UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________to__________
1-14074
(Commission File Number)
ContiFinancial Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3852588
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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
-------------------------
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 46,747,370 shares of common stock outstanding as of August 10,
1999.
<PAGE>
ContiFinancial Corporation
Table of Contents
-----------------
PART I
Page
----
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets ................................... 3
Consolidated Statements of Operations ......................... 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
Recent Developments, Financial Results and Liquidity .......... 15
Selected Financial Data ....................................... 18
Results of Operations ......................................... 20
Liquidity and Capital Resources ............................... 23
Year 2000 ..................................................... 25
Forward-looking Statements .................................... 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk ....... 27
PART II
Item 1. Legal Proceedings ................................................ 29
Item 6. Exhibits and Reports on Form 8-K ................................. 29
Signatures ............................................................... 30
2
<PAGE>
CONTIFINANCIAL CORPORATION
Consolidated Balance Sheets as of June 30, 1999 and March 31, 1999
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
----------- -----------
Assets
------
<S> <C> <C>
Cash and cash equivalents ....................................................... $ 58,646 $ 112,839
Restricted cash ................................................................. 9,728 4,072
Receivables held for sale:
Receivables held for sale .................................................... 377,079 1,089,410
Allowance for loan losses .................................................... (4,773) (7,364)
----------- -----------
Receivables held for sale, net .................................................. 372,306 1,082,046
Other receivables ............................................................... 129,670 95,984
Due from affiliates ............................................................. 2,349 53,680
Interest-only and residual certificates ......................................... 561,372 722,012
Capitalized servicing rights .................................................... 94,121 105,273
Premises and equipment, net of accumulated depreciation of $12,002 and $13,454
as of June 30, 1999 and March 31, 1999, respectively ........................ 21,205 23,792
Cost in excess of equity acquired ............................................... 15,572 85,388
Equity investments in unconsolidated subsidiaries ............................... 5,660 4,978
Taxes receivable ................................................................ -- 13,024
Other assets .................................................................... 38,606 52,076
----------- -----------
Total assets ........................................................... $ 1,309,235 $ 2,355,164
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Accounts payable ................................................................ $ 74,051 $ 90,412
Receivables sold under agreements to repurchase ................................. 118,620 804,524
Due to affiliates ............................................................... 139 8,918
Short-term debt ................................................................. 420,116 512,797
Taxes payable ................................................................... 6,794 --
Long-term debt .................................................................. 699,221 699,225
Other liabilities ............................................................... 17,902 31,316
----------- -----------
Total liabilities ...................................................... 1,336,843 2,147,192
----------- -----------
Commitments and contingencies
Minority interest in subsidiaries ............................................... 4,707 4,721
Stockholders' equity (deficit):
Preferred stock (par value $0.01 per share; 25,000,000 shares authorized; none
issued at June 30, 1999 and March 31, 1999) ............................... -- --
Common stock (par value $0.01 per share; 250,000,000 shares authorized;
47,657,539 shares issued at June 30, 1999 and March 31, 1999) ............. 477 477
Paid-in capital .............................................................. 398,209 398,209
Accumulated deficit .......................................................... (401,018) (163,301)
Treasury stock (910,169 shares of common stock, at cost, at June 30, 1999 and
March 31, 1999) ........................................................... (25,106) (25,106)
Deferred compensation ........................................................ (4,877) (7,028)
----------- -----------
Total stockholders' equity (deficit) ................................... (32,315) 203,251
----------- -----------
Total liabilities and stockholders' equity ............................. $ 1,309,235 $ 2,355,164
=========== ===========
</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 Operations
for the three months ended June 30, 1999 and 1998
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Gross income (loss):
Gain (loss) on sale of receivables ................. $ (108,951) $ 37,572
Interest ........................................... 52,189 71,980
Net servicing income ............................... 12,907 26,720
Gain on sale of subsidiary (Note 5) ................ 22,121 --
Other income ....................................... 3,013 5,844
------------ ------------
Total gross income (loss) .................... (18,721) 142,116
------------ ------------
Expenses:
Compensation and benefits .......................... 51,056 43,324
Interest ........................................... 42,666 55,382
Provision for loan losses .......................... 1,953 722
General and administrative ......................... 43,138 32,511
Other charges (Note 3) ............................. 69,929 --
------------ ------------
Total expenses ............................... 208,742 131,939
------------ ------------
Income (loss) before income taxes and minority interest (227,463) 10,177
Provision for income taxes (Note 6) ................... 10,268 4,101
------------ ------------
Income (loss) before minority interest ................ (237,731) 6,076
Minority interest in earnings (losses) of subsidiaries (14) 56
------------ ------------
Net income (loss) ............................ $ (237,717) $ 6,020
============ ============
Basic earnings (loss) per common share ................ $ (5.12) $ 0.13
============ ============
Diluted earnings (loss) per common share .............. $ (5.12) $ 0.13
============ ============
Basic weighted average number of shares outstanding ... 46,448,688 46,685,863
============ ============
Diluted weighted average number of shares outstanding . 46,448,688 47,226,533
============ ============
</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 three months ended June 30, 1999 and 1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Net cash provided by (used in) operating activities ..................... $ 6,427 $(215,290)
--------- ---------
Cash flows from investing activities:
Proceeds from sale of majority-owned subsidiary, net (Note 5) .... 34,196 --
Acquisitions of majority-owned subsidiaries (net of cash acquired) (735) (21,595)
Acquisitions of minority-owned subsidiaries ...................... -- (366)
Purchase of premises and equipment, net .......................... (1,524) (3,511)
Other, net ....................................................... 199 --
--------- ---------
Net cash provided by (used in) investing activities ........... 32,136 (25,472)
--------- ---------
Cash flows from financing activities:
Decrease in short-term debt ...................................... (92,756) (24,678)
Increase in long-term debt ....................................... -- 199,778
Debt issuance costs .............................................. -- (11,658)
Repurchase of common stock ....................................... -- (19,632)
Other, net ....................................................... -- 55
--------- ---------
Net cash provided by (used in) financing activities ........... (92,756) 143,865
--------- ---------
Net decrease in cash and cash equivalents .............................. (54,193) (96,897)
Cash and cash equivalents at beginning of period ...................... 112,839 173,588
--------- ---------
Cash and cash equivalents at end of period ............................. $ 58,646 $ 76,691
========= =========
</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
June 30, 1999
(in thousands, except share data and where noted)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
ContiFinancial Corporation and its majority-owned subsidiaries (collectively,
"ContiFinancial" or the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission and, in the opinion of
management, reflect all normal recurring adjustments which are necessary for a
fair presentation of the financial position, results of operations, and cash
flows for each period shown. The preparation of financial statements 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. In addition, 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, 1999 (the "Annual
Report"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
2. RECENT DEVELOPMENTS, FINANCIAL RESULTS AND LIQUIDITY
In fiscal 1999 and continuing in the first quarter of fiscal 2000 the Company
has incurred significant losses. Over this period the Company has experienced a
significant decline in liquidity. As a result of these factors there is
substantial doubt as to the Company's ability to continue as a going concern.
The Company's operations were significantly and adversely affected by difficult
capital market conditions that commenced in the second quarter of fiscal 1999,
with the effects of these events, and their repercussions, continuing to affect
the Company's results through the first quarter of fiscal 2000. During the
second quarter of fiscal 1999, the economic instability in Asia and Russia
precipitated a global debt crisis (the "Debt Crisis") which caused a "flight to
quality" by investors. During this period, fixed income investors purchased
large amounts of U.S. Treasury securities, causing U.S. Treasury yields to
decrease significantly. As investor demand for U.S. Treasury securities
increased, the demand for other fixed income securities declined dramatically,
causing yields on such other securities to rise relative to U.S. Treasury
securities. Since almost all of the Company's loan originations were ultimately
funded by the issuance of securities backed by the loans it originates
(securitization), these unusual interest rate movements affected the market
value of all of the Company's originations, causing significant losses and
leading to a critical loss of liquidity.
While the Debt Crisis abated for other sectors of the economy in fiscal 1999,
its impact and subsequent repercussions continued to affect the "sub-prime"
industry in which the Company operates. The sudden and significant loss of
liquidity experienced throughout the industry, occurring within the context of
increasing market skepticism about the quality of earnings reported under
"gain-on-sale accounting", intensified capital market concerns about the
industry and severely curtailed access to the capital markets as a source of new
liquidity.
6
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
June 30, 1999
(in thousands, except share data and where noted)
In order to attempt to strengthen the Company's ability to operate in this
difficult environment, in the last quarter of fiscal 1999, the Company began to
search for an investor who could contribute additional equity capital to the
Company or a buyer who would be interested in purchasing the Company's business.
On May 14, 1999, the Company signed an indication of interest letter with
Residential Funding Corporation ("RFC") under which RFC indicated its interest
in acquiring all of the outstanding common stock of the Company. On July 2,
1999, a second indication of interest letter was signed with RFC, again for the
acquisition of all of the outstanding common stock of the Company, but on
revised business terms. Definitive documentation for the acquisition was then
negotiated with RFC. On July 14, 1999, just prior to the expected signing of the
definitive documentation, RFC informed the Company that it had determined not to
proceed with the acquisition.
In light of the failure to consummate the transaction with RFC, and with the
impending expiration of certain of the Company's credit facilities, the
Company's Board of Directors hired Mr. Alan Fishman as the new Chief Executive
Officer of the Company on July 20, 1999.
Following a review of the Company's situation, Mr. Fishman and other senior
members of the Company's management determined they should pursue a plan (the
"Restructuring Plan") of focusing the Company's operations on the most promising
of its origination channels, reducing the size of the Company, negotiating for
the restructuring or extension of the Company's credit facilities and then
recommencing the search for an equity investor in the Company or a buyer of the
Company's business.
Pursuant to the Restructuring Plan, in August 1999, the Company entered into a
definitive agreement with Greenwich Capital Financial Products, Inc.
("Greenwich"), a subsidiary of Greenwich Capital Markets, Inc., to provide
ContiFinancial with a $500 million revolving servicing-released whole loan
purchase facility with a maximum aggregate purchase commitment of up to $1.5
billion, at ContiFinancial's option, through March 31, 2000. Greenwich also will
provide a warehouse facility of up to $250 million on a revolving basis. This
facility also expires on March 31, 2000. In addition to the two facilities,
Greenwich also agreed to underwrite, by the end of August 1999, an approximately
$800 million securitization of home equity loans currently funded under
ContiFinancial's warehouse facilities. It is intended that these arrangements
with Greenwich will provide the Company with the necessary warehouse financing
to support the reduced amount of originations contemplated as the Restructuring
Plan is being implemented.
Also in August 1999, the Company began the implementation of a workforce
reduction plan which will result in the termination of approximately 30% of the
Company's employees in order to achieve the strategic goals of focusing the
Company's origination on the channels with the greatest potential and reducing
the overall size of the Company. See Note 9.
7
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
June 30, 1999
(in thousands, except share data and where noted)
On August 19, 1999, the Company agreed with the lenders under its Revolving
Credit Facility and Commercial Paper Program (collectively, the "Bank
Facilities") to extend the maturity date of the Bank Facilities from August 20,
1999 to March 31, 2000. The Company also agreed to certain modifications of the
Bank Facilities including a $20 million minimum liquidity covenant. The
agreement also includes providing collateral to the lenders in the form of a
lien on certain Excess Spread Receivables with a June 30, 1999 book value of
approximately $147 million. The interest rate on each facility remains at LIBOR
plus 300 basis points.
With the objectives of the Restructuring Plan of refocusing the Company's
operations, reducing the size of the Company and restructuring and extending the
Company's credit facilities being well underway, the Company now plans to
recommence its search for a new equity investor or buyer of the Company's
business.
During this upcoming period, the Company expects that it will be cash flow
negative and will operate at a loss. The Company's operations during this period
are dependent on the continued availability of the Bank Facilities and the
warehouse financing under the Greenwich arrangements as well as the subservicing
agreement with ContiGroup Companies, Inc., formerly Continental Grain Company.
In addition, the Company's cash reserves may not be sufficient to meet the
Company's cash needs during this period. There can be no assurance that an
equity investor or buyer of the Company's operations can be found on a timely
basis.
As a result of these developments described above, the Company has determined
that the carrying value of Cost in excess of equity acquired on the Company's
balance sheet has been impaired and should be written-down (see Note 3 and
Management's Discussion and Analysis of Financial Condition and Results of
Operations). The Company has also determined that it may not be able to achieve
the results assumed in its prior loan loss projections; therefore, assumptions
as to future loss severities were increased, resulting in a fair value
adjustment to interest-only and residual certificates (see Note 4 and
Management's Discussion and Analysis of Financial Condition and Results of
Operations).
For the three months ended June 30, 1999, the Company incurred a net loss of
$237.7 million, primarily due to the fair value adjustment to interest-only and
residual certificates and the write-down of Cost in excess of equity acquired as
discussed above. As a result of this net loss, stockholders' equity has been
reduced to a deficit balance of $32.3 million.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. Accordingly, the financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
8
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
June 30, 1999
(in thousands, except share data and where noted)
3. OTHER CHARGES
Other charges included in the Company's Consolidated Statements of Operations
for the three months ended June 30, 1999 consisted of the following:
Three Months
Ended
June 30, 1999
-------------
Write-down of cost in excess of equity acquired $59,953
Restructuring charges ......................... 7,842
Other ......................................... 2,134
-------
Total ..................................... $69,929
=======
Based on the recent developments discussed in Note 2, management made a
determination that the carrying value of Cost in excess of equity acquired
related to most of the Company's operations had been completely impaired and
appropriate write-downs had to be recorded.
The restructuring charges of $7.8 million primarily represent legal and
consulting fees related to restructuring.
4. INTEREST-ONLY AND RESIDUAL CERTIFICATES
Interest only and residual certificates (also referred to as excess spread
receivables or ESR) represents the present value of the 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. At June 30, 1999 and March 31,1999, the Company's ESR portfolio
consisted of the following:
June 30, March 31,
1999 1999
-------- --------
(in thousands)
Home equity:
ContiMortgage/ContiWest ........................ $499,101 $611,320
Other servicers ................................ 20,967 24,800
-------- --------
Total home equity ........................... 520,068 636,120
Home improvement ................................... 22,130 4,046
Commercial real estate ............................. 6,164 6,263
Auto ............................................... 7,301 69,804
Other .............................................. 5,709 5,779
-------- --------
Total ESR portfolio ......................... $561,372 $722,012
======== ========
9
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
June 30, 1999
(in thousands, except share data and where noted)
The changes in ESR from March 31, 1999 to June, 30, 1999 are presented in the
table below:
Interest-only and residual certificates (in thousands):
-------------------------------------------------------
Balance as of March 31, 1999 ................... $ 722,012
New securitizations ......................... 17,773
ESR received in Empire asset swap ........... 17,964
Net cash distributions from REMICs and trusts (18,200)
Sale of subsidiary .......................... (61,249)
Accruals of interest income ................. 12,178
Clean-up call on previously sold ESR ........ 22,076
Fair value adjustments ...................... (151,182)
---------
Balance as of June 30, 1999 .................... $ 561,372
=========
In accordance with SFAS No. 134, "Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise", the Company continues to classify ESR as "trading
securities". As such, they are carried at fair value in the Consolidated Balance
Sheets. Unrealized changes in ESR fair value are included in Gain (loss) on sale
of receivables on the accompanying Consolidated Statements of Operations in the
period of the change.
The Company has, from time to time, completed sales of ESR as either sales with
limited recourse or Net Interest Margin Securities ("NIMS") sales. Nevertheless,
there is only a limited market for the sale of ESR. Consequently, the Company
estimates the fair value of ESR through the application of a discounted cash
flow analysis, which requires the use of various assumptions.
A significant 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 contractually scheduled
reductions, and prepayment speeds are generally expressed as an annualized
Conditional (or Constant) Prepayment Rate ("CPR"). In determining the fair value
of the ContiMortgage/ContiWest ESR portfolio as of June 30, 1999, the Company's
weighted average estimated future CPR was 28.7% as compared to 28.3% at March
31, 1999.
Another significant factor that is considered in estimating the fair value of
ESR is the estimate of future credit losses. As credit enhancement, the ESR is
subordinate to the rights of the holders of the senior pass-through securities.
For the three months ended June 30, 1999, the Company recorded fair value
write-downs of $151.2 million on Interest-only and residual certificates,
primarily reflecting increased estimates of credit losses in the
ContiMortgage/ContiWest portfolio. Aggregate lifetime credit losses (historical
plus future) as a percentage of the original pool balances for the
ContiMortgage/ContiWest ESR portfolio was estimated to be 3.50% at June 30, 1999
as compared to 2.91% at March 31, 1999. Based on developments during the quarter
ended June 30, 1999 as discussed in Note 2, management made a determination that
the Company most likely would not be able to achieve the results assumed in its
prior loan loss projections; therefore, assumptions as to future loss severities
were increased, resulting in a fair value adjustment to interest-only and
residual certificates of $151.2 million.
10
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
June 30, 1999
(in thousands, except share data and where noted)
The Company determines the discount rate used in estimating fair value by
selecting a rate that it believes is commensurate with the risks involved. The
Company recognizes that the ESR discount rate when interacting with the other
two assumptions, losses and prepayment, is a "risk-adjusted" rate. In
determining this rate the Company considers many factors including a comparison
to the yields on other financial instruments with prepayment or credit risk. The
future cash flows estimated as of June 30, 1999 and March 31, 1999, taking into
consideration estimated prepayment rates and credit losses, were discounted at
12% to arrive at the fair value amounts presented in the accompanying
Consolidated Balance Sheets.
Assumptions regarding future CPR and credit losses are subject to volatility
that could materially affect operating results. Both the amount and timing of
estimated ESR cash flows are dependent on the performance of the underlying
loans, and actual cash flows may vary significantly from expectations. If actual
prepayment speeds or credit losses in future periods were to be higher than the
assumptions used in the Company's fair value estimate, or if the estimated
market discount rate were to increase, the ESR carrying value would have to be
written down through a charge to earnings, which could cause the Company to
report losses in future periods. Given the size of ContiMortgage/ContiWest's
servicing portfolio, even a modest change in ESR fair value assumptions can have
a relatively large impact on the ESR fair value. The table below illustrates the
impact of a positive or negative change in a single assumption used to determine
fair value for the ContiMortgage/ContiWest related ESR while keeping the
absolute value of the other two assumptions constant. The impact of changes in
these assumptions are not linear. As of June 30, 1999, changes in the
assumptions would have approximately the following impact on fair value:
Factor Change Fair value impact
------ ------ -----------------
Annual CPR +100 basis points $(26 million)
Annual CPR -100 basis points $ 27 million
Lifetime credit losses + 10 % $(61 million)
Lifetime credit losses - 10 % $ 78 million
Discount rate +100 basis points $(27 million)
Discount rate -100 basis points $ 29 million
5. GAIN ON SALE OF SUBSIDIARY
On June 11, 1999, the Company sold its interest in its wholly-owned subsidiary,
Triad Financial Corporation ("Triad") to Fairlane Credit LLC, a wholly-owned
subsidiary of Ford Motor Credit Company. The sale of Triad resulted in a gain of
approximately $22 million and provided gross proceeds of approximately $134
million through sale proceeds, repayment of intercompany debt and net return of
intercompany warehouse financing. Of this amount, approximately $95 million was
used to pay down the Company's Bank Facilities.
11
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
June 30, 1999
(in thousands, except share data and where noted)
6. TAXES
SFAS No. 109 requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion of the deferred tax
assets will not be realized. The Company has provided a valuation allowance for
the entire amount of the net deferred tax asset since it is more likely than not
that the net deferred tax asset will not be realized.
Due to the Company's ownership of REMIC residual certificates, the Federal tax
provision for the three months ended June 30, 1999 is based on excess inclusion
generated by the ownership of these certificates.
7. EARNINGS PER SHARE
The following table presents a reconciliation of basic and diluted earnings
(loss) per common share.
<TABLE>
<CAPTION>
Three months ended
June 30,
--------------------
1999 1998
---- ----
<S> <C> <C>
Net income (loss) ................................... $ (237,717) $ 6,020
============ ===========
Basic weighted average number of shares outstanding . 46,448,688 46,685,863
Adjustments for dilutive shares outstanding:
Restricted shares ................................ -- 55,235
Options .......................................... -- 485,435
Diluted weighted average number of shares outstanding 46,448,688 47,226,533
============ ===========
Earnings (loss) per common share:
Basic ............................................ $ (5.12) $ 0.13
============ ===========
Diluted .......................................... $ (5.12) $ 0.13
============ ===========
</TABLE>
For the three months ended June 30, 1999, diluted loss per share equals basic
loss per share, as the dilutive calculation would have an antidilutive impact as
a result of the net loss incurred in the quarter. Options to purchase 296,000
shares of common stock at a weighted average exercise price of $31.78,
outstanding during the three months ended June 30, 1998, were not included in
the computation of diluted earnings per share, as they were antidilutive.
12
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
June 30, 1999
(in thousands, except share data and where noted)
8. DEBT
Short-term and long-term debt at June 30, 1999 and March 31, 1999 consisted of
the following:
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
-------- --------
<S> <C> <C>
Short-term debt:
Commercial paper ...................................... $256,798 $312,477
Revolving Credit Facility ............................. 163,000 200,000
Current portion of long-term debt ..................... 318 320
-------- --------
Total short-term debt .................................... $420,116 $512,797
======== ========
Long-term debt:
8 3/8% Senior Notes, $300 million face amount, due 2003 $299,434 $299,405
7 1/2% Senior Notes, $200 million face amount, due 2002 199,582 199,547
8 1/8% Senior Notes, $200 million face amount, due 2008 199,796 199,792
Capitalized lease ..................................... 409 481
-------- --------
Total long-term debt ..................................... $699,221 $699,225
======== ========
</TABLE>
As of December 31, 1998 and continuing through June 30, 1999, the Company's
leverage ratio exceeded the leverage ratio test under the covenants of its
outstanding Senior Notes. As a result, the Company is prevented from issuing
additional unsecured debt until its leverage ratio is below such test. As of
December 31, 1998, the Company and two of its lenders agreed to amend certain
provisions of the Repurchase Agreements. Amendments were received from the
Repurchase Agreement lenders changing the leverage ratio to 2.75 to 1. These
Repurchase Agreements were again amended as of March 31, 1999. One agreement was
amended to remove all financial covenants through August 20, 1999, while the
other removed the financial covenants to the July 1, 1999 maturity date of the
facility. Subsequent to June 30, 1999, one Repurchase Agreement matured and was
not extended while the other was replaced with a new facility that does not
include any financial covenants.
13
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
June 30, 1999
(in thousands, except share data and where noted)
As of December 31, 1998, amended financial covenants were also received changing
the leverage and fixed charge ratios and the minimum net worth test in the Bank
Facilities, and lenders agreed to exclude certain charges from the covenant
ratio calculations. As of March 31, 1999, the Bank Facilities were amended to
eliminate the financial covenants and borrowing base provisions, among other
things. As part of the bank amendment, the Company agreed to reduce commitments
under the Bank Facilities by 75% of the total proceeds received by the Company
for the sale of Triad. On June 11, 1999, the sale of Triad was closed, and the
Bank Facilities commitments were reduced by approximately $95 million. If the
above mentioned amendments had not been obtained, the Company would not have
been in compliance with the covenants. The Company was in compliance with the
amended covenants of the Revolving Credit Facility, the Commercial Paper Program
and the Repurchase Agreements as of June 30, 1999. As part of the December
amendments to the Revolving Credit Facility, the Company had agreed to prepay
the Revolving Credit Facility on August 20, 1999, which made the Revolving
Credit Facility coterminous with the Commercial Paper Program. As part of the
March amendments, the interest rates of the Revolving Credit Facility and the
Commercial Paper Program were increased to LIBOR plus 300 basis points.
On August 19, 1999, the Company agreed with the lenders under its Bank
Facilities to extend the maturity date of the Bank Facilities from August 20,
1999 to March 31, 2000. The Company also agreed to certain modifications of the
Bank Facilities including a $20 million minimum liquidity covenant. The
agreement also includes providing collateral to the lenders in the form of a
lien on certain Excess Spread Receivables with a June 30, 1999 book value of
approximately $147 million. The interest rate on each facility remains at LIBOR
plus 300 basis points.
9. SUBSEQUENT EVENTS
In August 1999, the Company began the implementation of a workforce reduction
plan which will result in the termination of approximately 30% of the Company's
employees in order to achieve the strategic goals of the Company's restructuring
plan as discussed in Note 2.
Effective in July 1999 and August 1999, the Company established the CFN and CMC
1999 Retention Bonus Plans (the "Plans") for the purpose of retaining the
valuable services of the Company's key employees through certain dates. In order
to guarantee payment under the Plans, the Company established and funded
irrevocable Trusts in the amount of $16.1 million.
Severance for terminated employees under the workforce reduction plan and
charges related to the Plans are approximately $7.2 million and $16.1 million,
respectively, and will be recorded in the second quarter of fiscal 2000.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This discussion should be read in conjunction with the accompanying unaudited
Condensed Consolidated Financial Statements and notes thereto 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."
Recent Developments, Financial Results and Liquidity
In fiscal 1999 and continuing in the first quarter of fiscal 2000 the Company
has incurred significant losses. Over this period the Company has experienced a
significant decline in liquidity. As a result of these factors there is
substantial doubt as to the Company's ability to continue as a going concern
(see Note 2 to the Consolidated Financial Statements).
The Company's operations were significantly and adversely affected by difficult
capital market conditions that commenced in the second quarter of fiscal 1999,
with the effects of these events, and their repercussions, continuing to affect
the Company's results through the first quarter of fiscal 2000. During the
second quarter of fiscal 1999, the economic instability in Asia and Russia
precipitated a global debt crisis (the "Debt Crisis") which caused a "flight to
quality" by investors. During this period, fixed income investors purchased
large amounts of U.S. Treasury securities, causing U.S. Treasury yields to
decrease significantly. As investor demand for U.S. Treasury securities
increased, the demand for other fixed income securities declined dramatically,
causing yields on such other securities to rise relative to U.S. Treasury
securities. Since almost all of the Company's loan originations were ultimately
funded by the issuance of securities backed by the loans it originates
(securitization), these unusual interest rate movements affected the market
value of all of the Company's originations, causing significant losses and
leading to a critical loss of liquidity.
While the Debt Crisis abated for other sectors of the economy in fiscal 1999,
its impact and subsequent repercussions continued to affect the "sub-prime"
industry in which the Company operates. The sudden and significant loss of
liquidity experienced throughout the industry, occurring within the context of
increasing market skepticism about the quality of earnings reported under
"gain-on-sale accounting", intensified capital market concerns about the
industry and severely curtailed access to the capital markets as a source of new
liquidity.
In order to attempt to strengthen the Company's ability to operate in this
difficult environment, in the last quarter of fiscal 1999, the Company began to
search for an investor who could contribute additional equity capital to the
Company or a buyer who would be interested in purchasing the Company's business.
On May 14, 1999, the Company signed an indication of interest letter with
Residential Funding Corporation ("RFC") under which RFC indicated its interest
in acquiring all of the outstanding common stock of the Company. On July 2,
1999, a second indication of interest letter was signed with RFC, again for the
acquisition of all of the outstanding common stock of the Company, but on
revised business terms. Definitive documentation for the acquisition was then
negotiated with RFC. On July 14, 1999, just prior to the expected signing of the
definitive documentation, RFC informed the Company that it had determined not to
proceed with the acquisition.
15
<PAGE>
In light of the failure to consummate the transaction with RFC, and with the
impending expiration of certain of the Company's credit facilities, the
Company's Board of Directors hired Mr. Alan Fishman as the new Chief Executive
Officer of the Company on July 20, 1999.
Following a review of the Company's situation, Mr. Fishman and other senior
members of the Company's management determined they should pursue a plan (the
"Restructuring Plan") of focusing the Company's operations on the most promising
of its origination channels, reducing the size of the Company, negotiating for
the restructuring or extension of the Company's credit facilities and then
recommencing the search for an equity investor in the Company or a buyer of the
Company's business.
Pursuant to the Restructuring Plan, in August 1999, the Company entered into a
definitive agreement with Greenwich Capital Financial Products, Inc.
("Greenwich"), a subsidiary of Greenwich Capital Markets, Inc., to provide
ContiFinancial with a $500 million revolving servicing-released whole loan
purchase facility with a maximum aggregate purchase commitment of up to $1.5
billion, at ContiFinancial's option, through March 31, 2000. Greenwich also will
provide a warehouse facility of up to $250 million on a revolving basis. This
facility also expires on March 31, 2000. In addition to the two facilities,
Greenwich also agreed to underwrite, by the end of August 1999, an approximately
$800 million securitization of home equity loans currently funded under
ContiFinancial's warehouse facilities. It is intended that these arrangements
with Greenwich will provide the Company with the necessary warehouse financing
to support the reduced amount of originations contemplated as the Restructuring
Plan is being implemented.
Also in August 1999, the Company began the implementation of a workforce
reduction plan which will result in the termination of approximately 30% of the
Company's employees in order to achieve the strategic goals of focusing the
Company's origination on the channels with the greatest potential and reducing
the overall size of the Company. See Note 9 to the Consolidated Financial
Statements.
On August 19, 1999, the Company agreed with the lenders under its Revolving
Credit Facility and Commercial Paper Program (collectively, the "Bank
Facilities") to extend the maturity date of the Bank Facilities from August 20,
1999 to March 31, 2000. The Company also agreed to certain modifications of the
Bank Facilities including a $20 million minimum liquidity covenant. The
agreement also includes providing collateral to the lenders in the form of a
lien on certain Excess Spread Receivables with a June 30, 1999 book value of
approximately $147 million. The interest rate on each facility remains at LIBOR
plus 300 basis points.
With the objectives of the Restructuring Plan of refocusing the Company's
operations, reducing the size of the Company and restructuring and extending the
Company's credit facilities being well underway, the Company now plans to
recommence its search for a new equity investor or buyer of the Company's
business.
During this upcoming period, the Company expects that it will be cash flow
negative and will operate at a loss. The Company's operations during this period
are dependent on the continued availability of the Bank Facilities and the
warehouse financing under the Greenwich arrangements as well as the subservicing
agreement with ContiGroup Companies, Inc., formerly Continental Grain Company.
In addition, the Company's cash reserves may not be sufficient to meet the
Company's cash needs during this period. There can be no assurance that an
equity investor or buyer of the Company's operations can be found on a timely
basis.
As a result of these developments described above, the Company has determined
that the carrying value of Cost in excess of equity acquired on the Company's
balance sheet has been impaired and should be written-down (see Note 3 to the
Consolidated Financial Statements). The Company has also determined that it may
not be able to achieve the results assumed in its prior loan loss projections;
therefore, assumptions as to future loss severities were increased, resulting in
a fair value adjustment to interest-only and residual certificates (see Note 4
to the Consolidated Financial Statements).
16
<PAGE>
For the three months ended June 30, 1999, the Company incurred a net loss of
$237.7 million, primarily due to the fair value adjustment to interest-only and
residual certificates and the write-down of Cost in excess of equity acquired as
discussed above. As a result of this net loss, stockholders' equity has been
reduced to a deficit balance of $32.3 million.
17
<PAGE>
Selected Financial Data
ContiFinancial Corporation
Loan Originations, Securitizations and Sales
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the three months ended
June 30, %
-------------------------- Incr.
1999 1998 (Decr.)
<S> <C> <C> <C>
Loan Originations
Home equity, home improvement
and other residential mortgage loans:
Brokers ...................................................... $ 416,058 $ 308,188 35.00%
Correspondents ............................................... 558,212 1,349,429 (58.63)%
Direct retail ................................................ 502,141 533,632 (5.90)%
---------- ----------
Total home equity, home improvement
and other residential mortgage loans ............................ 1,476,411 2,191,249 (32.62)%
---------- ----------
Commercial real estate mortgage loans:
Conduit (ContiMAP and affiliates) ............................ -- 718,783 (100.00)%
Keystone ..................................................... 319,325 217,952 46.51%
---------- ----------
Total commercial real estate loans .............................. 319,325 936,735 (65.91)%
Triad auto loans ................................................ 88,675 70,546 25.70%
---------- ----------
Total loan originations ................................... $1,884,411 $3,198,530 (41.09)%
========== ==========
Securitizations and Sales
ContiMortgage/ContiWest
securitizations .............................................. $ 800,000 $1,750,000 (54.29)%
Other home equity, home improvement and
other residential mortgage sales ............................. 584,365 196,183 197.87%
---------- ----------
Total home equity, home improvement
and other residential mortgage sales ............................ 1,384,365 1,946,183 (28.87)%
---------- ----------
Commercial real estate mortgage loans:
Whole loan sales ............................................. 380,652 -- n/a
Keystone ..................................................... 319,325 217,952 46.51%
---------- ----------
Total commercial real estate mortgage
loans ........................................................ 699,977 217,952 221.16%
Triad auto loans ................................................ -- 57,667 (100.00)%
Strategic alliances ............................................. 12,783 100,249 (87.25)%
---------- ----------
Total securitizations and sales ........................... $2,097,125 $2,322,051 (9.69)%
========== ==========
</TABLE>
n/a - not applicable
18
<PAGE>
ContiMortgage Corporation
Delinquencies, Defaults and Losses
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
ContiMortgage June 30, March 31, June 30,
Servicing Portfolio 1999 1999 1998
- ------------------- ----------- ----------- ------------
<S> <C> <C> <C>
Number of loans serviced (at period end) 192,634 194,032 170,425
Serviced loan portfolio (at period end) $12,902,516 $12,966,131 $11,154,731
=========== =========== ===========
Delinquencies:
30 - 59 days ........................ 1.60% 1.39% 2.57%
60 - 89 days ........................ 0.52% 0.51% 0.85%
90 days and over .................... 0.05% 0.44% 0.49%
----------- ----------- -----------
Total delinquencies (%) ................ 2.17% 2.34% 3.91%
=========== =========== ===========
Total delinquencies ($) ................ $ 279,651 $ 303,802 $ 435,927
=========== =========== ===========
Defaults:
Foreclosure ......................... 2.57% 2.29% 2.14%
Bankruptcy .......................... 1.76% 1.65% 1.54%
Real estate owned ................... 1.09% 1.04% 0.92%
Loss mitigation and legal (1) ....... 1.26% 1.24% 0.76%
----------- ----------- -----------
Total defaults (%) ..................... 6.68% 6.22% 5.36%
=========== =========== ===========
Total defaults ($) ..................... $ 861,613 $ 806,656 $ 598,226
=========== =========== ===========
</TABLE>
(1) This category includes non-performing accounts specifically identified for
accelerated resolution under the Company's loss mitigation program. Resolution
strategies include refinances, reinstatements, and full payoffs; forbearance
plans; pre-foreclosure sales for less than full payoff; third party foreclosure
sales; deed-in-lieu (or "cash for keys"); and charge-offs.
<TABLE>
<CAPTION>
For the three For the twelve
ContiMortgage months ended months ended
Loan Loss Experience June 30, 1999 June 30, 1999
-------------------- ------------- -------------
<S> <C> <C>
Average serviced loan portfolio ..................... $12,886,579 $12,608,710
=========== ===========
Net losses:
REMICs and loans held pending securitization ..... 50,415 156,201
Loans and properties purchased out of REMICs ..... 739 4,848
----------- -----------
Total net losses .............................. $ 51,154 $ 161,049
=========== ===========
Realized net losses as a percentage of average amount
outstanding (2):
REMICs and loans held pending securitization ..... 1.57% 1.24%
Loans and properties purchased out of REMICs ..... 0.02% 0.04%
----------- -----------
Total realized net losses as a percentage of average
amount outstanding ............................... 1.59% 1.28%
=========== ===========
(2) Amounts for the three months ended June 30, 1999 are annualized.
</TABLE>
19
<PAGE>
Results of Operations
Three Months Ended June 30, 1999 Compared with the Three Months Ended June 30,
1998
The Company incurred a net loss of $237.7 million for the three months ended
June 30, 1999 compared to net income of $6.0 million for the three months ended
June 30, 1998, a decrease of $243.7 million. Total gross income (loss) decreased
by $160.8 million, to a loss of $18.7 million for the three months ended June
30, 1999 compared to income of $142.1 million for the three months ended June
30, 1998. Total expenses increased by $76.8 million, to $208.7 million for the
three months ended June 30, 1999 compared to $131.9 million for the three months
ended June 30, 1998.
Gain (Loss) on Sale of Receivables:
The following table sets forth the components of gain (loss) on sale of
receivables for the three months ended June 30, 1999 and 1998:
Three Months Ended
June 30,
-------------------------
(dollars in thousands) 1999 1998
--------- ---------
Home equity/home improvement ..................... $ 40,407 $ 86,825
Commercial real estate ........................... 1,824 1,262
Auto and Other ................................... -- 8,337
--------- ---------
Gain before fair value adjustments ........ 42,231 96,424
Fair value adjustments ........................... (151,182) (58,852)
--------- ---------
Gain (loss) after fair value adjustments .. $(108,951) $ 37,572
========= =========
Gain before fair value adjustments decreased $54.2 million or 56.2% for the
three months ended June 30, 1999 as compared to the same three months of fiscal
1999, whereas total securitizations and sales decreased 10%, from $2.3 billion
to $2.1 billion for the same respective periods. For ContiMortgage/ContiWest
transactions, gains before fair value adjustments expressed as a percentage of
total securitizations and sales decreased to 2.92% from 4.46% for the respective
three month periods ended June 30, 1999 and 1998. This decrease in profitability
between the two periods reflects higher loss assumptions (see below) and higher
investor spread requirements due to the Company's impaired financial condition.
For the three months ended June 30, 1999, the Company recorded fair value
write-downs of $151.2 million on Interest-only and residual certificates,
primarily reflecting increased estimates of credit losses in the
ContiMortgage/ContiWest portfolio. In response to events occurring in the first
fiscal quarter, as more fully described in Note 2 to the Consolidated Financial
Statements, management made a determination that the Company most likely would
not be able to achieve the results assumed in its prior loan loss projections;
therefore, assumptions as to future loss severities were increased. For the
three months ended June 30, 1998, the fair value adjustments of $58.9 million
resulted primarily due to increased estimates of future prepayment speeds and
losses in the ContiMortgage/ContiWest portfolio.
20
<PAGE>
Interest Income and Expense:
In the normal course of its activities, the Company carries inventories of loans
pending sale or securitization and earns a positive spread between the interest
income earned on those loans and the cost of financing such loans. Interest
income also includes accrued imputed interest on Excess Spread Receivables
("ESR"). In addition to the cost of financing loans pending sale or
securitization, interest expense includes the cost of financing the Company's
longer term capital requirements, including the cost of strategic acquisitions.
Interest income during the three months ended June 30, 1999 declined $19.8
million or 27.5% compared to the three months ended June 30, 1998. Interest
expense fell $12.7 million or 23.0% for the three months ended June 30, 1999
compared to the three months ended June 30, 1998. These decreases reflect the
decline in loan originations that began in the second half of fiscal 1999 and
continued during the first quarter of fiscal 2000, the elimination of
substantially all financing commitments to strategic alliance clients, and the
reduction in the balance of ESR.
Net servicing Income:
Net servicing income consists of servicing fees and prepayment penalties
collected from borrowers, and capitalized servicing activity. Net servicing
income declined $13.8 million or 51.7% in the three months ended June 30, 1999
compared to the three months ended June 30, 1998. The following table presents
the components of servicing income for the two periods:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
----------------------------
(in thousands) 1999 1998
------------ ------------
<S> <C> <C>
Capitalized servicing created ..................... $ 7,052 $ 21,002
Premiums paid for capitalized prepayment penalties (1,736) (4,667)
Amortization of capitalized servicing ............. (15,819) (8,085)
Fees and prepayment penalty collections ........... 28,910 18,470
Impairment of capitalized servicing ............... (5,500) --
------------ ------------
Net servicing income .............................. $ 12,907 $ 26,720
============ ============
Total ContiMortgage/ContiWest securitization volume $ 800,000 $ 1,750,000
Average ContiMortgage servicing portfolio
(excluding warehouse) .......................... $ 11,510,233 $ 9,155,299
</TABLE>
The decrease of $14.0 million in capitalized servicing created in the three
months ended June 30, 1999 compared to the first quarter of fiscal 1999 was
primarily related to the decline in securitization volume and a lower
capitalization rate applied to prepayment penalties in anticipation of slower
future prepayment speeds. The increase in amortization of capitalized servicing
of $7.7 million in the three months ended June 30, 1999 compared to the three
months ended June 30, 1998 was partly due to a 20% increase in the amount of
capitalized servicing created during fiscal 1999, which affects the level of
amortization in the first quarter of fiscal 2000, as compared to the amount of
capitalized servicing created in fiscal 1998, such balances being $76.6 million
and $63.6 million, respectively. In addition, the prepayment penalty component
of capitalized servicing created was higher in fiscal 1999 than fiscal 1998, and
since prepayment penalties have set expiration dates that may be as short as six
months, capitalized prepayment penalties are, on average, amortized over a much
shorter period than normal servicing fees.
21
<PAGE>
The Company recorded an estimated impairment reserve of $5.5 million in the
first quarter of fiscal 1999 because certain securitized portfolios have reached
delinquency levels that may trigger the loss of the servicing rights related to
those pools.
Fees and prepayment penalties collected in the three months ended June 30, 1999
increased by $10.4 million compared to the three months ended June 30, 1998
primarily due to an increase in the average balance of the
ContiMortgage/ContiWest portfolio of loans serviced for others and a higher
level of ancillary income such as prepayment penalties and late fees.
The following table presents an analysis of capitalized servicing rights
activity during the three months ended June 30, 1999:
(in thousands)
Balance as of March 31, 1999 $ 105,273
New securitization 7,052
Capitalized servicing received in Empire asset swap 3,115
Amortization of capitalized servicing rights (15,819)
Impairment of capitalized servicing (5,500)
-----------
Balance as of June 30, 1999 $ 94,121
===========
Compensation and Benefits and General and Administrative Expenses:
Three Months Ended
June 30,
(dollars in thousands) 1999 1998
---------- ----------
Compensation and benefits $ 51,056 $ 43,324
========== ==========
General and administrative expenses $ 43,138 $ 32,511
========== ==========
Quarter-end head count 3,093 3,109
Average head count for the quarter 3,329 3,000
In the three months ended June 30, 1999, compensation and benefits increased by
$7.7 million or 17.8% compared to the three months ended June 30, 1998,
primarily reflecting an increase in average head count of 11.0% and increased
accruals for medical claims. The reduction in quarter-end head count at June 30,
1999 as compared to average head count for the same quarter is principally
attributable to the sale of Triad on June 11, 1999.
General and administrative expense ("G&A Expense") increased by $10.6 million or
32.7% in the three months ended June 30, 1999 compared to the same quarter a
year ago. The increase primarily reflects the expansion of the Company's
direct-to-consumer retail operations during fiscal 1999 and the expansion of the
Company's servicing operations due to the increase in the size of the servicing
portfolio. Direct-to-consumer retail operations require a higher level of G&A
Expense than non-retail operations that are conducted through correspondents and
brokers.
22
<PAGE>
Liquidity and Capital Resources
The following discussion of Liquidity and Capital Resources should be read in
conjunction with "Recent Developments, Financial Results and Liquidity" at the
beginning of this Item 2. "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Funding Requirements
The Company requires continued access to short- and long-term sources of funding
for its operations. The Company's primary cash requirements include the funding
of (i) mortgage, loan and lease originations and purchases pending their pooling
and sale, (ii) premiums paid in connection with the acquisition of correspondent
loans, (iii) fees and expenses incurred in connection with its securitization
program, (iv) ongoing administrative and other operating expenses, (v) payments
related to tax obligations, (vi) interest and principal payments relating to the
Company's long-term debt and short-term borrowed funds, (vii) the costs of sales
under the Company's Purchase and Sale Facilities and Repurchase Agreements
(collectively, the "Warehouse Facilities"), and (viii) the cost of any
subsequent contingent purchase price payments on prior acquisitions.
The Company has taken steps to improve the cash flow characteristics of its
business activities by shedding businesses that required significant capital
outlays and focusing its financial resources on its core home equity business.
Within the home equity business, the Company took further steps to reduce the
capital requirements by implementing a whole loan strategy to accelerate
recapture of origination costs. Furthermore, development of the Company's retail
home equity origination platform provides a source of cash income through
origination points and fees. The reduction in correspondent origination volume
has significantly reduced the total amount of premiums paid to originate a loan.
Market events have also contributed to the improved cash flow characteristics of
the Company. As competition has decreased, the cost of originating correspondent
loans has also dropped significantly, benefiting the Company through lower
purchase premiums.
Sources of Liquidity and Capital
During the quarter ended June 30, 1999, the Company's primary sources of
liquidity are sales of loans and other assets through securitization and whole
loan sales and the sale of loans and other assets under the Warehouse
Facilities.
As of June 30, 1999, the Company had $638 million of committed and $1.3 billion
of uncommitted capacity under the Warehouse Facilities. As of June 30, 1999, the
Company had utilized $882.6 million of the capacity under the Warehouse
Facilities. The Purchase and Sale Facilities allow the Company to sell, with
limited recourse, interests in designated pools of loans and other assets. The
Repurchase Agreements allow the Company to sell receivables held for sale to a
financial institution under an agreement to repurchase the receivables.
On August 12, 1999, the Company entered into a definitive agreement with
Greenwich Capital Financial Products, Inc. ("Greenwich"), a subsidiary of
Greenwich Capital Markets, Inc., to provide the Company with a $500 million
revolving servicing-released whole loan purchase facility of up to $1.5 billion,
at ContiFinancial's option, through March 31, 2000. Greenwich will also provide
a warehouse facility of up to $250 million on a revolving basis. Both facilities
("Greenwich Facilities") expire on March 31, 2000. In addition to the two
facilities, Greenwich will also underwrite an approximate $800 million
securitization of home equity loans funded by the Company's current warehouse
facilities. Once this securitization is complete, the Company expects all
warehouse facilities except the Greenwich Facilities to terminate ongoing
funding and the Greenwich Facilities to be the sole warehouse source through
March 31, 2000.
23
<PAGE>
The Company is operating on a negative cash flow basis and is dependent on the
Greenwich Facilities for its continued operations. In order to fund new loans
and asset originations and purchases, the Company is dependent on its ability to
fund loans under the Greenwich Facilities. The Company is also dependent on
continued access to the Bank Facilities or obtaining new bank facilities in
order to meet its cash needs.
The Company is required to comply with various financial covenants under its
outstanding Senior Notes, Revolving Credit Facility and Commercial Paper
Program, as well as under certain provisions of two of the Repurchase
Agreements, including, among other things, leverage ratios, minimum net worth
tests and interest coverage ratios. As of December 31, 1998 and continuing
through June 30, 1999, the Company's leverage ratio exceeded the leverage ratio
test under the covenants of its outstanding Senior Notes. As a result, the
Company is prevented from issuing additional unsecured debt until its leverage
ratio is below such test. As of December 31, 1998, the Company and two of its
lenders agreed to amend certain provisions of the Repurchase Agreements.
Amendments were received from the Repurchase Agreement lenders changing the
leverage ratio to 2.75 to 1. These Repurchase Agreements were again amended as
of March 31, 1999. One agreement was amended to remove all financial covenants
through August 20, 1999, while the other removed the financial covenants to the
July 1, 1999 maturity date of the facility. Subsequent to June 30, 1999, one
Repurchase Agreement matured and was not extended while the other was replaced
with a new facility that does not include any financial covenants.
As of December 31, 1998, amended financial covenants were also received changing
the leverage and fixed charge ratios and the minimum net worth test in the Bank
Facilities, and lenders agreed to exclude certain charges from the covenant
ratio calculations. As of March 31, 1999, the Bank Facilities were amended to
eliminate the financial covenants and borrowing base provisions, among other
things. As part of the bank amendment, the Company agreed to reduce commitments
under the Bank Facilities by 75% of the total proceeds received by the Company
for the sale of Triad Financial Corporation ("Triad"). On June 11, 1999, the
sale of Triad was closed, and the Bank Facilities commitments were reduced by
approximately $95 million. If the above mentioned amendments had not been
obtained, the Company would not have been in compliance with the covenants. The
Company was in compliance with the amended covenants of the Revolving Credit
Facility, the Commercial Paper Program and the Repurchase Agreements as of June
30, 1999. As part of the December amendments to the Revolving Credit Facility,
the Company had agreed to prepay the Revolving Credit Facility on August 20,
1999, which made the Revolving Credit Facility coterminous with the Commercial
Paper Program. As part of the March amendments, the interest rate of the
Revolving Credit Facility and the Commercial Paper Program were increased to
LIBOR plus 300 basis points.
On August 19, 1999, the Company agreed with the lenders under its Bank
Facilities to extend the maturity date of the Bank Facilities from August 20,
1999 to March 31, 2000. The Company also agreed to certain modifications of the
Bank Facilities including a $20 million minimum liquidity covenant. The
agreement also includes providing collateral to the lenders in the form of a
lien on certain Excess Spread Receivables with a June 30, 1999 book value of
approximately $147 million. The interest rate on each facility remains at LIBOR
plus 300 basis points.
The Company has taken steps to reduce its financing needs and provide continued
access to liquidity. ContiGroup Companies, Inc. ("ContiGroup"), formerly
Continental Grain Company, which owns approximately 78% of the Company's
outstanding common stock, provides monthly servicer advances, up to an aggregate
outstanding of $85 million, to certain REMICs for which ContiMortgage, a
wholly-owned subsidiary, is the servicer. ContiGroup has agreed to make these
advances, for a fee, through October 15, 1999. Although the advances have been
made to, and repaid by, the REMICs, and not by the Company or ContiMortgage,
ContiGroup's advances improve the liquidity of the Company by relieving it of
the significant portion of its obligation to make these advances itself.
24
<PAGE>
In May 1999, ContiGroup extended a short-term warehouse financing facility to
the Company for a maximum amount of $60.0 million. Availability under the
facility was subject to a combined maximum amount of $85 million of this
facility and the servicer advances facility. This facility was terminated on
August 3, 1999.
On June 11, 1999, the Company sold its interest in Triad to Fairlane Credit LLC,
a wholly-owned subsidiary of Ford Motor Credit Company. The sale of Triad
resulted in a gain to the Company of approximately $22 million and provided
gross proceeds of approximately $134 million through sale proceeds, repayment of
intercompany debt and net return of intercompany warehouse financing. Of this
amount, approximately $95 million was used to pay down the Company's Bank
Facilities, thereby reducing the commitments under the Bank Facilities by the
pay down amount.
On July 15, 1999, Standard & Poor's lowered its senior unsecured debt and
long-term debt credit ratings to CC, Moody's Investors Service downgraded the
Company's long-term debt ratings to Caa2 and Fitch IBCA reduced the Company's
long-term debt rating to C.
At June 30, 1999, the Company had outstanding $256.8 million of its Commercial
Paper Program and $163.0 million of its $200 million unsecured Revolving Credit
Facility.
Year 2000
The "Year 2000" issue, the ability of systems to identify dates in the 21st
century, is a critical business and operational issue being addressed by the
Company. During the three months ended June 30, 1999 the Company's Year 2000
Task Force continued to monitor and implement changes to upgrade the Company's
facilities and computer systems and applications for Year 2000 compliance. The
chart below summarizes the Company's progress to date.
<TABLE>
<CAPTION>
-------------------------------------------------- ----------------- ------------------ ----------------------------
TARGET
PHASE DATE STATUS COMMENTS
-------------------------------------------------- ----------------- ------------------ ----------------------------
<S> <C> <C> <C>
Awareness and Project Definition - March, 15, Complete
Heighten awareness of the Company's 1998
Year 2000 issues and formulate plans to
address them.
-------------------------------------------------- ----------------- ------------------ ----------------------------
Systems Inventory and Assessment - Inventory all Completed
hardware, software and computerized systems and April 15, Complete July 31, 1999.
identify those requiring Year 2000 remediation. 1998
-------------------------------------------------- ----------------- ------------------ ----------------------------
Remediation - Modify or replace all hardware, Awaiting Year 2000
software and computerized systems that are not August 31, Substantially compliant software
Year 2000 compliant. 1998 Complete* upgrades from some vendors.
-------------------------------------------------- ----------------- ------------------ ----------------------------
Testing - Test modifications to and replacements Awaiting Year 2000
of all hardware, software and computerized December 31, Substantially compliant software
systems for Year 2000 compliance. 1998 Complete* upgrades from some vendors.
-------------------------------------------------- ----------------- ------------------ ----------------------------
Implementation - Integrate the remediated and Anticipated completion
tested hardware, software and computerized March 31, Substantially date:
systems into the Company's operations. 1999 Complete* September 30, 1999.
-------------------------------------------------- ----------------- ------------------ ----------------------------
</TABLE>
* The systems and applications which have not been remediated, tested and
implemented are not mission critical and the Company does not expect a material
adverse effect as a result of not meeting these targets.
25
<PAGE>
The Company did not meet its March 31, 1999 target date for completion of its
Year 2000 project due to the unavailability of Year 2000 compliant systems from
some vendors. The Company expected these systems to be available for
remediation, testing and implementation by July 31, 1999. In addition,
remediation, testing and implementation of the Company's facilities, systems and
applications was not completed by July 31, 1999, as previously anticipated.
However, the facilities, systems and applications which have not been remediated
and tested are not mission critical. The Company's mission critical facilities,
systems and applications have been remediated and tested for Year 2000
compliance.
The Company estimates that the direct cost of its Year 2000 remediation,
including contingency planning, will be approximately $2.5 million, which is
about half the amount originally estimated for the Year 2000 issue. To date, the
Company has spent approximately $1.7 million on the Year 2000 issue. The Company
presently believes, based on the information obtained during the systems
inventory and assessment phase, that the Year 2000 issue will not have a
material adverse impact on its computer systems or operations. However, the
interdependent nature of the Company's operations, in particular its substantial
reliance on third party vendors, makes it impossible to say with certainty that
the Year 2000 issue will not have a material adverse impact on those computer
systems and operations. The Company will reassess the final cost of compliance
and the risk that the Year 2000 issue will have a material adverse impact during
the remediation, testing and implementation phases of its Year 2000 conversion
effort which are scheduled for completion by September 30, 1999.
Forward-looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q, including,
but not limited to, statements relating to the Company's strategic objectives,
raising additional equity and future performance, 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, including the ability of the Company to successfully complete a
transaction with a buyer or equity investor. Such factors also include, but are
not limited to, general economic conditions; interest rate risk; prepayment
speeds; delinquency and default rates; credit losses; changes (legislative and
otherwise) in the asset securitization industry; demand for the Company's
services; residential and commercial real estate values; the ability of the
Company to negotiate agreements to sell whole loans; the impact of certain
covenants in debt agreements of the Company; the degree to which the Company is
leveraged; its needs for financing; the continued availability of the Company's
credit facilities; the risk of margin calls on the Company's credit facilities
and hedge positions; capital markets conditions, including the markets for
asset-backed securities and commercial mortgage loans; the performance of the
Company's subsidiaries and affiliates; the Company's Year 2000 issues; 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.
26
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary market risk exposure that the Company faces is interest rate risk.
The Company is most vulnerable to changes in U.S. Treasury yields, LIBOR yields,
and the yield spread requirements of the investors who buy the Company's
securities and loans. The Company's material exposures of interest rate
sensitive financial instruments, which are entered into for other than trading
purposes, are its committed pipeline of loans, its loan inventories (including
off-balance-sheet exposures), its interest-only and residual certificates, its
capitalized servicing rights, and the various derivative financial instruments
that the Company uses to manage the interest rate risk related to the
aforementioned other financial instruments. The overall objective of the
Company's interest rate risk management policies is to mitigate the effect of
changing interest rates on the fair value of its other financial instruments.
The Company does not have an ongoing hedging program to manage interest rate
risk associated with its interest-only and residual certificates and its
capitalized servicing rights. The primary risk involved is that a decline in
interest rates could result in an acceleration of prepayment speeds that would
adversely impact the fair value of these assets. However, because of the
relatively short average lives of the Company's home equity loans, prepayment
speeds related to the Company's portfolios are not as interest rate sensitive as
those of traditional mortgage products; therefore, the Company believes it would
require a substantial and sustained decline in interest rates, beyond what the
Company would consider to be a "reasonably possible near-term change," to impact
prepayment speeds to a material extent. The Company is also exposed to basis
risk in its portfolio of interest-only and residual certificates in that a
portion of the Company's securities have interest rates that adjust on a monthly
basis, whereas the interest rates on the loans that collateralize the securities
may be fixed or have adjustment intervals and indices that are different than
those of the underlying securities.
As part of its interest rate risk management process, the Company performs
various sensitivity analyses that attempt to quantify the net change in fair
value of its interest rate sensitive financial instruments. These analyses
assume hypothetical scenarios of instantaneous and permanent shifts in the U.S.
Treasury and/or LIBOR yield curves. The Company employs various discounted cash
flow models to determine the fair value of its interest rate sensitive financial
instruments under these scenarios. The primary assumptions used in the
discounted cash flow models are prepayment rates, credit losses, discount rates
and investor yield spread requirements. See Note 4 to the Consolidated Financial
Statements.
Using the sensitivity analysis described above, as of June 30, 1999, the Company
estimates that a parallel, instantaneous and permanent increase in the U.S.
Treasury yield curve of 50 basis points (.50%), all else being constant, would
result in an aggregate decrease in the fair value of its interest rate sensitive
financial instruments (derivative and other) of approximately $18 million; an
instantaneous and permanent increase in the LIBOR yield curve of 50 basis points
(.50%), all else being constant, would result in an aggregate decrease in the
fair value of its interest rate sensitive financial instruments (derivative and
other) of approximately $2.0 million; an instantaneous and permanent increase in
the discount rate of 120 basis points (1.20%), all else being constant, would
result in an aggregate decrease in the fair value of its interest rate sensitive
financial instruments (derivative and other) of approximately $36 million; and
an instantaneous and permanent increase in the investor yield spread requirement
of 50 basis points (.50%), all else being constant, would result in an aggregate
decrease in the fair value of its interest rate sensitive financial instruments
(derivative and other) of approximately $17 million.
The Company assumed there would be no material change in prepayment speeds under
the interest rate change scenarios presented above. The Company estimates that a
100 basis points (1.0%) increase in prepayment speeds would decrease the fair
value of the interest-only and residual certificates by approximately $26
million and would decrease the fair value of the capitalized servicing rights by
$0.2 million (net of the estimated
27
<PAGE>
benefit from increased prepayment penalty income). See Note 4 to the
Consolidated Financial Statements for the effect of changes in prepayment speeds
and other assumptions on the interest-only and residual certificates.
These sensitivity analyses are limited by the fact that that they are performed
at a particular point in time and do not incorporate other factors that may
impact the fair value of the Company's interest rate sensitive financial
instruments in each scenario. The above scenarios do not reflect the Company's
expectations regarding future movements in interest rates or prepayment speeds.
Consequently, the preceding estimates should not be viewed as a forecast.
28
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company has been named as a defendant in various legal actions
arising from the conduct of its normal business activities. Although
the amount of any liability that could arise with respect to these
actions cannot be accurately predicted, in the opinion of the Company,
any such liability will not have a material adverse effect on the
consolidated financial position or results of operations of the
Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
No. Description
--- -----------
11.1 Computation of the Company's Earnings Per Common Share
12.1 Ratio of Earnings to Fixed Charges
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None.
29
<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
Signature Title Date
--------- ----- ----
/s/ Alan H. Fishman President, Chief Executive Officer and August 23, 1999
-------------------- Director (Principal Executive Officer) ---------------
Alan H. Fishman
/s/ Frank W. Baier Senior Vice President and Chief Financial August 23, 1999
-------------------- Officer (Principal Financial Officer) ---------------
Frank W. Baier
30
ContiFinancial Corporation
Calculation of Earnings Per Share
For the three months ended June 30, 1999
<TABLE>
<CAPTION>
<S> <C>
Basic and Diluted Computation for the three months ended June 30,1999
Weighted average shares outstanding:
Common stock excluding shares relating to employee incentive plans 45,432,465
Vested Restricted Shares Outstanding during the Quarter 1,016,223
-------------
Weighted Average Shares Outstanding 46,448,688
-------------
Quarter income (loss) ($237,717,000)
-------------
Basic and Diluted Earnings Per Share ($5.12)
=============
</TABLE>
ContiFinancial Corporation
Ratio of Earnings to Fixed Charges
Exhibit 12.1 of June 30, 1999 Form 10-Q
<TABLE>
<CAPTION>
Three months ended
June 30,
1999 1998 Fiscal 99 Fiscal 98 Fiscal 97 Fiscal 96 Fiscal 95
-------- -------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Summary:
Earnings (186,253) 63,663 (255,696) 385,425 297,677 197,996 77,895
Fixed Charges 42,666 55,382 233,598 165,904 120,636 74,770 29,635
-------- -------- -------- -------- -------- -------- --------
Ratio (4.37)(a) 1.15 (1.09)(b) 2.32 2.47 2.65 2.63
======== ======== ======== ======== ======== ======== ========
Earnings:
Income (loss) before income taxes and
minority interest (227,463) 10,177 (493,615) 224,965 177,041 126,536 56,988
Plus: Interest expense 42,666 55,382 233,598 165,904 120,636 74,770 29,635
Less: Equity income/loss in unconsolidated
subsidiaries (1,456) (1,840) 4,321 (5,444) -- -- --
Less: Minority Interest n/a (56) n/a n/a n/a (3,310) (8,728)
-------- -------- -------- -------- -------- -------- --------
Total "Earnings" (186,253) 63,663 (255,696) 385,425 297,677 197,996 77,895
======== ======== ======== ======== ======== ======== ========
Fixed Charges:
Interest expense 42,666 55,382 233,598 165,904 120,636 74,770 29,635
</TABLE>
(a) The dollar amount of the deficiency at June 30, 1999 was $228,919.
(b) The dollar amount of the deficiency at March 31, 1999 was $489,294.
n/a = Not Applicable
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONTIFINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF
OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> JUN-30-1999
<CASH> 58,646
<SECURITIES> 561,372
<RECEIVABLES> 603,219
<ALLOWANCES> (4,773)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 33,207
<DEPRECIATION> (12,002)
<TOTAL-ASSETS> 1,309,235
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 477
<OTHER-SE> (32,792)
<TOTAL-LIABILITY-AND-EQUITY> 1,309,235
<SALES> 0
<TOTAL-REVENUES> (18,721)
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 164,123
<LOSS-PROVISION> 1,953
<INTEREST-EXPENSE> 42,666
<INCOME-PRETAX> (227,463)
<INCOME-TAX> 10,268
<INCOME-CONTINUING> (237,717)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (237,717)
<EPS-BASIC> (5.12)
<EPS-DILUTED> (5.12)
</TABLE>
