<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 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
------------------------------
(Commission File Number)
ContiFinancial Corporation
------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 13-3852588
----------------------------------------------------
(State or other jurisdiction of incorporation or -------------------------------
organization) (I.R.S. Employer Identification No.)
277 Park Avenue
New York, New York 10172
---------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 207-2800
------------
</TABLE>
no change
------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No
The Company had 47,657,539 shares of common stock outstanding as of
February 6,1998.
<PAGE>
CONTIFINANCIAL CORPORATION
TABLE OF CONTENTS
PART I .
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets.............................................................. 3
Consolidated Statements of Income.................................................................. 4
Condensed Consolidated Statements of Cash Flows.................................................... 5
Notes to Unaudited Condensed Consolidated Financial Statements..................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
General............................................................................................ 8
Assumptions Used To Determine Fair Value of Excess Spread Receivables.............................. 11
Financial Condition................................................................................ 11
Results of Operations.............................................................................. 13
Liquidity and Capital Resources.................................................................... 19
PART II.
Item 6. Exhibits and Reports on Form 8-K................................................................... 22
Signatures.................................................................................................... 23
</TABLE>
2
<PAGE>
CONTIFINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND MARCH 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1997
------------ ----------
<S> <C> <C>
Assets
Cash and cash equivalents.............................................................. $ 116,668 $ 51,200
Restricted cash........................................................................ 1,459 464
Securities purchased under agreements to resell........................................ 604,464 223,962
Trade receivables:
Receivables held for sale............................................................ 678,132 625,545
Other receivables.................................................................... 131,432 87,353
Allowance for loan losses............................................................ (2,904) (3,747)
------------ ----------
Total trade receivables, net........................................................... 806,660 709,151
------------ ----------
Interest-only and residual certificates................................................ 622,764 445,005
Capitalized servicing fees receivable.................................................. 57,185 29,353
Other.................................................................................. 148,786 86,663
------------ ----------
Total assets..................................................................... $2,357,986 $1,545,798
------------ ----------
------------ ----------
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable and accrued expenses.................................................. $ 158,807 $ 87,770
Securities sold but not yet purchased.................................................. 594,155 225,131
Trade receivables sold under agreements to repurchase.................................. 179,912 251,539
Due to affiliates...................................................................... 16,163 36,367
Short-term borrowed funds.............................................................. 268,333 25,000
Long-term debt......................................................................... 499,932 498,817
Other liabilities...................................................................... 27,039 12,102
------------ ----------
Total liabilities................................................................ 1,744,341 1,136,726
------------ ----------
Commitments and contingencies
Minority interest in subsidiary........................................................ 1,343 1,288
Stockholders' equity:
Preferred stock(par value $0.01 per share; 25,000,000 shares authorized;none issued
at December 31, and March 31, 1997, respectively).................................. -- --
Common stock (par value $0.01 per share; 250,000,000 shares authorized; 47,657,539
and 44,390,335 shares issued and outstanding at December 31, and March 31, 1997,
respectively)...................................................................... 477 444
Paid-in capital...................................................................... 398,963 295,029
Retained earnings.................................................................... 225,502 128,652
Treasury Stock (7,509 and 27,931 shares of common stock, at cost, as of
December 31, and March 31, 1997, respectively) (158) (586)
Deferred compensation................................................................ (12,482) (15,755)
------------ ----------
Total stockholders' equity....................................................... 612,302 407,784
------------ ----------
Total liabilities and stockholders' equity....................................... $2,357,986 $1,545,798
------------ ----------
------------ ----------
</TABLE>
The accompanying notes to the unaudited condensed consolidated financial
statements are an integral part of these statements.
3
<PAGE>
CONTIFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
------------------------ ------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Gross income:
Gain on sale of receivables..................................... $ 82,631 $ 58,404 $ 225,763 $ 133,773
Interest........................................................ 63,497 48,273 171,401 109,967
Net servicing income............................................ 24,866 12,420 58,646 32,386
Other income.................................................... 6,261 2,235 13,598 4,652
----------- ----------- ----------- -----------
Total gross income.......................................... 177,255 121,332 469,408 280,778
----------- ----------- ----------- -----------
Expenses:
Compensation and benefits....................................... 45,394 23,674 112,105 51,870
Interest (includes $4,066 and $15,372 due to affiliates for
the three and nine months ended December 31, 1996,
respectively)................................................. 43,551 36,001 119,913 79,989
Provision for loan losses....................................... 865 994 3,379 1,302
General and administrative...................................... 27,164 13,073 70,952 24,830
----------- ----------- ----------- -----------
Total expenses.............................................. 116,974 73,742 306,349 157,991
----------- ----------- ----------- -----------
Income before income taxes and minority interest.................. 60,281 47,590 163,059 122,787
Income taxes...................................................... 24,170 18,944 66,154 49,192
----------- ----------- ----------- -----------
Income before minority interest................................... 36,111 28,646 96,905 73,595
Minority interest in subsidiary earnings (loss)................... 971 (379) 55 (379)
----------- ----------- ----------- -----------
Net income.................................................. $ 35,140 $ 29,025 $ 96,850 $ 73,974
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic earnings per common share................................... $ 0.75 $ 0.67 $ 2.10 $ 1.71
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted earnings per common share................................. $ 0.74 $ 0.66 $ 2.07 $ 1.68
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic weighted average number of shares outstanding............... 46,870,941 43,292,557 46,160,728 43,278,265
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted weighted average number of shares outstanding............. 47,415,299 44,282,407 46,874,537 44,091,627
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes to the unaudited condensed consolidated financial
statements are an integral part of these statements.
4
<PAGE>
CONTIFINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................................. $ 96,850 $ 73,974
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of deferred compensation................................................ 4,065 5,325
Depreciation and amortization........................................................ 3,985 3,579
Equity in income of unconsolidated subsidiaries...................................... (3,053) --
Provision for loan losses............................................................ 3,379 1,302
Increase in restricted cash.......................................................... (995) (2,701)
Increase in interest-only and residual certificates.................................. (177,759) (43,708)
Increase in capitalized servicing fees receivable.................................... (27,832) (12,131)
Increase in receivables held for sale:
Originations and purchases......................................................... (21,715,158) (10,166,437)
Sales and principal repayments..................................................... 21,662,727 9,990,537
Increase in other receivables........................................................ (44,057) (22,526)
Increase in accounts payable and accrued expenses.................................... 80,514 29,030
Decrease in trade receivables sold under agreements to repurchase.................... (71,627) --
Increase in securities purchased under agreements to resell less the increase in
securities sold but not yet purchased............................................... (11,478) (2,817)
Increase (decrease) in minority interest in subsidiary............................... 55 (379)
Other, net........................................................................... (423) (2,855)
------------ ------------
Net cash used in operating activities.............................................. (200,807) (149,807)
------------ ------------
Cash flows from investing activities:
Acquisition of majority owned subsidiaries (net of cash acquired).................... (4,796) (28,277)
Investments in unconsolidated subsidiaries........................................... (37,393) --
Purchase of property and equipment................................................... (8,555) (1,356)
------------ ------------
Cash used in investing activities.................................................. (50,744) (29,633)
------------ ------------
Cash flows from financing activities:
Net decrease in notes payable to affiliates --....................................... -- (122,000)
Net (decrease) increase in due to affiliates......................................... (29,203) 26,511
Increase in short-term borrowed funds................................................ 243,333 --
Net proceeds from issuance of common stock........................................... 100,778 --
Increase in long-term debt........................................................... 987 293,136
Proceeds from exercise of employee stock options..................................... 996 --
Debt issuance costs.................................................................. -- (11,164)
Other, net........................................................................... 128 (479)
------------ ------------
Net cash provided by financing activities.......................................... 317,019 186,004
------------ ------------
Net increase in cash and cash equivalents............................................ 65,468 6,564
Cash and cash equivalents at beginning of period..................................... 51,200 32,479
------------ ------------
Cash and cash equivalents at end of period........................................... $ 116,668 $ 39,043
------------ ------------
------------ ------------
</TABLE>
The accompanying notes to the unaudited condensed consolidated financial
statements are an integral part of these statements.
5
<PAGE>
CONTIFINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
ContiFinancial Corporation and its consolidated subsidiaries (collectively,
"ContiFinancial" or the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission and, in the opinion of
management, reflect all normal recurring adjustments which are necessary for a
fair presentation of the financial position, results of operations, and cash
flows for each period shown. Results for interim periods are not necessarily
indicative of results for the full year. These unaudited condensed consolidated
financial statements should be read in conjunction with the audited Consolidated
Financial Statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1997 (the "Annual Report"). All
significant intercompany accounts and transactions have been eliminated in
consolidation. Certain reclassifications of prior year amounts have been made to
conform to the current year presentation.
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 the
results of operations. Actual results could differ from these estimates. See
"Assumptions Used to Determine Fair Value of Excess Spread Receivables ("ESR")"
in Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 130 "Reporting Comprehensive Income" ("SFAS 130") which is effective
for fiscal years beginning after December 15, 1997. SFAS 130 establishes
standards for reporting comprehensive income and its components in a full set of
general-purpose financial statements. SFAS 130 requires that all components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The adoption of this standard
will not have an impact on the Company's financial position or results of
operations.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131") which is effective for fiscal
years beginning after December 15, 1997. SFAS 131 establishes standards for
reporting information about operating segments in annual financial statements
and in interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of this standard will not have an impact on the Company's financial
position or results of operations.
3. DEBT
On September 9, 1997, the Company initiated a $275 million unsecured
Commercial Paper Program ("Commercial Paper Program") backed by an
irrevocable direct-pay letter of credit that is being provided by a syndicate
of banks.
6
<PAGE>
CONTIFINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
4. EQUITY
On June 4, 1997, the Company completed a primary offering of 2,800,000
shares of common stock; an additional 420,000 shares were issued to cover
over-allotments. The proceeds of the offering to the Company, net of expenses
and underwriting discount, were $100.8 million. The net proceeds have been
used for general corporate purposes including funding loan originations and
purchases, supporting securitization transactions (including the retention of
interest-only and residual certificates), supporting other working capital
needs and financing certain strategic acquisitions. The offering reduced
Continental Grain Company's ("Continental Grain") ownership of the Company
from 81% to 75% and caused the vesting of certain outstanding employee stock
options.
5. ACQUISITIONS
On October 1, 1997, the Company, through its subsidiary ContiMortgage
Corporation ("ContiMortgage"), purchased, for $5.8 million, 100% of the equity
of Fidelity Mortgage Decisions Corporation ("Fidelity"). Fidelity, headquartered
in Lincolnshire, Illinois, is a wholesale and retail originator of fixed and
adjustable rate home equity loans. This transaction has been accounted for as a
purchase, and Fidelity's results of operations have been included in the
Company's results of operations beginning October 1, 1997. The terms of the
acquisition provide for contingent payments based on the future earnings of
Fidelity. Such payments, if any, will be accounted for as cost in excess of
equity acquired.
On December 5, 1997, the Company acquired, for $30 million in cash, 24% of
the equity of Empire Funding Holding Corporation ("EFHC") with an option to
acquire additional shares of EFHC at a later date. EFHC, a newly formed entity,
owns 100% of Empire Funding Corp. ("Empire"). Empire, headquartered in Austin,
Texas, specializes in originating, servicing and securitizing high loan-to-value
home improvement loans. This transaction has been accounted for using the equity
method and the Company's appropriate share of EFHC's results of operations have
been included in the Company's results of operations beginning December 5, 1997.
Upon the closing of the acquisition, ContiFinancial's parent, Continental Grain,
exchanged a warrant for a 25% equity interest in Empire for a 25% equity
interest in EFHC.
6. SUBSEQUENT EVENT
On January 8, 1998, ContiMortgage purchased, for $4.0 million, 100% of the
equity of Crystal Mortgage Company, Inc. ("Crystal") and its subsidiary Lenders
M.D., Inc. ("Lenders"). Crystal is a retail mortgage broker and Lenders is a
mortgage bank. Both Crystal and Lenders are based in Amherst, Ohio, and work
together to originate conforming and non-conforming mortgage loans. The
transaction will be accounted for as a purchase, and the results of operations
of the acquired companies will be included in the Company's results of
operations beginning January 8, 1998. The terms of the acquisition include
payments which are contingent upon the future earnings of Crystal. Any such
payments will be accounted for as cost in excess of equity acquired.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
This discussion should be read in conjunction with the accompanying
unaudited consolidated financial statements and notes thereto included herein,
and the Company's audited Consolidated Financial Statements and notes thereto
included in the Company's Annual Report. Certain statements under this caption
constitute "forward-looking statements" under federal securities laws. See
"Forward-looking Statements."
GENERAL
ContiFinancial engages in the consumer and commercial finance business by
originating and servicing home equity loans, commercial real estate loans and
non-prime auto loans. ContiFinancial also provides financing and asset
securitization structuring and placement services to originators of a broad
range of loans, leases, receivables and other assets. ContiFinancial 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. These loans are
primarily for debt consolidation, home improvements, education or refinancing
and are primarily secured by first mortgages on one- to four-family residential
properties.
During the third quarter of fiscal 1997, the Company purchased 100% of the
outstanding stock of California Lending Group, Inc. d/b/a United Lending Group
("ULG"), a west coast-based home equity lender specializing in retail
originations through direct mail and telemarketing throughout the United States,
and 56% of the common stock of Triad Financial Corporation ("Triad"), an auto
finance company headquarted in Huntington Beach, California. The Company,
through its subsidiary ContiMortgage, also purchased Royal Mortgage Partners,
L.P., d/b/a Royal MortgageBanc ("Royal"), a California-based wholesale and
retail originator of home equity loans and 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 inquiries directly
from borrowers throughout the eastern and mid-western states. During the third
quarter of fiscal 1998, the Company, through ContiMortgage, purchased 100% of
Fidelity, an Illinois-based wholesale and retail originator of fixed and
adjustable rate home equity loans. These five companies are collectively
referred to herein as the "Acquisitions". During the third quarter of fiscal
1997, the Company organized ContiWest Corporation ("ContiWest"), a Nevada
corporation, to better administer and underwrite the Company's origination
portfolio.
ContiTrade Services L.L.C. ("ContiTrade"), a wholly owned subsidiary,
provides financing and asset securitization structuring expertise.
ContiFinancial Services Corporation ("ContiFinancial Services"), a wholly owned
subsidiary, provides placement services. ContiTrade's management and execution
of the Company's financing, hedging and securitization needs serves as a model
for the Company's strategic alliances with originators of a broad range of
consumer and commercial loans and other assets ("Strategic Alliances"). The
Company offers Strategic Alliances complete balance sheet liability management,
including warehouse financing, interest rate hedging services and structuring
and placement of asset portfolios in the form of asset-backed securities.
8
<PAGE>
The following tables present loan portfolio data for the three and nine
month periods ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
---------------------- ----------------------
LOAN PORTFOLIO DATA 1997 1996 1997 1996
- ---------------------------------------------------------------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ContiMortgage serviced loan portfolio at period end (1)......... $9,122,792 $5,699,145
---------- ----------
---------- ----------
Net losses as a percentage of ContiMortgageaverage serviced
loans outstanding............................................. 0.131% 0.082%
---------- ----------
---------- ----------
ContiMortgage and ContiWest home equity loan originations:
Wholesale..................................................... $1,285,277 $1,172,729 $3,655,453 $2,690,325
Retail and small brokers...................................... 437,985 48,432 901,311 94,371
Other home equity/home improvement and other loan originations--
retail........................................................ 126,039 79,779 324,107 79,779
---------- ---------- ---------- ----------
Total home equity/home improvement and other loan originations.. $1,849,301 $1,300,940 $4,880,871 $2,864,475
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Non-prime auto loan originations................................ $ 54,787 $ 12,428 $ 131,120 $ 12,428
Commercial loan originations.................................... $ 760,817 $ 174,594 $1,336,387 $ 516,042
Securitizations and sales:
ContiMortgage and ContiWest................................... $1,660,000 $ 900,180 $4,450,000 $2,407,554
Other ContiFinancial home equity/homeimprovement.............. 80,214 52,781 231,365 52,781
Commercial real estate........................................ 494,722 243,287 981,545 437,203
Triad......................................................... 62,174 -- 108,055 --
Strategic Alliances........................................... 57,821 66,322 307,898 484,805
---------- ---------- ---------- ----------
Total securitizations and sales................................. $2,354,931 $1,262,570 $6,078,863 $3,382,343
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
(1) Includes home equity loans originated by ContiWest and the Acquisitions and
serviced by ContiMortgage.
For the three months ended December 31, 1997 retail and small broker loan
originations increased by $389.6 million over the three months ended December
31, 1996. For the nine months ended December 31, 1997 retail and small broker
home equity loan originations increased by $806.9 million over the nine
months ended December 31, 1996. The increases are primarily due to
originations from the Acquisitions. For the three months ended December 31,
1997 commercial real estate loan originations increased by $586.2 million
over the three months ended December 31, 1996. For the nine months ended
December 31, 1997 commercial real estate loan originations increased by
$820.3 million over the nine months ended December 31, 1996. The Company
expects that retail and small broker loan originations and commercial real
estate loan originations will continue to become a larger percentage of total
loan originations.
9
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<TABLE>
<CAPTION>
AS OF
----------------------------
DECEMBER 31, SEPTEMBER 30,
CONTIMORTGAGE SERVICING PORTFOLIO (1) 1997 1997
--------------------------------- ------------- -------------
<S> <C> <C>
Total portfolio..................................................................... $ 9,122,792 $ 8,163,419
------------- -------------
------------- -------------
Delinquencies:
30-59 days........................................................................ 2.37% 2.92%
60-90 days........................................................................ 0.74% 0.73%
91 days and over.................................................................. 0.31% 0.62%
------------- -------------
Total delinquencies (%)........................................................... 3.42% 4.27%
------------- -------------
------------- -------------
Total delinquencies ($)........................................................... $ 311,821 $ 348,180
------------- -------------
------------- -------------
Defaults:
Foreclosures...................................................................... 2.78% 2.98%
Bankruptcies...................................................................... 1.53% 1.39%
Real estate owned................................................................. 0.65% 0.53%
Forbearances...................................................................... 0.59% 0.07%
------------- -------------
Total defaults (%)................................................................ 5.55% 4.97%
------------- -------------
------------- -------------
Total defaults ($)................................................................ $ 506,744 $ 405,503
------------- -------------
------------- -------------
</TABLE>
- ------------------------------
(1) Includes home equity loans originated by ContiWest and the Acquisitions and
serviced by ContiMortgage.
<TABLE>
<S> <C> <C>
Triad Servicing Portfolio
Total portfolio..................................................................... $ 177,237 $ 135,148
Delinquencies:
31-59 days........................................................................ 1.97% 1.56%
60-90 days........................................................................ 0.66% 0.59%
91 days and over.................................................................. 0.35% 0.19%
------------- -------------
Total delinquencies (%)........................................................... 2.98% 2.34%
------------- -------------
------------- -------------
Total delinquencies ($)........................................................... $ 5,289 $ 3,159
------------- -------------
------------- -------------
Repossession inventory.............................................................. $ 3,294 $ 1,735
------------- -------------
------------- -------------
</TABLE>
The delinquency rate on ContiMortgage's servicing portfolio at December 31,
1997 was 3.42%, 85 basis points lower than the September 30, 1997 rate of 4.27%.
The default portfolio increased to 5.55% from 4.97% at September 30, 1997.
Included in the default total were loans performing under bankruptcy plans and
real estate owned, making up 0.75% and 0.65% of the servicing portfolio,
respectively,
10
<PAGE>
compared with 0.62% and 0.53%, respectively, as of September 30, 1997. The
default category increased during the quarter due to a more conservative
classification of certain loans which are a part of the forbearance loss
mitigation program.
ASSUMPTIONS USED TO DETERMINE FAIR VALUE OF EXCESS SPREAD RECEIVABLES ("ESR")
The ESR is reported as "Interest-only and residual certificates" in the
accompanying unaudited condensed consolidated balance sheets. The ESR represents
the discounted present value of an estimated stream of future cash flows that
the Company expects to receive over the life of a securitization, taking into
consideration estimated prepayment speeds and credit losses. These cash flows
include the excess of the weighted average coupon on the loans or other assets
securitized over the sum of the pass-through interest rate, a normal servicing
fee, a trustee fee, an insurance fee (where applicable) and the credit losses
relating to the loans or other assets securitized. At December 31, 1997, ESR
totaled $622.8 million, of which $535.2 million, or 86% of the total, was
attributable to ContiMortgage securitizations.
The predominant factor affecting the level of estimated future ESR cash
flows is the rate at which the underlying principal of the securitized loans is
reduced. Prepayments represent principal reductions in excess of the
contractually scheduled reductions; prepayment speeds are generally expressed as
an annualized Conditional Prepayment Rate ("CPR"). At December 31, 1997, the
weighted average (based on remaining pool balances) of the estimated future CPRs
used in the determination of the fair value of ContiMortgage's ESR was 27%.
Additional factors that are considered in determining the fair value of ESR
are estimated future credit losses and the discount rate. As a credit
enhancement, the ESR is subordinate to the rights of the holders of the senior
pass-through securities. The weighted average annual credit loss provision used
in the determination of the fair value of ContiMortgage's ESR at December 31,
1997 was 0.60%. The future cash flows estimated as of December 31, 1997, taking
into consideration estimated prepayment rates and credit losses, were then
discounted at a rate of 10% to arrive at the fair value amount presented in the
condensed consolidated balance sheets. If actual prepayments or credit losses
are greater than the assumptions used to determine ESR fair value, the ESR
carrying value would be written down through a charge to earnings.
FINANCIAL CONDITION
DECEMBER 31, 1997
Cash and cash equivalents increased $65.5 million from $51.2 million at
March 31, 1997 to $116.7 million at December 31, 1997. In the normal course
of its activities the Company must maintain sufficient liquidity to finance
loan acquisitions by its subsidiaries and Strategic Alliance clients. The
increase was primarily due to the timing of loan acquisitions. The Company's
financing requirements will fluctuate on a daily basis.
Securities purchased under agreements to resell increased $380.5 million
from $224.0 million at March 31, 1997 to $604.5 million at December 31, 1997.
Securities sold but not yet purchased increased $369.1 million from $225.1
million at March 31, 1997 to $594.2 million at December 31, 1997. The Company
hedges, in part, its interest rate exposure on receivables held for sale and
loans and other assets sold, with limited recourse, through the use of futures
contracts and short sales of United States treasury securities. The increases in
securities purchased under agreements to resell and securities sold but not yet
purchased, which are integral to this hedging strategy, reflect growth in the
level of loans and other assets sold with limited recourse or held for sale.
Trade receivables, net increased $97.5 million from $709.2 million at March
31, 1997 to $806.7 million at December 31, 1997. This increase was primarily due
to a $52.6 million increase in receivables held for sale
11
<PAGE>
and a $44.1 million increase in other receivables. The receivables held for sale
account fluctuates based upon the volume of loans originated and the timing of
securitizations. The growth in other receivables was primarily due to a $30.8
million increase in REMIC interest advances for delinquent loans made by
ContiMortgage on loans serviced and the issuance of a subordinated loan to an
unconsolidated subsidiary of $10.0 million.
Interest-only and residual certificates increased $177.8 million from $445.0
million at March 31, 1997 to $622.8 million at December 31, 1997. This increase
represents $310.8 million of interest-only and residual certificates recorded in
connection with new securitizations, adjusted for changes in fair value of
existing interest-only and residual certificates, and interest income of $33.1
million, partially offset by the sale of $105.5 million of interest-only and
residual certificates and $60.6 million of cash distributions.
Capitalized servicing fees receivable increased $27.8 million from $29.4
million at March 31, 1997 to $57.2 million at December 31, 1997. This increase
reflects the capitalization of $39.9 million of servicing rights and prepayment
penalties paid partially offset by amortization of $12.1 million.
Other assets increased $62.1 million from $86.7 million at March 31, 1997
to $148.8 million at December 31, 1997. Other assets includes premises and
equipment, cost in excess of equity acquired, prepaid expenses, margin and
other deposits, deferred bond issuance costs, equity investments in
unconsolidated subsidiaries and other investments. This increase is primarily
due to new investments in consolidated and unconsolidated subsidiaries,
including cost in excess of equity acquired, of $42.2 million, a $4.9 million
net increase in ContiMortgage's premises and equipment primarily relating to
the new facilities in Hatboro, Pennsylvania, a $2.2 million net increase in
ULG's premises and equipment primarily resulting from the expansion of their
offices, and a $4.6 million increase in margin deposits.
As a result of the reduction in Continental Grain's ownership of the
Company from 81% to 75%, the Company is no longer included in Continental
Grain's consolidated U.S. Federal tax return. Consequently, current and
deferred U.S. income taxes, previously included in due to affiliates, are now
included in accounts payable and accrued expenses. Accounts payable and
accrued expenses increased $71.0 million from $87.8 million at March 31, 1997
to $158.8 million at December 31, 1997. This increase is primarily
attributable to increases in accrued Federal, state and local taxes payable
of $51.1 million, accrued interest payable of $14.7 million and accrued
securitization payables of $6.5 million, partially offset by a $11.6 million
decrease in accrued incentive compensation. Due to affiliates decreased $20.2
million from $36.4 million at March 31, 1997 to $16.2 million at December 31,
1997. The balance at December 31, 1997 primarily consists of estimated U.S.
Federal taxes payable to Continental Grain relating to the periods prior to
the June 1997 primary offering (See Note 4 to the unaudited condensed
consolidated financial statements).
Trade receivables sold under agreements to repurchase decreased $71.6
million from $251.5 million at March 31, 1997 to $179.9 million at December 31,
1997. The repurchase agreement is used primarily to finance auto loan
receivables held for sale and receivables purchased from Strategic Alliances.
Account balances fluctuate based upon the volume of loans originated and the
timing of securitzations.
Short-term borrowed funds increased $243.3 million from $25.0 million at
March 31, 1997 to $268.3 million at December 31, 1997. The March 31, 1997
balance represented borrowings under the Company's unsecured revolving credit
facility. At December 31, 1997, short-term borrowings consisted entirely of
issuances under the Company's Commercial Paper Program. For further discussion
see "Liquidity and Capital Resources."
Other liabilities increased $14.9 million from $12.1 million at March 31,
1997 to $27.0 million at December 31, 1997, primarily due to an increase in
deferred compensation payable.
Stockholders' equity increased $204.5 million from $407.8 million at March
31, 1997 to $612.3 million at December 31, 1997. The increase includes net
proceeds of $100.8 million from the June 1997 primary offering
12
<PAGE>
of common stock, net income of $96.9 million, and other net increases of $6.8
million attributable to employee stock plans.
RESULTS OF OPERATIONS
The Company's move into retail origination has resulted in a change in the
profile of the income statement. Retail origination expenses focus heavily on
compensation and benefits and general and administrative expenses, whereas with
wholesale originators, such as ContiMortgage, costs of origination in the form
of origination points are netted against gain on sale of receivables. As retail
origination grows, the Company anticipates a related increase in operating
expenses, largely offset by higher income from origination points and other
origination income included in gain on sale of receivables.
Gain on sale of receivables primarily represents income from the structuring
and sale (through REMICS, owner trusts and grantor trusts) of pools of home
equity loans originated by ContiMortgage, the Acquisitions and Strategic
Alliances. In addition, gain on sale of receivables is generated through whole
loan sales and securitizations of commercial and multi-family loans, home
improvement loans, franchisee loans, prime and non-prime auto loans and
equipment leases.
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH THREE MONTHS ENDED DECEMBER
31, 1996
The Company's total gross income increased from $121.3 million for the three
months ended December 31, 1996 to $177.3 million for the three months ended
December 31, 1997, a 46.1% increase. Net income increased from $29.0 million for
the three months ended December 31, 1996 to $35.1 million for the three months
ended December 31, 1997, a 21.1% increase. Annualized return on average equity
for the three months ended December 31, 1997 was 23.7%.
13
<PAGE>
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>
THREE MONTHS
ENDED DECEMBER 31,
------------------------
GROSS INCOME 1997 1996
- ---------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Gain on sale of receivables..................................................... 46.62% 48.13%
Interest........................................................................ 35.82 39.79
Net servicing income............................................................ 14.03 10.24
Other income.................................................................... 3.53 1.84
----------- -----------
Total gross income............................................................ 100.00% 100.00%
----------- -----------
Expenses
Compensation and benefits....................................................... 25.61% 19.51%
Interest........................................................................ 24.57 29.67
Provision for loan losses....................................................... 0.49 0.82
General and administrative...................................................... 15.32 10.78
----------- -----------
Total expenses................................................................ 65.99% 60.78%
----------- -----------
Income before income taxes and minority interest.................................. 34.01% 39.22%
Income taxes...................................................................... 13.64 15.61
----------- -----------
Income before minority interest................................................... 20.37 23.61
Minority interest of subsidiary................................................... 0.55 (0.31)
----------- -----------
Net income.................................................................... 19.82% 23.92%
----------- -----------
----------- -----------
</TABLE>
INCOME. Gain on sale of receivables increased $24.2 million, or 41.5%, in
the three months ended December 31, 1997 over the corresponding period in 1996.
The Company structured and sold $2.4 billion of mortgages, loans and leases in
the three months ended December 31, 1997, an increase of $1.1 billion from the
three months ended December 31, 1996. The positive impact that higher volume had
on gain on sale of receivables was partially offset by a reduction of the spread
between the weighted average coupon on loans securitized by ContiMortgage and
the pass-through interest rate, and higher prepayment speed assumptions used to
value the ESR.
Interest income increased $15.2 million, or 31.5%, for the three months
ended December 31, 1997 from the corresponding period in 1996. Interest income
includes interest earned on loans originated, purchased or financed by the
Company prior to their sale or securitization as well as the accrual of interest
on the discounted ESR. Interest earned on loans originated, purchased and
financed contributed $14.5 million to the quarterly increase.
Net servicing income increased $12.4 million, or 100.2%, for the three
months ended December 31, 1997 compared with the corresponding period in 1996
primarily due to increases in the size of the home equity servicing portfolio
and the volume of home equity loan sales and securitizations. The Company's
home equity loan servicing portfolio increased $3.4 billion from $5.7 billion
at December 31, 1996 to $9.1 billion at December 31, 1997, contributing $5.4
million to the quarterly increase in net servicing income. The 84.4% increase
in ContiMortgage and ContiWest home equity loan sales and securitizations
for the three months ended December 31, 1997 over the
14
<PAGE>
corresponding period in 1996 resulted in a $6.2 million increase in capitalized
servicing income, net of amortization.
Other income increased $4.0 million, or 180.1%, for the three month period
ended December 31, 1997 over the corresponding period in 1996. Other income
consists primarily of purchase premium refunds and mortgage processing fees, and
for the three months ended December 31, 1997, equity in the income of
unconsolidated subsidiaries. Income from unconsolidated subsidiaries, purchase
premium refunds and mortgage processing fees contributed $2.7 million, $0.5
million and $0.4 million, respectively, to the quarterly increase.
EXPENSES. Total expenses for the three months ended December 31, 1997
increased $43.2 million or 58.6% from the corresponding period in 1996. This
increase in total expenses is primarily the result of the increase in number of
employees resulting from the Company's expansion into retail loan originations
and costs associated with increased loan origination volume.
The following table allocates the Company's compensation and benefits,
general and administrative expenses and headcount between the Acquisitions and
all other activities. The increases were primarily due to increased retail
origination costs from the Acquisitions, the majority which were consolidated
into operations for the full three months ended December 31, 1997 versus
consolidation for only part of the quarter during fiscal 1997.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED DECEMBER 31, INCREASE
-------------------- ----------------------
1997 1996 AMOUNT %
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Compensation and benefits:
Acquisitions................................................................ $ 20,676 $ 7,041 $ 13,635 193.7%
Operations excluding Acquisitions........................................... 24,718 16,633 8,085 48.6%
--------- --------- ----------- ---------
Total compensation and benefits............................................... $ 45,394 $ 23,674 $ 21,720 91.7%
--------- --------- ----------- ---------
--------- --------- ----------- ---------
General and administrative:
Acquisitions................................................................ $ 12,720 $ 4,716 $ 8,004 169.7%
Operations excluding Acquisitions........................................... 14,444 8,357 6,087 72.8%
--------- --------- ----------- ---------
Total general and administrative.............................................. $ 27,164 $ 13,073 $ 14,091 107.8%
--------- --------- ----------- ---------
--------- --------- ----------- ---------
Headcount (at period end):
Acquisitions................................................................ 1,420 692 728 105.2%
Headcount excluding Acquisitions............................................ 1,050 654 396 60.6%
--------- --------- ----------- ---------
Total headcount............................................................... 2,470 1,346 1,124 83.5%
--------- --------- ----------- ---------
--------- --------- ----------- ---------
</TABLE>
As previously discussed and as demonstrated in the table above, the
acquisition of retail origination subsidiaries has resulted in significantly
higher levels of compensation and benefits expense and general and
administrative expenses. With respect to the Acquisitions, the percentage
increases in the expense categories noted above exceed the percentage increases
for headcount because results (and therefore expenses) for most of the
Acquisitions were consolidated into the Company's results for only a portion of
the quarter ended December 31, 1996. With respect to the Company's activities
exclusive of the Acquisitions, the expense increases are indicative of the
significant growth in the serviced loan portfolio and the related growth in
headcount to support that activity.
15
<PAGE>
Interest expense increased $7.6 million, or 21.0%, to $43.6 million for the
three months ended December 31, 1997 from $36.0 million for the corresponding
period in 1996. This increase was primarily a result of an increase in
short-term borrowings and sales under the Company's asset purchase and sale
facilities with certain financial institutions ("Purchase and Sale Facilities")
and a funding agreement under an agreement to repurchase (the "Repurchase
Agreement"), collectively the ("Facilities"). Total average borrowings increased
by $389.2 million for the three months ended December 31, 1997, over the
corresponding period in 1996.
INCOME TAXES. The Company's provision for income taxes was $24.2 million
and $18.9 million for the three months ended December 31, 1997 and 1996,
respectively. The effective tax rate for the three months ended December 31,
1997 increased slightly to 40.1% from 39.8% in the comparable period in 1996.
NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH NINE MONTHS ENDED DECEMBER 31,
1996
The Company's total gross income increased 67.2% from $280.8 million for the
nine months ended December 31, 1996 to $469.4 million for the nine months ended
December 31, 1997. Net income increased 30.9% from $74.0 million for the nine
months ended December 31, 1996 to $96.9 million for the nine months ended
December 31, 1997. Annualized return on average equity for the nine months ended
December 31, 1997 was 25.3%.
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>
NINE MONTHS
ENDED DECEMBER 31,
------------------------
<S> <C> <C>
1997 1996
----------- -----------
Gross income
Gain on sale of receivables............................................................. 48.10% 47.64%
Interest................................................................................ 36.51 39.17
Net servicing income.................................................................... 12.49 11.53
Other income............................................................................ 2.90 1.66
----------- -----------
Total gross income.................................................................... 100.00% 100.00%
----------- -----------
Expenses
Compensation and benefits............................................................... 23.88% 18.47%
Interest................................................................................ 25.55 28.50
Provision for loan losses............................................................... 0.72 0.46
General and administrative.............................................................. 15.12 8.84
----------- -----------
Total expenses........................................................................ 65.27% 56.27%
----------- -----------
Income before income taxes and minority interest.......................................... 34.73% 43.73%
Income taxes.............................................................................. 14.09 17.52
----------- -----------
Income before minority interest........................................................... 20.64 26.21
Minority interest of subsidiary........................................................... 0.01 (0.13)
----------- -----------
Net income............................................................................ 20.63% 26.34%
----------- -----------
----------- -----------
</TABLE>
16
<PAGE>
INCOME. Gain on sale of receivables increased $92.0 million, or 68.8%,
in the nine months ended December 31, 1997 as compared with the corresponding
period in 1996. The Company structured and sold $6.1 billion of mortgages,
loans and leases in the nine months ended December 31, 1997, an increase of
$2.7 billion from the nine months ended December 31, 1996. The positive
impact that higher volume had on gain on sale of receivables was partially
offset by an increase in the premiums paid for wholesale loan originations
and higher prepayment speed assumptions used to value the ESR.
Interest income increased $61.4 million, or 55.9%, for the nine months ended
December 31, 1997 from the corresponding period in 1996. Interest earned on
loans originated, purchased, or financed contributed $52.2 million to the
increase. The remaining $9.2 million increase reflects a higher level of
interest income recorded with respect to the ESR.
Net servicing income increased $26.3 million, or 81.1%, for the nine
months ended December 31, 1997 compared with the corresponding period in 1996
primarily due to increases in the size of the home equity servicing portfolio
and the volume of home equity loan sales and securitizations. The Company's
home equity loan servicing portfolio increased $3.4 billion from $5.7 billion
at December 31, 1996 to $9.1 billion at December 31, 1997, contributing $14.2
million to the increase in net servicing income for the nine months ending
December 31, 1997. The 84.8% increase in ContiMortgage and ContiWest home
equity loan sales and securitizations for the nine months ended December 31,
1997 over the corresponding period in 1996 resulted in a $10.3 million
increase in capitalized servicing income, net of amortization.
Other income increased $8.9 million, or 192.3%, for the nine month period
ended December 31, 1997 over the corresponding period in 1996. Other income
consists primarily of purchase premium refunds and mortgage processing fees,
and for the nine months ended December 31, 1997, equity in the income of
unconsolidated subsidiaries and miscellaneous income. Income from purchase
premium refunds and mortgage banking fees increased by approximately $1.7
million and $2.0 million, respectively. Equity in income from unconsolidated
subsidiaries and miscellaneous income contributed $3.1 million and $1.1
million to the increase, respectively. Miscellaneous income consisted of
income received in connection with the termination of a Strategic Alliance
agreement.
EXPENSES. Total expenses for the nine months ended December 31, 1997
increased $148.4 million or 93.9% from the corresponding period in 1996. This
increase in total expenses was primarily the result of the increase in the
number of employees resulting from the Company's expansion into retail loan
originations and costs associated with increased loan origination volume.
17
<PAGE>
The following table allocates the Company's compensation and benefits
general and administrative expenses and headcount between the Acquisitions and
all other activities. The increases were primarily due to increased retail
origination costs from the Acquisitions, the majority which were consolidated
into operations for the full nine months ended December 31, 1997 versus
consolidation for less than one quarter during fiscal 1997.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED DECEMBER 31, INCREASE
------------------------ ----------------------
1997 1996 AMOUNT %
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Compensation and benefits:
Acquisitions........................................................... $ 47,478 $ 7,041 $ 40,437 574.3%
Operations excluding Acquisitions...................................... 64,627 44,829 19,798 44.2%
----------- ----------- ----------- ---------
Total compensation and benefits.......................................... $ 112,105 $ 51,870 $ 60,235 116.1%
----------- ----------- ----------- ---------
----------- ----------- ----------- ---------
General and administrative:
Acquisitions........................................................... $ 32,994 $ 4,716 $ 28,278 599.6%
Operations excluding Acquisitions...................................... 37,958 20,114 17,844 88.7%
----------- ----------- ----------- ---------
Total general and administrative......................................... $ 70,952 $ 24,830 $ 46,122 185.8%
----------- ----------- ----------- ---------
----------- ----------- ----------- ---------
Headcount (at period end):
Acquisitions........................................................... 1,420 692 728 105.2%
Headcount excluding Acquisitions....................................... 1,050 654 396 60.6%
----------- ----------- ----------- ---------
Total headcount.......................................................... 2,470 1,346 1,124 83.5%
----------- ----------- ----------- ---------
----------- ----------- ----------- ---------
</TABLE>
As previously discussed and as demonstrated in the table above, the
acquisition of retail origination subsidiaries has resulted in significantly
higher levels of compensation and benefits expense and general and
administrative expenses. With respect to the Acquisitions, the percentage
increases in the expense categories noted above exceed the percentage increases
for headcount because results (and therefore expenses) for most of the
Acquisitions were consolidated into the Company's results for only a small
portion of the nine month period ended December 31, 1996. With respect to the
Company's activities exclusive of the Acquisitions, the expense increases are
indicative of the significant growth in the serviced loan portfolio and the
related growth in headcount to support that activity.
Interest expense increased $39.9 million, or 49.9%, for the nine months
ended December 31, 1997 as compared to the corresponding period in 1996. This
increase was primarily a result of an increase in short-term borrowings and
sales under the Company's Purchase and Sales Facilities. Total average
borrowings increased by $595.6 million for the nine months ended December 31,
1997 over the corresponding period in 1996.
INCOME TAXES. The Company's provision for income taxes was $66.2 million
and $49.2 million for the nine months ended December 31, 1997 and 1996,
respectively. The effective tax rate for the nine months ended December 31, 1997
increased slightly to 40.6% from 40.1% in the comparable period in fiscal 1996.
YEAR 2000
The "Year 2000" issue involves computer programs and applications that were
written using two digits (instead of four) to describe the applicable year.
Failure to successfully modify such programs and applications to be Year 2000
compliant may have a material adverse impact on the Company. Exposure arises not
only from potential consequences (e.g., business interruption) of certain of the
Company's own applications not being Year 2000 compliant, but the impact of
non-compliance by certain significant counterparties, including
18
<PAGE>
Strategic Alliances. The Company has undertaken an assessment to determine
the anticipated costs and remediation of the systems and applications, either
its own or those of material business counterparties, to make them Year 2000
compliant. This assessment is not yet complete; completion is expected in the
first quarter of fiscal 1999 (that is, the quarter ended June 30, 1998).
LIQUIDITY AND CAPITAL RESOURCES
In a securitization, the Company recognizes a gain on the sale of loans or
assets securitized upon the closing of the securitization, but does not receive
the majority of the cash representing such gain until it realizes the Excess
Spread, which occurs over the actual lives of the loans or other assets
securitized. This negative cash flow has been partially offset by the Company's
move into retail origination which resulted in an increase in the cash received
from origination points and other origination income included in the gain on
sale results. The move into retail origination also mitigates the impact of
premiums expended for wholesale loan originations. 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 premium paid in
connection with the acquisition of wholesale loans; (iii) fees and expenses
incurred in connection with its securitization program; (iv) over
collateralization or reserve account requirements in connection with loans and
leases pooled and sold; (v) ongoing administrative and other operating expenses;
(vi) payments related to tax obligations; (vii) interest and principal payments
relating to the Company's long-term debt and short-term borrowed funds; (viii)
the costs of the Purchase and Sale Facilities; and (ix) the cost of any new
acquisitions that the Company may pursue and subsequent purchase price
adjustments on prior acquisitions.
As a result of its growing securitization program, the Company has operated,
and expects to continue to operate, on a negative cash flow basis. The Company
securitized and sold in the secondary market $6.1 billion of loans in the nine
months ended December 31, 1997 compared with $3.4 billion in the nine months
ended December 31, 1996 and used $200.8 million of cash in operations during the
nine months ended December 31, 1997.
For the nine months ended December 31, 1997 the cash component of gross
income, excluding the cash expended for premiums on ContiMortgage wholesale loan
originations, amounted to $313.5 million, or 66.8% of gross income. The Company
paid $205.3 million for these premiums to create $291.5 million of ESR through
the securitization process. The cash expended for these premiums has been
recovered to the extent of $98.3 million from the proceeds of the September 1997
Net Interest Margin Securities ("NIMS") transaction in which the Company sold
$99.7 million of interest-only and residual certificates. The anticipated next
regular NIMS sale, planned for the fourth quarter of fiscal 1998, is expected to
provide most of the remaining cash expended for premiums through December 31,
1997.
As a credit enhancement to support the sale of senior interests, the Company
subordinates to the rights of holders of senior interests a portion of the
Excess Spread otherwise due to the Company. 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 over
collateralization to specified maximums either through addition to the cash
reserve account or paydown of the senior interests. The value of such "deposit"
accounts is included in the value of ESR and the related gain on sale of
receivables, net of necessary reserves for credit losses, if applicable. At
December 31, 1997, $216.2 million of such deposits were included in ESR.
19
<PAGE>
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 its Facilities, the issuance of shares of common stock, the issuance of
long-term debt and short-term borrowed funds.
In previous fiscal years, the Company sold ESR, with limited recourse, to
provide cash to fund the Company's securitization program. At December 31, 1997
$105.8 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 ESR
there is no liquid market for such instruments and no assurance can be given
that such opportunities will be available in the future. As noted above, another
method of generating liquidity from the ESR is through the sale of NIMS.
The Company had $2.4 billion of committed and $2.1 billion of uncommitted
sale capacity under the Facilities as of December 31, 1997. The Purchase and
Sale Facilities allow the Company to sell, with limited recourse, interests in
designated pools of loans and other assets. The Repurchase Agreement allows the
Company to sell receivables held for sale to a financial institution under an
agreement that the Company will repurchase the assets. The Facilities generally
have one year renewable terms (one Purchase and Sale Facility has a two-year
term), all of which will expire between March 1998 and December 1998. As of
December 31, 1997, the Company had utilized $759.7 million of the capacity under
the Facilities. The Company currently anticipates that it will be able to renew
these facilities when they expire and to obtain additional facilities.
On June 4, 1997, the Company completed a primary offering of 2,800,000
shares of common stock; an additional 420,000 shares were purchased by the
underwriters for over allotments. The net proceeds of the offering to the
Company were $100.8 million which were used for general corporate purposes
including funding loan originations and purchases, supporting securitization
transactions (including the retention of ESR), supporting other working capital
needs and funding strategic acquisitions.
On September 9, 1997, the Company initiated a $275 million Commercial Paper
Program, supported by an irrevocable direct-pay letter of credit is being
provided by a syndicate of banks. At December 31, 1997, $268.3 million of
commercial paper was outstanding.
In anticipation of growth in the Company's future operations, additional
financing sources will be required. The Company currently has commitments for
financing through the unsecured revolving credit facility and has filed, under
the Securities Act of 1933, a universal shelf registration to issue senior
unsecured debt. However, there can be no assurance that the Company will be
successful in consummating additional financing transactions in the future on
terms that the Company would consider to be favorable. Furthermore, no assurance
can be given that Continental Grain will provide such financing if the Company
is unable to obtain third party financing or that the terms of the Continental
Grain debt agreements will permit the Company to obtain such financing.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q, which
are not historical fact, may be deemed to be forward-looking statements under
the federal securities laws. There are many important factors that could cause
the Company's actual results to differ materially from those indicated in the
forward-looking statements. Such factors include, but are not limited to,
general economic conditions, interest rate risk, prepayment speeds, delinquency
and default rates, changes (legislative and otherwise) in the asset
securitization industry, demand for the Company's services, the impact of
certain covenants in loan agreements
20
<PAGE>
of the Company and Continental Grain, the degree to which the Company is
leveraged, its needs for financing, the net interest margin securities market,
and other risks identified in the Company's Securities and Exchange Commission
filings. In addition, it should be noted that past financial and operational
performance of the Company is not necessarily indicative of future financial and
operational performance.
21
<PAGE>
PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
11.1 Computation of the Company's earnings per common share
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
None.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONTIFINANCIAL CORPORATION
<TABLE>
<CAPTION>
DATE SIGNATURE TITLE
- ---------------- ------------------------------------- --------------------------------------------------------
<S> <C> <C>
February 17, /s/ Daniel J. Willett Senior Vice President and Chief Financial Officer
1998 ------------------------------------ (Principal Financial Officer)
Daniel J. Willett
February 17, /s/ Dennis G. Sullivan Vice President and Controller(Principal Accounting
1998 ------------------------------------ Officer)
Dennis G. Sullivan
</TABLE>
23
<PAGE>
EXHIBIT 11.1
CONTIFINANCIAL CORPORATION
CALCULATION OF EARNINGS PER SHARE
<TABLE>
<S> <C> <C>
BASIC
Net Income........................................................................................... $96,850,000
Weighted Average Shares
1st Quarter............................................................................. 44,757,322
2nd Quarter............................................................................. 46,853,920
3rd Quarter............................................................................. 46,870,941
----------
Average.......................................................................................... 46,160,728
----------
Year-to-date Basic EPS............................................................................. $2.10
----------
----------
DILUTED
Net Income........................................................................................... $96,850,000
Weighted Average Shares
1st Quarter............................................................................. 45,588,626
2nd Quarter............................................................................. 47,619,685
3rd Quarter............................................................................. 47,415,299
----------
Average.......................................................................................... 46,874,537
----------
Year-to-date diluted EPS........................................................................... $2.07
----------
----------
</TABLE>
<PAGE>
EXHIBIT 11.1
CONTIFINANCIAL CORPORATION
3RD QUARTER EPS CALCULATION
BASIC
<TABLE>
<CAPTION>
WEIGHTED
# OF SHARES WEIGHTING AVG. SHARE
----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Continental Grain Shares................................................................ 35,918,421 100% 35,918,421
Shares Issued in IPO.................................................................... 7,130,000 100% 7,130,000
Shares Acquired through exercise of options............................................. 1,996 100% 1,996
Shares Aquired Through Accelerated Vesting -8/15/96..................................... 1,996 100% 1,996
Shares Aquired Through Accelerated Vesting -8/15/96..................................... 53,220 100% 53,220
Shares Aquired Through Accelerated Vesting -11/19/96.................................... 3,990 100% 3,990
Shares Acquired through exercise of options--1/23/97.................................... 5,991 100% 5,991
Shares Acquired through exercise of options--2/19/97.................................... 3,395 100% 3,395
Shares Acquired through exercise of options--4/11/97.................................... 5,328 100% 5,328
Shares Acquired through exercise of options--4/30/97.................................... 5,326 100% 5,326
Shares Acquired through exercise of options--5/9/97..................................... 2,995 100% 2,995
Shares Acquired through exercise of options--8/19/97.................................... 11,185 100% 11,185
Vested Restricted Stock of former Employees............................................. 5,328 100% 5,328
Vested Restricted Stock of former Employees............................................. 5,321 100% 5,321
Secondary Equity Offering............................................................... 3,220,000 100% 3,220,000
Shares Acquired through exercise of options--11/17/97............. 17-Nov-97 31-Dec-97 22,370 49% 10,942
EFFECT OF RESTRICTED SHARES:
Effect of Restricted Shares:
Restricted Shares Outstanding during the Quarter
Restricted Shares Granted--IPO................................ 1,330,532
Vested Shares of Departed Employees: During the whole
quarter..................................................... (119,764)
---------
Oustanding Restricted Shares.................................. 1,210,768
Percentage Vested........................................... 40.00%
---------
Shares Outstanding........................................ 484,307 484,307 100% 484,307
---------
---------
New Awards of Restricted Shares
Restricted Shares Granted--1/15/97............................ 6,000
Percentage Vested........................................... 20.00%
---------
Shares Outstanding........................................ 1,200 1,200 100% 1,200
---------
---------
New Awards of Restricted Shares
Restricted Shares Granted--4/10/97............................ 20,000
Percentage Vested........................................... 0.00%
---------
Shares Outstanding........................................ 0 0 100% 0
---------
---------
New Awards of Restricted Shares
Restricted Shares Granted--5/1/97............................. 6,400
Percentage Vested........................................... 0.00%
---------
Shares Outstanding........................................ 0 0 100% 0
---------
---------
New Awards of Restricted Shares
Restricted Shares Granted--9/17/97............................ 10,000
Percentage Vested........................................... 0.00%
---------
Shares Outstanding........................................ 0 0 100% 0
---------
---------
Restricted Shares Outstanding for part of the Quarter:
none
Oustanding Restricted Shares
Percentage Vested
Shares Outstanding 0
Weighted Average Shares 46,870,941
Quarter income 35,140,000
Basic Earnings Per Share $0.75
</TABLE>
<PAGE>
EXHIBIT 11.1
CONTIFINANCIAL CORPORATION
3RD QUARTER EPS CALCULATION
DILUTED
<TABLE>
<CAPTION>
WEIGHTED
# OF SHARES WEIGHTING AVE. SHARES
------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Continental Grain Shares.................................................. 35,918,421 100% 35,918,421
Shares Issued in IPO...................................................... 7,130,000 100% 7,130,000
Shares Acquired through exercise of options............................... 1,996 100% 1,996
Shares Aquired Through Accelerated Vesting -8/15/96....................... 1,996 100% 1,996
Shares Aquired Through Accelerated Vesting -8/15/96....................... 53,220 100% 53,220
Shares Aquired Through Accelerated Vesting -11/19/96...................... 3,990 100% 3,990
Shares Acquired through exercise of options--1/23/97...................... 5,991 100% 5,991
Shares Acquired through exercise of options--2/19/97...................... 3,395 100% 3,395
Shares Acquired through exercise of options--4/11/97...................... 5,328 100% 5,328
Shares Acquired through exercise of options--4/30/97...................... 5,326 100% 5,326
Shares Acquired through exercise of options--5/9/97....................... 2,995 100% 2,995
Shares Acquired through exercise of options--8/19/97...................... 11,185 100% 11,185
Vested Restricted Stock of former Employees............................... 5,328 100% 5,328
Vested Restricted Stock of former Employees............................... 5,321 100% 5,321
Secondary Equity Offering................................................. 3,220,000 100% 3,220,000
Shares Acquired through exercise of
options--11/17/97................................. 17-Nov-97 31-Dec-97 22,370 49% 10,942
EFFECT OF RESTRICTED SHARES:
Effect through December 31, 1997
Assumed Proceeds:
Unamortized deferred comp. @ 12/31/97................................. 12,481,834
------------
Tax benefit on assumed exercise:
Total Restricted Shares....................... 1,253,168
Ave. Market Price for period.................. 27.873
----------
Value......................................... 34,929,552
----------
----------
Tax Effect (40%).............................. 13,971,821
Tax Effect of compensation.................... 10,707,161
----------
3,264,659.47
------------
Total Assumed Proceeds.................................................. 15,746,493.42
------------
------------
Repurchase Shares on Market
Total Assumed Proceeds................................................ 15,746,493.42
Ave. Market Price (for period)........................................ 27.873
------------
Number of Shares.................................................... 564,937.16
------------
------------
Incremental Shares Considered to be Outstanding
Restricted Shares..................................................... 1,253,168
Repurchase Shares..................................................... 564,937.16
------------
Incremental Shares.................................................. 688,230.84 100% 688,231
------------
------------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Effect of Options:
Options Exercised:
OPTIONS EXERCISED:
Number of Options............................... 22,370
Offering Price.................................. 21.11
---------
Proceeds on exercising options........................................ 472,230.70
Tax Effect:
Options Exercised............................. 22,370
Price @ exercise date......................... 29.151
---------
Value......................................... 652,108
---------
---------
Tax Effect (40.0%)............................ 260,843
Tax Effect of compensation.................... 188,892
---------
71,950.87
------------
Total Assumed Proceeds.................................................. 544,181.57
------------
------------
Repurchase Shares on Market
Total Assumed Proceeds................................................ 544,181.57
Price @ exercise date................................................. 29.151
------------
Number of Shares.................................................... 18,667.68
------------
------------
Incremental Shares Considered to be Outstanding
Granted Options....................................................... 22,370.00
Repurchase Shares..................................................... 18,667.68
------------
Incremental Shares.................................................. 3,702.32 51% 1,891
------------
------------
OPTIONS REMAINING:
Number of Options............................... 2,335,315
Offering Price.................................. 21.11
----------
Proceeds on exercising options........................................ 49,309,484.80
Tax Effect:
Options Remaining............................. 2,335,315
Ave. Market Price for period.................. 27.873
----------
Estimated value............................... 65,092,235
----------
----------
Tax Effect (40%)................................ 26,036,894
Tax Effect of compensation...................... 19,723,794
----------
6,313,100.08
------------
Total Assumed Proceeds.................................................. 55,622,584.88
------------
------------
Repurchase Shares on Market
Total Assumed Proceeds................................................ 55,622,584.88
Ave. Market Price (for quarter)....................................... 27.873
------------
Number of Shares.................................................... 1,995,572.23
------------
------------
Incremental Shares Considered to be Outstanding
Granted Options....................................................... 2,335,315.00
Repurchase Shares..................................................... 1,995,572.23
------------
Incremental Shares.................................................. 339,742.77 100.00% 339,743
------------
------------
Weighted Average Shares.............................................................................. 47,415,299
-----------
-----------
Quarter income....................................................................................... 35,140,000
-----------
-----------
Diluted Earnings Per Share........................................................................... $ 0.74
-----------
-----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1997
<CASH> 116,668
<SECURITIES> 1,227,228
<RECEIVABLES> 866,749
<ALLOWANCES> (2,904)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 21,539
<DEPRECIATION> (7,009)
<TOTAL-ASSETS> 2,357,986
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 477
<OTHER-SE> 611,825
<TOTAL-LIABILITY-AND-EQUITY> 2,357,986
<SALES> 0
<TOTAL-REVENUES> 469,408
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 183,057
<LOSS-PROVISION> 3,379
<INTEREST-EXPENSE> 119,913
<INCOME-PRETAX> 163,059
<INCOME-TAX> 66,154
<INCOME-CONTINUING> 96,850
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 96,850
<EPS-PRIMARY> 2.10
<EPS-DILUTED> 2.07
</TABLE>
