Provision for loan losses increased to $3.0 million in fiscal 1997 as compared
to $0.3 million in fiscal 1996 and $1.9 million in fiscal 1995. Excluding $2.4
million of provision for loan losses relating to the Acquisitions, the fiscal
1997 balance increased by $0.3 million from fiscal 1996. 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
Purchase and Sale Facilities, prior to sale or securitization. The increase in
fiscal 1997 as compared to fiscal 1996 and the decrease in fiscal 1996 as
compared to fiscal 1995 resulted from a determination of adequate reserves in
light of actual loss experience during the period.
General and administrative expenses increased $26.9 million or 149% in fiscal
1997 compared to fiscal 1996 and $8.4 million or 87% in fiscal 1996 compared to
fiscal 1995. Excluding $9.4 million of general and administrative expenses
relating to the Acquisitions, the fiscal 1997 balance increased by $17.5
million, or 97% from fiscal 1996. The increases were partially a result of a
$7.1 million and a $3.7 million increase in costs associated with underwriting,
originating and servicing higher loan volumes in fiscal 1997 as compared to
fiscal 1996 and fiscal 1996 as compared to fiscal 1995, respectively. In fiscal
1997, the origination volume increased 69% as compared to fiscal 1996 and 74% in
fiscal 1996 as compared to fiscal 1995. Expenses related to the implementation
of collection technology accounted for approximately $1.3 million of the
increase in fiscal 1997 as compared to fiscal 1996. The remaining increases were
primarily due to an increase in general and administrative expenses related to
the increase in the number of employees by 248, excluding employees of the
Acquisitions, from fiscal 1996 to fiscal 1997 and the increase of 221 employees
from fiscal 1995 to fiscal 1996.
Income Taxes. The Company's provision for income taxes was $71.3 million, $49.1
million and $22.2 million for fiscal 1997, fiscal 1996 and fiscal 1995,
respectively. The Company is included in the consolidated Federal income tax
return of Continental Grain. The increase in taxes over the three fiscal years
is directly related to the increase in income before taxes and minority interest
over the same period. The effective tax rate for each year remained relatively
consistent at 39% to 40%. Increases in the effective tax rate were due to
changes in the provision for state income taxes.
Minority Interest. In fiscal 1996 and fiscal 1995, minority interest represents
the portion of income before taxes and minority interest due to the 20% minority
shareholders of ContiMortgage. Minority interest decreased $5.4 million or 62%
in fiscal 1996 compared to fiscal 1995. This decrease in minority interest was
directly related to the change in the Company's ownership percentage of
ContiMortgage. On June 19, 1995, ContiTrade Services Corporation ("ContiTrade
Services") effectively acquired control of the remaining 20% minority interest
in ContiMortgage, which became a wholly-owned subsidiary of ContiFinancial
Corporation. Accordingly, the fiscal 1996 results of operations include
approximately three months of minority interest of $3.3 million, while the
comparable period of fiscal 1995 reflected 12 months of minority interest of
$8.7 million.
In fiscal 1997, minority interest represents the portion of loss before taxes
and minority interest due to the 44% minority shareholders of Triad. In the
third and fourth quarters of fiscal 1997, the Company acquired 56% of the common
stock of Triad. Minority interest was ($0.3) million for the period ended March
31, 1997.
35
<PAGE>
Liquidity and Capital Resources
In a securitization, the Company recognizes a gain on the sale of loans or
assets securitized upon the closing of the securitization, but does not receive
the cash representing such gain until it receives the Excess Spread, which is
payable over the actual life of the loan or other assets securitized. The
Company incurs significant expenses in connection with a securitization and
incurs both current and deferred tax liabilities as a result of the gain on
sale. Therefore, the Company requires continued access to short and long term
external sources of cash to fund its operations. The Company's primary cash
requirements are expected to include the funding of: (i) mortgage, loan and
lease originations and purchases pending their pooling and sale; (ii) the points
and expenses paid in connection with the acquisition of wholesale loans; (iii)
fees and expenses incurred in connection with its securitization program; (iv)
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 its tax obligations under a Tax Sharing
Agreement with Continental Grain or to tax authorities; (vii) interest and
principal payments under the Senior Notes; (viii) the costs of the Purchase and
Sale Facilities; (ix) interest payments under the unsecured revolving credit
facility; and (x) the cost of any new acquisitions that the Company may pursue.
As a result of its growing securitization program, the Company has operated, and
expects to continue to operate, on a negative cash flow basis, which is expected
to increase as the volume of its loan and asset purchases and originations
increases and its securitization program grows. During fiscal 1995, 1996 and
1997, the Company securitized and sold in the secondary market $2.3 billion,
$4.0 billion and $5.0 billion of loans, respectively. The Company used $153.2
million, $300.5 million and $35.3 million of cash in operations during fiscal
1997, 1996 and 1995, respectively.
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 fiscal 1995, 1996 and 1997, the
Company recognized gain on sale of receivables in the amounts of $67.5 million,
$146.5 million, and $210.9 million, respectively. 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 trade receivables sold under agreements to
repurchase, the sale of Excess Spread Receivables, the sale of the Senior Notes
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 $2.3 billion of committed sale capacity under its Purchase and
Sale Facilities with various financial institutions as of March 31, 1997. The
Purchase and Sale Facilities allow the Company to sell, with limited recourse,
interests in designated pools of loans and other assets. These agreements
36
<PAGE>
generally have one year renewable terms (one Purchase and Sale Facility has a
two-year term), all of which will expire between May 1997 and June 1998. On
March 31, 1997, the Company utilized $590.7 million of the capacity under these
facilities. The Company currently anticipates that it will be able to renew
these facilities when they expire and to obtain additional facilities.
On March 31, 1997, the Company entered into a funding agreement under an
agreement to repurchase ("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 asset. This agreement
has a one year renewable term which expires January 1998. The Company currently
anticipates that it will be able to renew this facility when it expires and to
obtain additional facilities.
The Company sells Excess Spread Receivables, with limited recourse, to provide
cash to fund the Company's securitization program. These sales aggregated $50.0
million in fiscal 1995, $54.5 million in fiscal 1996 and $96.5 million in fiscal
1997. At March 31, 1997, $144.9 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.
In order to fund the Company's growth prior to the IPO, Continental Grain
provided the Company with intercompany financing ("Intercompany Debt"). To
refinance the Intercompany Debt, simultaneously with the completion of the IPO,
Continental Grain purchased from the Company a $125 million five-year note
issued under an indenture (the "Indenture Note"), a $74 million four-year note
(the "Four Year Note") and a $125 million term note (the "Term Note") for $324
million in aggregate (collectively, the "Notes").
On August 14, 1996, the Company issued the 8 3/8% Senior Notes maturing August
15, 2003. Interest on these notes is payable semiannually on February 15 and
August 15 commencing February 15, 1997. The 8 3/8% Senior Notes are redeemable
as a whole or in part, at the option of the Company, at any time or from time to
time, at a redemption price equal to the greater of (i) 100% of their principal
amount and (ii) the sum of the present values of the remaining scheduled
payments of principal and interest thereon discounted to the date of redemption
on a semiannual basis at the treasury yield plus 50 basis points, plus in each
case, accrued interest to the date of redemption. Proceeds to the Company, net
of underwriting fees, market discount and other costs were $287.7 million. Of
this amount, $125.0 million was used by the Company to repay in full the Term
Note payable to Continental Grain and the remaining funds have been used for
general corporate purposes, including funding loan originations and purchases,
supporting securitization transactions and other working capital needs.
On January 8, 1997, the Company closed a $200 million unsecured revolving credit
facility. The three-year facility has several interest rate pricing
alternatives, including those based on LIBOR and federal funds rates. The
facility will be used for general corporate and liquidity purposes.
On March 12, 1997, the Company issued the 7 1/2% Senior Notes maturing March 15,
2002. Proceeds to the Company, net of underwriting fees, market discount and
other costs were $197.7 million. Interest on these notes is payable
semi-annually on March 15 and September 15 commencing September 15 ,1997. This
amount, together with other funds of the Company, were used to repay in full the
Indenture Note and the Four Year Note payable to Continental Grain which
constituted all of the remaining financing indebtedness due to Continental
Grain.
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.
37
<PAGE>
The net proceeds from the IPO, the issuance of the 8 3/8% and the 7 1/2% Senior
Notes and the June 4, 1997 primary offering, 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. Sales of the loans, leases and other assets through
securitizations, the sale of loans under the Purchase and Sale Facilities, the
sale of Excess Spread Receivables and the June 4, 1997 primary offering of
2,800,000 shares of common stock, together with cash on hand, are expected to be
sufficient to fund the Company's liquidity requirements for at least the next 12
months if the Company's future operations are consistent with management's
current growth expectations. The Company has no commitments for additional
financing and there can be no assurance that the Company will be successful in
consummating any such financing transactions in the future on terms that the
Company would consider to be favorable. Furthermore, no assurance can be given
that Continental Grain will provide such financing if the Company is unable to
obtain third party financing or that the terms of the Continental Grain debt
agreements will permit the Company to obtain such financing.
During fiscal 1995 and during fiscal 1996, prior to the close of its IPO on
February 14, 1996, the Company paid cash dividends to Continental Grain of $30
million and $0.3 million, respectively. The Company has no current intention to
pay cash dividends on its Common Stock. As a holding company, the ability of the
Company to pay dividends is dependent upon the receipt of dividends or other
payments from its subsidiaries. Any future determination as to the payment of
dividends will be at the discretion of the Company's Board of Directors and will
depend upon the Company's operating results, financial condition and capital
requirements, contractual restrictions, general business conditions and such
other factors as the Company's Board of Directors deems relevant. Furthermore,
covenants in the Company's and Continental Grain's loan agreements restrict the
payment of dividends by the Company. There can be no assurance that the Company
will have earnings sufficient to pay a dividend on its Common Stock or that,
even if there are sufficient earnings, dividends will be permitted under
applicable law.
Effects of Accounting Pronouncements
On January 1, 1997, the Company adopted the SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities".
See "Certain Accounting Considerations" for discussion of the statement and its
impact on the Company's financial condition and results of operations.
In February 1997, the FASB issued SFAS No. 128 "Earnings Per Share ("EPS")"
("SFAS 128") which is effective in fiscal 1998, early application is not
permitted. 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 fiscal 1997 results of
operations, the Company's basic EPS would have been $2.44 (pro forma) of
earnings per common share based on net income of $106,004 and weighted-average
number of common shares of 43,361,253 (pro forma). Fully dilutive EPS remains
the same under SFAS 128 but will be referred to as diluted EPS.
Forward-looking Statements
Certain statements contained in this Annual Report Form 10-K 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
38
<PAGE>
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.
39
<PAGE>
Item 8. Financial Statements and Supplementary Data.
CONTIFINANCIAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Public Accountants 41
Consolidated Balance Sheets as of March 31, 1997 and 1996 42
Consolidated Statements of Income for the years ended March 31, 1997, 1996
and 1995 43
Consolidated Statements of Changes in Stockholders' Equity for the years
ended March 31, 1997, 1996 and 1995 44
Consolidated Statements of Cash Flows for the years ended March 31, 1997,
1996 and 1995 45
Notes to Consolidated Financial Statements 46
</TABLE>
40
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of ContiFinancial Corporation:
We have audited the accompanying consolidated balance sheets of ContiFinancial
Corporation (a Delaware corporation) and subsidiaries as of March 31, 1997 and
1996, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ContiFinancial Corporation as
of March 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 1997, in conformity
with generally accepted accounting principles.
New York, New York
May 8, 1997 (except with respect
to the matter discussed in Note 14,
as to which the date is June 4, 1997)
41
<PAGE>
<TABLE>
<CAPTION>
CONTIFINANCIAL CORPORATION
Consolidated Balance Sheets
as of March 31, 1997 and 1996
(dollars in thousands, except share data)
March 31,
---------
1997 1996
---- ----
Assets
<S> <C> <C>
Cash and cash equivalents ................................................... $ 51,200 $ 32,479
Restricted cash ............................................................. 464 620
Securities purchased under agreements to resell ............................. 223,962 179,875
Interest-only and Residual Certificates .................................... 445,005 293,218
Capitalized servicing fees receivable ....................................... 29,353 11,689
Trade receivables:
Receivables held for sale ................................................ 625,545 303,679
Other receivables ........................................................ 87,353 50,470
Allowance for loan losses ................................................ (3,747) (1,824)
------ ------
Total trade receivables, net ............................................. 709,151 352,325
------- -------
Premises and equipment, net of accumulated depreciation of $4,298
and $2,497 as of March 31, 1997 and 1996, respectively .................. 7,789 3,906
Cost in excess of equity .................................................... 48,200 14,573
Other assets ................................................................ 30,674 3,855
------ -----
Total assets ........................................................ $ 1,545,798 $ 892,540
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable and accrued expenses ....................................... $ 87,770 $ 73,459
Securities sold but not yet purchased ....................................... 225,131 180,729
Trade receivables sold under agreements to repurchase ....................... 251,539 --
Payables to affiliates:
Due to affiliates ........................................................ 36,367 13,734
Notes payable ............................................................ -- 324,000
------- -------
Total payables to affiliates ............................................... 36,367 337,734
------ -------
Short-term borrowed funds ................................................... 25,000 --
Long-term debt .............................................................. 498,817 --
Other liabilities ........................................................... 12,102 5,799
------ -----
Total liabilities ................................................... 1,136,726 597,721
--------- -------
Commitments and contingencies
Minority interest of subsidiary ............................................. 1,288 --
Stockholders' equity:
Preferred stock (par value $0.01 per share; 25,000,000 shares authorized;
none issued at March 31, 1997 and 1996) ................................. -- --
Common stock (par value $0.01 per share; 250,000,000 shares authorized;
44,390,335 and 44,378,953 shares issued at March 31, 1997 and 1996,
respectively) ............................................................ 444 444
Paid-in capital .......................................................... 295,029 294,701
Retained earnings ........................................................ 128,652 22,648
Treasury Stock (27,931 and 0 shares of common stock, at cost as of
March 31, 1997 and 1996, respectively) ................................... (586) --
Deferred Compensation ................................................... (15,755) (22,974)
------- -------
Total stockholders' equity .......................................... 407,784 294,819
------- -------
Total liabilities and stockholders' equity .......................... $ 1,545,798 $ 892,540
=========== ===========
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
42
<PAGE>
CONTIFINANCIAL CORPORATION
Consolidated Statements of Income
for the years ended March 31, 1997, 1996 and 1995
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Gross income
Gain on sale of receivables ................................. $ 210,861 $ 146,529 $ 67,512
Interest .................................................... 161,402 91,737 42,929
Net servicing income ........................................ 46,340 29,298 9,304
Other income ................................................ 9,227 4,252 2,252
----- ----- -----
Total gross income ..................................... 427,830 271,816 121,997
------- ------- -------
Expenses
Compensation and benefits ................................... 82,170 52,203 23,812
Interest (includes $18,598, $22,635, and $10,234
for the years ended March 31, 1997, 1996
and 1995, respectively, to affiliates) ................ 120,636 74,770 29,635
Provision for loan losses ................................... 3,043 285 1,935
General and administrative .................................. 44,940 18,022 9,627
------ ------ -----
Total expenses ......................................... 250,789 145,280 65,009
------- ------- ------
Income before income taxes and
minority interest ....................................... 177,041 126,536 56,988
Income taxes 71,341 49,096 22,168
------ ------ ------
Income before minority interest ................................ 105,700 77,440 34,820
Minority interest of subsidiary ................................ (304) 3,310 8,728
---- ----- -----
Net income ............................................. $ 106,004 $ 74,130 $ 26,092
============ ============ ============
Primary and fully diluted earnings per common share (pro forma
at March 31, 1996) ............................................. $ 2.40 $ 2.00
============ ============
Fully diluted weighted average number of shares outstanding
(pro forma at March 31, 1996) .................................. 44,152,343 37,050,165
========== ==========
Primary weighted average number of shares outstanding (pro forma
at March 31, 1996) at March 31, 1996) .......................... 44,090,095 36,995,631
========== ==========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
</TABLE>
43
<PAGE>
44
CONTIFINANCIAL CORPORATION
Consolidated Statements of Changes in Stockholders' Equity
for the years ended March 31, 1997, 1996 and 1995
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
Common
Stock Total
----- -----
Number Paid-in Retained Treasury Deferred Stockholders
of Shares Amount Capital Earnings Stock Compensation Equity
--------- ------ ------- -------- ----- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1995 .... $ 3,100 $ 1 $ 34,000 $ 33,914 $ -- $ -- $ 67,915
Capital contribution ......... -- -- 10,000 -- -- -- 10,000
Net income for the period
from April 1, 1995 to
February 8, 1996 ............. -- -- -- 51,482 -- -- 51,482
Cash dividend paid ........... -- -- -- (305) -- -- (305)
----- ----- ----- ----- ----- ----- -----
Balance at February 8, 1996 .. 3,100 1 44,000 85,091 -- -- 129,092
Reorganization:
Transfer of stock ......... (3,100) (1) -- -- -- -- (1)
Common stock issued ....... 35,918,421 359 84,732 (85,091) -- -- --
Common stock issued in
public offering ............ 7,130,000 72 138,041 -- -- -- 138,113
Issuance of restricted stock . 1,330,532 13 27,928 -- -- (27,941) --
Net income for the period
from February 9, 1996
to March 31, 1996 ............ -- -- -- 22,648 -- -- 22,648
Amortization of deferred
compensation ................. -- -- -- -- -- 4,967 4,967
----- ----- ----- ----- ----- ----- -----
Balance at March 31, 1996 .... 44,378,953 444 294,701 22,648 -- (22,974) 294,819
Net income ................... -- -- -- 106,004 -- -- 106,004
Exercise of options .......... 11,382 -- 240 -- -- -- 240
Forfeiture of restricted stock -- -- -- -- (712) 712 --
Restricted stock awards ...... -- -- 88 -- 126 (214) --
Amortization of deferred
compensation ................. -- -- -- -- -- 6,721 6,721
----- ----- ----- ----- ----- ----- -----
Balance at March 31, 1997 .... 44,390,335 $ 444 $ 295,029 $ 128,652 $ (586) $ (15,755) $ 407,784
========== ======= ============ ============ ====== ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
44
<PAGE>
CONTIFINANCIAL CORPORATION
Consolidated Statements of Cash Flows
for the years ended March 31, 1997, 1996 and 1995
(dollars in thousands)
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------
<S> <C> <C> <C>
Cash flows from operating activities: 1997 1996 1995
---- ---- ----
Net income .......................................................... $ 106,004 $ 74,130 $ 26,092
Adjustments to reconcile net income to net cash
used in operating activities:
Amortization of deferred compensation ............................ 6,721 4,967 --
Depreciation and amortization .................................... 4,536 1,690 555
Provision (benefit) for deferred taxes ........................... 5,680 3,830 (3,080)
Provision for loan losses ........................................ 3,043 285 1,935
Net changes in operating assets and liabilities:
Decrease in restricted cash ...................................... 156 140 164
Increase in interest-only and residual certificates .............. (150,701) (150,187) (48,540)
Increase in capitalized servicing fees receivable ................ (17,664) (11,689) --
Increase in receivables held for sale:
Originations and purchases .................................... (16,094,071) (12,532,051) (4,986,561)
Sales and principal repayments ................................ 15,774,222 12,304,078 4,951,227
Increase in other receivables .................................... (34,858) (33,924) (8,499)
Increase in accounts payable and accrued expenses ................ 7,908 31,356 24,207
Increase in trade receivables sold under agreements to
repurchase .................................................... 251,539 -- --
Increase (decrease) in securities purchased under
agreements to resell and securities sold but
not yet purchased ............................................. 315 3,887 (4,789)
(Increase) decrease in minority interest of subsidiary ........... (325) 3,310 8,728
Other, net ....................................................... (15,689) (279) 3,225
------- ---- -----
Net cash used in operating activities ........................ (153,184) (300,457) (35,336)
-------- -------- -------
Cash flows from investing activities:
Acquisitions of subsidiaries (net of cash acquired) .................. (28,277) (34,600) --
Purchase of property and equipment ................................... (3,535) (2,643) (1,816)
------ ------ ------
Net cash used in investing activities ......................... (31,812) (37,243) (1,816)
------- ------- ------
Cash flows from financing activities:
Net increase (decrease) in due to affiliates ........................ 17,972 (94,451) 67,666
Net increase (decrease) in notes payable to affiliates .............. (324,000) 324,000 --
Increase in short-term borrowed funds ............................... 25,000 -- --
Increase in long-term debt .......................................... 498,423 -- --
Debt issuance costs ................................................. (12,982) -- --
Other, net .......................................................... (696) -- --
Net proceeds from initial public common stock offering .............. -- 138,113 --
Dividends paid ...................................................... -- (305) (30,000)
----- ---- -------
Net cash provided by financing activities .................... 203,717 367,357 37,666
Net increase in cash and cash equivalents .............................. 18,721 29,657 514
Cash and cash equivalents at beginning of year ........................ 32,479 2,822 2,308
------ ----- -----
Cash and cash equivalents at end of year ............................... $ 51,200 $ 32,479 $ 2,822
============ ============ ============
Supplemental schedule of noncash financing activities:
For the year ended March 31, 1996, Continental Grain Company
forgave intercompany debt of $10,000 and such amount was
capitalized as a capital contribution.
The accompanying notes to consolidated financial statements are
an integral part of these statements.
</TABLE>
45
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1997, 1996 and 1995
(dollars in thousands)
1. BACKGROUND AND BASIS OF PRESENTATION
ContiFinancial Corporation ("ContiFinancial" or the "Company") was incorporated
as a Delaware corporation on September 29, 1995. The accompanying consolidated
financial statements include the accounts of the Company and its direct wholly
or majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Reorganization
Prior to February 14, 1996, the consolidated financial statements present the
financial condition and results of operations of the Company which includes its
directly wholly-owned subsidiaries: ContiSecurities Asset Funding Corp.
("CSAF"), ContiSecurities Asset Funding II, L.L.C. ("CSAF II"), ContiFunding
Corporation ("CFC"), ContiTrade Services L.L.C. ("CTS"), ContiMortgage
Corporation ("CMC") (all Delaware corporations or limited liability companies)
and ContiFinancial Services Corporation ("CSC"), a New York corporation.
On February 14, 1996, ContiFinancial closed an initial public offering in the
United States and internationally (the "IPO") of approximately 16% of its common
stock. In the reorganization that occurred in December 1995 (the
"Reorganization"), (i) ContiTrade Services Corporation ("CTSC") transferred
certain of its businesses (excluding its trade finance business) to CTS and the
common stock of its subsidiaries, CMC and CSC, and its interest-only and
residual certificates to Continental Grain Company ("Continental Grain") and
(ii) Continental Grain transferred all of the common stock of CMC, CSC, CSAF and
CFC, all of the members' interest held by it in CTS and CSAF II and the
transferred interest-only and residual certificates (See Note 7) to
ContiFinancial. As a result, ContiFinancial owns all of the common stock or
members' interests in CTS, CMC, CSC, CFC, CSAF and CSAF II (collectively, the
"Previous Companies"). Prior to the IPO, both ContiFinancial and the Previous
Companies (exclusive of CMC) were direct or indirect wholly-owned subsidiaries
of Continental Grain. As described in Note 6, on June 19, 1995, CTSC effectively
acquired control of the remaining 20% minority interest in CMC, which became a
wholly-owned subsidiary of CTSC.
As a result of the Reorganization, the Company issued 35,918,421 shares of
common stock to Continental Grain. Additionally, the Company converted $84,732
of the Previous Companies retained earnings to paid-in capital.
The consolidated financial statements for the periods prior to the IPO have been
combined to reflect the Reorganization accounted for similar to a pooling of
interests method. All material intercompany transactions have been eliminated in
the combination. The Consolidated Financial Statements include additional
charges and liabilities related to expenses incurred by Continental Grain for
the Previous Companies, which historically had not been allocated to the
Previous Companies. These charges include corporate service charges from
Continental Grain and income taxes (See Note 7.).
46
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements (continued)
March 31, 1997, 1996 and 1995
(dollars in thousands)
Acquisitions
In fiscal 1997, the Company acquired 100% of three home equity companies,
California Lending Group, Inc., d/b/a United Lending Group, Inc. ("ULG"),
Resource One Consumer Discount Company, Inc. ("Resource One"), and Royal
Mortgage Partners, L.P., d/b/a Royal MortgageBanc ("Royal") and 56% of an auto
finance company, Triad Financial Corporation ("Triad"), collectively, the
"Acquisitions". In each case, the companies acquired were former Strategic
Alliances or CMC loan origination sources. The Acquisitions have been accounted
for as purchases, and the results of operations have been included with the
Company's results of operations since the effective acquisition date. ( See Note
6.).
Other
The Company organized ContiWest Corporation ("CWC"), a Nevada corporation, in
fiscal 1997 to administer and underwrite a portion of the Company's origination
portfolio. Other direct or indirect wholly-owned subsidiaries were also
organized in fiscal 1997.
2. NATURE OF BUSINESS
The Company engages in the consumer and commercial finance business by
originating and servicing home equity loans and providing financing and asset
securitization expertise to originators of a broad range of loans, leases and
receivables. Securitization provides significant benefits, including greater
operating leverage and reduced costs of funds, in the financing of assets, such
as non-conforming home equity loans, equipment leases, home improvement loans,
franchisee loans, commercial/multi-family loans, non-prime and sub-prime auto
loans and leases and timeshare loans. The Company considers this business to be
one operating segment.
Through CMC and CWC, the Company is an originator, purchaser and servicer of
home equity loans made to borrowers who may not otherwise qualify for
conventional loans. The loans are then sold to whole-loan investors or
securitized in the form of Real Estate Mortgage Investment Conduits ("REMICs"),
owner trusts or grantor trusts. All of the mortgages are sold on a servicing
retained basis. The outstanding principal balance in CMC's mortgage servicing
portfolio at March 31, 1997 and March 31, 1996 was $6,423,376 and $3,863,575,
respectively. Through CTS and CSC, the Company provides complete balance sheet
liability management, including warehouse financing, interest rate hedging
services and the structuring and placement of asset portfolios in the form of
asset-backed securities to CMC, the Acquisitions and other originators
("Strategic Alliances") of consumer and commercial loans, leases, receivables
and other assets (collectively, the "Receivables"). The Strategic Alliances
provide ContiFinancial with a consistent flow of securitizable Receivables. In
certain of the Strategic Alliances, CTSC receives warrants or warrant-like
equity participations ("Strategic Alliance Equity Interests") in the Strategic
Alliance client. The Strategic Alliance Equity Interests in existence prior to
the IPO are held by Continental Grain and as such are not reflected in
ContiFinancial's consolidated financial statements. Strategic Alliance Equity
Interests received from Strategic Alliance clients subsequent to the IPO have
been granted to ContiFinancial. If such Strategic Alliance Equity Interests
develop a readily determinable fair value, the Strategic Alliance Equity
Interests will be recorded at fair value. If such value is not determinable, the
Strategic Alliance Equity Interests will be recorded at cost adjusted for write
downs for impairments as appropriate.
47
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements (continued)
March 31, 1997, 1996 and 1995
(dollars in thousands)
The Company's business may be affected by many factors including real estate and
other asset values, the level of and fluctuations in interest rates, changes in
the securitization market and competition. In addition, the Company's operations
require continued access to short and long term sources of cash.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of reserves and expenses during the reporting period.
Actual results could differ from these estimates.
Income Recognition
Gain on sale of receivables is recognized upon delivery and acceptance of loans,
leases or receivables by whole-loan investors or upon the securitization of the
Receivables in the form of REMICs, owner trusts or grantor trusts, as
applicable. Gains from sales of whole-loans are calculated based upon the
difference between the net sales proceeds and the net carrying amount of the
loans sold. Gains on sales of Receivables from securitizations represent the
present value of the differential between the interest rate earned on the
Receivables sold and the pass-through rate paid to the securitization investors,
after considering the effects of estimated prepayments, defaults and other
costs, including normal servicing fees, less the costs of originating such
Receivables, and the gain or loss on certain transactions structured as an
economic hedge that are designed to minimize the risk of interest rate
fluctuations.
Interest income is recorded as earned. Interest income represents the interest
earned on the loans and leases during the warehousing period (the period prior
to their securitization) and the recognition of interest income on the
interest-only and Residual Certificates, which is the recognition of the
increased time value of the discounted interest-only and Residual Certificates
over time. Receivables are placed on non-accrual status when the loans become
sixty days past due. When a loan is classified as non-accrual, the accrual of
interest income ceases, and all interest income previously accrued and unpaid on
such loans is reversed.
Income Taxes
The Company is included in the consolidated Federal income tax return of
Continental Grain. The Company has a tax sharing arrangement with Continental
Grain whereby Federal income taxes are computed on a separate company basis.
Federal income taxes are settled through the due to affiliates accounts.
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes"
("SFAS 109"). SFAS 109 utilizes the balance sheet method and deferred taxes are
determined based on the estimated future tax effects of differences between the
financial statement and tax basis of assets and liabilities given the provision
of the enacted tax laws.
48
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements (continued)
March 31, 1997, 1996 and 1995
(dollars in thousands)
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of no more than three months to be cash equivalents.
Restricted Cash
As of March 31, 1997 and 1996, the Company had restricted cash of $464 and $620,
respectively, related to the sale of mortgage loans with limited recourse to a
counterparty. The amount of cash required to be restricted is based on a
percentage of the outstanding balance of the loans sold.
Securities Purchased Under Agreements to Resell and Securities Sold But Not Yet
Purchased
In order to hedge the interest rate risk on loan purchases and commitments, the
Company sells short United States Treasury securities which match the duration
of the Receivables and purchases the securities under agreements to resell.
Securities sold but not yet purchased are recorded on a trade date basis and are
carried at their sale amount. The unrealized gain or loss on these instruments
is deferred and recognized upon securitization as an adjustment to the carrying
value of the hedged asset.
Securities purchased under agreements to resell are recorded on a trade date
basis and are carried at the amounts at which the securities will be
subsequently resold, plus accrued interest. The agreements mature through May
1997 and have interest rates ranging from 4.9% to 5.4%.
Interest-only and Residual Certificates
The Company purchases Receivables for the purpose of securitization and sale.
The Company securitizes the Receivables primarily into the form of a REMIC. A
REMIC is a multi-class security structure with certain tax advantages which
derives its monthly principal paydowns from a pool of underlying mortgages. The
senior classes of the REMICs are sold, with the subordinated classes retained by
the Company. The subordinated classes are in the form of interest-only and
residual certificates. These subordinated classes of REMICs represent an
interest in the REMIC, or in other minor cases an owner trust or a grantor
trust, as compared to the right to receive funds under the form of retained or
capitalized excess servicing assets.
In accordance with the provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", the Company classifies subordinated
classes of REMICs, owner trusts and grantor trusts as "trading securities" and,
as such, they are recorded at fair value with the resultant unrealized gain or
loss recorded in the results of operations in the period of the change in fair
value. The Company determines fair value based on a discounted cash flow
analysis. The cash flows are estimated as the excess of the weighted average
coupon on each pool of Receivables sold over the sum of the pass-through
interest rate plus a normal servicing fee, a trustee fee, an insurance fee and
an estimate of annual future credit losses related to the Receivables
securitized, over the life of the Receivables. These cash flows are projected
over the life of the Receivables using prepayment, default, and interest rate
assumptions that market participants would use for similar financial instruments
subject to prepayment, credit and interest rate risk and are discounted using an
interest rate that a purchaser unrelated to the seller of such a financial
instrument would demand. The fair valuation includes consideration of the
49
<PAGE>
following characteristics: loan type, size, interest rate, date of origination,
term and geographic location. The Company also uses other available information
such as externally prepared reports on prepayment rates, interest rates,
collateral value, economic forecasts and historical default and prepayment rates
of the portfolio under review.
Receivables Held for Sale/Trade Receivables Sold Under Agreements to Repurchase
Receivables held for sale are mortgages, loans, leases and other assets the
Company plans to sell or securitize and other related assets including deposits
made with financial institutions. Receivables held for sale are stated at the
lower of cost, the origination costs plus accrued interest, or market. Market
value is determined by outstanding commitments from investors or current
investor yield requirements plus any deferred hedging gain less any deferred
hedging loss calculated on the aggregate loan basis. The carrying amount of
receivables held for sale is a reasonable estimate of fair value based on
current pricing of whole-loan transactions.
On January 1, 1997, the Company adopted SFAS No. 125 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS
125") which addresses the accounting for transfers of financial assets in which
the transferor has some continuing involvement either with the assets
transferred or with the transferee. A transfer of financial assets in which the
transferor surrenders control over those assets is accounted for as a sale to
the extent that consideration other than beneficial interest in the transferred
assets is received in exchange. SFAS 125 requires that liabilities and
derivatives incurred or obtained by transferors as part of a transfer of
financial assets be initially measured at fair value, if practicable. In
addition, SFAS 125 requires that servicing assets and liabilities be
subsequently measured by the amortization over their estimated life and
assessment of asset impairment be based on such assets' fair value. SFAS 125 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. The adoption of this standard did not have a material impact on
the Company's results of operations. However, certain of the assets that the
Company has sold under the Purchase and Sale Facilities subsequent to January 1,
1997 did not qualify for sale treatment under SFAS 125 and as a result are
accounted for on the balance sheet of the Company on a trade date basis and are
carried at their sale amount of $251,539 as of March 31, 1997. In the opinion of
management, SFAS 125 does not in any way effect the ability of the Company to
finance these assets.
Capitalized Servicing Fees Receivable
Effective April 1, 1995, the Company adopted SFAS No. 122 "Accounting for
Mortgage Servicing Rights" ("SFAS 122") which requires that upon sale or
securitization of servicing retained mortgages, companies capitalize the cost
associated with the right to service mortgage loans based on their relative fair
values. Effective January 1, 1997, SFAS 122 was superseded by SFAS 125, as
discussed above, with minor amendments. The Company determines fair value based
on the present value of estimated net future cash flows related to servicing
income. The cost allocated to the servicing rights is amortized in proportion to
and over the period of estimated net future servicing fee income.
Prior to the adoption of SFAS 122, income related to servicing rights acquired
through loan origination activities was recorded in the period the loans were
serviced. Under SFAS 122 and SFAS 125, the Company capitalized, at fair value,
$24,004 and $13,828 of such costs during the years ended March 31, 1997 and
1996, respectively. During the same periods, amortization of capitalized
servicing rights were $7,676 and $2,139, respectively. Also increasing the
capitalized servicing fees receivable were prepayment premiums paid during the
50
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements (continued)
March 31, 1997, 1996 and 1995
(dollars in thousands)
year ended March 31, 1997 of $1,336. At March 31, 1997 and 1996 the capitalized
servicing rights approximated fair value. The Company periodically reviews
capitalized servicing fees receivable for valuation impairment. This review is
performed on a disaggregated basis for the predominant risk characteristics of
the underlying loans which are loan type, 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.
Other Receivables
Other receivables consist primarily of amounts relating to the origination and
execution of securitization transactions which include advances made to
Strategic Alliances to finance their purchase of interest-only and residual
certificates, servicing advances, short-term receivables, mortgage loan
advances, and accrued interest on loans and other receivables.
Allowance for Loan Losses
The allowance for loan losses represents an amount considered by management to
be adequate to cover estimated losses and valuation adjustments related to the
balance of mortgage and non-prime auto receivables held for sale and mortgage
receivables sold with limited recourse. The allowance for loan losses is based
upon periodic analysis of the portfolio, economic conditions and trends,
historical credit loss experience, borrowers' ability to repay and collateral
values. The Company's charge-off policy is based on a review of each individual
receivable.
Premises and Equipment, Net of Accumulated Depreciation
Property and equipment are carried at cost and depreciated on a straight-line
basis over the estimated useful lives of the assets. Leasehold improvements are
amortized over the lesser of the useful lives of the improvements or term of the
leases. The estimated useful lives of property and equipment and leasehold
improvements are between two to twelve years.
Other Assets
Other assets is comprised of prepaid expenses, margin and other deposits,
deferred bond issuance costs and other investments. Certain of these assets are
periodically reviewed for impairment.
Stock Based Compensation
In October 1995, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") which is
effective beginning in fiscal 1997. SFAS 123 allows companies either to continue
to account for stock-based employee compensation plans under existing accounting
standards or adopt a fair value based method of accounting for stock options as
compensation expense over the service period (generally the vesting period) as
defined in the new standard. SFAS 123 requires that if a company continues to
account for stock options under Accounting Principles Board ("APB") Opinion No.
51
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements (continued)
March 31, 1997, 1996 and 1995
(dollars in thousands)
25, it must provide pro forma net income and earnings per share information "as
if " the new fair value approach had been adopted. The Company will continue to
account for stock based compensation under APB Opinion No. 25 and made the
required disclosures in fiscal 1997 (See Note 9.).
Recent Accounting Pronouncements
In February 1997, the FASB issued SFAS No. 128 "Earnings Per Share ("EPS")"
("SFAS 128") which is effective in fiscal 1998, early application is not
permitted. 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 fiscal 1997 results of
operations, the Company's basic EPS would have been $2.44 (pro forma) of
earnings per common share based on net income of $106,004 and weighted-average
number of common shares of 43,361,253 (pro forma). Fully dilutive EPS remains
the same under SFAS 128 but will be referred to as diluted EPS.
Consolidated Statements of Cash Flows--Supplemental Disclosures
Total interest paid was $119,223, $71,539, and $29,635 for the years ended March
31, 1997, 1996, and 1995, respectively. Total income taxes paid were $45,624,
$896, and $441 for the years ended March 31, 1997, 1996 and 1995, respectively.
For the year ended March 31, 1997, federal income taxes were paid, on a current
basis, to Continental Grain in accordance with the provisions of the tax sharing
agreement (See Note 7.). As such, these amounts were included in total income
taxes paid for the year ended March 31, 1997. Prior to the IPO, federal income
taxes were included in due to affiliates, which was not repaid to Continental
Grain on a current basis, and as such were not included in total income taxes
paid for the years ended March 31, 1996 and 1995.
Pro Forma Earnings Per Common Share and Earnings Per Common Share
Due to the Reorganization and the issuance of common stock in the IPO, net
earnings per common share for the year ended March 31, 1996 have been computed
on a pro forma basis, assuming the Reorganization occurred at the beginning of
fiscal 1996, and includes the number of common shares issued by the Company in
the IPO from the date of issuance plus the effect of common stock equivalent
shares under the restricted stock awards and stock options plans (See Note 9.)
from that same date. Because of the Company's Reorganization and changes in
capital structure, per share data for the year ended March 31, 1995 is not
meaningful.
Net earnings per common share for the year ended March 31, 1997 have been
computed using the weighted average number of common shares outstanding during
the year, after giving effect of common stock equivalents issued under the "1995
Long-Term Stock Incentive Plan" (See Note 9.).
Reclassifications
Certain reclassifications of prior years' amounts have been made to conform to
the current year presentation.
52
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements (continued)
March 31, 1997, 1996 and 1995
(dollars in thousands)
4. STOCKHOLDERS' EQUITY
The stockholders' equity as of March 31, 1995 reflects the combined common
stock, paid-in capital and retained earnings of the Previous Companies.
CMC is subject to minimum capital requirements imposed by the states in which it
operates, with the highest being $250. In addition, CMC is required by the U.S.
Department of Housing and Urban Development to maintain minimum capital of $250
plus an amount based on the volume of Federal Housing Authority business.
Furthermore, CMC is required by the Federal National Mortgage Association
("FNMA") to maintain minimum capital of $250 plus .20% of the principal balance
of the portfolio being serviced for FNMA.
CSC is registered as a broker/dealer with the Securities and Exchange Commission
and is subject to the SEC's Uniform Net Capital Rule 15c3-1, under which the
ratio of aggregate indebtedness to net capital, as those are defined, may not
exceed 15 to 1.
5. ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses and related additions and deductions to the
allowance for the years ended March 31, 1997,1996, and 1995, were as follows:
<TABLE>
<CAPTION>
Balance at Additions Charged Deductions
Year Ended Beginning Acquired from to Costs and and Balance at End
March 31, of Year Acquisitions Expenses Reversals of Year
--------- ------- ------------ -------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
1997 $ 1,824 $ 1,547 $ 3,043 $(2,667) $ 3,747
1996 1,808 -- 285 (269) 1,824
1995 2,401 -- 1,935 (2,528) 1,808
</TABLE>
The deductions in the allowance for loan losses for the years ended March 31,
1997, 1996, and 1995 relate to the reversal of reserves and net loan
charge-offs.
53
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements (continued)
March 31, 1997, 1996 and 1995
(dollars in thousands)
6. ACQUISITIONS
On June 19, 1995, CTSC effectively acquired control of the remaining 20%
minority interest of CMC for $34,600. The acquisition has been accounted for by
the purchase method of accounting. Associated cost in excess of equity is being
amortized over 25 years on a straight-line basis. The Company assesses the
future useful life of this asset whenever events or changes in circumstances
indicate that the current useful life has diminished. The Company considers the
future undiscounted cash flows of the acquired business in assessing the
recoverability of this asset. If the fair value of the estimated future
undiscounted cash flows from this business is lower than the carrying value of
this asset, and the decline is deemed to be other than temporary, the Company
will write down the asset to fair value.
The March 31, 1996 consolidated statement of income of the Company reflects the
entire results of the operations of CMC for the period from June 19, 1995 to
March 31, 1996.
The pro forma results of operations of the Company for the year ended March 31,
1996 would be as follows to reflect the acquisition of the minority interest as
if the acquisition occurred as of April 1, 1995: Gross income of $271,816, Net
income of $77,319 and pro forma primary and fully diluted earnings per common
share of $2.09.
On November 8, 1996, the Company purchased 100% of the outstanding stock of ULG,
a west coast-based home equity lender specializing in retail originations via
direct mail and telemarketing throughout the United States. On November 15,
1996, the Company, through its subsidiary CMC, purchased 100% of Royal, a
California-based wholesale and retail originator of fixed and adjustable rate
home equity loans. On November 21, 1996, the Company purchased 53.5% of the
common stock of Triad and an additional 2.5% of the common stock in January
1997. Triad is a California-based auto finance company specializing in
origination of non-prime auto finance contracts for used and new vehicles. On
December 16, 1996, the Company, through its subsidiary CMC, purchased 100% of
the outstanding stock of 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. In each case the
companies acquired were former Strategic Alliances or CMC loan origination
sources. These transactions have been accounted for as purchases, and the
results of operations have been included with the Company's results of
operations since the effective acquisition dates. The cumulative purchase price
was approximately $38,000, which includes deferred payments of approximately
$5,000. As a result of the acquisitions, approximately $35,000 of cost in excess
of equity was recorded which will be amortized on a straight-line basis over a
25 year useful life. Certain acquisition's terms contain payments which are
contingent upon future earnings or employment of key management. Such contingent
payments will be recorded as purchase price or compensation as is appropriate
for the nature of the payments. The Company has a right and obligation to
purchase the remaining 44% of the common stock of Triad over the next 4.5 years.
The purchase price will be based upon the future earnings of Triad and will be
recorded, when determinable. The excess of the purchase price over the fair
value of the net assets acquired will be recorded as an increase in cost in
excess of equity. The Acquisitions are not material to the financial position or
results of operations of the Company.
54
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements (continued)
March 31, 1997, 1996 and 1995
(dollars in thousands)
7. RELATED PARTY TRANSACTIONS
Notes Payable
In connection with the IPO (See Note 1.), the Company entered into a note
purchase agreement with Continental Grain, pursuant to which Continental Grain
purchased from the Company a $125,000 five-year note issued under an indenture
(the "Indenture Note"), a $74,000 four-year note (the "Four Year Note") and a
$125,000 term note (the "Term Note") for $324,000 in the aggregate
(collectively, the "Notes"). As of March 12, 1997 the intercompany debt was paid
in full and the Company is no longer subject to the covenants of the
intercompany debt.
The Company is indirectly subject to the financial covenants of Continental
Grain's debt agreements which restrict dividends by less than wholly-owned
subsidiaries. If these covenants are still in place at the time the Company
decides to declare a dividend, a waiver from the related lenders would have to
be obtained.
Due to Affiliates
Prior to the IPO, Continental Grain provided interest bearing and non-interest
bearing funds to support operations of the Company. On February 14, 1996, this
support of operations was replaced by the Notes. The interest bearing funds
("Interest Bearing Funds") provided by Continental Grain were subject to
interest charges which represent Continental Grain's all inclusive weighted
average cost of short term funds (the "FMA Rate"). Interest expense incurred at
the FMA Rate was $19,584 and $10,234 for the years ended March 31, 1996 and
1995, respectively.
The average Interest Bearing Funds for the years ended March 31, 1996 and 1995,
were $325,355 and $160,659, respectively. The weighted average interest rates
charged on the Interest Bearing Funds for the years ended March 31, 1996 and
1995 were 6.88% and 6.37%, respectively.
The March 31, 1997 and 1996 due to affiliates balance represents payments due on
the Services Agreement, the Tax Sharing Agreement, the Employee Benefits
Allocation Agreement and the Sublease Agreement, as defined below. The March 31,
1996 due to affiliates balance also included accrued interest due to Continental
Grain under the terms of the Notes.
Affiliate Charges
Continental Grain incurs certain general and administrative expenses that
support the Company's operations. Expenses directly attributable to the Company,
such as occupancy and communication charges, are directly charged to the
Company. Other general and administrative expenses indirectly charged relate to
support services such as treasury functions, tax services, human resource
management, information technology, internal audit functions, insurance
management, legal services, and others. The amount of such expenses was $1,749,
$1,907 and $2,848 for the years ended March 31, 1997, 1996 and 1995,
respectively.
The determination of expenses incurred by Continental Grain applicable to the
Company is based first, on identifying specific expenses that are directly
attributable to its operations and second, on estimating that portion of general
and administrative expenses of Continental Grain used to support the operations
55
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements (continued)
March 31, 1997, 1996 and 1995
(dollars in thousands)
of the Company based on the service hours attributable to the Company and the
asset base of the Company. Management believes that the method of allocation of
general and administrative expenses is reasonable.
On February 14, 1996, the Company entered into an agreement with Continental
Grain (the "Services Agreement") under which Continental Grain agrees to
continue to provide the Company certain corporate services, including treasury
administration, risk management, internal audit, Federal and state tax
(including payroll) administration, management information and communication
support services, public affairs, and facilities management through March 31,
1999 and from year-to-year thereafter.
Interest-only and Residual Certificates Transfer
On February 14, 1996, the Company entered into an agreement with Continental
Grain to transfer $60,701 of its interest-only and residual certificates at book
value to Continental Grain in order to reduce the amount of due to affiliates to
$324,000 on such date. Based upon management's valuation of these interest-only
and residual certificates and other sales transactions with unrelated third
parties, the Company believes that the book value of such interest-only and
residual certificates represented the fair value of such interest-only and
residual certificates.
Tax Sharing Agreement
On February 14, 1996, Continental Grain and the Company entered into a tax
sharing agreement (the "Tax Sharing Agreement") which (i) defines their
respective rights and obligations with respect to Federal, state, local and all
other taxes for all taxable periods both prior to and after the IPO and (ii)
governs the conduct of all audits and other tax controversies relating to the
Company. Pursuant to the Tax Sharing Agreement, the Company will be charged or
credited, as the case may be, for its Federal income tax liability or refund
that would have been payable or received by the Company for such year, or
portion thereof, determined as if the Company had filed a separate Federal
income tax return computed in accordance with prevailing Federal income tax laws
and regulations as applied to the Company as if it were a separate taxpayer.
Employee Benefits Allocation Agreement
On February 14, 1996, Continental Grain and the Company entered into an employee
benefits allocation agreement (the "Employee Benefits Allocation Agreement")
which permits the Company's employees to continue to participate in the
Continental Grain employee benefit plans. The cost of the Company's employees'
participation in these programs will be allocated to the Company based on the
actual cost of benefit accruals and an allocated cost of administration of the
plans and overhead (See Note 9.).
Sublease Agreement
On February 14, 1996, Continental Grain and the Company entered into a sublease
agreement with subsequent amendments (the "Sublease Agreement") for the
utilization of the facilities leased from Continental Grain. The Sublease
Agreement will require an annual payment of approximately $787 through the year
2000.
56
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements (continued)
March 31, 1997, 1996 and 1995
(dollars in thousands)
8. DEBT
In fiscal 1996, debt financing was provided by Continental Grain (See Note 7.).
During fiscal 1997, this debt was retired and replaced with publicly issued
debt. Long-term debt at March 31, 1997 consists of the following:
March 31,
1997
----
8 3/8% Senior Notes, $300 million face amount, due 2003 $299,194
7 1/2% Senior Notes, $200 million face amount, due 2002 199,288
Capitalized lease 335
--------
Total long-term debt $498,817
========
On August 14, 1996, the Company issued $300 million of unsecured senior notes
(the "8 3/8% Senior Notes") due August 15, 2003. Proceeds to the Company, net of
underwriting fees, market discount and other costs were $287,742. Interest on
these notes is payable semi-annually on February 15 and August 15 commencing
February 15, 1997. The 8 3/8% Senior Notes are redeemable as a whole or in part,
at the option of the Company, at any time or from time to time, at a redemption
price equal to the greater of (i) 100% of their principal amount or (ii) the sum
of the present values of the remaining scheduled payments of principal and
interest thereon discounted to the date of redemption on a semiannual basis at
the treasury yield plus 50 basis points, plus, in each case, accrued interest to
the date of redemption. Interest expense on the unsecured 8 3/8% Senior Notes
was $15,484 for fiscal 1997.
On March 12, 1997, the Company issued $200 million of unsecured senior notes
(the "7 1/2% Senior Notes") due March 15, 2002 (together with the 8 3/8% Senior
Notes, the "Senior Notes"). Proceeds to the Company, net of underwriting fees,
market discount and other costs were $197,700. Interest on these notes is
payable semi-annually on March 15 and September 15 commencing September 15,
1997. Interest expense on the 7 1/2% Senior Notes was $756 for fiscal 1997.
The Company is required to comply with various operating and financial covenants
as set forth in the agreements governing the issuance of the Senior Notes. Among
other restrictions, the Company must comply with limitations on indebtedness and
restricted payments.
The Senior Notes are equal 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.
On January 8, 1997, the Company closed a $200 million unsecured revolving credit
facility (the "Short-Term Borrowing"). The three-year Short-Term Borrowing has
several interest rate pricing alternatives, including those based on the London
Interbank Offering Rate ("LIBOR") and federal funds rate. The amount available
under the Short-Term Borrowing is based on a formula based on certain of the
Company's consolidated assets. Interest expense on the Short-Term Borrowing was
$164 for fiscal 1997.
57
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements (continued)
March 31, 1997, 1996 and 1995
(dollars in thousands)
9. EMPLOYEE BENEFITS
The Company's employees are included in Continental Grain's employee benefits
programs, and the Company reimburses Continental Grain for the actual cost of
benefit accruals and an allocable cost of administration and overhead.
Continental Grain has a number of noncontributory pension plans covering
substantially all United States employees. The pension plan covering salaried
employees provides benefits that are generally based on a percentage of the
employee's salary during the five years before retirement. Continental Grain's
funding policy for these plans is generally to make the minimum annual
contribution required by applicable regulations. Pension costs charged to the
Company by Continental Grain were $374, $118, and $91 for the years ended March
31, 1997, 1996 and 1995, respectively.
Post-retirement health care coverage under Continental Grain's Salaried Health
Care Plan is available on a cost sharing basis to retired employees. Life
insurance coverage is provided on a noncontributory basis to substantially all
retirees. Post-retirement health care costs charged to the Company by
Continental Grain were $419, $680 and $394 for the years ended March 31, 1997,
1996, and 1995, respectively. Effective April 1, 1996, Continental Grain
transferred the Company's portion of the accrual, as of such date, for
post-retirement health care costs. This accrual was determined on a stand alone
basis for the Company.
The Company has in effect an incentive compensation program which is a formula
plan based on pre-tax income targets. Incentive compensation for the years ended
March 31, 1997, 1996 and 1995 was $24,580, $27,986 and $12,400, respectively.
Upon acquisition of ULG, the Company established a long term incentive plan for
certain key employees of ULG. The program is a formula plan based on after-tax
income. The Company recognized $200 in expense for this plan for the year ended
March 31, 1997.
1995 Long-Term Stock Incentive Plan
On February 9, 1996, the Company adopted the 1995 Long-Term Stock Incentive Plan
(the "Stock Plan") pursuant to which the Company was authorized to grant certain
key employees 4,437,895 of options and restricted stock, in the common stock of
the Company. The aggregate equity interests in the Company available under the
Stock Plan is not to exceed 9% of all equity interests in the Company as of the
date the plan was adopted. In fiscal 1997 and fiscal 1996, the Company granted
stock options and restricted stock under the Stock Plan.
The Company applies APB Opinion No. 25 and the related interpretations in
accounting for the Stock Plan. In October 1995, the FASB issued SFAS 123. If
fully adopted, SFAS 123 changes the method for measurement and recognition of
stock-based compensation on plans similar to those of the Company. The Company
has adopted the disclosure requirements established by SFAS 123. Pro forma
disclosures as if the Company had adopted the cost recognition requirements
under SFAS 123 are presented below.
58
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements (continued)
March 31, 1997, 1996 and 1995
(dollars in thousands, except share data)
Stock options granted under the Stock Plan are nonqualified stock options that:
(1) are granted at prices which are equal to the market value of the stock on
the date of grant; (2) subject to a grantee's continued employment with the
Company, vest at various periods over a four year period; and (3) expire ten
years subsequent to the award.
A summary of the status of the Company's stock options as of March 31, 1997 and
1996 and the changes during the year is presented below:
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1996
-------------- --------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 2,623,500 $21.11 -- $ --
Granted 50,000 35.63 2,623,500 21.11
Exercised (11,382) 21.11 -- --
Forfeited (177,388) 21.11 -- --
Outstanding at end of year 2,484,730 $21.41 2,623,500 $21.11
Options exercisable at end of year 491,946 $21.26 196,763 $21.11
</TABLE>
The fair value of each option granted during fiscal 1997 and fiscal 1996 is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions: (1) dividend yield of zero; (2) expected volatility
49.75%; (3) risk-free interest rate of 5.05% for 1996 and 6.32% for 1997 and;
(4) expected life of 3.5 years. The weighted average fair value of options
granted during 1997 and 1996 was $15.33 and $8.78, respectively.
Had compensation cost for the Company's fiscal 1997 and fiscal 1996 grants for
stock options been determined consistent with SFAS 123, the Company's pro forma
net income and pro forma net income per common share for fiscal 1997 and fiscal
1996 would approximate the pro forma amounts below:
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1996
-------------- --------------
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net income $106,004 $99,730 $74,130 $72,217
Net income per common share:
Primary $2.40 $2.25 $2.00 $1.95
Fully diluted $2.40 $2.25 $2.00 $1.95
</TABLE>
The restricted stock granted under the Stock Plan is recorded as deferred
compensation in stockholders' equity. The deferred compensation is amortized
over the vesting period of the restricted stock. The restricted stock vests over
a 3 to 4 year period and is subject to the employee's continued employment with
the Company.
59
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements (continued)
March 31, 1997, 1996 and 1995
(dollars in thousands, except share data)
In connection with the restricted stock issuance, the Company recorded
compensation expense of $6,721 and $4,967 in fiscal 1997 and fiscal 1996,
respectively.
A summary of the status of the Company's restricted stock as of March 31, 1997
and 1996 and the changes during the year is presented below:
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1996
-------------- --------------
Weighted Weighted
Average Average
Shares Grant Price Shares Grant Price
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,330,532 $21.00 -- $ --
Granted 6,000 35.63 1,330,532 21.00
Forfeited (33,929) 21.00 -- --
Vested and transferable (57,052) 21.00 -- --
Outstanding at end of year 1,245,551 $21.07 1,330,532 $21.00
</TABLE>
60
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements (continued)
March 31, 1997, 1996 and 1995
(dollars in thousands)
10. INCOME TAXES
Income taxes included in the consolidated statements of income
represent the following:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
Year ended March 31, 1997
Federal ......................................................... $54,137 $ 4,661 $58,798
State and local ................................................. 11,524 1,019 12,543
------ ----- ------
$65,661 $ 5,680 $71,341
======= ======= =======
Year ended March 31, 1996
Federal ......................................................... $38,762 $ 3,278 $42,040
State and local ................................................. 6,504 552 7,056
----- --- -----
$45,266 $ 3,830 $49,096
======= ======= =======
Year ended March 31, 1995
Federal ......................................................... $21,354 $(2,605) $18,749
State and local ................................................. 3,894 (475) 3,419
----- ---- -----
$25,248 $(3,080) $22,168
======= ======= =======
</TABLE>
The difference between the "expected" Federal tax rate and expense
computed by applying the statutory tax rate to income before
provision for income taxes and the effective tax rate and expense
is as follows:
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1996 March 31, 1995
-------------- -------------- --------------
Percent Percent Percent
of of of
Pre-Tax Pre-Tax Pre-Tax
Amount Earnings Amount Earnings Amount Earnings
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" tax provision ... $61,963 35.0% $44,288 35.0% $19,946 35.0%
State and local taxes, net of related
Federal benefit ................... 8,055 4.6% 4,808 3.8% 2,222 3.9%
Other ............................... 1,323 0.7% -- -- -- --
----- ---- ---- ---- ---- ----
Total ............................ $71,341 40.3% $49,096 38.8% $22,168 38.9%
======= ==== ======= ==== ======= ====
The effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax
liabilities are as follows:
</TABLE>
<TABLE>
<CAPTION>
March 31,
---------
<S> <C> <C> <C>
1997 1996 1995
---- ---- ----
Deferred Tax Assets:
Provision for loan losses ............. $ 1,069 $ 982 $ 605
Deferred compensation ................. 4,835 -- --
Restricted stock awards ............... 301 1,927 --
Other ................................. 2,776 377 42
Deferred Tax Liabilities:
Net servicing income .................. (11,081) (4,535) --
Interest-only and residual certificates (12,942) (9,813) (7,881)
Other ................................. (115) (18) (16)
---- --- ---
Net deferred tax liability ............... $(15,157) $(11,080) $ (7,250)
======== ======== ========
</TABLE>
61
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements (continued)
March 31, 1997, 1996 and 1995
(dollars in thousands)
11. COMMITMENTS AND CONTINGENCIES
In addition to utilizing facilities leased by Continental Grain, the Company's
operations are conducted from leased facilities located in various areas of the
United States. These leases have clauses which provide for increases in rent in
the event of increases in real estate taxes and maintenance costs. Rental
expense for the years ended March 31, 1997, 1996 and 1995 was $3,470, $1,884,
and $564, respectively. The Company also has a capital lease on certain
machinery and equipment included as part of "Premises and equipment". The future
minimum lease payments under the operating and capital leases for the Company,
are as follows:
Operating Capital
Fiscal Year Leases Leases
----------- ------ ------
1998 ................................. $ 6,653 $ 362
1999 ................................. 7,580 174
2000 ................................. 7,222 121
2001 ................................. 5,960 64
2002 ................................. 5,159 18
Thereafter ........................... 29,614 0
------ ------
$ 62,188 $ 739
======== --------
Less: amounts
representing interest ................ (104)
---------
Present value of net
minimum lease payments .............. 635
Less: current maturties .............. (300)
---------
Long-term obligation ................. $ 335
=========
Litigation
The Company is involved in certain litigation arising in the normal course of
business. The Company believes that any liability with respect to such legal
actions, individually or in the aggregate, is not likely to be material to the
Company's consolidated financial position or results of operations.
12. FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET ACTIVITIES
Sales of Assets with Recourse
During 1997, 1996 and 1995, the Company utilized agreements with financial
institutions (the "Purchasers") to sell, with limited recourse, interests in
designated pools of securitized and whole loans receivables. Under the
agreements, the Purchasers have given the Company a right of first refusal to
repurchase such receivables prior to third-party sales. Pursuant to the recourse
provisions of these agreements, the Company is responsible for losses incurred
by the Purchasers on third-party sales of the receivables up to either 5% or 10%
of the sale amounts. The agreements are guaranteed by the Company. The Company
monitors its exposure associated with these agreements and records recourse
provisions, as necessary, to address this potential exposure. During 1997, 1996
and 1995, the Company utilized these facilities to sell receivables totaling
62
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements (continued)
March 31, 1997, 1996 and 1995
(dollars in thousands)
approximately $7,350,000, $5,671,000 and $2,510,000, respectively. At March 31,
1997 and 1996, approximately $591,000 and $565,000, respectively, were
outstanding and offset against receivables held for sale.
During 1997, 1996, and 1995, the Company sold, with limited recourse, an
interest in certain interest-only and residual certificates for $96,545, $54,500
and $50,000, respectively. At March 31, 1997, 1996 and 1995, $144,926, $90,985
and $50,000, respectively, of these aforementioned sales were outstanding. Under
the recourse provisions of the agreements, the Company is responsible for losses
incurred by the purchaser within an agreed upon range. The agreements are
guaranteed by Continental Grain for an agreed upon fee.
Financial Instruments
SFAS No. 105, "Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk" and SFAS No. 119, "Disclosure about Derivative Financial Instruments and
Fair Value of Financial Instruments" require the disclosure of the notional
amount or contractual amounts of financial instruments.
The Company regularly securitizes and sells fixed and variable rate mortgage
loan receivables. As part of its interest rate risk management strategy, the
Company may choose to hedge its interest rate risk related to its mortgage
portfolio and purchase commitments by utilizing financial futures. The Company
classifies these futures as hedges of specific loan receivables and purchase
commitments. The gains and losses derived from these financial futures are
deferred and included in the carrying amounts of the related hedged items and
ultimately recognized in income. Deferred gains on the futures used to hedge the
anticipated transactions amounted to $2,821, $1,968 and $359 at March 31, 1997,
1996, and 1995, respectively.
The following table identifies the contract and market values of financial
instruments as of March 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Futures Contracts:
Contract Value Market Value
Short Short
----- -----
<S> <C> <C>
March 31, 1997 .............. $364,900 $377,440
March 31, 1996 .............. 219,800 231,739
March 31, 1995 .............. 58,500 60,068
</TABLE>
Market Risk
In the normal course of business the Company enters into various contractual
commitments involving forward settlement. These include financial futures
contracts and short sales. Commitments involving forward settlement give rise to
market risk, which represents the potential loss that can be caused by a change
in the market value of a particular financial instrument.
The Company is also exposed to market interest rate risk. A decline in interest
rates will typically increase the amount of loan prepayments and decrease the
value of the interest-only and residual certificates and capitalized servicing
fees receivable. An increase in interest rates may decrease the demand for
consumer and commercial credit.
63
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements (continued)
March 31, 1997, 1996 and 1995
(dollars in thousands)
Periods of economic slowdown or recession may be accompanied by decreased demand
for the market for Receivables or declines in real estate values. These factors
will influence the Company's ability to obtain and securitize Receivables.
During these periods the Company's cost of servicing loans may increase as rates
of delinquency and foreclosure increase.
Fair Value of Financial Instruments
The Company's financial instruments recorded at contractual amounts that
approximate market or fair value primarily consist of securities purchased under
agreements to resell, trade receivables, accounts payable and accrued expenses,
securities sold but not yet purchased and trade receivables sold under
agreements to repurchase. As these amounts are short term in nature and/or
generally bear market rates of interest, the carrying amounts of these
instruments are reasonable estimates of their fair values. The carrying amounts
of the Company's long-term debt approximate fair value when valued using
available quoted market prices.
Credit Risk
The Company is exposed to on-balance sheet credit risk related to its
Receivables and interest-only and residual certificates. The Company is exposed
to off-balance sheet credit risk related to loans which the Company has
committed to originate or buy and loans sold with limited recourse.
The Company utilizes securities purchased under agreements to resell as part of
its interest rate management strategy. These instruments expose the Company to
credit risk which is measured as the loss the Company would record if
counterparties failed to perform pursuant to terms of their contractual
obligations and the value of the collateral held, if any, was not adequate to
cover such losses. The Company's policy is to take possession of securities
purchased under agreements to resell. The Company monitors the market value of
the assets acquired to ensure their adequacy as compared to the amount at which
the securities will be resold. The Company may require the counterparty to
deposit additional collateral or reduce the loan balance when necessary. The
interest rate on these instruments depends upon, among other things, the
underlying collateral, the term of the agreement and the credit quality of the
counterparty. At March 31, 1997 and 1996, these instruments had a weighted
average interest rate of 5.1%, and 4.7%, respectively. The Company transacts
these resale agreements primarily with three institutional broker/dealers.
The Company is a party to financial instruments with off-balance sheet credit
risk in the normal course of business. These financial instruments include
commitments to extend credit to borrowers, commitments to purchase loans from
correspondents, and recourse provided on loans sold to investors in prior years.
The Company has a first or second lien position on all of its loans, and the
combined loan-to-value ratio ("CLTV") permitted by the Company's mortgage
underwriting guidelines generally may not exceed 85%. The CLTV represents the
combined first and second mortgage balances as a percentage of the appraised
value or the mortgaged property, with the appraised value determined by an
appraiser with appropriate professional designations. A title insurance policy
is required for all loans.
As of March 31, 1997 and 1996, the Company had outstanding commitments to extend
credit or purchase loans in the amount of $428,234 and $206,314, respectively.
As these amounts are short term in nature and/or generally bear market rates of
interest, the contractual amounts of these instruments are reasonable estimates
of their fair values.
64
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements (continued)
March 31, 1997, 1996 and 1995
(dollars in thousands)
Commitments to extend credit or to purchase a loan are granted for a period of
thirty days and are contingent upon the borrower and the borrower's collateral
satisfying the Company's underwriting guidelines. Since many of the commitments
are expected to expire without being exercised, the total commitment amount does
not necessarily represent future cash requirements or future credit risk.
The Company monitors concentrations of credit risk associated with business
conducted with financial institutions and minimizes credit risk by avoiding a
concentration with any single financial institution. As of March 31, 1997, and
1996 the majority of loans with on-balance sheet and off-balance sheet risks
were collateralized by properties located in the Eastern United States.
Warehousing Exposure
The Company makes warehouse financing available to its securitization clients to
facilitate the accumulation of securitizable products prior to securitization.
As of March 31, 1997 and 1996, the Company had $1,567,600 and $981,600 of
committed warehousing available to its third party clients, of which $566,029
and $425,378, respectively, was drawn down. Warehouse commitments are typically
for a term of one year or less and are designated to fund only securitizable
assets. Assets from a particular client remain in the warehouse for a period of
90-120 days at which point they are securitized and sold to institutional
investors. As these amounts are short term in nature and/or generally bear
market rates of interest, the contractual amounts of these instruments are
reasonable estimates of their fair values.
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents the quarterly results of operations for the year
ended March 31, 1997:
<TABLE>
<CAPTION>
Three Months Ended
<S> <C> <C> <C> <C>
June 30, September 30, December 31, March 31,
1996 1996 1996 1997
---- ---- ---- ----
Total gross income $ 69,763 $ 89,683 $121,332 $147,052
Net income 19,433 25,516 29,025 32,030
Primary and fully diluted earning per common
share $ 0.44 $ 0.58 $ 0.66 $ 0.72
======== ====== ====== ======
</TABLE>
14. SUBSEQUENT EVENT
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 proceeds will
be used for general corporate purposes, including strategic acquisitions,
funding loan originations and purchases, supporting securitization transactions,
and other working capital needs. The completion of the offering reduces
Continental Grain's ownership of the Company from approximately 81% to
approximately 75%.
65
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements (continued)
March 31, 1997, 1996 and 1995
(dollars in thousands)
The consummation of the public offering causes the vesting of certain options
granted. The additional vesting would cause options exercisable as of March 31,
1997 to increase to 1,734,311.
66
<PAGE>
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
None.
67
<PAGE>
Part III.
Item 10. Directors and Executive Officers of the Registrant.
The Company incorporates by reference herein information in its proxy
statement which complies with the information called for by Item 10 of the
Form 10-K. The proxy will be filed at a later date, that is not more than
120 days after the end of the Company's 1997 fiscal year, with the
Commission.
Item 11. Executive Compensation
The Company incorporates by reference herein information in its proxy
statement which complies with the information called for by Item 11 of the
Form 10-K. The proxy will be filed at a later date, that is not more than
120 days after the end of the Company's 1997 fiscal year, with the
Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The Company incorporates by reference herein information in its proxy
statement which complies with the information called for by Item 12 of the
Form 10-K. The proxy will be filed at a later date, that is not more than
120 days after the end of the Company's 1997 fiscal year, with the
Commission.
Item 13. Certain Relationships and Related Transactions.
The Company incorporates by reference herein information in its proxy
statement which complies with the information called for by Item 13 of the
Form 10-K. The proxy will be filed at a later date, that is not more than
120 days after the end of the Company's 1997 fiscal year, with the
Commission.
Part IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits.
(1) Financial Statements
See Item 8. "Financial Statements and Supplementary Data."
(2) Financial Statement Schedules
No Financial statement schedules are included because of the absence of the
conditions under which they are required or because the information is
included in the financial statements or the notes thereto.
68
<PAGE>
<TABLE>
<CAPTION>
(3) Exhibits
<S> <C>
Exhibit
No. Description
--- -----------
3.1 Restated Certificate of Incorporation of the Company (1)
3.2 By-laws of the Company (1)
4.1 Indenture between the Company and the Trustee with form of Indenture Note (1)
4.2 Form of Term Note issued by the Company to Continental Grain (1)
4.3 Form of Four Year Note issued by The Company to Continental Grain (1)
10.1 Indemnification Agreement between the Company and Continental Grain (1)
10.2 Tax Sharing Agreement between the Company and Continental Grain (1)
10.3 Employee Benefit Allocation Agreement between the Company and Continental Grain(2)
10.4 Services Agreement between the Company and Continental Grain (1)
10.5 Note Purchase Agreement between the Company and Continental Grain (1)
10.6 Common Stock Registration Rights Agreement between the Company and Continental Grain (1)
10.7 Indenture Note Registration Rights Agreement between the Company and Continental Grain (1)
10.8 Sublease Agreement between the Company and Continental Grain (1)
10.9 ContiFinancial Corporation 1995 Long -Term Stock Incentive Plan (1)
10.10 ContiFinancial Services Long -Term Incentive Compensation Plan (1)
10.11 1997 ContiFinancial Services Division Incentive Compensation Plan (1)
10.12 1997 ContiMortgage Corporation Incentive Compensation Plan (1)
10.13 Form of Stock Option Agreement (1)
10.14 Form of Restricted Stock Award Agreement (1)
10.15 Agreement of Lease between LC/N Keith Valley Limited Partnership I and
ContiTrade Services Corporation and amendments thereto (1)
10.16 ContiFinancial Corporation Directors Retainer Fee Plan (1)
10.17 Assignment and Transfer of Excess Spread Receivables between Continental Grain
and certain subsidiaries of the Company (1)
10.18 Secured Promissory Note (2)
11.1 Computation of the Company's pro forma earnings per common share
21.1 List of Subsidiaries of the Company
23.2 Consent of Arthur Andersen LLP (2)
24.1 Attorneys-In-Fact and Agents for James J. Bigham (2)
24.2 Attorneys-In-Fact and Agents for Paul J. Fribourg (2)
24.3 Attorneys-In-Fact and Agents for John W. Spiegel (2)
24.4 Attorneys-In-Fact and Agents for Donald L. Staheli (2)
24.5 Attorneys-In-Fact and Agents for John P. Tierney (2)
24.6 Attorneys-In-Fact and Agents for Lawrence G. Weppler (2)
24.7 Attorneys-In-Fact and Agents for Daniel J. Willett (2)
24.8 Attorneys-In-Fact and Agents for Michael J. Zimmerman
27.1 Financial Data Schedule
(1) Incorporated by reference to the exhibit of the same number from the Company's
Registration Statement on Form S-1, File No. 33-98016.
(2) Incorporated by reference to the exhibit of the same number from the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1996, File No.
1-14074.
(b) Reports on Form 8-K.
None
(c) Exhibits.
See (a) (3) above.
(d) Financial Statement Schedules.
See (a) (2) above.
</TABLE>
69
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, ContiFinancial Corporation has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CONTIFINANCIAL CORPORATION
By: /s/ James E. Moore
James E. Moore
President, Chief Executive
Officer and Director
Date: June 27, 1997
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ James E. Moore President, Chief Executive June 27, 1997
James E. Moore Officer and Director (Principal
Executive Officer)
/s/ Daniel J. Willett Senior Vice President and Chief June 27, 1997
Daniel J. Willett Financial Officer (Principal
Financial Officer)
/s/ Susan E. O'Donovan Vice President and Controller June 27, 1997
Susan E. O'Donovan (Principal Accounting
Officer)
* Director and Chairman of the June 27, 1997
James J. Bigham Board
* Director June 27, 1997
Paul J. Fribourg
* Director June 27, 1997
John W. Spiegel
* Director June 27, 1997
Donald L. Staheli
* Director June 27, 1997
John P. Tierney
* Director June 27, 1997
Lawrence G. Weppler
* Director June 27, 1997
Michael J. Zimmerman
* By: /s/ James E. Moore
James E. Moore
Attorney-In-Fact
70
<PAGE>
Exhibit Index
Exhibit
No. Description
11.1 Computation of the Company's pro forma earnings per common share
21.1 List of Subsidiaries of the Company
24.8 Attorneys-In-Fact and Agents for Michael J. Zimmerman
27.1 Financial Data Schedule
71
<PAGE>
ContiFinancial Corporation
4th quarter EPS calculation
Primary
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Weighted
# of shares weighting Ave. Shares
-------------- ----------- -----------
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 1,836 100% 1,836
Shares Acquired through exercise of options - 1/23/97 5,991 74% 4,433
Shares Acquired through exercise of options - 2/19/97 3,395 44% 1,494
Effect of restricted shares:
Effect from Jan 1- Mar 31, 1997
Unamortized deferred comp. @ 12/31/96 17,034,752
Unamortized deferred comp. @ 3/31/97 15,754,726
-----------
32,789,478
===========
Average unamortized def. comp. during the period 16,394,739
Tax benefit on assumed exercise:
Total Restricted Shares 1,245,551
Ave. Market Price (1/1-3/30) 36.115
-----------
Value 44,983,074
===========
Tax Effect (40%) 17,993,230
Tax Effect of compensation 10,462,628
-----------
7,530,601
--------------
Total Assumed Proceeds 23,925,340
==============
Repurchase Shares on Market
Total Assumed Proceeds 23,925,340
Ave. Market Price (1/1-3/30) 36.115
--------------
Number of Shares 662,477
==============
Incremental Shares Considered to be Outstanding
Restricted Shares 1,245,551
Repurchase Shares 662,477
--------------
Incremental Shares 583,074 100% 583,074
==============
</TABLE>
<PAGE>
Exhibit 11.1 (Cont.)
<TABLE>
<CAPTION>
Effect of Options:
<S> <C> <C> <C> <C> <C>
Options Exercised:
Number of Options 5,991
Offering Price 21.11
-----------
Proceeds on exercising options 126,470
Tax Effect:
Options Exercised 5,991
Ave. Market Price ( from 1/1 - 1/23) 36.336
-----------
value 217,689
===========
Tax Effect (40.0%) 87,076
Tax Effect of compensation 50,588
-----------
36,488
--------------
Total Assumed Proceeds 162,958
==============
Repurchase Shares on Market
Total Assumed Proceeds 162,958
Ave. Market Price ( from 1/1 - 1/23) 36.336
--------------
Number of Shares 4,484.74
==============
Incremental Shares Considered to be Outstanding
Granted Options 5,991
Repurchase Shares 4,484.74
--------------
Incremental Shares 1,506.26 26% 392
==============
Options Exercised:
Number of Options 3,395
Offering Price 21.11
-----------
Proceeds on exercising options 71,668
Tax Effect:
Options Exercised 3,395
Ave. Market Price ( from 1/1 - 2/19) 36.636
-----------
Value 124,379
===========
Tax Effect (40.0%) 49,752
Tax Effect of compensation 28,667
-----------
21,084
--------------
Total Assumed Proceeds 92,753
==============
Repurchase Shares on Market
Total Assumed Proceeds 92,753
Ave. Market Price ( from 1/1 - 2/6) 36.636
--------------
Number of Shares 2,532
==============
Incremental Shares Considered to be Outstanding
Granted Options 3,395
Repurchase Shares 2,532
--------------
Incremental Shares 863 56% 483
==============
</TABLE>
<PAGE>
Exhibit 11.1 (Cont.)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Options Remaining:
Number of Options, net of cancelled and exercised 2,484,730
Offering Price 21.11
-----------
Proceeds on exercising options 52,452,650
Tax Effect:
Options Exercised 2,484,730
Ave. Market Price (from 1/1 - 3/31) 36.115
-----------
Value 89,736,024
===========
Tax Effect (40%) 35,894,410
Tax Effect of compensation 20,981,060
-----------
14,913,349
--------------
Total Assumed Proceeds 67,366,000
==============
Repurchase Shares on Market
Total Assumed Proceeds 67,366,000
Ave. Market Price (from 1/1 - 3/31) 36.115
--------------
Number of Shares 1,865,319
==============
Incremental Shares Considered to be Outstanding
Granted Options 2,484,730
Repurchase Shares 1,865,319.11
--------------
Incremental Shares 619,411 100% 619,411
==============
Weighted Average Shares 44,316,757
===========
Fourth quarter income 32,030,000
===========
Primary Earnings Per Share $0.72
</TABLE>
<PAGE>
Exhibit 11.1 (Cont.)
<TABLE>
<CAPTION>
ContiFinancial Corporation
4th quarter EPS calculation
Fully Diluted
<S> <C> <C> <C>
Weighted
# of shares weighting Ave. Shares
-------------- ----------- -----------
Continental Grain Shares 35,918,421.00 100% 35,918,421
Shares Issued in IPO 7,130,000.00 100% 7,130,000
Shares Acquired through exercise of options 1,996.00 100% 1,996
Shares Aquired Through Accelerated Vesting -8/15/96 1,996.00 100% 1,996
Shares Aquired Through Accelerated Vesting -8/15/96 53,200.00 100% 53,200
Shares Aquired Through Accelerated Vesting -11/19/96 1,836.00 100% 1,836
Shares Acquired through exercise of options - 1/23/97 5,991.00 74% 4,433
Shares Acquired through exercise of options - 2/19/97 3,395.00 44% 1,494
Effect of Restricted Shares:
Effect through March 31, 1997
Assumed Proceeds:
Unamortized deferred comp. @ 3/31/97 15,754,726
--------------
Tax benefit on assumed exercise:
Total Restricted Shares 1,245,551
Higher of Ave. Market Price (for quarter)or
ending market price 36.115
-----------
Value 44,983,074
===========
Tax Effect (40%) 17,993,230
Tax Effect of compensation 10,462,628
-----------
7,530,601
--------------
Total Assumed Proceeds 23,285,327
==============
Repurchase Shares on Market
Total Assumed Proceeds 23,285,327
Market Price (3/31) 36.115
--------------
Number of Shares 644,755
==============
Incremental Shares Considered to be Outstanding
Restricted Shares 1,245,551
Repurchase Shares 644,755
--------------
Incremental Shares 600,796 100.00% 600,796
==============
</TABLE>
<PAGE>
Exhibit 11.1 (Cont.)
Effect of Options:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Options Exercised:
Options Exercised:
Number of Options 5,991
Offering Price 21.11
-----------
Proceeds on exercising options 126,470
Tax Effect:
Options Exercised 5,991
Price @ exercise date 37.500
-----------
Value 224,663
===========
Tax Effect (40.0%) 89,865
Tax Effect of compensation 50,588
-----------
39,277
--------------
Total Assumed Proceeds 165,747
==============
Repurchase Shares on Market
Total Assumed Proceeds 165,747
Price @ exercise date 37.500
--------------
Number of Shares 4,420
==============
Incremental Shares Considered to be Outstanding
Granted Options 5,991
Repurchase Shares 4,419.92
--------------
Incremental Shares 1,571 26% 408
==============
Options Exercised:
Number of Options 3,395
Offering Price 21.00
-----------
Proceeds on exercising options 71,295
Tax Effect:
Options Exercised 3,395
Price @ exercise date 37.375
-----------
Value 126,888
===========
Tax Effect (40.0%) 50,755
Tax Effect of compensation 28,518
-----------
22,237
--------------
Total Assumed Proceeds 93,532
==============
Repurchase Shares on Market
Total Assumed Proceeds 93,532
Price @ exercise date 37.375
--------------
Number of Shares 2,502.54
==============
Incremental Shares Considered to be Outstanding
Granted Options 3,395
Repurchase Shares 2,503
--------------
Incremental Shares 892 56% 500
==============
</TABLE>
<PAGE>
Exhibit 11.1 (Cont.)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Options Remaining:
Number of Options 2,484,730
Offering Price 21.11
-----------
Proceeds on exercising options 52,452,650
Tax Effect:
Options Exercised 2,484,730
Higher of Ave. Market Price
(for quarter) or ending mkt price 36.115
-----------
Estimated value 89,736,024
===========
Tax Effect (40%) 35,894,410
Tax Effect of compensation 20,981,060
-----------
14,913,349
--------------
Total Assumed Proceeds 67,366,000
==============
Repurchase Shares on Market
Total Assumed Proceeds 67,366,000
Higher of Ave. Market Price (for month) or ending mkt price 36.115
--------------
Number of Shares 1,865,319
==============
Incremental Shares Considered to be Outstanding
Granted Options 2,484,730
Repurchase Shares 1,865,319
--------------
Incremental Shares 619,411 100.00% 619,411
==============
Weighted Average Shares 44,334,491
===========
Fourth quarter income 32,030,000
===========
===========
Fully Dilutive Earnings Per Share $0.72
===========
</TABLE>
<PAGE>
Exhibit 11.1 (Cont.)
ContiFinancial Corporation
Calculation of Earnings Per Share - Fiscal Year ended March 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Primary
Net Income 106,004,000
Weighted Average Shares
1st Quarter 43,898,281
2nd Quarter 43,914,518
3rd Quarter 44,230,824
4th Quarter 44,316,757
------------
Average 44,090,095
------------
============
Year-to-date Primary EPS $2.40
============
Fully Dilutive
Net Income 106,004,000
Weighted Average Shares
1st Quarter 44,043,368
2nd Quarter 43,949,105
3rd Quarter 44,282,407
4th Quarter 44,334,491
------------
Average 44,152,343
------------
============
Year-to-date Primary EPS $2.40
============
</TABLE>
List of Subsidiaries of the Company as of March 31, 1997
ContiFinancial Services Corporation
ContiMortgage Corporation
ContiTrade Services L.L.C.
ContiSecurities Asset Funding Corp.
ContiSecurities Asset Funding II, L.L.C.
ContiFunding Corporation
ContiSecurities Asset Funding Corp. II
ContiAuto Asset Funding Corp.
California Lending Group, Inc.
Triad Financial Corporation
ContiWest Corporation
ContiSecurities Asset Funding, L.L.C.
CONTIFINANCIAL CORPORATION
ATTORNEYS-IN-FACT AND AGENTS
The undersigned, a director of ContiFinancial Corporation (the "Company"), a
Delaware corporation, which intends to file with the United States Securities
and Exchange Commission, under the provisions of the Securities Exchange Act of
1934 (the "Exchange Act"), as amended, each fiscal year an Annual Report on Form
10-K, or such other form appropriate for the purpose pursuant to Section 13 or
15(d) of the exchange Act, together with possible amendments thereto,
constitutes and appoints James E. Moore and Alan L. Langus and each of them
singly, as attorneys-in-fact and agents with full power of substitution and
resubstitution, for him and in his name, place and stead, to sign in any and all
capacities and file of cause to be filed any such Annual Report on Form 10-K,
and any and all amendments thereto, and all instruments necessary or incidental
in connection therewith, and hereby grants to said attorneys-in-fact and agents,
and each of them singly, full power and authority to do and perform in the name
and on behalf of the undersigned and in any and all capacities, any and all acts
and things whatsoever necessary or appropriate to be done in and about the
premises, as fully and to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the
undersigned has hereunto set his hand this 4th day of June, 1997
/s/Michael J. Zimmerman
Michael J. Zimmerman
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 51,200
<SECURITIES> 668,967
<RECEIVABLES> 738,504
<ALLOWANCES> (3,747)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 12,087
<DEPRECIATION> 4,298
<TOTAL-ASSETS> 1,545,798
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 444
<OTHER-SE> 407,340
<TOTAL-LIABILITY-AND-EQUITY> 1,545,798
<SALES> 0
<TOTAL-REVENUES> 427,830
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 127,110
<LOSS-PROVISION> 3,043
<INTEREST-EXPENSE> 120,636
<INCOME-PRETAX> 177,041
<INCOME-TAX> 71,341
<INCOME-CONTINUING> 106,004
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 106,004
<EPS-PRIMARY> 2.40
<EPS-DILUTED> 2.40
</TABLE>
