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, 1998
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 46,749,435 shares of common stock outstanding as of February 11,
1999.
<PAGE>
ContiFinancial Corporation
Table of Contents
PART I
<TABLE>
<CAPTION>
Page
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<S> <C>
Item 1. Financial Statements (unaudited)
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
Discussion of Events During the Three and Nine Months Ended
December 31, 1998 ............................................................... 11
Selected Financial Information ......................................................... 16
Results of Operations .................................................................. 18
Gain (Loss) on Sale of Receivables and Excess Spread Receivables ....................... 20
Liquidity and Capital Resources ........................................................ 24
Year 2000 .............................................................................. 26
Forward-looking Statements ............................................................. 29
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................................ 29
PART II
Item 1. Legal Proceedings ......................................................................... 30
Item 6. Exhibits and Reports on Form 8-K .......................................................... 30
Signatures ......................................................................................... 31
</TABLE>
2
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CONTIFINANCIAL CORPORATION
Consolidated Balance Sheets
as of December 31, 1998 and March 31, 1998
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
----------- -----------
Assets
<S> <C> <C>
Cash and cash equivalents .................................................................... $ 110,691 $ 173,588
Restricted cash .............................................................................. 2,825 1,147
Securities purchased under agreements to resell .............................................. 75,726 857,649
Receivables held for sale, net:
Receivables held for sale .................................................................. 942,947 726,990
Allowance for loan losses .................................................................. (5,069) (2,685)
----------- -----------
Receivables held for sale, net ............................................................... 937,878 724,305
Other receivables ............................................................................ 86,928 117,678
Due from affiliates .......................................................................... 103,085 46,922
Interest-only and residual certificates ...................................................... 849,644 648,785
Capitalized servicing rights ................................................................. 105,577 74,292
Premises and equipment, net of accumulated depreciation of $12,313
and $7,951 as of December 31, 1998 and March 31, 1998, respectively ........................ 25,205 18,887
Cost in excess of equity acquired ............................................................ 79,062 55,738
Equity investments in unconsolidated subsidiaries ............................................ 19,343 53,660
Other assets ................................................................................. 68,023 35,928
----------- -----------
Total assets ........................................................................ $ 2,463,987 $ 2,808,579
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable ............................................................................. $ 109,026 $ 91,179
Securities sold but not yet purchased ........................................................ 74,209 847,470
Receivables sold under agreements to repurchase .............................................. 574,561 245,556
Due to affiliates ............................................................................ 7,542 163
Short-term debt .............................................................................. 512,233 366,104
Taxes payable ................................................................................ -- 81,190
Long-term debt ............................................................................... 699,269 499,553
Other liabilities ............................................................................ 19,935 30,427
----------- -----------
Total liabilities ................................................................... 1,996,775 2,161,642
----------- -----------
Commitments and contingencies
Minority interest in subsidiaries ............................................................ 4,652 629
Stockholders' equity:
Preferred stock (par value $0.01 per share; 25,000,000 shares authorized; none
issued at December 31, 1998 and March 31, 1998) ....................................... -- --
Common stock (par value $0.01 per share; 250,000,000 shares authorized;
47,657,539 shares issued at December 31, 1998 and March 31, 1998) ..................... 477 477
Paid-in capital ........................................................................... 400,101 399,776
Retained earnings ......................................................................... 95,925 262,956
Treasury stock (908,104 and 201,209 shares of common stock, at cost, at December
31, 1998 and March 31, 1998, respectively) ............................................. (25,096) (5,794)
Deferred compensation ..................................................................... (8,847) (11,107)
----------- -----------
Total stockholders' equity .......................................................... 462,560 646,308
----------- -----------
Total liabilities and stockholders' equity .......................................... $ 2,463,987 $ 2,808,579
=========== ===========
</TABLE>
The accompanying notes to the unaudited condensed consolidated financial
statements are an integral part of these statements.
3
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CONTIFINANCIAL CORPORATION
Consolidated Statements of Income
for the three and nine months ended December 31, 1998 and 1997
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended December 31, Ended December 31,
-------------------------------- --------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Gross income:
Gain on sale of receivables ....................... $ 35,720 $ 82,631 $ 89,608 $ 225,763
Commercial real estate
valuation adjustments (see Note 3) ............. -- -- (129,034) --
Interest .......................................... 72,740 63,497 235,619 171,401
Net servicing income .............................. 18,631 24,866 74,317 58,646
Other income (loss) ............................... (1,523) 6,261 8,029 13,598
------------ ------------ ------------ ------------
Total gross income .......................... 125,568 177,255 278,539 469,408
------------ ------------ ------------ ------------
Expenses:
Compensation and benefits ......................... 48,366 45,394 143,532 112,105
Interest .......................................... 61,285 43,551 182,807 119,913
Provision for loan losses ......................... 1,059 865 4,110 3,379
General and administrative ........................ 41,342 27,164 113,924 70,952
Other charges (see Note 3) ........................ 44,192 -- 80,282 --
------------ ------------ ------------ ------------
Total expenses .............................. 196,244 116,974 524,655 306,349
------------ ------------ ------------ ------------
Income (loss) before income taxes and
minority interest ................................ (70,676) 60,281 (246,116) 163,059
Income taxes (See Note 7) ............................ (11,907) 24,170 (79,168) 66,154
------------ ------------ ------------ ------------
Income (loss) before minority interest ............... (58,769) 36,111 (166,948) 96,905
Minority interest in subsidiaries .................... 31 971 83 55
------------ ------------ ------------ ------------
Net income (loss) ........................... $ (58,800) $ 35,140 $ (167,031) $ 96,850
============ ============ ============ ============
Basic earnings (loss) per common share ............... $ (1.27) $ 0.75 $ (3.61) $ 2.10
============ ============ ============ ============
Diluted earnings (loss) per common share ............. $ (1.27) $ 0.74 $ (3.61) $ 2.07
============ ============ ============ ============
Basic weighted average number of
shares outstanding ................................ 46,140,707 46,870,941 46,326,692 46,160,728
============ ============ ============ ============
Diluted weighted average number of
shares outstanding ................................ 46,140,707 47,415,299 46,326,692 46,874,537
============ ============ ============ ============
</TABLE>
The accompanying notes to the unaudited condensed consolidated financial
statements are an integral part of these statements.
4
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CONTIFINANCIAL CORPORATION
Condensed Consolidated Statements of Cash Flows
for the nine months ended December 31, 1998 and 1997
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
-----------------------------
1998 1997
--------- ---------
<S> <C> <C>
Net cash used in operating activities .......................................... $(342,937) $(200,807)
--------- ---------
Cash flows from investing activities:
Acquisitions of majority owned subsidiaries (net of cash acquired) ....... (26,730) (4,796)
Acquisitions of minority owned subsidiaries .............................. (1,544) (37,393)
Purchase of property and equipment, net .................................. (10,983) (8,555)
--------- ---------
Net cash used in investing activities (39,257) (50,744)
--------- ---------
Cash flows from financing activities:
Increase(decrease) in due to affiliates .................................. 7,379 (29,203)
Increase in short-term debt .............................................. 145,884 243,333
Increase in long-term debt ............................................... 199,778 987
Proceeds from exercise of employee stock options ......................... -- 996
Debt issuance costs ...................................................... (11,692) --
Repurchase of common stock ............................................... (22,052) --
Net proceeds from common stock offering .................................. -- 100,778
Other, net ............................................................... -- 128
--------- ---------
Net cash provided by financing activities 319,297 317,019
--------- ---------
Net increase (decrease) in cash and cash equivalents ........................... (62,897) 65,468
Cash and cash equivalents at beginning of period ............................... 173,588 51,200
--------- ---------
Cash and cash equivalents at end of period ..................................... $ 110,691 $ 116,668
========= =========
</TABLE>
The accompanying notes to the unaudited condensed consolidated financial
statements are an integral part of these statements.
5
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CONTIFINANCIAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 1998
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, 1998 (the "Annual
Report"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
2. RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133") which is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. SFAS 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring that an entity recognize those items
as assets or liabilities in the statement of financial position and measure them
at fair value. The Company is currently evaluating the impact of SFAS 133 on its
financial position and results of operations.
3. COMMERCIAL REAL ESTATE VALUATION ADJUSTMENTS and OTHER CHARGES
The Company's results were significantly and adversely affected by difficult
capital market conditions that commenced during the second quarter of fiscal
1999, with the effects of and certain conditions continuing to a lesser degree
during the third quarter. Interest rates on U.S. Treasury securities moved
significantly lower during the second quarter as fixed income investors
purchased large amounts of these securities in a "flight to quality" and at the
same time the interest rate spread between such securities and other fixed
income securities widened considerably as demand for other fixed income
securities declined dramatically. These unusual interest rate movements had an
adverse impact on the market for commercial real estate loans, subprime home
equity loans, other residential mortgages and securities backed by such loans.
These market disruptions affected many participants in the commercial real
estate and subprime home equity industries, including several of the Company's
majority and minority-owned affiliates.
These adverse developments resulted in the following charges to the Company's
accompanying consolidated statements of income. First, a commercial real estate
valuation adjustment of $129.0 million was incurred during the second quarter.
Second, charges for $44.2 million and $80.3 million were incurred during the
three and nine months ended December 31, 1998, respectively, to write down
investments in or establish reserves on receivables from majority and
minority-owned affiliates and to cover the expenses in connection with the
Company's decision to reduce the scope of certain business activities. This
charge is shown under the caption "Other charges" on the accompanying
consolidated statements of income. The Company also incurred
6
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charges during these periods as a result of the fair value adjustment of its ESR
portfolio relating to home equity loans. Details of this ESR fair value
adjustment are set forth in Item 2. "Management's Discussion and Analysis of
Financial Condition and Results of Operations -Gain (Loss) on Sale of
Receivables and Excess Spread Receivables."
The commercial real estate valuation adjustments of $129.0 million for the nine
months ended December 31, 1998 are composed of a $125.0 million charge related
to the write down of commercial real estate loans during the second quarter of
fiscal 1999 and a $4.0 million reduction in the carrying value of commercial
real estate related excess spread receivable ("ESR") during the same period.
Prior to sale or securitization, the Company's commerical real estate loans held
for sale are carried at the lower of aggregate cost or market value. Market
value represents the proceeds the Company believes it would receive if such
assets were sold over a reasonable period of time under prevailing market
conditions. The Company hedged its resulting exposure to absolute movement in
interest rates, typically through the short sale of U.S. Treasury securities or
interest rate futures contracts. During the second fiscal quarter, the
significant decline in interest rates on U.S. Treasury securities resulted in
significant losses on hedge positions. If interest rate spreads between U.S.
Treasury securities and the securities to be issued (backed by the commercial
real estate loans) had remained at the levels that prevailed when the hedges
were executed, the market value of the loans would have increased, offsetting
the hedge losses. However, spreads widened considerably, so much in fact that
the market value of the loans declined at the same time that hedge losses were
being incurred resulting in the charge of $125.0 million to the second quarter
results.
At December 31, 1998, the Company had commercial real estate loans held for sale
totaling $624.6 million of which $71.5 million was owned and $553.1 million of
loans were sold with limited recourse under the Company's asset purchase and
sale facilities with certain financial institutions (the "Purchase and Sale
Facilities").
The other charges of $44.2 million and $80.3 million for the three and nine
months ended December 31, 1998, respectively, consist of (i) charges of $11.8
million and $39.8 million that were recorded in order to establish reserves on
receivables from such affiliates for the three and nine months ended December
31, 1998, respectively, (ii) charges in connection with the Company's decision
to reduce the scope of certain business activities, resulting in an accrual of
$4.8 million during the three months ended December 31, 1998, for severance
plans related to the termination of approximately 170 employees, (iii) charges
of $5.3 million relating to exit costs (not including employee severance costs)
for commercial real estate activities during the nine months ended December 31,
1998, and (iv) charges of $27.6 million and $30.4 million during the three and
nine months ended December 31, 1998, respectively, relating to the write down or
the sale of certain minority and majority investments.
Included in the $27.6 million charge during the three months ended December 31,
1998, is a noncash accounting charge of $23.6 million related to the impairment
of a minority-owned affiliate. The securitization of the loans of the
minority-owned affiliate began to require large initial cash investments and
investors in the securitization required an increasing yield on their investment
decreasing the profit associated with securitization. Additionally, the
minority-owned affiliate experienced liquidity constraints and a decrease in
demand for whole loan product. These market factors caused a significant
decrease in the fair market value of the minority-owned affiliate's origination
business, as well as negatively impacted future cash flow. Estimated fair market
value was determined by reviewing cash flow estimates and discussions with
market professionals.
7
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CONTIFINANCIAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 1998
4. STOCKHOLDERS' EQUITY
The following table presents a reconciliation of basic and diluted earnings per
common share (in thousands, except share amounts).
<TABLE>
<CAPTION>
Three Months Nine Months
Ended December 31, Ended December 31,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) ................................. $ (58,800) $ 35,140 $ (167,031) $ 96,850
=========== =========== =========== ===========
Basic weighted average number of
shares outstanding .............................. 46,140,707 46,870,941 46,326,692 46,160,728
Adjustments for dilutive shares outstanding:
Restricted shares .............................. -- 202,724 -- 176,241
Options ........................................ -- 341,634 -- 537,568
----------- ----------- ----------- -----------
Diluted weighted average number of
shares outstanding ................................ 46,140,707 47,415,299 46,326,692 46,874,537
=========== =========== =========== ===========
Earnings (loss) per common share:
Basic ........................................ $ (1.27) $ 0.75 $ (3.61) $ 2.10
=========== =========== =========== ===========
Diluted ...................................... $ (1.27) $ 0.74 $ (3.61) $ 2.07
=========== =========== =========== ===========
</TABLE>
For the three and nine months ended December 31, 1998, there were no adjustments
for restricted shares or options in computing the diluted weighted average
number of shares outstanding as their effect was antidilutive. During the three
and nine months ended December 31, 1997, options to purchase 295,000 and 98,333
shares of common stock, respectively, were outstanding but were not included in
the computation of diluted earnings per common share as they were antidilutive.
In February 1998, the Company's Board of Directors authorized the purchase of up
to one million shares of the Company's outstanding common stock. During the nine
months ended December 31, 1998, the Company purchased 806,300 shares at an
average cost of $27.35 per share, completing the authorized one million share
repurchase. The purchased shares are held in treasury for use in connection with
ContiFinancial's 1995 Long-Term Stock Incentive Plan (the "Stock Plan").
5. ACQUISITION
In April 1998, the Company acquired, for approximately $18.0 million, a 75%
interest in Keystone Mortgage Partners L.L.C. ("Keystone"). Keystone, an
originator and servicer of commercial mortgage loans which acts as a mortgage
banker primarily to the insurance industry but does not take principal risk.
8
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CONTIFINANCIAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 1998
6. DEBT
Short-term and long-term debt at December 31, 1998 and March 31, 1998 consisted
of the following :
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------- ---------
(in thousands)
<S> <C> <C>
Short-term debt:
Commercial paper ............................................... $311,873 $270,708
Revolving credit facility ...................................... 200,000 95,000
Current portion of long-term debt .............................. 360 396
-------- --------
Total short-term debt ............................................. $512,233 $366,104
======== ========
Long-term debt:
8 3/8% Senior Notes, $300 million face amount, due 2003 ........ $299,376 $299,295
7 1/2% Senior Notes, $200 million face amount, due 2002 ........ 199,513 199,412
8 1/8% Senior Notes, $200 million face amount, due 2008 ........ 199,788 --
Capitalized lease .............................................. 592 846
-------- --------
Total long-term debt .............................................. $699,269 $499,553
======== ========
</TABLE>
On April 2, 1998, the Company issued $200 million aggregate principal amount of
8 1/8% unsecured Senior Notes due April 1, 2008. Proceeds to the Company, net of
underwriting fees, market discount and other costs were $188.1 million. Interest
on these notes is payable semi-annually on April 1 and October 1 commencing
October 1, 1998. The notes are redeemable in whole or in part, at the option of
the Company, at any time or from time to time, at a redemption price equal to
the greater of (i) 100% of their principal amount or (ii) the sum of the present
values of the remaining scheduled payments of principal and interest thereon
discounted to the date of redemption on a semiannual basis at the treasury yield
plus 50 basis points, plus, in each case, accrued interest to the date of
redemption.
On August 21, 1998, the Company increased its one year renewable unsecured
commercial paper program ("Commercial Paper Program") backed by an irrevocable
direct-pay letter of credit provided by a syndicate of banks from $275.0 million
to $317.5 million. At December 31, 1998, $311.9 million of commercial paper was
outstanding and the Company was fully drawn under its $200 million revolving
credit facility ("Revolving Credit Facility").
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 agreements to
repurchase ("Repurchase Agreements"), including, among other things, leverage
ratios, minimum net worth tests and interest coverage ratios. As of December 31,
1998, 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. 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. Amended financial
covenants were also received changing the leverage and fixed charge ratios and
the
9
<PAGE>
minimum net worth test in the Revolving Credit Facility and Commercial Paper
Program and lenders agreed to exclude certain charges from the covenant ratio
calculations. 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 December 31, 1998.
As part of the amendments to the Revolving Credit Facility, the Company has
agreed to prepay the Revolving Credit Facility on August 20, 1999, which would
make the revolving Credit Facility coterminous with the Commercial Paper
Program, and increase the interest rate of the Revolving Credit Facility and the
Commercial Paper Program by 138 basis points.
The Company's ability to continue to maintain funding under the Revolving Credit
Facility, the Commercial Paper Program and the Repurchase Agreements is subject
to its continued compliance with these amended covenants or, if necessary,
obtaining covenant relief. The Company's ability to remain in compliance is
dependent on factors some of which are beyond the control of the Company,
primarily conditions in the securitization and whole-loan sale markets. The
Company is dependent on continued access to its Revolving Credit Facility,
Commercial Paper Program, Purchase and Sale Facilities and the Repurchase
Agreements (collectively, the "Lending Facilities") or obtaining new financing
sources in order to meet its cash needs. Failure of the Company to have
continued access to the securitization and whole-loan sale markets and its
Lending Facilities or the failure of the Company to renew such Lending
Facilities or obtain alternate financing could have a material adverse effect on
the Company's liquidity, financial condition and operations.
7. TAXES
As of December 31, 1998, the Company recorded net deferred tax assets of $19.1
million. Included in this amount are net deferred tax liabilities of $6.7
million relating to temporary differences between financial accounting income
and taxable income including, nondeductible and compensation related expenses,
capitalized servicing rights, and interest-only and residual certificates, as
well as a deferred tax asset of $25.8 million relating to the tax benefit of
operating losses. In the opinion of management, it is more likely than not that
the deferred tax asset will be realized. For income tax purposes, the loss
carryforwards expire in years beginning after March 31, 2019.
10
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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".
Discussion of Events During the Three and Nine Months Ended December 31, 1998
Overview The Company's results were significantly and adversely affected by
difficult capital market conditions that commenced during the second quarter of
fiscal 1999, with the effects of and certain conditions continuing to a lesser
degree during the third quarter. Interest rates on U.S. Treasury securities
moved significantly lower during the second quarter as fixed income investors
purchased large amounts of these securities in a "flights to quality" and at the
same time, the interest rate spread between such securities and other fixed
income securities widened considerably as demand for other fixed income
securities declined dramatically. These unusual interest rate movements had an
adverse impact on the market for commercial real estate loans, subprime home
equity loans, other residential mortgages and securities backed by such loans.
As a result of these market disruptions, the value of the loans held for sale by
the Company declined during these periods and the loans became more difficult to
sell, either on a whole basis or through securitization. The most significant
effect of this was realized on the commercial real estate activities. As a
result of the decline in the value of the loans, which are used by the Company
as collateral for the Company's Purchase and Sale Facilities and Repurchase
Agreements, (collectively, the "Facilities") used to finance the purchase of the
loans, margin calls were made by the lenders under the Facilities for additional
cash collateral. Later in the third quarter, as market conditions improved and
the value of loans held as collateral increased, a portion of this collateral
was returned to the Company.
These market disruptions affected many participants in the commercial real
estate and subprime home equity industries, including several of the Company's
majority and minority-owned affiliates.
As discussed in further details below, the Company has taken several steps to
respond to these changed market conditions. The Company has reduced the volume
of home equity loan origination, with much of the reduction focusing on
originations from wholesale sources, where the Company must pay a premium to
acquire loans. The Company has negotiated an arrangement with a home equity loan
buyer to sell whole loans, servicing released, to the buyer on a flow basis,
reducing the Company's reliance on securitization as a method for selling its
loans, reducing the Company's overall financing requirements and improving the
Company's cash flow. The Company also plans to securitize its loans more
frequently, resulting in smaller securitizations and a reduced need to finance
loan inventory. With respect to commercial real estate loans, the Company will
focus on the origination of these loans through Keystone, a subsidiary of the
Company, which acts as a commercial mortgage banker and does not take principle
risks.
These adverse developments resulted in the following charges to the Company's
income statement. First, a commercial real estate valuation adjustment of $129.0
million was incurred during the second quarter. Second, charges for $44.2
million and $80.3 million were incurred during the three and nine months ended
December 31, 1998, respectively, to write down investments in or establish
reserves on receivables from majority and minority-owned affiliates and to cover
the expenses in connection with the Company's decision to reduce the scope of
certain business activities. This charge is shown under the caption "Other
charges" on the accompanying consolidated statements of income. The Company also
incurred charges during these periods as
11
<PAGE>
a result of the fair value adjustment of its ESR portfolio relating to home
equity loans. Details of this ESR fair value adjustment are set forth in Item 2.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -Gain (Loss) on Sale of Receivables and Excess Spread Receivables."
Commercial Real Estate Valuations and Other Charges
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
December 31, 1998 December 31, 1998
<S> <C> <C>
Commercial real estate valuation adjustments:
Commercial loan valuation adjustment $ -- $125,034
Excess spread receivables valuation adjustment -- 4,000
-------- --------
Total Commercial real estate valuation adjustment -- 129,034
-------- --------
Other charges:
Reserves for receivables from affiliates 11,754 39,722
Accrued severance plan for terminated employees 4,838 4,838
Write down or sale of certain minority and
majority investments 27,600 30,383
Accrued exit costs (not including employee
severance costs) for reduction in commercial
real estate activity -- 5,339
-------- --------
Total other charges
44,192 80,282
-------- --------
Total commercial real estate valuation adjustments
and other charges $ 44,192 $209,316
======== ========
</TABLE>
Commercial Real Estate Valuation Adjustments The commercial real estate
valuation adjustments of $129.0 million for the nine months ended December 31,
1998 are composed of a $125.0 million charge related to the write down of
commercial real estate loans during the second quarter of fiscal 1999 and a $4.0
million reduction in the carrying value of commercial real estate related ESR
during the same period.
Prior to sale or securitization, the Company's commercial real estate loans held
for sale are carried at the lower of aggregate cost or market value. Market
value represents the proceeds the Company believes it would receive if such
assets were sold over a reasonable period of time under prevailing market
conditions. With respect to loans held for sale and the recourse risk on the
Purchase and Sale Facilities, the Company hedged its resulting exposure to
absolute movement in interest rates, typically through the short sale of U.S.
Treasury securities or interest rate futures contracts. During the second fiscal
quarter, the significant decline in interest rates on U.S. Treasury securities
resulted in significant losses on hedge positions. If interest rate spreads
between U.S. Treasury securities and the securities to be issued (backed by the
commercial real estate loans) had remained at the levels that prevailed when the
hedges were executed, the market value of the loans would have increased,
offsetting the hedge losses. However, spreads widened considerably, so much in
fact that the market value of the loans declined at the same time that hedge
losses were being incurred resulting in a charge of $125.0 million to the second
quarter results.
12
<PAGE>
At December 31, 1998, the Company had commercial real estate loans held for sale
totaling $624.6 million of which $71.5 million was owned and $553.1 million of
loans were sold with limited recourse under the Company's Purchase and Sale
Facilities.
Other Charges The other charges of $44.2 million and $80.3 million for the three
and nine months ended December 31, 1998, respectively, consist of (i) charges of
$11.8 million and $39.8 million that were recorded in order to establish
reserves on receivables from such affiliates for the three and nine months ended
December 31, 1998, respectively, (ii) charges in connection with the Company's
decision to reduce the scope of certain business activities resulting in an
accrual of $4.8 million in the three months ended December 31, 1998, for
severance plans related to the termination of approximately 170 employees, (iii)
charges of $5.3 million relating to exit costs (not including employee severance
costs) for commercial real estate activities during the nine months ended
December 31, 1998 and (iv) charges of $27.6 million and $30.4 million during the
three and nine months ended December 31, 1998, respectively, relating to the
write down or sale of certain minority and majority investments.
Included in the $27.6 million of costs incurred for the three months ended
December 31, 1998, was a charge of $23.6 million related to the impairment of a
minority-owned affiliate. The securitization of the loans of the minority-owned
affiliate began to require large initial cash investments and investors in the
securitization required an increasing yield on their investment. Additionally,
the minority-owned affiliate experienced liquidity constraints and a decrease in
demand for whole loan product. These market factors caused a significant
decrease in the fair market value of such minority-owned affiliate's origination
business, as well as negatively impacted future cash flow.
Impact on Operating Results - In addition to the items discussed above, the
market conditions that prevailed during fiscal 1999 second quarter and continued
during the third quarter had adverse impact on operating results. The
deterioration of interest rate spreads caused the Company to record lower gain
on sale and the need for liquidity required the Company to execute whole loan
home equity sales at a loss.
As discussed in "Draws on liquidity" below, the Company is pursuing an approach
to decrease the average home equity loans held for sale through a combination of
whole loan sales and smaller, but more frequent, securitizations. During the
third quarter of fiscal 1999, the Company executed whole loan sales of $782.6
million, including two ContiMortgage Corporation ("ContiMortgage") /ContiWest
Corporation ("ContiWest") sales totaling $551.2 million and one $1.0 billion
securitization. The two ContiMortgage/ContiWest whole loan sales were executed
at a loss of $10.9 million due to market conditions and the interest rate
environment negatively impacting premiums received versus the origination
premiums paid on such loans which were predominately originated in the second
quarter prior to the change in market conditions. The pretax gain on sale
recorded in connection with the ContiMortgage/ContiWest securitization in the
fiscal 1999 third quarter was $37.9 million. The gain on sale percentage (i.e.,
gain on sale as a percentage of securitization volume) for that transaction was
3.61%, up from 3.07% for the ContiMortgage/ContiWest securitization completed in
the second quarter of fiscal 1999, primarily due to a decrease in premiums paid
later in the quarter for loans from wholesale sources. The aforementioned
amounts do not include the impact of ESR fair value adjustments.
The ESR fair value adjustment for the three and nine months ended December 31,
1998 was $24.0 million and $161.9 million, respectively. During the first
quarter, the Company increased the weighted average estimated future Conditional
Prepayment Rate ("CPR") for its ContiMortgage /ContiWest ESR portfolio from 27%
at March 31, 1998 to 28% at June 30, 1998 where it still remains at December 31,
1998. In the third quarter the Company increased its estimate of future credit
losses to reflect a projected increase in defaults on currently performing loans
and loss severity on defaulted loans. The Company also increased its estimate of
future prepayments on certain ContiMortgage/ContiWest real estate mortgage
investment conduit's ("REMIC"). The decline in ESR fair value during the quarter
as also impacted by greater than anticipated credit losses on
13
<PAGE>
ContiMortgage/ContiWest REMIC's. These declines in value were partially offset
by a favorable effect of the interest rate environment. (See "Gain (Loss) on
Sale of Receivables and Excess Spread Receivables" for further discussion.)
Draws on liquidity - In the second quarter of fiscal 1999 interest rate spreads
widened on securities backed by commercial real estate loans and, to a lesser
extent, subprime home equity and other residential mortgage loans, the "margins"
applied to financing for such loans prior to sale or securitization were in many
instances increased. The margin represents the difference between a loan's
principal value and the amount that can be borrowed by pledging the loan as
collateral. In the normal course of its business activities, the Company
maintains substantial inventories of loans held for sale or securitization and,
as a result, has significant financing requirements. As a result of the
reduction in the value of loans pledged as collateral for secured borrowings
and/or the increase in related margins, the Company was required to post net
cash collateral of $55.4 million and $14.9 million during the second and third
quarters of fiscal 1999, respectively.
On an ongoing basis, the Company is required to maintain margin deposits in
connection with its hedge positions. As noted earlier, the Company incurred
significant hedge losses during the second quarter. As a result, the net cash
outflow in connection with its hedge positions was $114.1 million and $18.6
million over the course of the second and third quarters of fiscal 1999,
respectively. The Company had hedged its interest rate exposure on its loan
portfolio through the short sale of U.S. Treasury securities, interest rate
futures contracts or options on interest rate futures contracts. The Company
intends to monitor the impact of hedging on its future liquidity and make
adjustments to the hedging financial instruments accordingly.
Since the second quarter of fiscal 1999, the Company maintained sufficient
levels of liquidity and was able to fund its business activities, albeit at a
reduced level because of additional cash requirements in connection with margins
on secured financing and margins on hedge positions. As discussed further below,
the Company has taken steps to reduce its financing needs and provide continued
access to liquidity. Continental Grain Company ("Continental Grain"), which owns
approximately 78% of the Company's outstanding common stock, provides up to an
aggregate of $85 million in monthly servicer advances to certain REMICs for
which ContiMortgage, a wholly-owned subsidiary, is the servicer. Continental
Grain 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, Continental Grain's advances improve the liquidity
of the Company by relieving it of the significant portion of its obligation to
make these advances itself.
The Company's most significant financing requirement is the funding of mortgage
and loan originations and purchases pending their pooling and sale. These
receivables are generally financed on a secured basis through the Company's
Facilities.
In October 1998, the Company suspended new loan originations through its
ContiMAPa commercial loan conduit program and decided to sell its loan exposure.
During the three months ended ecember 31, 1998, and the one month ended January
31, 1999, the Company sold $368.8 million and $97.0 million of commercial real
estate loans, respectively. These sales were executed at prices approximating
the loans' carrying value and provided cash proceeds of $24.1 million from
margins on secured financing. The Company plans to sell the remaining commercial
real estate loans of approximately $527.6 million over the next nine months. In
the future, the Company will focus on the origination of commercial real estate
loans primarily through Keystone, a subsidiary of the Company, which acts as a
mortgage banker for a fee but does not take principal risk.
During the third quarter of fiscal 1999, the Company reduced the volume of home
equity and other residential mortgage loan originations. Loan originations for
the three months ended December 31, 1998 were $1.8 billion compared with
originations of $2.5 billion during the preceding three month period. The
reduction was focused on wholesale originations, as opposed to retail
orginations, since the Company typically pays premiums in
14
<PAGE>
connection with the purchase of loans from wholesale originators. The Company
plans to reduce ContiMortgage/ContiWest wholesale originations to approximately
40% of its total originations, down from 55% for the month of December 1998.
The Company is taking these actions to improve the cash flow characteristics of
its business activities in order to focus on its direct origination (i.e.,
retail) and small broker channels, and reducing the level of loan purchases from
wholesale originators. The Company's objective with respect to wholesale
origination is to pursue a pricing policy that will facilitate a continuous flow
of cash positive whole loan sales.
Another factor influencing financing requirements is the timing of loan sales
and securitizations. The Company has generally executed one large home equity
securitization each quarter. During the third quarter of fiscal 1999,
ContiMortgage/ContiWest executed two home equity whole loans sales totaling
$551.2 million and a $1.0 billion securitization. By pursuing this approach to
increase the frequency of loan sales through a combination of whole loan sales
and smaller, but more frequent, securitizations, the Company expects that the
financing required to fund loan inventory should be less than that otherwise
required under the previous approach. In January 1999, in order to establish a
consistent and committed whole loan sale program, the Company negotiated a two
year purchase agreement with a financial institution that permits the Company to
sell, with servicing released, not less than $2.25 billion and up to a maximum
of $7.2 billion of home equity loans. The purchase agreement establishes a sales
price that can be adjusted, upon occurrence of specific events.
In November 1998 the Company disposed of its leasing subsidiary. The Company's
decision to exit this business was based on such subsidiary's long-term cash
flow characteristics.
In connection with the foregoing actions, the Company is proceeding to implement
a staff reduction consistent with the reduction of its non-retail home equity
loan origination and funding, and commercial real estate activity as well as
eliminating redundancies in home equity affiliates. Most of the positions relate
to home equity wholesale origination and funding. During the third quarter of
fiscal 1999, an accrual of $4.8 million has been recorded for severance plans
established as of December 31, 1998, for approximately 170 employees. At
December 31, 1998, $3.6 million of such accrual remained.
There can be no assurance that the Company will be able to renew the Revolving
Credit Facility and the Commercial Paper Program, or obtain new bank debt, when
the Revolving Credit Facility and the Commercial Paper Program terminate in
August, 1999, on as favorable terms, if at all.
The Company is engaged in discussions with potential new investors regarding an
equity investment in the Company to improve its capital base and enhance the
execution of its new business strategy. No assurance can be given that the
Company will be successful in raising additional equity. Under appropriate
conditions, Continental Grain, which owns approximately 78% of the Company's
outstanding common stock, expects to participate along with such potential
equity investor or investors in making an equity investment in the Company.
However, Continental Grain has made no commitment to make such an investment.
15
<PAGE>
Selected Financial Information
ContiFinancial Corporation
Loan Originations, Securitizations and Sales
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the three months ended % For the nine months ended %
December 31, Incr. December 31, Incr.
1998 1997 (Decr.) 1998 1997 (Decr.)
---------- ---------- ------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Originations
Home equity, home improvement and
other residential mortgage loans:
Wholesale:
Brokers ................................. $ 376,791 $ 345,715 9.0% $1,153,987 $ 778,925 48.2%
Correspondents .......................... 1,009,731 1,170,509 (13.7)% 3,945,035 3,262,955 20.9%
Direct retail .............................. 457,313 333,077 37.3% 1,422,144 838,991 69.5%
---------- ---------- ----- ---------- ---------- -----
Total home equity, home improvement
and other residential mortgage loans ......... 1,843,835 1,849,301 (0.3)% 6,521,166 4,880,871 33.6%
---------- ---------- ----- ---------- ---------- -----
Commercial real estate mortgage loans:
Conduit (ContiMAP(R)and affiliates) ......... 80,537 760,817 (89.4)% 1,455,844 1,336,387 8.9%
Keystone .................................... 236,225 -- n/a 723,720 -- n/a
---------- ---------- ----- ---------- ---------- -----
Total commercial real estate
mortgage loans ............................... 316,762 760,817 (58.4)% 2,179,564 1,336,387 63.1%
---------- ---------- ----- ---------- ---------- -----
Triad auto loans ............................... 98,992 54,787 80.7% 271,945 131,120 107.4%
---------- ---------- ----- ---------- ---------- -----
Total loan originations ................ $2,259,589 $2,664,905 (15.2)% $8,972,675 $6,348,378 41.3%
========== ========== ===== ========== ========== =====
Securitizations and sales
ContiMortgage/ContiWest
securitizations .............................. $1,049,318 $1,660,000 (36.8)% $4,899,318 $4,450,000 10.1%
Other home equity,
home improvement and
other residential mortgage sales ............. 782,583 181,679 330.8% 1,172,126 399,263 193.6%
---------- ---------- ----- ---------- ---------- -----
Total home equity, home improvement
and other residential mortgage sales ......... 1,831,901 1,841,679 (0.5)% 6,071,444 4,849,263 25.2%
---------- ---------- ----- ---------- ---------- -----
Commercial real estate mortgage loans:
Conduit (ContiMAP(R)and affiliates) .......... -- 494,722 (100.0)% 581,343 981,545 (40.8)%
Whole loan sales ............................. 368,762 -- n/a 368,762 -- n/a
Keystone ..................................... 236,225 -- n/a 723,720 -- n/a
---------- ---------- ----- ---------- ---------- -----
Total commercial real estate
mortgage loans ............................... 604,987 494,722 22.3% 1,673,825 981,545 70.5%
---------- ---------- ----- ---------- ---------- -----
Triad auto loans ............................... 100,000 62,174 60.8% 237,674 108,055 120.0%
Strategic alliances ............................ 60,000 57,821 3.8% 217,188 307,898 (29.5)%
---------- ---------- ----- ---------- ---------- -----
Total securitizations and sales ......... $2,596,888 $2,456,396 5.7% $8,200,131 $6,246,761 31.3%
========== ========== ===== ========== ========== =====
</TABLE>
16
<PAGE>
ContiMortgage Corporation
Delinquencies, Defaults and Losses
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
ContiMortgage December 31, March 31, December 31,
Servicing Portfolio 1998 1998 1997
- ------------------- -------------- -------------- --------------
<S> <C> <C> <C>
Serviced loan portfolio (at period end) .......... $ 12,676,546 $ 10,135,785 $ 9,122,792
============== ============== ==============
Delinquencies:
30 - 59 days ................................. 2.06% 1.50% 2.37%
60 - 89 days ................................ 0.74% 0.51% 0.74%
90 days and over ............................. 0.63% 0.35% 0.31%
-------------- -------------- --------------
Total delinquencies (%) ...................... 3.43% 2.36% 3.42%
-------------- -------------- --------------
Total delinquencies ($) ...................... $ 434,841 $ 239,015 $ 311,821
============== ============== ==============
Defaults(2):
Foreclosures ................................. 2.14% 2.31% 2.78%
Bankruptcies ................................. 1.59% 1.70% 1.53%
Real estate owned ............................ 1.05% 0.83% 0.65%
Loss mitigation (1) .......................... 1.04% 0.74% 0.59%
-------------- -------------- --------------
Total defaults (%) ........................... 5.82% 5.58% 5.55%
============== ============== ==============
Total defaults ($) ........................... $ 737,189 $ 565,238 $ 506,744
============== ============== ==============
</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.
(2) This category includes accounts that are contractually less than 90 days
delinquent but are classified within foreclosure, bankruptcy or loss mitigation
categories.
For the three For the twelve
months ended months ended
ContiMortgage December 31, December 31,
Loan Loss experience 1998 1998
----------- -----------
Average serviced loan portfolio .............. $12,690,000 $11,270,111
=========== ===========
Net losses:
REMICs, other sales and loans held
pending sale or securitization ....... $ 32,084 $ 88,398
Loans and properties
purchased out of REMICs .............. 1,089 9,668
----------- -----------
Total net losses ............... $ 33,173 $ 98,066
=========== ===========
Net losses as a percentage of average
amount outstanding(3):
REMICs, other sales and loans held
pending sale or securitization .......... 1.01% 0.78%
Loans and properties
purchased out of REMICs ................. 0.03% 0.09%
----------- -----------
Total net losses as a percentage of
average amount outstanding ................ 1.04% 0.87%
=========== ===========
(3) Amounts for the three months ended December 31, 1998 are annualized and are
not necessarily indicative of or predictive of actual performance.
17
<PAGE>
Results of Operations
Three and Nine Months Ended December 31, 1998 Compared with the Three and Nine
Months Ended December 31, 1997
Net loss for the three and nine months ended December 31, 1998 was $58.8 million
and $167.0 million, respectively, compared with net income of $35.1 million and
$96.9 million for the corresponding periods in fiscal 1998. The Company's total
gross income decreased to $125.6 million and $278.5 million for the three and
nine months ended December 31, 1998, respectively, from $177.3 million and
$469.4 million for the comparable periods last year.
As discussed previously in the "Discussion of Events During the Three and Nine
Months Ended December 31, 1998", the Company incurred charges related to
commercial real estate valuation and other charges against earnings for the
three and nine months ended December 31, 1998, of $44.2 million and $209.3
million, respectively. Also contributing to the losses were fair value
adjustments to primarily home equity related ESR for the three and nine months
ended December 31, 1998 of $24.0 million and $161.9 million, respectively.
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 its cost of financing those loans. Due to the
decline in the Company's origination volume during the quarter ended December
31, 1998, there was a concurrent decrease in the average level of loans held in
inventory pending sale or securitization. As a result, net interest income
decreased to $11.5 million for the three months ended December 31, 1998 from
$19.9 million for the corresponding period last year. Net interest income for
the nine months ended December 31, 1998, remained relatively flat at $52.8
million as compared to $51.5 million for the corresponding period in fiscal
1998. This resulted from an increase in origination, securitization and sales
volume during the first two quarters of fiscal 1999 offset by a decreased volume
for the third quarter of fiscal 1999. Interest income also includes accrued
interest on 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 (see "Liquidity and Capital Resources" for
discussion of future operations).
Net servicing income:
Net servicing income decreased $6.2 million or 25.1% and increased $15.7 million
or 26.7% for the three and nine months ended December 31, 1998, respectively, as
compared to the corresponding periods in fiscal 1998. Servicing income consists
of fee income and capitalized servicing. The servicing fee income component
represents income earned from the REMICs and other trusts based on the level of
loans serviced. The fee income component of servicing income increased by $9.9
million and $26.9 million for the three and nine months ended December 31, 1998
, as compared to the corresponding period in fiscal 1998, respectively. These
increases were primarily due to the increase in the size of the Company's home
equity servicing portfolio and the year-to-date volume of home equity
securitizations. The Company's home equity loan servicing portfolio increased to
$12.7 billion at December 31, 1998 from $9.1 billion at December 31, 1997.
Capitalized servicing consists of servicing assets recorded in connection with
new securitizations (i.e., the present value of future servicing income, net of
expenses), reduced by the amortization of capitalized servicing from prior
securitizations. The net capitalized servicing component of servicing income
decreased by $16.1 million and $11.3 million for the three and nine months ended
December 31, 1998, as compared to the corresponding periods in fiscal 1998,
respectively. The decrease for the three months ended December 31, 1998 as
compared to the corresponding period in fiscal 1998 was due to a decrease in
securitization volume from $1.7 billion in the third quarter of fiscal 1998 to
$1.0 billion in the third quarter of fiscal 1999. Additionally, the decline in
net
18
<PAGE>
capitalized servicing for both the three and nine months ended December 31,
1998, as compared to corresponding periods in fiscal 1998 was caused by a
scheduled acceleration in amortization of the capitalized servicing asset as
compared to the prior periods. Loans originated during 1997 and 1998 had a
higher amount of capitalized servicing than earlier originations, as a result,
the implied amortization accelerated.
Compensation and benefits and General and administrative expenses:
In fiscal 1997, the Company acquired 100% of three retail home equity companies,
California Lending Group, Inc., d/b/a United Lending Group, Resource One
Consumer Discount Company, Inc., and Royal Mortgage Partners, L.P., d/b/a Royal
MortgageBanc and 56% of an auto finance company, Triad Financial Corporation
("Triad"). In fiscal 1998, the Company acquired the remaining 44% of Triad and
100% of two additional retail home equity companies, Fidelity Mortgage Decisions
Corporation and Crystal Mortgage Company, Inc. along with its subsidiary Lenders
M.D., Inc. These companies are collectively referred to herein as the "Retail
Subsidiaries". In each case, the companies acquired were former Strategic
Alliances or ContiMortgage/ContiWest loan origination sources.
The table below allocates the Company's compensation and benefits, general and
administrative expenses and headcount between the Retail Subsidiaries and all
other activities. The Company's development of its retail origination platform
has resulted in a change in the profile of the consolidated statements of
income. Retail origination expenses focus heavily on compensation and benefits
and general and administrative expenses, whereas wholesale origination costs in
the form of loan origination points, are netted against gain on sale of
receivables. Consequently, the accompanying unaudited consolidated statements of
income reflect increases in retail operating expenses, as well as higher income
from retail loan origination points (see "Gain (Loss) on Sale of Receivables and
Excess Spread Receivables"). From the date of the acquisition of majority
ownership, expenses of the acquired subsidiaries are included in the Company's
consolidated expenses.
As demonstrated in the table below, the acquisition and expansion of the retail
origination subsidiaries has resulted in higher levels of general and
administrative expenses and compensation and benefits expenses. With respect to
the Company's activities exclusive of the Retail Subsidiaries, general and
administrative expense increased due to the significant year-to-year growth in
ContiMortgage's origination volume, its serviced loan portfolio and the related
growth in headcount to support these activities. Conversely, compensation and
benefits expense for the three months ended December 31, 1998, exclusive of the
Retail Subsidiaries, decreased slightly as compared to the corresponding period
in fiscal 1998. During the nine months ended December 31, 1998, compensation and
benefits expense, exclusive of the Retail Subsidiaries, increased but at a lower
rate than the related increase in ContiMortgage's aforementioned growth factors
effecting general and administrative expense. The compensation and benefits
fluctuations resulted from decreased incentive compensation accrued during the
three and nine months ended December 31, 1998.
19
<PAGE>
<TABLE>
<CAPTION>
Three Nine
Months Ended Months Ended
December 31, Increase/ December 31,
1998 1997 (Decrease) 1998 1997 Increase
-------- -------- ---------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Compensation and benefits:
Retail Subsidiaries ........................ $ 24,106 $ 20,676 $ 3,430 $ 68,800 $ 47,478 $ 21,322
Operations excluding Retail
Subsidiaries ................... 24,260 24,718 (458) 74,732 64,627 10,105
-------- -------- -------- -------- -------- --------
Total compensation and benefits ............... $ 48,366 $ 45,394 $ 2,972 $143,532 $112,105 $ 31,427
======== ======== ======== ======== ======== ========
General and administrative:
Retail Subsidiaries ......................... $ 17,845 $ 12,720 $ 5,125 $ 52,811 $ 32,994 $ 19,817
Operations excluding Retail
Subsidiaries ................... 23,497 14,444 9,053 61,113 37,958 23,155
-------- -------- -------- -------- -------- --------
Total general and administrative .............. $ 41,342 $ 27,164 $ 14,178 $113,924 $ 70,952 $ 42,972
======== ======== ======== ======== ======== ========
Headcount (at period end):
Retail Subsidiaries ........................ 1,830 1,420 410
Headcount excluding Retail
Subsidiaries ................... 1,577 1,050 527
-------- -------- --------
Total headcount ............................... 3,407 2,470 937
======== ======== ========
</TABLE>
Gain (Loss) on Sale of Receivables and Excess Spread Receivables
Gain (loss) on sale of receivables:
The following table sets forth the components of gain (loss) on sale of
receivables for the three and nine months ended December 31, 1998 and 1997. Gain
on sale of receivables with respect to ContiMortgage/ContiWest securitizations
includes the gain recorded upon the completion of the securitizations as well as
unrealized gains or losses that result from the quarterly adjustment of ESR to
fair value. ESR fair value adjustments recorded in fiscal 1999 are discussed in
the following section on "Excess Spread Receivables" :
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1998 1997 1998 1997
-------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Home equity/home improvement:
ContiMortgage/ContiWest securitizations ............. $ 17,757 $ 33,993 $ 19,108 $120,953
Other (including whole loan sales, origination
points and fees) .................................. 13,564 33,532 55,514 64,577
-------- -------- -------- --------
Total home equity/home improvement ..................... 31,321 67,525 74,622 185,530
Commercial real estate ................................. 1,515 8,493 267 24,270
Auto ................................................... 3,540 7,335 15,957 14,290
Other .................................................. (656) (722) (1,238) 1,673
-------- -------- -------- --------
Total ........................................... $ 35,720 $ 82,631 $ 89,608 $225,763
======== ======== ======== ========
</TABLE>
20
<PAGE>
Also, see "Discussion of Events During the Three and Nine Months Ended December
31, 1998" at the beginning of Item 2. "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Excluding the ESR fair value adjustments, gain on sale of receivables for
ContiMortgage/ContiWest securitizations was $37.9 million and $170.8 million for
the three and nine months ended December 31, 1998, respectively. Gain on sale of
receivables for ContiMortgage/ContiWest securitizations was $34.0 million and
$121.0 million for the three and nine months ended December 31, 1997,
respectively. The increase in gain on sale in the third quarter of fiscal 1999
from the comparable period in fiscal 1998 is due to an increase in the gain on
sale percentage from 2.05% to 3.61%, partially offset by a decline in
securitization volume from $1.7 billion in the third quarter of fiscal 1998 to
$1.0 billion in the third quarter of fiscal 1999. The increase for the fiscal
1999 nine month period to the comparable fiscal 1998 period was due to higher
securitization volumes in fiscal 1999 of $4.9 billion from $4.5 billion in
fiscal 1998 and a higher gain on sale percentage of 3.49% from 2.72%.
The increases in the gain on sale percentage (i.e. gain on sale before ESR fair
value adjustments as a percentage of securitization volume) for the three and
nine months ended December 31, 1998, from the comparable periods in fiscal 1998
were due to a decline in premiums paid to acquire loans from wholesale sources,
partially offset by a widening in the interest rate spread.
Excess Spread Receivables:
At December 31, 1998 and March 31, 1998, the Company's ESR portfolio was
comprised of the following :
<TABLE>
<CAPTION>
December 31, Percentage March 31, Percentage
1998 of Total 1998 of Total
------------ ---------- --------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Home equity:
ContiMortgage/ContiWest .................. $715,340 84.2% $555,884 85.7%
Other servicers .......................... 31,404 3.7 37,428 5.8
-------- ----- -------- -----
Total home equity ..................... 746,744 87.9 593,312 91.5
Home improvement ............................. 5,333 0.6 7,919 1.2
Commercial real estate ....................... 39,589 4.7 8,233 1.3
Auto ......................................... 51,358 6.0 28,223 4.3
Leases ....................................... 5,301 0.6 8,960 1.4
Franchise .................................... 1,319 0.2 2,138 0.3
-------- ----- -------- -----
Total ESR portfolio ................... $849,644 100.0% $648,785 100.0%
======== ===== ======== =====
</TABLE>
The ESR is reported as "Interest-only and residual certificates" in the
accompanying unaudited consolidated balance sheets. The ESR represents the
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
21
<PAGE>
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,
1998, ESR totaled $849.6 million, of which $715.3 million, or 84.2% of the
total, was attributable to ContiMortgage/ContiWest securitizations.
A major 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; prepayment speeds are generally expressed as an annualized CPR. In
determining fair value of the ContiMortgage/ContiWest ESR portfolio as of
December 31, 1998, the Company's weighted average estimated future CPR was 28%.
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/ContiWest's ESR was 0.75% at
December 31, 1998. Total estimated future ESR credit losses as of December 31,
1998 as a percentage of the December 31, 1998 unpaid principal balance of loans
securitized was 2.41%. The future cash flows estimated as of December 31, and
March 31, 1998, taking into consideration estimated prepayment rates and credit
losses, were discounted at a rate of 10% to arrive at the fair value amounts
presented in the accompanying unaudited consolidated balance sheets.
The Company determines the discount rate utilized in determining fair value by
selecting a rate that is commensurate with the risks involved. The Company
recognizes that the ESR discount rate when interacting with the other two
assumptions, loss 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.
If actual prepayments or credit losses are greater than the assumptions used to
determine ESR fair value, the ESR carrying value will be written down through a
charge to earnings. Given the size of the Company's servicing portfolio, even a
modest change in ESR fair value assumptions can have a relatively large impact
on ESR fair value. The table below illustrates the impact of a positive or
negative change in a single assumption used to determine ESR fair value while
keeping the absolute value of the other two assumptions constant. The impact of
changes in these assumptions are not linear. As of December 31, 1998, changes in
the assumptions would have approximately the following impact on ESR fair value.
Factor Change Fair value impact
------ ------ -----------------
Annual CPR +100 basis points $(32 million)
Annual CPR -100 basis points $36 million
Annual credit losses +10 basis points $(30 million)
Annual credit losses -10 basis points $29 million
Discount rate +100 basis points $(29 million)
Discount rate -100 basis points $31 million
22
<PAGE>
The following table presents an analysis of ESR activity during the nine months
ended December 31, 1998:
Interest-only and residual certificates (in thousands):
Balance as of March 31, 1998 ....................... $ 648,785
New securitizations:
ContiMortgage 1998-2 ........................ 100,175
Triad 1998-2 ................................ 6,165
ContiMortgage 1998-3 ........................ 130,388
Triad 1998-3 ................................ 9,621
Commercial (1) .............................. 35,931
ContiMortgage 1998-4 ........................ 66,403
Triad 1998-4 ................................ 13,600 362,283
---------
Cash distributions from REMICs and trusts ....... (87,319)
Cash payments on previous ESR sales (2) ......... 50,989
Accruals of interest income ..................... 40,762
Special Charges (3) ............................. (4,000)
Fair value adjustments (see discussion below) ... (161,856)
---------
Balance as of December 31, 1998 .................... $ 849,644
=========
(1) Represents "BB+/-" rated certificates retained from the Morgan Stanley
Capital 1998-CF1 securitization.
(2) Represents cash payments made to certain purchasers of interest-only and
residual certificates sold with limited recourse.
(3) Included in special charges was a $4.0 million write-down of the "BB+/-"
rated certificates retained from the Morgan Stanley Capital 1998-CF1
securitization.
ESR Fair Value Adjustments - The $161.9 million adjustment noted above included
$59.5 million, $78.4 million and $24.0 million in the first three quarters of
fiscal 1999, respectively. The first quarter negative adjustment was primarily
attributable to higher prepayment speeds. During the first quarter, the Company
increased the weighted average estimated future CPR for its
ContiMortgage/ContiWest ESR portfolio from 27% at March 31, 1998 to 28% at June
30, 1998. At December 31, 1998, the estimate remained at 28%. Approximately
$25.0 million of the aggregate second quarter adjustment was the result of a
higher level of actual prepayments during the quarter than the level assumed in
the computation of ESR fair value on ContiMortgage/ContiWest REMICs. Prepayments
moderated later in the second quarter. Also during the second quarter, the
Company increased its assumption of future credit losses on
ContiMortgage/ContiWest REMICs to reflect the increase in its assumed level of
defaults on currently performing loans and loss severity. This increase
accounted for $46.3 million of the fair value adjustment. The third quarter fair
value adjustment of $24.0 million was the result of an increase in the estimated
future credit losses of ContiMortgage/ContiWest REMIC's and the impact of actual
credit losses during the quarter being higher than expected. The increase in
estimated future losses and the impact of higher losses for the quarter
accounted for $27.7 million and $5.8 million in ESR fair value decline,
respectively. This increase in estimated future credit losses reflects a
projected increase in defaults on currently performing loans and loss severity
on defaulted loans. During the third quarter the Company increased its estimate
of future prepayments on certain ContiMortgage/ContiWest REMIC's. This increase
resulted in a $10.0 million decline in ESR fair value. These declines in ESR
fair value were partially offset by the impact of favorable changes in interest
rates during the quarter which increased ESR fair value by $19.5 million.
Combined historical and estimated future losses as a percentage of original
23
<PAGE>
pool balances (for ContiMortgage/ContiWest REMICs) was 2.31% at December 31,
1998 compared with 2.08% and 1.81% at September 31, 1998 and June 30, 1998,
respectively.
Liquidity and Capital Resources
Also, see "Discussion of Events During the Three and Nine Months Ended December
31, 1998" at the beginning of Item 2. "Management's Discussion and Analysis of
Financial Conditions and Results of Operations".
Sources of Liquidity and Capital
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 and loan originations and purchases pending their sale; (ii)
premiums 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
pooled and sold; (v) servicer advances to REMICs; (vi) ongoing administrative
and other operating expenses; (vii) payments related to tax obligations; (viii)
interest and principal payments relating to the Company's long-term debt and
short-term borrowed funds; (ix) the costs of sales under the Company's
Facilities; (x) funding margin calls; (xi) payments made in connection with the
Company's hedging strategy; and (xii) the cost of any subsequent purchase price
adjustments on prior acquisitions.
The Company's primary sources of liquidity are sales of loans and other assets
through securitizations, whole loan sales, the sale or financing 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.
The Company had $1.93 billion of committed and $2.30 billion of uncommitted
funding capacity under the Facilities as of February 12, 1999. 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, with recourse, receivables held for sale to financial
institutions under agreements to repurchase the receivables. The Facilities
generally have one year renewable terms, which expire between March 1999 and
December 1999 as follows (amounts in thousands):
Committed Uncommitted Total
Expiration Facility Facility Facility
---------- -------- -------- --------
(in thousands)
March, 1999 $ 600,000 $1,050,000 $1,650,000
May, 1999 400,000 -- 400,000
June, 1999 150,000 600,000 750,000
July, 1999 230,000 -- 230,000
September, 1999 250,000 450,000 700,000
December, 1999 300,000 200,000 500,000
---------- ---------- ----------
Total facilities $1,930,000 $2,300,000 $4,230,000
========== ========== ==========
As of December 31, 1998, the Company had utilized $1.7 billion of the capacity
under the Facilities. Although the Company currently plans to renew these
facilities when they expire, there can be no assurance that such financing will
be obtainable on as favorable terms, if at all.
24
<PAGE>
On April 2, 1998, the Company issued $200 million aggregate principal amount of
8 1/8% unsecured Senior Notes due April 1, 2008. Proceeds to the Company, net of
underwriting fees, market discount and other costs were $188.1 million. Interest
on these notes is payable semi-annually on April 1 and October 1 commencing
October 1, 1998. The notes are redeemable in whole or in part, at the option of
the Company, at any time or from time to time, at a redemption price equal to
the greater of (i) 100% of their principal amount or (ii) the sum of the present
values of the remaining scheduled payments of principal and interest thereon
discounted to the date of redemption on a semiannual basis at the treasury yield
plus 50 basis points, plus, in each case, accrued interest to the date of
redemption.
On August 21, 1998, the Company increased its Commercial Paper Program backed by
an irrevocable direct-pay letter of credit provided by a syndicate of banks from
$275.0 million to $317.5 million. At December 31, 1998, $311.9 million of
commercial paper was outstanding. As of February 16, 1999, the Company was fully
drawn under the Company's Commercial Paper Program and its $200 million
unsecured Revolving Credit Facility.
In previous fiscal years, the Company sold ESR, with limited recourse, to
provide cash to fund the Company's operations. Under the recourse provisions of
the agreements, the Company is responsible for losses incurred by the purchaser
within an agreed-upon range. At December 31, 1998, $30.5 million of these sales
were outstanding. The Company's performance obligations in these transactions
are guaranteed by Continental Grain for an agreed-upon fee. Another method of
generating liquidity from the ESR portfolio is through the sale of Net Interest
Margin Notes, which generated proceeds of $159.7 million in fiscal 1998. The
Company does not intend to pursue such sales in the future, rather, the Company
intends to retain ESR in the portfolio allowing ESR cash flow to build over
time.
The Company is operating on a negative cash flow basis and is dependent on
various financing sources for its continued operations. Although the Company's
objective is to achieve a positive cash flow from operations, no assurance can
be given that this objective will be achieved. In order to fund new loans and
asset originations and purchases, the Company is dependent on its ability to
fund loans and other assets under its Facilities. The Company is dependent on
securitizations and whole-loan sales to generate the cash flow to repay these
lines and to create availability on such lines for new fundings. Adverse
conditions in the securitization and whole-loan sale markets could impair the
Company's ability to originate, purchase and sell loans and other assets on a
favorable or timely basis. The Company is also dependent on continued access to
its Revolving Credit Facility and Commercial Paper Program (the "Bank
Facilities") or obtaining new bank facilities in order to meet its cash needs.
Failure of the Company to have continued access to the securitization and
whole-loan sale markets and its Facilities and the Bank Facilities or failure of
the Company to renew such Facilities and the Bank Facilities when they expire
could have a material adverse effect on the Company's liquidity, financial
condition and operations.
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, 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. 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. Amended financial covenants
were also received changing the leverage and fixed charge ratios and the minimum
net worth test in the Revolving Credit Facility and Commercial Paper Program and
lenders agreed to exclude certain charges from the covenant ratio calculations.
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
25
<PAGE>
covenants of the Revolving Credit Facility, the Commercial Paper Program and the
Repurchase Agreements as of December 31, 1998. As part of the amendments to the
Revolving Credit Facility, the Company has agreed to prepay the Revolving Credit
Facility on August 20, 1999, which would make the revolving Credit Facility
coterminous with the Commercial Paper Program, and increase the interest rate of
the Revolving Credit Facility and the Commercial Paper Program by 138 basis
points. The Company's ability to continue to maintain funding under the
Revolving Credit Facility and the Commercial Paper Program is subject to its
continued compliance with these amended covenants or, if necessary, obtaining
covenant relief. The Company's ability to remain in compliance is dependent on
factors, some of which are beyond the control of the Company, primarily
conditions in the securitization and whole-loan sale markets. Failure of the
Company to remain in compliance with the financial covenants may result in the
discontinuation of funding under its financing facilities.
There can be no assurance that the Company will be able to renew the Revolving
Credit Facility and the Commercial Paper Program, or obtain new bank debt, when
the Revolving Credit Facility and the Commercial Paper Program terminate in
August, 1999, on as favorable terms, if at all.
The Company is engaged in discussions with potential new investors regarding an
equity investment in the Company to improve its capital base and enhance the
execution of its new business strategy. No assurance can be given that the
Company will be successful in raising additional equity. Under appropriate
conditions, Continental Grain Company ("Continental Grain"), which owns
approximately 78% of the Company's outstanding common stock, expects to
participate along with such potential equity investor or investors in making an
equity investment in the Company. However, Continental Grain has made no
commitment to make such an investment.
In February 1998, the Company's Board of Directors authorized the purchase of up
to one million shares of the Company's outstanding common stock. The repurchase
of one million shares was completed in July 1998 at an average cost of $27.66
per share. The purchased shares are held in treasury for use in connection with
ContiFinancial's Stock Plan.
On October 13, 1998, Standard & Poor's lowered its senior unsecured debt and
long-term debt credit ratings to B+. On November 20, 1998, Fitch IBCA reduced
the Company's long-term debt rating to B+. On February 9, 1999, Moody's
Investors Service downgraded the Company's long-term debt ratings to B3.
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. The issue primarily encompasses computer programs and applications that
were written using two digits (instead of four) to describe an applicable year.
Failure to successfully modify such programs and applications to be Year 2000
compliant could 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
noncompliance by certain significant counterparties, including Strategic
Alliances.
The Company has undertaken a project to bring its systems into Year 2000
compliance. This project includes an assessment to determine the anticipated
cost to remediate its systems and applications to make them Year 2000 compliant.
Project efforts are being coordinated by a Year 2000 Task Force whose members
include the Company's senior management and information technology, finance,
accounting and legal staffs, supported by external consultants. Similar task
forces have been formed by each of Company's majority owned subsidiaries.
The Company's Year 2000 Task Force established the following five step project
methodology to address the Company's Year 2000 issues: (1) awareness and project
definition; (2) systems inventory and assessment; (3)
26
<PAGE>
remediation; (4) testing; and, (5) implementation. The chart below describes the
Company's current and anticipated progress on the Year 2000 issue.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
TARGET
PHASE DATE STATUS COMMENTS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Awareness and Project Definition - Heighten
awareness of the Company's Year 2000 issues and March, 15, Complete
formulate plans to address them. 1998
- ------------------------------------------------------------------------------------------------------------------------
Systems Inventory and Assessment - Inventory
all hardware, software and computerized systems April 15, Substantially A portion of the facilities
and identify those requiring Year 2000 1998 Complete* assessment is incomplete.
remediation.
- ------------------------------------------------------------------------------------------------------------------------
Remediation - Modify or replace all hardware, Awaiting Year 2000
software and computerized systems that are not August 31, Partially compliant software
Year 2000 compliant. 1998 Completed* upgrades from some
vendors.
- ------------------------------------------------------------------------------------------------------------------------
Testing - Test modifications to and replacements Awaiting Year 2000
of all hardware, software and computerized December 31, In progress* compliant software
systems for Year 2000 compliance. 1998 upgrades from some
vendors.
- ------------------------------------------------------------------------------------------------------------------------
Implementation - Integrate the remediated and March 31, In progress
tested hardware, software and computerized 1999
systems into the Company's operations.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Company does not expect a material adverse effect as a result of not
meeting these targets.
The Company has taken a prioritized approach to addressing the Year 2000 issue
and has directed its efforts in achieving compliance in the most critical
systems first. Systems and functions such as loan servicing, loan origination,
payroll, human resources, financial, communications and other systems have taken
priority over facilities. The Company is also dependent on third party property
managers for facility compliance information which has not yet been received in
full. The facilities inventory and assessment is substantially complete but
until it is finalized, the Company cannot complete the System Inventory and
Assessment phase of the project. The Company plans on addressing facilities and
does not expect a material adverse effect as a result of not meeting its project
phase target dates for facilities related systems.
Based on its analysis of the data from the systems inventory and assessment
phase, the Company has concluded that the greatest risk posed by the Year 2000
issue concerns the computerized loan servicing systems utilized by its home
equity and automobile lending operations. If such systems fail to operate
properly as a result of the Year 2000 issue, the loan servicing process could
not be executed efficiently in a manual environment. Both ContiMortgage, the
Company's largest home equity originator, and Triad, the Company's auto loan
originator, use loan servicing systems and software developed by outside
vendors. These systems and related key ancillary systems are operated and
maintained in-house or under a service arrangement with the vendors. Conversion
to new systems and servicing software could take up to twelve months.
Accordingly, a large part of the Company's remediation effort currently focuses
on insuring that ContiMortgage's and Triad's loan servicing systems will not be
negatively impacted by the Year 2000 issue.
ContiMortgage has received notice from its loan servicing software service
provider that their product line and data center environment is Year 2000
compliant as of December 31, 1998. Through 1999, the vendor will facilitate
client based testing, participate in industry testing, and continue future date
testing of their systems and underlying third-party products to verify ongoing
compliance. ContiMortgage's loan servicing software vendor is one of the largest
in the financial services industry and its Year 2000 remediation and testing
efforts are being scrutinized by the Federal Financial Institutions Examination
Council. The loan servicing software vendor has retained an independent auditor
to monitor its Year 2000 remediation and testing efforts and to
27
<PAGE>
provide regular reports to the vendor's customers. Although the Company has the
highest level of confidence in its loan servicing vendor, it has undertaken the
preparation of a plan that would facilitate the identification of Year 2000
related issues by users and outline the actions to be taken to address the
issues in the event that compliance issues arise within the loan servicing
system. Even with a contingency plan in place, it is possible that ContiMortgage
could suffer a business disruption that could have a material adverse impact on
the Company. ContiMortgage's remediation, testing and implementation of other
primary systems and applications for Year 2000 compliance is complete.
Triad uses a vendor for its computerized loan servicing and collections system.
According to the terms of its contract with Triad, the loan servicing and
collections vendor is obligated to ensure that the Year 2000 issue does not
cause an interruption in the services it provides to Triad. Testing of Triad's
loan servicing system has been completed successfully and loan servicing is
currently processed on the Year 2000 compliant system. Triad has substantially
completed testing of its computerized systems and applications for Year 2000
readiness and continues to test its remaining systems and its interfaces with
loan origination sources and other entities with which it exchanges information
electronically.
The Company is also working to ensure that other operations are not materially
affected by the Year 2000 issue. The ability of the Company's subsidiaries to
generate new business would be severely impacted if the Company's primary long
distance telephone carrier experiences Year 2000 related difficulties. The
Company's primary long distance telephone carrier anticipated that its systems
would be Year 2000 compliant by late calendar year 1998 but the carrier has
pushed back the compliance date approximately six months. Telecommunications
networks are difficult to test and it is highly unlikely that the Company's long
distance telephone carrier will provide written assurance that the Company's
telecommunications network will not experience Year 2000-related interruptions.
Therefore, the Company will have to rely on its long distance carrier's
reputation, public statements and internal testing procedures.
Another function that could be adversely effected by the Year 2000 issue are the
credit reporting agencies which provide the Company's home equity and auto
lending subsidiaries with information about the creditworthiness of potential
borrowers. The Company's subsidiaries make extensive use of these credit
reporting agencies, which in turn rely on consumer information provided to them
by third parties. The Company's credit reporting agencies did not meet their
December 1998 compliance deadlines but it is the Company's understanding from
these firms that they will continue to test their systems through 1999 and do
not anticipate interruption of service due to the Year 2000. However, some
credit industry estimates indicate that over half of all consumer reports from
credit reporting agencies could be inaccurate or incomplete as a result of the
Year 2000 issue. If the credit reporting agencies, or the third parties upon
which they rely, experience such difficulties, this could have a material
adverse impact on the Company's business operations.
The Company believes that through the execution of its Year 2000 project
methodology, it will significantly reduce the risk of a major business
interruption due to Year 2000 failures. The major risks are associated with the
Year 2000 remediation efforts of third party vendors utilized by the Company.
The vendors have provided information indicating that they will remediate their
Year 2000 issues prior to December 31, 1999. The Company is in the process of
developing contingency plans for use in the event that any of its hardware,
software or other computerized systems, or those of a vendor, are not ready for
the Year 2000.
The Company reaffirms its estimate that the direct cost of its Year 2000
remediation, including contingency planning, will be approximately $5.0 million.
This estimate is subject to change as the project progresses. To date, the
Company has spent approximately $1.3 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,
28
<PAGE>
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 expected 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.
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
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. Such factors
include, but are not limited to, general economic conditions; interest rate
risk; prepayment speeds; delinquency and default rates; credit loss rates;
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 loan 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, commercial mortgage-backed securities and
net interest margin securities; 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
29
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
The Company has been actively pursuing settlements of potential and
threatened claims arising from the suspension of fundings with respect
to that portion of the Company's commercial real estate loan business
originated by ContiTrade Services L.L.C. ("ContiTrade") under the
ContiMAP(R) conduit. The Company has settled most of such claims. The
settlement amount in the aggregate will not have a material adverse
effect on the Company's financial condition or results of operations.
In addition, none of the pending potential claims which remain
unresolved are expected to have a material adverse effect on the
Company's financial condition or results of operations. ContiTrade
believes that it has valid defenses to such remaining claims and
intends to vigorously defend against any litigation which has been
initiated or which may ensue.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
No. Description
------- -----------
10.1 SECOND AMENDMENT to the Credit Agreement
10.2 SECOND AMENDMENT to the Letter of Credit and Reimbursement
Agreement
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.
30
<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 16, 1999 /s/ Susan E. O'Donovan Vice President and Controller
- -------------------- -------------------------- (Principal Accounting Officer)
Susan E. O'Donovan
February 16, 1999 /s/ Daniel J. Willett Senior Vice President and Chief
- -------------------- -------------------------- Financial Officer (Principal
Daniel J. Willett Financial Officer)
</TABLE>
31
CONFORMED COPY
SECOND AMENDMENT dated as of January 27, 1999 (this
"Amendment") to the Credit Agreement (as previously amended,
the "Credit Agreement") dated as of January 7, 1997, among
ContiFinancial Corporation, a Delaware corporation (the
"Borrower"), the Lenders party thereto and Credit Suisse
First Boston, New York Branch, as Administrative Agent.
A. Pursuant to the Credit Agreement, the Lenders have extended and agreed
to extend credit to the Borrower on the terms and subject to the conditions set
forth therein.
B. The Borrower has requested that the Credit Agreement be amended as set
forth herein. The Required Lenders are willing to so amend the Credit Agreement
on the terms and subject to the conditions set forth herein.
Accordingly, in consideration of the mutual agreements herein contained and
other good and valuable consideration, the sufficiency and receipt of which are
hereby acknowledged, the parties hereto hereby agree as follows:
SECTION 1. Definitions. Unless otherwise specifically defined herein, each
capitalized term used herein which is defined in the Credit Agreement shall have
the meaning assigned to such term in the Credit Agreement.
SECTION 2. Amendments.
(a) Amendment to Section 1.01. Section 1.01 of the Credit Agreement is
hereby amended by
(i) inserting in the appropriate alphabetical order the following
definitions:
"'Empire' means Empire Funding Holding Corporation, a Delaware
corporation and its subsidiaries."
"'Excluded Empire Debt' means any Indebtedness of Empire existing as
of the date Empire becomes a Subsidiary and for which neither the Borrower
nor any Restricted Subsidiary is directly or contingently liable in whole
or in part, whether as co-obligor, pursuant to any Guarantee or otherwise."
<PAGE>
2
"'Excluded Charges' means the Strategic Alliance Charges and the
Residual Valuation Charge."
"'Residual Valuation Charge' means noncash charges arising from
adjustments to assumptions underlying the valuation of Excess Spread
Receivables in an aggregate pre-tax amount not to exceed $120,000,000."
"'Strategic Alliance Charges' means a noncash charge or charges
arising from the Borrower's investment in Strategic Alliance Clients in an
aggregate pre-tax amount not to exceed $80,000,000."
(ii) deleting the definition of "Applicable Rate" in its entirety and
substituting therefor the following new definition:
"'Applicable Rate' means as of any time 2.375%; provided that if, as
of any date, either the aggregate pre-tax amount of the Residual Valuation
Charge taken on or prior to such date exceeds $90,000,000 or the aggregate
pre-tax amount of the Strategic Alliance Charges taken on or prior to such
date exceeds $55,000,000, 'Applicable Rate' shall mean 2.750%.";
(iii) deleting the word "and" immediately before the words "(b)
foreign, Federal, state and local" in the definition of "Consolidated EBIT"
and substituting therefor a comma;
(iv) inserting immediately before the period at the end of the
definition of "Consolidated EBIT" the words "and (c) the amount of any
Excluded Charges for such period";
(v) inserting immediately before the period at the end of the
definition of "Consolidated Interest Expense" the words "other than any
interest expense attributable solely to Excluded Empire Debt";
(vi) deleting the word "and" immediately following the words "(A)
Permitted Warehouse Indebtedness" in the definition of "Consolidated
Leverage Ratio" and substituting therefor a comma;
<PAGE>
3
(vii) inserting immediately after clause (B) in the parenthetical in
the definition of "Consolidated Leverage Ratio" the words "and (C) Excluded
Empire Debt";
(viii) inserting immediately before the period at the end of the
definition of "Consolidated Net Income" the words "and the effect of the
Excluded Charges"; and
(ix) inserting immediately before the period at the end of the
definition of "Consolidated Net Worth" the words ", plus the amount, after
giving effect to taxes, of any Excluded Charges".
(b) Amendment to Section 6.05(a). Clause (iii) of Section 6.05(a) of the
Credit Agreement is hereby amended by deleting the words "to the extent" therein
and substituting therefor "; provided that at the time such Investment is made".
(c) Amendment to Section 6.09. Section 6.09 of the Credit Agreement is
hereby amended by deleting such Section 6.09 in its entirety and substituting
therefor the following new Section 6.09:
"SECTION 6.09. Financial Covenants (a) Consolidated Net Worth shall
not at any time be less than (i) $470,100,000 plus (ii) an amount, for each
fiscal quarter which begins after December 31, 1998 and ends prior to the
date for which compliance with this Section 6.09 is being determined, equal
to the sum of (A) 75% of the aggregate of positive Consolidated Net Income
(without deduction for quarterly losses) and (B) 50% of Equity Net
Proceeds.
(b) The Consolidated Leverage Ratio will not at any time during any
period set forth below exceed the ratio set forth below opposite such
period:
Period Ratio
------ -----
October 1, 1998 through
June 30, 1999 2.65 to 1.00
July 1, 1999 and
thereafter 2.50 to 1.00.
(c) The Consolidated Interest Coverage Ratio for the Rolling Period
will not, at any time
<PAGE>
4
during any period set forth below, be less than the ratio set forth below
opposite such period:
Period Ratio
------ -----
October 1, 1998 through
December 31, 1998 0.95 to 1.00
January 1, 1999 through
March 31, 1999 0.65 to 1.00
April 1, 1999 through
June 30, 1999 0.55 to 1.00
July 1, 1999 through
September 30, 1999 0.90 to 1.00
October 1, 1999 through
December 31, 1999 1.20 to 1.00
January 1, 2000 and
thereafter 1.50 to 1.00.
SECTION 3. Notice of Termination of Commitments. Pursuant to Section 2.07
of the Credit Agreement, the Borrower hereby irrevocably notifies the Lenders
that the Commitments will terminate on August 20, 1999, and that the Borrower
will repay all outstanding Swingline Loans and Revolving Loans (together with
all applicable fees, interest and other amounts due under the Credit Agreement)
as of such date. This notice is being given in order to induce the Lenders to
enter into this Amendment and is not revocable for any reason whatsoever.
SECTION 4. Representations and Warranties. The Borrower represents and
warrants to the Agent and each Lender that:
(a) The representations and warranties set forth in the Credit
Agreement after giving effect to this Amendment are true and correct in all
material respects except to the extent such representations and warranties
expressly relate to an earlier date.
(b) After giving effect to this Amendment, the Borrower is in
compliance in all material respects with all the terms and provisions
contained in the Credit Agreement required to be observed or performed.
(c) After giving effect to this Amendment, no Default has occurred and
is continuing.
<PAGE>
5
Section 5. Effectiveness. This Amendment shall become effective on the date
(the "Amendment Effective Date") on which each of the following conditions is
met:
(a) the Agent has received counterparts of this Amendment that, when
taken together, bear the signatures of the Borrower and the Required
Lenders;
(b) the Agent has received the Amendment Fee (as defined below);
(c) the Agent has received an opinion of Dewey Ballantine LLP, in form
reasonably satisfactory to the Agent and covering such matters relating to
this Amendment as the Agent shall reasonably request;
(d) the Agent shall have received such documents and certificates as
the Agent or its counsel may reasonably request relating to the
organization, existence and good standing of the Borrower or the
authorization of this Amendment and any other legal matters relating to the
Borrower or this Amendment, all in form and substance satisfactory to the
Agent and its counsel; and
(e) an amendment to the Amended and Restated Letter of Credit and
Reimbursement Agreement, dated as of September 1, 1997, as amended and
restated as of August 21, 1998 among the Borrower, the participating banks
party thereto, CSFB, as agent and Dresdner Bank AG, New York Branch, as
issuing bank, substantially in the form of this Amendment shall have become
effective (or will become effective concurrently with the effectiveness of
this Amendment).
The Agent shall promptly notify the Borrower and the Lenders of the
Amendment Effective Date, and such notice shall be conclusive and binding on all
parties hereto.
SECTION 6. Amendment Fee. The Borrower agrees to pay to the Agent an
amendment fee (the "Amendment Fee") in the amount of $500,000 to be distributed
to each Lender that executes and delivers a copy of this Amendment to the Agent
(or its counsel) on or prior to January 27, 1999 pro rata with respect to such
Lender's Commitment and the total Commitment of all Lenders entitled to share in
the Amendment Fee pursuant to this Section 6; provided that the Borrower shall
have no liability for the Amendment Fee if this Amendment does not become
effective.
SECTION 7. Miscellaneous. (a) Except as expressly set forth herein, this
Amendment shall not by implication or otherwise limit, impair, constitute a
waiver
<PAGE>
6
of, or otherwise affect, the rights and remedies of the Lenders or the Agent
under the Credit Agreement, and shall not alter, modify, amend or in any way
affect any of the terms, conditions, obligations, covenants or agreements
contained in the Credit Agreement, all of which are ratified and affirmed in all
respects and shall continue in full force and effect. Nothing herein shall be
deemed to entitle the Borrower or any Subsidiary to a consent to, or a waiver,
amendment, modification or other change of, any of the terms, conditions,
obligations, covenants or agreements contained in the Credit Agreement in
similar or different circumstances. This Amendment shall apply and be effective
only with respect to the provisions of the Credit Agreement specifically
referred to herein.
(b) As used in the Credit Agreement, the terms "Agreement", "herein",
"hereinafter", "hereunder", "hereto", and words of similar import shall mean,
from and after the date hereof, the Credit Agreement as amended by this
Amendment.
(c) Section headings used herein are for convenience of reference only and
are not to affect the construction of, or to be taken into consideration in
interpreting, this Amendment.
(d) THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY
THE LAWS OF THE STATE OF NEW YORK.
(e) This Amendment may be executed in any number of counterparts, each of
which shall be an original but all of which, when taken together, shall
constitute but one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective duly authorized officers as of
the date first above written.
CONTIFINANCIAL CORPORATION,
by
/s/ Frank V. Baier
------------------------------------
Name: Frank V. Baier
Title:Vice President & Treasurer
by
/s/ Daniel J. Willets
------------------------------------
Name: Daniel J. Willets
Title: SVP & CFO
<PAGE>
7
CREDIT SUISSE FIRST BOSTON,
NEW YORK BRANCH, Individually,
and as Agent,
by
/s/ Jay Chall
--------------------------------
Name: Jay Chall
Title: Director
by
/s/ Andrea E. Shkane
--------------------------------
Name: Andrea E. Shkane
Title: Vice President
DRESDNER BANK AG, NEW YORK AND
GRAND CAYMAN BRANCHES,
by
/s/ J. Curtin Beaudouin
--------------------------------
Name: J. Curtin Beaudouin
Title: First Vice President
by
/s/ Jonathan Wallin
--------------------------------
Name: Jonathan Wallin
Title: Vice President
CORESTATES BANK, N.A.,
by
/s/ Helen F. Wessling
--------------------------------
Name: Helen F. Wessling
Title: Vice President
THE BANK OF NEW YORK,
by
/s/ Robert A. Tweed
--------------------------------
Name: Robert A. Tweed
Title: Vice President
<PAGE>
8
DEUTSCHE BANK AG, NEW YORK AND/OR
CAYMAN ISLAND BRANCHES,
by
/s/ Gayma Z. Shivnarain
--------------------------------
Name: Gayma Z. Shivnarain
Title: Vice President
by
/s/ Jonathan B.P. Mendes
--------------------------------
Name: Jonathan B.P. Mendes
Title: Vice President
DG BANK,
by
/s/ Andrew S. Resnick
--------------------------------
Name: Andrew S. Resnick
Title: Vice President
by
/s/ Karen A. Brinkman
--------------------------------
Name: Karen A. Brinkman
Title: Vice President
THE BANK OF NOVA SCOTIA,
by
/s/ Stephen Lockhart
--------------------------------
Name: Stephen Lockhart
Title: Vice President
CREDIT LYONNAIS NEW YORK BRANCH,
by
/s/ Vladimir Labun
--------------------------------
Name: Vladimir Labun
Title: First VP-Manager
SOCIETE GENERALE,
by
/s/ Janet M. Kagan
--------------------------------
Name: Janet M. Kagan
Title: Director
<PAGE>
9
COMERICA BANK,
by
/s/ Robert W. Marr
--------------------------------
Name: Robert W. Marr
Title: Account Officer
FIRST UNION NATIONAL BANK OF NORTH
CAROLINA,
by
/s/ Helen F. Wessling
--------------------------------
Name: Helen F. Wessling
Title: Vice President
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK,
by
--------------------------------
Name:
Title:
PNC BANK NATIONAL ASSOCIATION,
by
--------------------------------
Name:
Title:
THE SUMITOMO BANK, LIMITED,
NEW YORK BRANCH,
by
/s/ C. Michael Garrido
--------------------------------
Name: C. Michael Garrido
Title: Senior Vice President
CONFORMED COPY
SECOND AMENDMENT dated as of January 27, 1999 (this
"Amendment") to the Letter of Credit and Reimbursement
Agreement (as previously amended, the "Reimbursement
Agreement") dated as of September 9, 1997, as amended and
restated as of August 21, 1998, among ContiFinancial
Corporation, a Delaware corporation (the "Borrower"), the
Participating Banks party thereto, Credit Suisse First
Boston, New York Branch, as Agent, and Dresdner Bank AG, New
York Branch, as Issuing Bank.
A. Pursuant to the Reimbursement Agreement, the Participating Banks have
extended and agreed to extend credit to the Borrower on the terms and subject to
the conditions set forth therein.
B. The Borrower has requested that the Reimbursement Agreement be amended
as set forth herein. The Required Banks are willing to so amend the
Reimbursement Agreement on the terms and subject to the conditions set forth
herein.
Accordingly, in consideration of the mutual agreements herein contained and
other good and valuable consideration, the sufficiency and receipt of which are
hereby acknowledged, the parties hereto hereby agree as follows:
SECTION 1. Definitions. Unless otherwise specifically defined herein, each
capitalized term used herein which is defined in the Reimbursement Agreement
shall have the meaning assigned to such term in the Reimbursement Agreement.
SECTION 2. Amendments.
(a) Amendment to Section 1.01. Section 1.01 of the Reimbursement Agreement
is hereby amended by
(i) inserting in the appropriate alphabetical order the following
definitions:
"'Empire' means Empire Funding Holding Corporation, a Delaware
corporation and its subsidiaries."
"'Excluded Empire Debt' means any Indebtedness of Empire existing as
of the date
<PAGE>
2
Empire becomes a Subsidiary and for which neither the Borrower nor any
Restricted Subsidiary is directly or contingently liable in whole or in
part, whether as co-obligor, pursuant to any Guarantee or otherwise."
"'Excluded Charges' means the Strategic Alliance Charges and the
Residual Valuation Charge."
"'Residual Valuation Charge' means noncash charges arising from
adjustments to assumptions underlying the valuation of Excess Spread
Receivables in an aggregate pre-tax amount not to exceed $120,000,000."
"'Strategic Alliance Charges' means a noncash charge or charges
arising from the Borrower's investment in Strategic Alliance Clients in an
aggregate pre-tax amount not to exceed $80,000,000."
(ii) deleting the definition of "Applicable Percentage" in its
entirety and substituting therefor the following new definition:
"'Applicable Percentage' means as of any time 2.375%; provided that
if, as of any date, either the aggregate pre-tax amount of the Residual
Valuation Charge taken on or prior to such date exceeds $90,000,000 or the
aggregate pre-tax amount of the Strategic Alliance Charges taken on or
prior to such date exceeds $55,000,000, 'Applicable Percentage' shall mean
2.750%.";
(iii) deleting the definition of "Applicable Rating Level" in its
entirety;
(iv) deleting the word "and" immediately before the words "(b)
foreign, Federal, state and local" in the definition of "Consolidated EBIT"
and substituting therefor a comma;
(v) inserting immediately before the period at the end of the
definition of "Consolidated EBIT" the words "and (c) the amount of any
Excluded Charges for such period";
(vi) inserting immediately before the period at the end of the
definition of "Consolidated Interest Expense" the words "other than any
<PAGE>
3
interest expense attributable solely to Excluded Empire Debt";
(vii) deleting the word "and" immediately following the words "(i)
Permitted Warehouse Indebtedness" in the definition of "Consolidated
Leverage Ratio" and substituting therefor a comma;
(viii) inserting immediately after clause (ii) of the definition of
"Consolidated Leverage Ratio" the words "and (iii) Excluded Empire Debt";
(ix) inserting immediately before the period at the end of the
definition of "Consolidated Net Income" the words "and the effect of the
Excluded Charges"; and
(x) inserting immediately before the period at the end of the
definition of "Consolidated Net Worth" the words ", plus the amount, after
giving effect to taxes, of any Excluded Charges".
(b) Amendment to Section 6.05(a). Clause (iii) of Section 6.05(a) of the
Reimbursement Agreement is hereby amended by deleting the words "to the extent"
therein and substituting therefor "; provided that at the time such Investment
is made".
(c) Amendment to Section 6.09. Section 6.09 of the Reimbursement Agreement
is hereby amended by deleting such Section 6.09 in its entirety and substituting
therefor the following new Section 6.09:
"SECTION 6.09. Financial Covenants (a) Consolidated Net Worth shall
not at any time be less than (i) $470,100,000 plus (ii) an amount, for each
fiscal quarter which begins after December 31, 1998 and ends prior to the
date for which compliance with this Section 6.09 is being determined, equal
to the sum of (A) 75% of the aggregate of positive Consolidated Net Income
(without deduction for quarterly losses) and (B) 50% of Equity Net
Proceeds.
(b) The Consolidated Leverage Ratio will not at any time during any
period set forth below exceed the ratio set forth below opposite such
period:
<PAGE>
4
Period Ratio
------ -----
October 1, 1998 through
June 30, 1999 2.65 to 1.00
July 1, 1999 and
thereafter 2.50 to 1.00.
(c) The Consolidated Interest Coverage Ratio for the Rolling Period
will not, at any time during any period set forth below, be less than the
ratio set forth below opposite such period:
Period Ratio
------ -----
October 1, 1998 through
December 31, 1998 0.95 to 1.00
January 1, 1999 through
March 31, 1999 0.65 to 1.00
April 1, 1999 through
June 30, 1999 0.55 to 1.00
July 1, 1999 through
September 30, 1999 0.90 to 1.00
October 1, 1999 through
December 31, 1999 1.20 to 1.00
January 1, 2000 and
thereafter 1.50 to 1.00.
SECTION 3. Representations and Warranties. The Borrower represents and
warrants to the Agent and each Participating Bank that:
(a) The representations and warranties set forth in the Reimbursement
Agreement after giving effect to this Amendment are true and correct in all
material respects except to the extent such representations and warranties
expressly relate to an earlier date.
(b) After giving effect to this Amendment, the Borrower is in
compliance in all material respects with all the terms and provisions
contained in the Reimbursement Agreement required to be observed or
performed.
(c) After giving effect to this Amendment, no Default has occurred and
is continuing.
Section 4. Effectiveness. This Amendment shall become effective on the date
(the "Amendment Effective Date") on which each of the following conditions is
met:
<PAGE>
5
(a) the Agent has received counterparts of this Amendment that, when
taken together, bear the signatures of the Borrower and the Required Banks;
(b) the Agent has received the Amendment Fee (as defined below);
(c) the Agent has received an opinion of Dewey Ballantine LLP, in form
reasonably satisfactory to the Agent and covering such matters relating to
this Amendment as the Agent shall reasonably request;
(d) the Agent shall have received such documents and certificates as
the Agent or its counsel may reasonably request relating to the
organization, existence and good standing of the Borrower or the
authorization of this Amendment and any other legal matters relating to the
Borrower or this Amendment, all in form and substance satisfactory to the
Agent and its counsel; and
(e) an amendment to the Credit Agreement substantially in the form of
this Amendment shall have become effective (or will become effective
concurrently with the effectiveness of this Amendment).
The Agent shall promptly notify the Borrower and the Participating Banks of
the Amendment Effective Date, and such notice shall be conclusive and binding on
all parties hereto.
SECTION 5. Amendment Fee. The Borrower agrees to pay to the Agent an
amendment fee (the "Amendment Fee") in the amount of $793,750 to be distributed
to each Participating Bank that executes and delivers a copy of this Amendment
to the Agent (or its counsel) on or prior to January 27, 1999 pro rata with
respect to such Participating Bank's Participation Percentage and the total
Participation Percentages of all Participating Banks entitled to share in the
Amendment Fee pursuant to this Section 5; provided that the Borrower shall have
no liability for the Amendment Fee if this Amendment does not become effective.
SECTION 6. Miscellaneous. (a) Except as expressly set forth herein, this
Amendment shall not by implication or otherwise limit, impair, constitute a
waiver of, or otherwise affect, the rights and remedies of the Participating
Banks or the Agent under the Reimbursement Agreement, and shall not alter,
modify, amend or in any way affect any of the terms, conditions, obligations,
covenants or agreements contained in the Reimbursement Agreement, all of which
are ratified and affirmed in all respects and shall
<PAGE>
6
continue in full force and effect. Nothing herein shall be deemed to entitle the
Borrower or any Subsidiary to a consent to, or a waiver, amendment, modification
or other change of, any of the terms, conditions, obligations, covenants or
agreements contained in the Reimbursement Agreement in similar or different
circumstances. This Amendment shall apply and be effective only with respect to
the provisions of the Reimbursement Agreement specifically referred to herein.
(b) As used in the Reimbursement Agreement, the terms "Agreement",
"herein", "hereinafter", "hereunder", "hereto", and words of similar import
shall mean, from and after the date hereof, the Reimbursement Agreement as
amended by this Amendment.
(c) Section headings used herein are for convenience of reference only and
are not to affect the construction of, or to be taken into consideration in
interpreting, this Amendment.
(d) THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY
THE LAWS OF THE STATE OF NEW YORK.
(e) This Amendment may be executed in any number of counterparts, each of
which shall be an original but all of which, when taken together, shall
constitute but one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective duly authorized officers as of
the date first above written.
CONTIFINANCIAL CORPORATION,
by
/s/ Frank V. Baier
--------------------------------
Name: Frank V. Baier
Title:Vice President & Treasurer
by
/s/ Daniel J. Willets
--------------------------------
Name: Daniel J. Willets
Title: SVP & CFO
<PAGE>
7
CREDIT SUISSE FIRST BOSTON,
NEW YORK BRANCH, Individually,
and as Agent,
by
/s/ Jay Chall
--------------------------------
Name: Jay Chall
Title: Director
by
/s/ Andrea E. Shkane
--------------------------------
Name: Andrea E. Shkane
Title: Vice President
DRESDNER BANK AG, NEW YORK AND
GRAND CAYMAN BRANCHES,
by
/s/ J. Curtin Beaudouin
--------------------------------
Name: J. Curtin Beaudouin
Title: First Vice President
by
/s/ Jonathan Wallin
--------------------------------
Name: Jonathan Wallin
Title: Vice President
THE BANK OF NEW YORK,
by
/s/ Robert A. Tweed
--------------------------------
Name: Robert A. Tweed
Title: Vice President
CREDIT AGRICOLE INDOSUEZ,
by
--------------------------------
Name:
Title:
by
--------------------------------
Name:
Title:
<PAGE>
8
THE BANK OF NOVA SCOTIA,
by
/s/ Stephen Lockhart
--------------------------------
Name: Stephen Lockhart
Title: Vice President
THE CHASE MANHATTAN BANK,
by
/s/ Gary L. Spevack
--------------------------------
Name: Gary L. Spevack
Title: Vice President
NATIONSBANK, N.A.,
by
--------------------------------
Name:
Title:
CREDIT LYONNAIS NEW YORK BRANCH,
by
/s/ Vladimir Labun
--------------------------------
Name: Vladimir Labun
Title: First VP-Manager
SOCIETE GENERALE NEW YORK BRANCH,
by
/s/ Janet M. Kagan
--------------------------------
Name: Janet M. Kagan
Title: Director
COMERICA BANK,
by
/s/ Robert W. Marr
--------------------------------
Name: Robert W. Marr
Title: Account Officer
<PAGE>
9
UBS AG, NEW YORK BRANCH,
by
/s/ Eva Rushkevich
--------------------------------
Name: Eva Rushkevich
Title: Executive Director
by
/s/ Roger Liechti
--------------------------------
Name: Roger Liechti
Title: Associate Director
THE SUMITOMO BANK, LIMITED,
NEW YORK BRANCH,
by
/s/ C. Michael Garrido
--------------------------------
Name: C. Michael Garrido
Title: Senior Vice President
BW CAPITAL MARKETS, INC.,
by
/s/ Robert B. Herber
--------------------------------
Name: Robert B. Herber
Title: Managing Director
by
/s/ Thomas A. Lowe
--------------------------------
Name: Thomas A. Lowe
Title: Vice President
SOUTHTRUST BANK, NATIONAL
ASSOCIATION
by
/s/ D. Andrew Raine
--------------------------------
Name: D. Andrew Raine
Title: Assistant Vice President
MANUFACTURERS AND TRADERS TRUST
COMPANY
by
/s/ Kevin B. Quinn
--------------------------------
Name: Kevin B. Quinn
Title: Assistant Vice President
Exhibit 11.1
ContiFinancial Corporation
Calculation of Earnings Per Share
For the three months ended December 31, 1998
<TABLE>
<CAPTION>
Basic and Diluted Computation for the three months ended December 31, 1998
<S> <C>
Weighted average shares outstanding:
Common stock excluding shares relating to employee incentive plans 45,400,970
Vested Restricted Shares Outstanding during the Quarter 739,737
-------------
Weighted Average Shares Outstanding 46,140,707
-------------
Quarter income (loss) ($58,800,000)
-------------
Basic Earnings Per Share ($1.27)
=============
<CAPTION>
Basic and Diluted computation for the nine months ended December 31, 1998
<S> <C>
Net Income (loss) ($167,031,000)
Weighted Average Shares Outstanding
First quarter 46,685,863
Second quarter 46,153,506
Third quarter 46,140,707
-------------
Average 46,326,692
-------------
Year-to-date Basic EPS ($3.61)
=============
</TABLE>
ContiFinancial Corporation
Ratio of Earnings to Fixed Charges
Exhibit 12.1 of December 31, 1998 Form 10-Q
<TABLE>
<CAPTION>
Nine months ended
December 31,
1998 1997 Fiscal 98 Fiscal 97 Fiscal 96 Fiscal 95 Fiscal 94
-------- ------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Summary:
Earnings (63,392) 279,919 385,425 297,677 197,996 77,895 42,334
Fixed Charges 182,807 119,913 165,904 120,636 74,770 29,635 12,124
-------- ------- ---------------------------------------------------
Ratio -0.35 2.33 2.32 2.47 2.65 2.63 3.49
======== ======= ===================================================
Earnings:
Income (loss) before income taxes and
minority interest (246,116) 163,059 224,965 177,041 126,536 56,988 35,286
Plus: Interest expense 182,807 119,913 165,904 120,636 74,770 29,635 12,124
Less: Equity income in unconsolidated
subsidiaries n/a (3,053) (5,444) -- -- -- --
(Less): Minority interest (83) n/a n/a n/a (3,310) (8,728) (5,076)
-------- ------- ---------------------------------------------------
Total "Earnings" (63,392) 279,919 385,425 297,677 197,996 77,895 42,334
======== ======= ===================================================
Fixed Charges:
Interest expense 182,807 119,913 165,904 120,636 74,770 29,635 12,124
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 110,691
<SECURITIES> 925,370
<RECEIVABLES> 1,048,524
<ALLOWANCES> (5,069)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 37,518
<DEPRECIATION> (12,313)
<TOTAL-ASSETS> 2,463,987
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 477
<OTHER-SE> 462,083
<TOTAL-LIABILITY-AND-EQUITY> 2,463,987
<SALES> 0
<TOTAL-REVENUES> 278,539
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 337,738
<LOSS-PROVISION> 4,110
<INTEREST-EXPENSE> 182,807
<INCOME-PRETAX> (246,116)
<INCOME-TAX> (79,168)
<INCOME-CONTINUING> (167,031)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (167,031)
<EPS-PRIMARY> (3.61)
<EPS-DILUTED> (3.61)
</TABLE>
