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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
1-14074
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(Commission File Number)
ContiFinancial Corporation
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(Exact name of registrant as specified in its charter)
Delaware 13-3852588
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(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
277 Park Avenue
New York, New York 10172
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 207-2800
Securities registered pursuant to Section 12(b) of the Act:
Common Stock New York Stock Exchange
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(Title of each Class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of Class)
Indicate by check mark whether registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of June 30, 1999 the aggregate market value of the voting stock held by
non-affiliates of the registrant was $33,159,561.
The Company had 46,747,370 shares of common stock outstanding as of June 30,
1999.
DOCUMENTS INCORPORATED BY REFERENCE:
The information required by Part III, Items 10,11,12 and 13, is incorporated by
reference to ContiFinancial Corporation's proxy statement which will be filed
with the Securities and Exchange Commission not more than 120 days after March
31, 1999.
The Form 10-K previously filed is hereby amended as follows:
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ContiFinancial Corporation
Table of Contents
PART I.
Page
----
Item 1. Business .......................................................... 3
Item 2. Properties ........................................................ 20
Item 3. Legal Proceedings ................................................. 20
Item 4. Submission of Matters to a Vote of Security Holders ............... 20
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters ........................................................... 21
Item 6. Selected Financial Data ........................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................. 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ........ 53
Item 8. Financial Statements and Supplementary Data ....................... 55
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure .......................................... 93
PART III.
Item 10. Directors and Executive Officers of the Registrant ................ 94
Item 11. Executive Compensation ............................................ 94
Item 12. Security Ownership of Certain Beneficial Owners and Management .... 94
Item 13. Certain Relationships and Related Transactions .................... 94
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ... 94
Signatures ................................................................. 97
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Forward-looking Statements
Certain statements contained in this Annual Report Form 10-K including, but not
limited to, statements relating to the Company's strategic objectives, raising
additional equity and future performance, which are not historical fact, may be
deemed to be forward-looking statements under the federal securities laws. There
are many important factors that could cause the Company's actual results to
differ materially from those indicated in the forward-looking statements,
including the ability of the Company, in fact, to successfully complete a
transaction with a buyer or equity investor. Such factors also include, but are
not limited to, general economic conditions, interest rate risk, prepayment
speeds, delinquency and default rates, credit losses, changes (legislative and
otherwise) in the asset securitization industry, demand for the Company's
services, residential and commercial real estate values, the ability of the
Company to negotiate agreements to sell whole loans, the impact of certain
covenants in debt agreements of the Company, the degree to which the Company is
leveraged, its needs for financing, the continued availability of the Company's
credit facilities, the risk of margin calls on the Company's credit facilities
and hedge positions, capital markets conditions, including the markets for
asset-backed securities and commercial mortgage loans, the performance of the
Company's subsidiaries and affiliates, the Company's Year 2000 issues and other
risks identified in the Company's Securities and Exchange Commission filings. In
addition, it should be noted that past financial and operational performance of
the Company is not necessarily indicative of future financial and operational
performance.
Part I.
Item 1. Business.
General
ContiFinancial Corporation together with its subsidiaries (collectively, the
"Company" or "ContiFinancial") engages in the consumer finance business by
originating and servicing primarily non-conforming home equity loans ("HELs").
Through ContiMortgage Corporation ("ContiMortgage") and ContiWest Corporation
("ContiWest"), the Company is a leading originator, purchaser, seller,
securitizer and servicer of home equity loans made to borrowers whose borrowing
needs may not be met by traditional financial institutions due to credit
exceptions or other factors. These loans are primarily for debt consolidation,
home improvements, education or refinancing and are most often secured by first
mortgages on single family residential properties.
In fiscal 1999, the Company incurred a net loss of $426.3 million and suffered a
critical loss of liquidity. The Company's Bank Facilities expire on August 20,
1999, and the Warehouse Facilities expire at various times from July 1999
through December 1999. The Company's continued operations are dependent on the
extension, renegotiation or refinancing, as well as availability through
scheduled maturity of the Bank and Warehouse Facilities. The Company's ability
to extend, renegotiate or refinance its facilities depends on the successful
completion of a transaction with a buyer or equity investor. As a result, there
is substantial doubt about the Company's ability to continue as a going concern.
See Note 1 to the Consolidated Financial Statements.
Historically, the Company operated as a more diversified consumer and commercial
financial intermediary that originated, securitized and serviced various loan
products in addition to HELs. These products included commercial real estate
loans, high loan-to-value mortgage loans, non-prime auto loans, charged-off
consumer receivables, equipment leases and franchise loans. In fiscal 1999,
severe turbulence in the capital markets (described in greater detail below)
contributed to significant losses and resulted in a critical loss of liquidity
that made it impossible for the Company to continue financing its diversified
product lines. As a result, the Company had to restrict its focus primarily to
the core HEL business and reduce or eliminate its involvement with most other
loan products. The Company's Consolidated Statement of Income for the year ended
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March 31, 1999 reflects, under Commercial real estate valuation adjustments and
Other charges, total charges of $315.5 million related to losses incurred as a
result of these factors. See Note 4 to the Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
ContiMortgage purchases and originates HELs through a diversified network of
correspondents and mortgage loan brokers and on a retail basis through its
direct consumer lending effort. As of March 31, 1999, ContiMortgage had 359
active correspondents, 1,766 active mortgage loan brokers and 119 Company-owned
retail branches or call centers. For the years ended March 31, 1999 and 1998,
the Company originated $8.2 billion and $6.8 billion, respectively, of home
equity, home improvement and other residential mortgage loans, and securitized
or sold $7.7 billion and $6.7 billion, respectively, of such loans.
Notwithstanding the increase in fiscal 1999 production volume over the prior
year, the Company significantly reduced production through its correspondent
division in the third and fourth quarters of fiscal 1999, which historically had
been the Company's largest and fastest growing production channel. Due to its
diminished liquidity position, the Company reduced the cash premiums it would
pay for correspondent product, opting instead to focus its production efforts on
broker and direct retail originations, which fundings are typically cash flow
positive due to points and fees collected from the borrowers. Of total HEL
production of $8.2 billion for fiscal 1999, $1.8 billion and $1.7 billion was
produced in the third and fourth quarters, respectively.
Recent Developments
Write-downs of Interest-only and Residual Certificates
During fiscal 1999, the Company recorded fair value adjustments to interest-only
and residual certificates totaling $329 million, resulting from
higher-than-estimated prepayment speeds and credit losses, and an increase to
the discount rate used in the valuation from 10% to 12% to reflect the capital
market's deteriorating view of the "sub-prime" industry in which the Company
operates. The Company believes its interest-only and residual certificates are
fairly valued at March 31, 1999 but can provide no assurances that future
prepayment and loss experience or changes in the required market discount rate
will not necessitate additional write-downs. If there are such additional
write-downs in future periods, the Company's income would be reduced and that
could cause the Company to report net losses for such periods. See Note 5 to the
Consolidated Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Gain on Sale of Receivables and
Interest-only and Residual Certificates."
Capital Markets Turbulence
The Company's operations were significantly and adversely affected by difficult
capital market conditions that commenced in the second quarter of fiscal 1999,
with the effects of these events, and their repercussions, continuing to affect
the Company's results in the third and fourth quarters. During the second
quarter, the economic instability in Asia and Russia precipitated a global debt
crisis (the "Debt Crisis") which caused a "flight to quality" by investors.
During this period, fixed income investors purchased large amounts of U.S.
Treasury securities, causing U.S. Treasury yields to decrease significantly. As
investor demand for U.S. Treasury securities increased, the demand for other
fixed income securities declined dramatically, causing yields on such other
securities to rise relative to U.S. Treasury securities. Since almost all of the
Company's loan originations were ultimately funded by the issuance of securities
backed by the loans it originates (securitization), these unusual interest rate
movements affected the market value of all of the Company's originations,
causing significant losses and leading to a critical loss of liquidity.
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By late September, these unusual interest rate movements had caused the
near-collapse of a large hedge fund controlling over $90 billion in financial
assets. This event panicked the world's banking systems and further eroded the
value of financial assets. In October, one of the largest investors in the
subordinate classes of securities produced in commercial loan securitizations
(the "Investor") filed for bankruptcy protection under the weight of margin
calls by its lenders. These margin calls were made because of the loss in value
of the securities which collateralized the Investor's borrowings. This
bankruptcy removed a large source of liquidity from the commercial loan
securitization market.
The immediate impact of these events was an increase to the Company's margin
requirements under its warehouse financing facilities - the Purchase and Sale
Facilities and Repurchase Agreements (collectively, the "Warehouse Facilities")
and significant losses in the Company's related hedge positions in U.S. Treasury
securities. Because the Company's securities are priced based on a spread over
the U.S. Treasury yield, the Company's policy had been to hedge its inventory
position by selling short U.S. Treasury securities. During the "flight to
quality" the Company's short position lost money as U.S. Treasury yields
declined, and its long position (its inventory of loans) also lost value due to
(i) a decline in demand for the securities backed by its loans, and (ii) a
sudden over supply in the whole loan market as securitizers, en masse, attempted
to sell their inventories to a limited number of whole loan buyers. In response
to the decline in market value of the inventory securing the Warehouse
Facilities, the Company's lenders made margin calls for additional cash
collateral. The most significant hedge losses and margin calls occurred in the
Company's commercial loan portfolio due to the longer durations associated with
these loans and in the Company's high loan-to-value business because of the more
limited funding options for this product.
To lessen the drain on liquidity caused by the margin calls, the Company had to
sell inventory to reduce its margin exposure and to generate cash premiums.
Large whole loan sales of HELs and commercial loans had to be executed near the
bottom of the market, with the twofold result being that the Company sold
portfolios at a loss (some under par, others at sales premiums less than the
purchase premiums) and had to close out the related hedge positions at a loss,
eliminating any possibility of recovery as the Debt Crisis eventually eased and
U.S. Treasury yields began to rise.
While the Debt Crisis abated for other sectors of the economy over the remainder
of fiscal 1999, its impact and subsequent repercussions continued to affect the
"sub-prime" industry in which the Company operates. The sudden and significant
loss of liquidity experienced throughout the industry, occurring within the
context of increasing market skepticism about the quality of earnings reported
under "gain-on-sale accounting," intensified capital market concerns about the
industry and effectively eliminated access to the capital markets as a source of
new liquidity. Although the Company was successful in the third and fourth
quarters of fiscal 1999 in securitizing its products and selling its products on
a whole loan basis, its diminished liquidity position adversely affected the
Company's ability to continue to provide financing to its Strategic Alliance
clients. The continued viability of these client companies and the
recoverability of the Company's investments in and receivables from these
companies became contingent upon their ability to find alternative sources of
financing. As the evolving impact of the Debt Crisis on certain client companies
became known, the Company recorded write-downs or reserves against these
balances.
Revised Business Strategy and Additional Capital Requirements
In response to the new market environment and the severe capital constraints
under which the Company must operate, the Company has taken various steps to
reposition its business. Going forward, the Company will focus on those
businesses that (i) generate positive cash flow, (ii) represent platforms for
future growth and diversification, (iii) have the ability to achieve a position
of market leadership, and (iv) reduce reliance on securitization as a sole
funding source. Given these operating considerations, the Company intends to
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focus on its HEL origination business through ContiMortgage. ContiMortgage will
continue its strategy to be a low cost producer generating loan volume through
multiple origination channels supported by experienced servicing, collections
and loss mitigation groups. ContiMortgage will continue to (i) de-emphasize
originations in its most cash intensive correspondent channel of production,
while also reducing the premiums paid for correspondent loans; (ii) increase its
higher margin broker and retail loan production channel; and (iii) diversify
loan funding strategies to increase the level of whole loan sales and reduce
reliance upon securitization.
There can be no assurances given that the Company will be successful in
implementing its revised business strategy, primarily because the Company has
debt obligations totaling $422 million as of July 13, 1999 that will mature in
August 1999. In addition, the Company's Warehouse Facilities expire at various
times from July 1999 through December 1999. The Company is operating on a
negative cash flow basis and is dependent on various financing sources for its
continued operations. In order to fund new loans and asset originations and
purchases, the Company is dependent on its Purchase and Sale Facilities and
Repurchase Agreements (collectively, the "Warehouse Facilities"). The Company is
also dependent on continued access to its Revolving Credit Facility and
Commercial Paper Program (collectively, the "Bank Facilities"). The Company is
required to comply with various financial covenants under its outstanding
long-term debt, Bank Facilities and Warehouse Facilities. As of March 31, 1999,
the Company's leverage ratio exceeded the leverage ratio test under the
covenants of its outstanding long-term debt. As a result, the Company is
prevented from issuing additional unsecured debt until its leverage ratio is
below such test. Additionally, the Company would not have been in compliance
with several of the financial covenants of the Bank Facilities and Warehouse
Facilities at December 31, 1998 and March 31, 1999 had these agreements not been
amended. The Company's continued operations are dependent on the extension,
renegotiation or refinancing, as well as availability through scheduled maturity
of the Bank and Warehouse Facilities. The Company's ability to extend,
renegotiate or refinance its facilities depends on the successful completion of
a transaction with a buyer or equity investor. As a result, there is substantial
doubt about the Company's ability to continue as a going concern. In order to
address this issue, the Company has been seeking a financially strong acquirer
or equity investor who can provide the necessary financing or provide the
Company's lenders with the requisite guarantees. The previously announced
discussions with Residential Funding Corporation, a subsidiary of General Motors
Acceptance Corporation, with respect to an acquisition of the Company have
terminated. The Company is in discussions with others to act as an acquiror or
equity investor and has commenced negotiations for a restructuring with the
providers of its Bank Facilities and Warehouse Facilities.
Home Equity Loan Origination and Servicing
Loan Production
Origination. ContiMortgage's and ContiWest's principal loan product is a
non-conforming home equity loan with a fixed principal amount and term to
maturity, which may have a fixed or adjustable interest rate and is secured by a
first- or second-lien mortgage on the borrower's residence. For fiscal 1999,
over 94% of ContiMortgage/ContiWest loan originations were secured by a
first-lien mortgage. Non-conforming home equity loans are made to borrowers
whose needs may not be met by traditional financial institutions due to credit
exceptions. The Company obtains its loans through three primary production
channels in 47 states and the District of Columbia: correspondent, broker retail
and direct retail.
Correspondent. The correspondent division purchases closed loans from
independent mortgage bankers and other financial institutions, typically in
pools in excess of $1 million. Every loan is reunderwritten prior to purchase
for compliance with the ContiMortgage underwriting guidelines. For fiscal 1999,
ContiMortgage purchased loans from 359 correspondent sources, with the largest
source accounting for 11% of total correspondent volume, and the top five
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sources accounting for 24% of total correspondent volume. At March 31, 1999, the
correspondent division had 15 employees based in ContiMortgage's headquarters in
Hatboro, PA and a west coast satellite office located in Orange County, CA.
Correspondent loan volume was $4.68 billion and $4.46 billion for fiscal years
1999 and 1998, respectively, representing 57% and 65% of total home equity loan
volume for the respective years. Notwithstanding the increase in fiscal 1999
correspondent production volume over the prior year, the Company's correspondent
division, which historically had been the Company's largest and fastest growing
production channel, experienced a significant decline in production volume in
the third and fourth quarters of fiscal 1999. Due to its diminished liquidity
position, the Company reduced the cash premiums it would pay for correspondent
product, opting instead to focus its production efforts on broker and direct
retail originations, which fundings are typically cash flow positive due to
points and fees collected from the borrowers. Of total correspondent production
of $4.68 billion for fiscal 1999, $1.01 billion and $732 million was produced in
the third and fourth fiscal quarters, respectively.
Broker Retail. The broker division sources loans through its network of
independent mortgage brokers which provides ContiMortage with qualified loan
applicants. All loans are underwritten, processed, closed and funded by
ContiMortgage. In fiscal 1999, the Company sourced loans through 1,766
independent brokers. At March 31, 1999, the broker division had 195 employees in
eight regional offices and five satellite offices. The regional offices are
located in Horsham, PA; Oak Brook, IL; Dallas, TX; Atlanta, GA; Phoenix, AZ;
Pleasanton, CA; Charlotte, NC; and Dublin, OH. Broker loan volume was $1.56
billion and $1.03 billion for fiscal years 1999 and 1998, respectively,
representing 19% and 15% of total home equity loan volume for the respective
years. Of total broker retail production of $1.56 billion for fiscal 1999, $377
million and $411 million was produced in the third and fourth fiscal quarters,
respectively.
Direct Retail. ContiMortgage originates loans on a direct-to-consumer basis
through ContiMortgage divisions and subsidiaries. As of March 31, 1999, the
Company had 119 retail offices including three call centers and a portfolio
retention group. Direct-to-consumer retail volume was $1.96 billion and $1.32
billion for fiscal years 1999 and 1998, respectively, representing 24% and 19%
of total home equity loan volume for the respective years. Of total direct
retail production of $1.96 billion for fiscal 1999, $457 million and $534
million was produced in the third and fourth fiscal quarters, respectively.
The direct-to-consumer retail network has been developed through a series of
acquisitions and start-ups of retail loan originators made by the Company during
fiscal years 1997 through 1999. These acquisitions and start-ups allow the
Company to vertically integrate, reducing its reliance on correspondent sources,
and to leverage the ContiMortgage securitization and servicing platforms. In
each case the companies acquired were former Strategic Alliance clients or
ContiMortgage loan origination sources. The Company's acquisition strategy was
to acquire companies whose products had a history of good performance and whose
management team had a strong, long-term relationship with ContiMortgage. Each
acquisition was structured with an upfront payment at closing and an earnout to
be paid over a three to five year period based on performance. During the second
quarter of fiscal 1999, ContiMortgage initiated the start up of ContiDirect, a
direct-to-consumer division which uses centralized call centers to conduct
out-bound telemarketing supported by direct mail. ContiDirect produced
approximately $18 million of direct retail origination in March 1999, its
seventh month of production. During the fourth quarter of fiscal 1999,
ContiMortgage acquired from a former Strategic Alliance client a retail branch
network of 18 origination offices.
The Company believes that direct-to-consumer originations will provide a
lower-cost alternative to correspondent production and will enable the Company
to increase its utilization of prepayment penalties and improve the quality and
consistency of loan underwriting, resulting in improved loan performance.
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The following table details selected information regarding each of
ContiMortgage's retail direct-to-consumer loan production sources:
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Retail
Monthly Volume
(March 1999)
Name Headquarters Employees Offices (in millions)
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ContiDirect Hatboro, PA 294 2 18
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United Lending Irvine, CA 367 5 40
Group
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Resource One Langhorne, PA 315 30 38
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Royal Mortgage Orange, CA 198 25 15
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Crystal Amherst, OH 240 23 22
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FMD Lincolnshire, IL 129 15 12
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ContiMortgage Hatboro, PA 165 18 21
Branches
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Portfolio Hatboro, PA 53 1 42
Retention
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Underwriting. All home equity loans are underwritten in accordance with the
Company's underwriting guidelines. The underwriting process is intended to
assess both the prospective borrower's ability to repay the loan and the
adequacy of the real property securing the loan. In the underwriting process, an
underwriter reviews a credit package which typically includes, among other
things, a current property appraisal from an independent appraiser, a credit
report, a title report and verification of employment and income. On a
case-by-case basis, an underwriter may approve a loan that varies in some
limited respect from the underwriting guidelines provided that compensating
factors exist; however, any significant variation from the underwriting
guidelines must be approved by a senior underwriter or senior credit officer.
ContiMortgage generally purchases or originates loans which either fully
amortize over a period not to exceed 360 months or provide for amortization over
a 360-month schedule with a "balloon" payment required at the maturity date,
which would typically be fifteen years after origination but in no event less
than five years. The loan amounts generally range from a minimum of $10,000 to a
maximum of $350,000, unless a higher amount is specifically approved by senior
management. The current average home equity loan purchased or originated by
ContiMortgage has a balance of approximately $75,000. ContiMortgage and
ContiWest primarily purchase or originate non-purchase money first- or
second-lien mortgage loans, although ContiMortgage and ContiWest have programs
for origination of certain purchase money first-lien mortgages.
The properties used for collateral to secure the loans are residential one- to
four-family homes, condominiums or townhouses, mostly primary residences, but
may also include second homes, vacation homes or investor-owned residential
properties. Generally, each home must have a minimum appraised value of $40,000.
Mobile housing or agricultural land are not accepted as collateral. In addition,
mixed-use loans secured by owner-occupied properties, including one- to
four-family and small multifamily residences, are made where the proceeds may be
used for business purposes.
Each property proposed as collateral for a loan must be appraised not more than
six months prior to the date of such loan. The combined loan-to-value ratio
("CLTV") of the first and second mortgages generally may not exceed 90%. If a
prior mortgage exists, ContiMortgage first reviews the first mortgage history.
If it contains open end, advance or negative amortization provisions, the
maximum potential first mortgage balance is used in calculating the CLTV ratio
which determines the maximum loan amount. ContiMortgage does not purchase or
originate loans where the first mortgage contains a shared appreciation clause.
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ContiMortgage also requires a credit report by an independent credit reporting
agency which describes the applicant's credit history. The credit report should
reflect all delinquencies of 30 days or more, repossessions, judgments,
foreclosures, garnishments, bankruptcies and similar adverse credit events that
can be discovered by a search of public records. Written verification is
obtained on any first mortgage balance, its status and whether local taxes,
interest, insurance and assessments are included in the applicant's monthly
payment on the first mortgage. All taxes and assessments not included in the
monthly payment must be verified as current.
Each loan applicant is required to secure property insurance in an amount
sufficient to cover the new loan and any other outstanding mortgages. If the sum
of the outstanding first mortgage, if any, and the home equity loan exceeds
replacement value, insurance at least equal to replacement value may be
accepted.
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The following chart outlines the most significant parameters of the credit
grades of ContiMortgage's and ContiWest's current underwriting guidelines:
<TABLE>
<CAPTION>
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"A" CREDIT GRADE "B" CREDIT GRADE "C" CREDIT GRADE "D" CREDIT GRADE
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<S> <C> <C> <C> <C>
General Repayment Has good credit Pays the Marginal credit Designed to
but might have majority of history which provide a
some minor accounts on is offset by borrower with
delinquency. time but has other positive poor credit
some 30- attributes. history an
and/or 60-day opportunity to
delinquency. correct past
credit problems
through lower
monthly payments.
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Existing Current at Current at Cannot exceed Must be paid in
Mortgage Loans application application four 30-day full from loan
time and a time and a delinquencies proceeds and no
maximum of two maximum of or one 60-day more than 119
30-day three 30-day delinquency in days'
delinquencies delinquencies the past 12 delinquency.
in the past 12 in the past 12 months.
months. months.
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Non-Mortgage Major credit Major credit Major credit Major and minor
Credit and installment and installment and installment credit
debt should be debt can debt can delinquency is
current but may exhibit some exhibit some acceptable, but
exhibit some minor 30-and/or minor 30-and/or must demonstrate
minor 30-day 60-day 90-day some payment
delinquency. delinquency. delinquency. regularity.
Minor credit Minor credit Minor credit
may exhibit may exhibit up may exhibit
some minor to 90-day more serious
delinquency. delinquency. delinquency.
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Bankruptcy Charge-offs, Discharged more Discharged more Discharged prior
Filings judgments, than two years than one year to closing.
liens, and with with
former reestablished reestablished
bankruptcies credit. credit.
are generally
unacceptable.
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Debt Generally not Generally not Generally not Generally not to
Service-to-Income to exceed 45%. to exceed 45%. to exceed 50%. exceed 50%.
Ratio
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Maximum
Loan-to-Value
Ratio:
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Owner Occupied Generally 90% Generally 85% Generally 80% Generally 70%
for a for a for a for a
1 to 4 family 1 to 4 family 1 to 4 family 1 to 4 family
dwelling; 75% dwelling; 75% dwelling; 70% residence.
for a for a for a
condominium. condominium. condominium.
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Non-Owner Generally 75% Generally 70% Generally 65% N/A
Occupied for a 1 to 2 for a 1 to 2 for a 1 to 2
family dwelling family dwelling family dwelling
or condominium, or condominium, or condominium,
70% for a 3 to 65% for a 3 to 60% for a 3 to
4 family. 4 family. 4 family.
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</TABLE>
Quality Control. The purpose of ContiMortgage's quality control program is (i)
to monitor and improve the overall quality of loan production generated by
regional offices, branches and subsidiaries, ContiWest and correspondent
sources, and (ii) to identify and communicate to management existing and/or
potential underwriting and loan file packaging problems or areas of concern.
Each month, the following sample of funded loans are examined: (i) a 10% random
sample of all funded loans, (ii) an additional sample of loans underwritten at
the maximum LTV ratio for such risk class of loans, (iii) an additional sample
of loans with a debt-to-income ratio greater than 50%, (iv) a minimum of the
first five loans from any new origination source, and (v) loans selected in
accordance with such other criteria as may be determined by management. The
quality control file review examines compliance with underwriting guidelines and
federal and state regulations. This is accomplished through a focus on (i)
accuracy of all credit and legal information, (ii) collateral analysis including
re-appraisals of property (field or desk) and review of original appraisal,
(iii) employment and income verification, and (iv) legal document review to
ensure that the appropriate documents are in place.
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Loan Securitization
The primary funding strategy of ContiMortgage historically has been to
securitize loans purchased or originated. The Company benefits from the reduced
cost of funds and greater leverage provided through securitization. Through
March 31, 1999, the Company had completed 36 ContiMortgage/ContiWest
AAA/Aaa-rated Real Estate Mortgage Investment Conduits ("REMIC" or "REMICs")
securitizations. Management has structured ContiMortgage's operations and
processes specifically for the purpose of efficiently originating, underwriting,
and servicing loans for securitization in order to meet the requirements of
rating agencies, credit enhancers and AAA/Aaa-rated REMIC pass-through
investors. ContiMortgage generally seeks to enter the public home equity
securitization market on at least a quarterly basis.
In a securitization, the Company sells the loans that it has originated or
purchased to a REMIC, owner trust or grantor trust, for a cash purchase price
and a retained interest in the loans or other assets securitized. See "Gain on
Sale of Receivables and Interest-only and Residual Certificates" in Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations for further discussion of the Company's securitization procedures.
The purchasers of the pass-through certificates receive a credit-enhanced
security. Credit enhancement is generally achieved by the Company's
subordination of its retained interest in the form of over-collateralization or
by one or both of the following: (i) subordination of subsidiary classes of
bonds to senior classes; and/or (ii) an insurance policy provided by an
AAA/Aaa-rated monoline insurance company. As a result, each offering of the
senior class of REMIC pass-through certificates has received ratings of AAA from
Standard & Poor's Ratings Group and Fitch Investor Services, L.P. and Aaa from
Moody's Investors Service.
The pooling and servicing agreements that govern the distribution of cash flows
from the loans included in the REMIC trusts require either (i) the establishment
of a reserve account that may be funded by cash or a letter of credit deposited
by the Company, or (ii) the build up of over-collateralization of the REMIC
trust by application of excess spread, which is intended to result in receipts
and collections on the loans exceeding the amounts required to be distributed to
the holders of the senior or subordinate REMIC pass-through certificates. If
payment defaults exceed the amount in the reserve account or the amount of
over-collateralization, as applicable, the monoline insurance company policy
will pay any further losses experienced by holders of the senior interests in
the related REMIC trust, or a subordinate class will bear the loss. To date,
there have been no calls on monoline insurance company policies obtained for any
of the Company's ContiMortgage/ContiWest securitizations.
Whole Loan Sales
In response to the new market environment and the severe capital constraints
under which the Company must operate, the Company has made efforts to increase
the amount of whole loan sales. In a whole loan sale, the Company sells loans
directly to an investor on a servicing-released basis for a cash premium. In
contrast, the premium value of loans sold through securitization is realized
over the life of the securitization in the form of cash flow from the retained
interest spread. The economics of securitization are generally superior to those
of whole loan sales, but the increased volume of whole loan sales is made
necessary by cash flow considerations. As part of its whole loan strategy,
ContiMortgage negotiated a long-term sale commitment with a large financial
institution (see Note 13 to the Consolidated Financial Statements) and is
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<PAGE>
actively selling loans to several other whole loan investors on a monthly flow
basis. The Company will also bid pools of loans for sale or will enter into
one-time sale agreements with institutional investors.
During fiscal 1999, the Company sold $1.6 billion of home equity loans on a
whole loan basis, representing 19% of fiscal 1999 originations. This compares to
$596 million of home equity loans sold on a whole loan basis during fiscal 1998.
During the third and fourth quarters of fiscal 1999, the Company executed whole
loan sales of $782.6 million and $396.7 million, respectively, which represented
43% and 25% of total sales for the third and fourth quarters, respectively.
Loan Servicing
Overview. The Company retains the right to service the home equity loans
originated or purchased and included in ContiMortgage/ContiWest securitizations.
Servicing includes collecting payments from borrowers, remitting payments to
investors who have purchased the loans, investor reporting, accounting for
principal and interest, contacting delinquent borrowers, conducting foreclosure
proceedings and disposing of foreclosed properties. As of March 31, 1999,
ContiMortgage serviced 194,032 loans in 50 states and the District of Columbia
with an outstanding balance of $13.0 billion, an increase of 27.9% from March
31, 1998, earning a normal servicing fee of approximately 50 basis points per
annum plus ancillary servicing fees and prepayment penalties which amounted to
30 basis points per annum for fiscal 1999 and 23 basis points for fiscal 1998.
The key elements of any servicing operation are the quality and experience of
the staff and the effectiveness of the computer software. Senior management for
the various servicing functions has an average of 17 years of mortgage banking
experience. During fiscal 1999, the Company converted its servicing operations
to the Alltel servicing system. This system provides ContiMortgage with a
sophisticated mortgage-servicing platform that enables it to provide effective
and efficient processing of home equity loans. The Alltel system provides
state-of-the-art technology for payment processing, cashiering, hazard and tax
monitoring, investor reporting, on-line collection, default management, loss
mitigation and loan liquidation.
ContiMortgage is a Fannie Mae and Freddie Mac approved seller/servicer. As such,
ContiMortgage is subject to a thorough due diligence of its policies, procedures
and business, and is qualified to underwrite, sell and service loans on behalf
of both Fannie Mae and Freddie Mac. This designation is typically a prerequisite
for loan securitization. In addition, rating agencies and monoline bond insurers
conduct periodic due diligence on ContiMortgage.
The pooling and servicing agreements which govern the distribution of cash flows
within the REMIC trusts generally require that ContiMortgage, as servicer,
advance interest (but not principal) to the related REMIC trusts on any loans
that are not paid through the last day of each monthly reporting period, but
only to the extent ContiMortgage deems such advances of interest to be
ultimately recoverable from future collections ("Delinquency Advances"). Due to
the Company's liquidity problems, in the third quarter ContiMortgage entered
into a subservicing agreement with Continental Grain whereby, for a fee,
Continental Grain makes Delinquency Advances to certain REMIC trusts, to a
maximum outstanding balance of $85 million.
Asset Management. The ContiMortgage asset management division comprises three
departments: collections, loss mitigation and default.
The collections department is organized into the following functional groups:
second mortgages, early payment default, 0-59 days past due and 60 days or more
past due. Each of these functions, with the exception of early payment default,
is now serviced by geographic region from either the asset management site in
Hatboro, PA or the new western asset management site in Tempe, AZ.
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Generally, collection activity will commence once a loan has not been paid
within 15 days of the due date. Once a loan becomes 30 days past due, a
collections supervisor generally analyzes the account to determine the
appropriate course of action. On or about the 60th day of delinquency, property
inspections are automatically obtained to assess the condition of the
collateral. For accounts 60 days or more past due, collection activity typically
emphasizes curing the delinquency by working with each borrower to set up
repayment plans, formal forbearance plans, reinstatements, and various other
loss mitigation options including short sales and short refinances (accepting a
payoff that is less than the full amount due to avoid the foreclosure process).
The loss mitigation department works with the collections department to identify
accounts that are likely candidates for a loss mitigation strategy. Both the 60+
collections staff and the loss mitigation staff are trained to negotiate
outcomes that are mutually beneficial to ContiMortgage and its customers. In
most cases, accounts that cannot be cured by reasonable means will be moved to
foreclosure as soon as practicable in accordance with applicable law, but it is
the Company's policy to work with the customer to resolve the past due balance
prior to legal action being initiated.
As part of the increased efforts to reduce losses, ContiMortgage's loss
mitigation department was doubled in size, from 19 employees at March 31, 1998
to 42 employees at March 31, 1999. The loss mitigation department monitors
accounts in all phases of the collection and foreclosure process to identify
opportunities to work out deals with borrowers to resolve defaults in a manner
most beneficial to the borrowers, while reducing the amount of loss that the
Company would incur in a drawn out foreclosure, eviction and property
liquidation process. Dual tracking of all defaulted loans has been implemented,
permitting accounts which are in the process of foreclosure or in bankruptcy to
be pursued for alternative disposition strategies with results more favorable to
ContiMortgage. Additional emphasis on positive resolution strategies is placed
on loans in states with higher historical loss rates.
The default department includes teams of foreclosure and bankruptcy coordinators
which are assigned different geographic regions, and property services and real
estate owned ("REO") units that are responsible for monitoring and preserving
the collateral values and liquidating the properties.
All accounts that are more than 60 days delinquent, including loans in
foreclosure and REO, are automatically inspected on a monthly basis. The
property services unit reviews the accounts where properties are reported vacant
or damaged and makes repairs or takes whatever other actions are appropriate.
Additionally, other accounts are reviewed by the property services unit on an
as-needed basis as a result of third party information.
When a property moves to a foreclosure status, a foreclosure coordinator will
review all previous inspection reports, evaluate the lien and equity position
and obtain any additional information necessary to decide on the appropriate
course of action. The loss mitigation department performs a parallel assessment,
looking for opportunities to implement a loss mitigation strategy. Foreclosure
regulations and practices and the rights of the owner in default vary from state
to state, but generally procedures may be initiated if (i) the loan is 90 days
or more delinquent, (ii) a notice of default on a senior lien is received, or
(iii) ContiMortgage discovers circumstances indicating potential loss exposure.
See Item 6. Selected Financial Data for information regarding the ContiMortgage
servicing portfolio's delinquencies, defaults and loan loss experience.
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Origination of Asset Classes Other Than Home Equity Loans
Other Businesses. The Company has been involved in other asset classes in
addition to HEL's, including commercial loans, high loan-to-value loans,
non-prime auto loans, equipment leases, franchise loans and charged-off consumer
receivables. Consistent with the Company's repositioning to focus on cash flow
positive businesses, the Company made a decision to focus on the core HEL
business and to reduce or eliminate its participation with most other loan
products. The Company's present plan is to continue its franchise loans and
charged-off consumer receivables businesses.
Commercial Loans. The Company executed its commercial mortgage loan purchase
strategy through loan conduits. Conduits are stand-alone securitization vehicles
where the originator(s), underwriter(s), servicer(s) and seller(s) may all be
different parties coming together to generate loans to be serviced and
securitized. Conduits allow smaller originators to sell their product into a
single securitizable pool, thus benefiting from the economies of scale and the
ability to share the fixed transaction costs associated with securitization. The
Company established a conduit for commercial/multi-family mortgages
("ContiMAP(R)"). The Company's role was to provide capital through warehouse
financing and/or the purchase of loans at a premium and to ensure that the loans
are underwritten to the conduit's underwriting guidelines and are thus
securitizable. In addition, the Company also managed the ultimate sale or
securitization of the loans originated through ContiMAP(R).
In October 1998, the Company suspended issuing new loan purchase commitment
letters within ContiMAP(R) and decided to sell its commercial loan exposure
through an orderly liquidation process over a reasonable period of time. See
Note 4 to the Consolidated Financial Statements. In the future, the Company will
limit its commercial real estate activities to loan originations through
Keystone Mortgage Partners ("Keystone"), a subsidiary of the Company. Keystone
is a broker and servicer of commercial mortgage loans, primarily to the
insurance industry, but does not take principal risk.
High Loan-To-Value Loans. During the first quarter of fiscal 2000, the Company
entered into an agreement with Empire Funding Holding Corporation ("EFHC") which
will result in the Company's exiting the high loan-to-value business. See Note 4
to Consolidated Financial Statements for details of this agreement.
Non-Prime and Sub-Prime Auto Loans and Leases. Non-prime auto loans and leases
are originated primarily to "B" and "C" credit grade borrowers as opposed to
sub-prime auto loans which are usually issued on a discount basis to "C-" and
"D" credit grade borrowers. As of March 31, 1999, Triad Financial Corporation
("Triad"), a non-prime and sub-prime automobile lending business which
originates automobile loans to credit-impaired borrowers, has relationships with
over 3,500 dealerships in 33 states, with California representing approximately
29% of loan originations. As with ContiMortgage, Triad utilizes centralized
origination, underwriting and servicing techniques.
During the first quarter of fiscal 2000, the Company sold its interest in Triad
and exited the automobile lending business. See Note 16 to Consolidated
Financial Statements for details of the sale.
Franchisee Loans. Franchisee loans represent loans to franchisees of top tier
national restaurant chains and other franchise chains. In the Company's
securitization of franchisee loans, the underwriting process focuses on the
franchisee borrower's ability to generate cash flow from the particular business
as opposed to more traditional financing, which is based upon hard collateral
values or the credit rating of the franchisor. During the second quarter of
fiscal 1999, the Company entered into a relationship with a startup franchisee
lender, American Commercial Capital ("ACC"). The Company is the primary source
of financing and securitization services to ACC and has a 50.1% interest in ACC.
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Equipment Leasing. In November 1998, the Company sold its small-ticket equipment
leasing subsidiary for nominal cash consideration, which resulted in a loss of
$3.3 million. The Company's decision to exit this business was based on such
subsidiary's long-term cash flow characteristics.
Charged-off Consumer Receivables. In February 1998, the Company entered the
charged-off consumer receivables business through the formation of its
subsidiary ContiAsset Receivables Management LLC ("CARMA"). CARMA engages in
portfolio sourcing and scrubbing. In addition, the Company simultaneously
entered into a strategic alliance with and, through CARMA, made a minority
investment in, Arrow Financial Services LLC ("Arrow"), which is engaged in the
business of servicing charged-off consumer receivables, both for its own account
and for third-party clients. As part of its strategic alliance with Arrow, the
Company, through its subsidiary ContiTrade Services LLC ("ContiTrade"), provides
a warehouse line to Arrow for the acquisition of portfolios of charged-off
consumer receivables. Targeted portfolios include bank credit cards, consumer
loans, private label credit cards, installment loans and auto loan deficiency
balances. As of March 31, 1999, Arrow's warehouse line with the Company had an
outstanding balance of approximately $13.2 million, financing approximately $1.3
billion in face amount of charged-off consumer receivables.
Asset Securitization Services
General
The Company has a specialized investment banking group based in New York which,
through ContiTrade and ContiFinancial Services, has provided financing and asset
securitization services to its subsidiaries and Strategic Alliance clients.
Services provided include warehouse financing, hedging, excess spread
receivables financing, operational financing, as well as securitization
expertise. Consistent with the Company's business repositioning, the Company has
made a strategic decision to focus new financing and asset securitization
services on subsidiaries, principally in support of the HEL business. The
investment banking group also monitors loan performance and maintains an
extensive loan level data base for loans that have been sold into REMICs.
ContiTrade provides asset-backed finance and structuring capabilities to the
Company. ContiFinancial Services, a National Association of Securities Dealers,
Inc. ("NASD") member and broker/dealer, privately places or underwrites
offerings of asset-backed securities or sells assets on a whole loan basis on
behalf of the Company and its Strategic Alliance clients.
Securitization and Whole Loan Sale Services. The Company has significant
structured finance expertise. ContiFinancial Services' placement capabilities
accomplish two objectives: (i) generating fee income, and (ii) providing a
controlled exit strategy for assets financed by allowing the Company and its
Strategic Alliance clients to manage more effectively when and how transactions
are brought to market. While ContiFinancial Services' placement capabilities
have been primarily focused on private placements, to the extent opportunities
exist in the public market, ContiFinancial Services will bid out the public
underwriting business to other investment banks and manage the process on behalf
of itself and its clients. The Company has filed an $8.2 billion shelf
registration statement with the Securities and Exchange Commission (the
"Commission") of which $7.1 billion was available as of March 31, 1999 to
securitize certain asset-backed securities. Additionally, ContiFinancial
Services manages the larger whole loan sales transactions for HEL production.
The marketing of HEL portfolios and the documentation of such sales has become a
primary focus for ContiFinancial Services.
Credit Enhancement. To the extent that the securitization of a particular asset
class requires credit enhancement in addition to the excess spread, the Company
will consider providing that additional support in the form of (i) an initial
deposit to be reimbursed from the cash flow of the assets securitized or (ii)
the purchase of a mezzanine or other subordinate security.
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Warehouse Financing. The Company made financing available to its securitization
clients through secured loans or purchase commitments which facilitated the
accumulation of securitizable assets prior to securitization ("warehouse
financing"). As of March 31, 1999, through ContiTrade, the Company had committed
$345 million of financing to its third party clients and equity investments, of
which $317 million was drawn down.
Hedging. As clients accumulate assets for securitization or sale, they are
exposed to fluctuations in interest rates, and the Company has entered into
hedge positions on behalf of its Strategic Alliance clients. As of March 31,
1999, all hedge positions entered into by the Company are on its own behalf.
Excess Spread Receivables Financing. In certain cases, the Company has financed
a client's excess spread receivables in order to provide the client with cash to
cover the expenses and up-front negative cash flow associated with
securitization. The financing was typically in the form of a loan secured by the
excess spread receivable. The Company committed to provide such financing only
to its Strategic Alliance clients. In each case, in return for the financing,
the Company received ownership participations either in the Strategic Alliance
clients or in the portfolio of loans securitized. As of March 31, 1999, the
total amount outstanding of such financing was $41.4 million.
The following table illustrates the Company's securitizations and whole loan
sales volume by asset class:
The Company's Securitizations and Sales
Volume by Asset Class
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------------------------- Total By
(in millions) 1999 1998 1997 1996 1995 Asset Class
------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Home equity, home improvement and other
residential mortgage loans:
ContiMortgage/ContiWest securitizations ...... $ 6,099 $ 6,150 $ 3,454 $ 2,030 $ 1,259 $18,992
Other home equity, home improvement and other
residential mortgage sales .................. 1,569 596 586 1,260 475 4,486
------- ------- ------- ------- ------- -------
Total home equity, home improvement and other
residential mortgage sales (1) .................. $ 7,668 $ 6,746 $ 4,040 $ 3,290 $ 1,734 $23,478
------- ------- ------- ------- ------- -------
Commercial real estate mortgage loans:
Conduit (ContiMAP(R)and affiliates) .......... 581 897 742 186 89 2,495
Whole loan sales ............................. 466 601 -- -- -- 1,067
Keystone ..................................... 1,104 -- -- -- -- 1,104
------- ------- ------- ------- ------- -------
Total commercial real estate mortgage loans ..... 2,151 1,498 742 186 89 4,666
------- ------- ------- ------- ------- -------
Non-prime and sub-prime auto loans and leases (1) 595 309 91 162 39 1,196
Equipment leasing ............................... -- 46 250 190 179 665
Title I home improvement loans .................. -- 139 -- -- 149 288
Franchisee loans ................................ -- -- 21 145 98 264
Other ........................................... -- 30 -- 20 -- 50
------- ------- ------- ------- ------- -------
Total securitization volume ..................... $10,414 $ 8,768 $ 5,144 $ 3,993 $ 2,288 $30,607
======= ======= ======= ======= ======= =======
</TABLE>
(1) Includes Strategic Alliances' sales.
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Regulation
General. The Company's businesses are subject to extensive regulation in the
United States at both the federal and state level. In the Company's home equity
loan and financing businesses, regulated matters include loan origination,
credit activities, maximum interest rates and finance and other charges,
disclosures to customers, the terms of secured transactions, the collection,
repossession and claims-handling procedures utilized by the Company, multiple
qualification and licensing requirements for doing business in various
jurisdictions, and other trade practices. As part of the Company's financing and
asset securitization business, ContiFinancial Services is required to register
as a broker/dealer with certain federal and state securities regulatory agencies
and is a member of the NASD.
The Truth in Lending Act ("TILA") and Regulation Z promulgated thereunder
contain disclosure requirements designed to provide consumers with uniform,
understandable information with respect to the terms and conditions of loans and
credit transactions in order to give them the ability to compare credit terms.
TILA also guarantees consumers a three day right to cancel certain credit
transactions including loans of the type originated by the Company. Management
of the Company believes that it is in compliance with TILA in all material
respects. If the Company were found not to be in compliance with TILA, aggrieved
borrowers could have the right to rescind their mortgage loan transactions and
to demand the return of finance charges paid to the Company.
The Riegle Community Development and Regulatory Improvement Act of 1994 (the
"Riegle Act") was enacted in September 1994. Among other things, the Riegle Act
makes certain amendments to TILA. The Riegle Act generally applies to certain
mortgage loans with (i) total points and fees upon origination exceeding the
greater of eight percent of the loan amount or $441 (as adjusted for changes in
the Consumer Price Index), or (ii) an annual percentage rate of more than ten
percentage points higher than comparably maturing United States Treasury
securities ("Covered Loans").
The Riegle Act imposes disclosure requirements on lenders originating Covered
Loans and prohibits lenders from originating Covered Loans that are underwritten
solely on the basis of the borrower's home equity without regard to the
borrower's ability to repay the loan.
The Riegle Act also prohibits lenders from including prepayment fee clauses in
Covered Loans to borrowers with a debt-to-income ratio in excess of 50% or
Covered Loans used to refinance existing loans originated by the same lender.
The Company will continue to collect prepayment fees on loans originated prior
to the October 1995 effectiveness of the Riegle Act and on non-Covered Loans as
well as on Covered Loans in permitted circumstances. The Riegle Act imposes
other restrictions on Covered Loans, including restrictions on balloon payments
and negative amortization features, which the Company does not believe will have
a material impact on its operations.
Equal Credit Opportunity Act of 1974, as amended ("ECOA"), prohibits creditors
from discriminating against applicants on the basis of race, color, sex, age or
marital status. Regulation B promulgated under ECOA restricts creditors from
obtaining certain types of information from loan applicants. It also requires
certain disclosures by the lender regarding consumer rights and requires lenders
to advise applicants of the reasons for any credit denial. In instances where
the applicant is denied credit or the rate or charge for loans increases as a
result of information obtained from a consumer credit agency, another statute,
the Fair Credit Reporting Act of 1970, as amended, requires lenders to supply
the applicant with the name and address of the reporting agency. The Company is
also subject to the Real Estate Settlement Procedures Act of 1974, as amended,
and is required to file an annual report with the Department of Housing and
Urban Development pursuant to the Home Mortgage Disclosure Act.
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The Real Estate Settlement Procedures Act ("RESPA") and Regulation X are
designed to protect borrowers against abusive practices, such as kick-backs and
hidden fees, and to provide additional disclosures so borrowers know the nature
and cost of the real estate settlement process, including escrow payments.
The Home Mortgage Disclosure Act ("HMDA") and Regulation C enables the
government and regulators to determine whether financial institutions are
serving the housing needs of their communities, assist public officials in
distributing public sector investments so as to attract private investment to
where there is economic decline, assist in identifying possible discriminatory
lending practices and enforce nondiscrimination statutes. Regulation C requires
lenders to collect and report certain information about applicants including:
loan type, loan purpose, loan amount, credit decision, location of the property,
race, sex and income of the applicant. HMDA requires lenders to place notices in
certain public locations regarding the availability of its reporting data.
The Fair Credit Reporting Act ("FCRA") is designed to regulate the consumer
reporting industry. It places disclosure obligations on the users of consumer
credit reports and is designed to ensure fair, timely, and accurate reporting of
credit information. FCRA also restricts the use of consumer credit reports and
in certain circumstances requires the deletion of obsolete information.
The Fair Debt Collection Practices Act ("FDCPA") generally specifies the manner
in which debt collectors may pursue debtors to receive payment for outstanding
obligations including, but not limited to, communication regarding a debt,
harassment or abuse, unfair practices or false or misleading representations.
In addition, the Company is subject to various other federal and state laws,
rules and regulations governing, among other things, the licensing of, and
procedures which must be followed by, consumer lenders and servicers, and
disclosures which must be made to consumer borrowers. Failure to comply with
such laws may result in civil and criminal liability and may, in some cases,
give consumer borrowers the right to rescind their mortgage loan transactions
and to demand the return of finance charges paid to the Company.
Also, certain of the loans purchased by the Company, such as Title I home
improvement loans, are insured by an agency of the federal government. Such
loans are subject to extensive government regulation.
Environmental Liability. In the course of its business, the Company may acquire
properties securing loans that are in default. There is a risk that hazardous or
toxic waste could be found on such properties. In such event, the Company could
be held responsible for the cost of cleaning up or removing such waste, and such
cost could exceed the value of the underlying properties.
Broker/Dealer. In the Company's capital management services business,
ContiFinancial Services acts as a placement agent and underwriter for public and
private offerings of asset-backed securities. As a result, ContiFinancial
Services is registered as a broker/dealer with the Securities and Exchange
Commission, the State of California and the State of New York and is a member of
the NASD. ContiFinancial Services is subject to regulation by the Commission,
the NASD and state securities administrators in matters relating to the conduct
of its securities business, including record keeping and reporting requirements,
supervision and licensing of employees and obligations to customers. Additional
legislation and regulations, including those relating to the activities of
affiliates of broker/dealers, changes in rules promulgated by the Commission or
other regulatory authorities and the NASD, changes in the interpretation or
enforcement of existing laws and rules, and changes in the special exemption of
ContiFinancial Services, may adversely affect the manner of operation and
profitability of the Company.
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As a registered broker/dealer, ContiFinancial Services is subject to the
Commission's net capital rules. These rules, which specify minimum net capital
requirements for registered broker/dealers, are designed to assure that
broker/dealers maintain adequate regulatory capital in relation to their
liabilities and the size of their customer business, and have the effect of
requiring that at least a substantial portion of their assets be kept in cash or
highly liquid investments. Because it acts primarily as a placement agent in
asset-backed private securities offerings, ContiFinancial Services operates
under a less restrictive net capital standard. To the extent that the Company
elects to expand its public underwriting capacity, it would be required to
substantially increase the net capital of ContiFinancial Services. Under such
circumstances, there can be no assurance that the Company will have the capital
necessary to increase such net capital.
Future Laws. Because each of the Company's businesses is highly regulated, the
laws, rules and regulations applicable to the Company are subject to regular
modification and change. There are currently proposed various laws, rules and
regulations which, if adopted, could impact the Company. There can be no
assurance that these proposed laws, rules and regulations, or other such laws,
rules or regulations will not be adopted in the future which could make
compliance much more difficult or expensive, restrict the Company's ability to
originate, broker, purchase or sell loans, further limit or restrict the amount
of commissions, interest and other charges earned on loans originated, brokered,
purchased or sold by the Company, or otherwise adversely affect the business or
prospects of the Company.
Competition
See "Competition" in Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations for discussion of the Company's competition.
Employees
At March 31, 1999 the Company had 3,330 employees. None of the Company's
employees are represented by a labor union. The Company believes that its
relations with its employees are good.
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Item 2. Properties.
The Company's corporate headquarters are located in approximately 24,000 square
feet of office space sublet from Continental Grain at 277 Park Avenue, New York,
New York 10172. The lease extends through February 28, 2000.
The ContiMortgage corporate headquarters are located in approximately 203,000
square feet of leased office space at 338 South Warminster Road, Hatboro,
Pennsylvania 19040. The lease extends through August 31, 2009.
The Company and its subsidiaries have various other loan origination and
processing operations located throughout the United States. These operations are
conducted from leased office facilities that have terms expiring through April
2004.
The Company believes that its present facilities are adequate for its current
needs.
Item 3. Legal Proceedings.
The Company has been named as a defendant in various legal actions arising from
the conduct of its normal business activities. Although the amount of any
liability that could arise with respect to these actions cannot be accurately
predicted, in the opinion of the Company, any such liability will not have a
material adverse effect on the consolidated financial position or results of
operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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Part II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock is traded under the symbol "CFN" on the New York
Stock Exchange. The following table sets forth, for the periods indicated, the
high and low closing sale price per share of the Company's common stock:
Sales Price
----------------------
High Low
--------- ----------
Fiscal Year Ended March 31, 1999:
First Quarter $ 37.3750 $ 23.1250
Second Quarter $ 25.2500 $ 7.5000
Third Quarter $ 8.6875 $ 3.1250
Fourth Quarter $ 8.2500 $ 3.4375
Fiscal Year Ended March 31, 1998:
First Quarter $36.8750 $26.5000
Second Quarter $40.3125 $31.0000
Third Quarter $32.3750 $23.7500
Fourth Quarter $32.1875 $18.3125
As of June 1, 1999, the Company had 126 stockholders of record, and
approximately 6,282 beneficial owners of its common stock.
The Company has no current intention to pay cash dividends on its Common Stock.
As a holding company, the ability of the Company to pay dividends is dependent
upon the receipt of dividends or other payments from its subsidiaries. Any
future determination as to the payment of dividends will be at the discretion of
the Company's Board of Directors and will depend upon the Company's operating
results, financial condition and capital requirements, contractual restrictions,
general business conditions and such other factors as the Company's Board of
Directors deems relevant. Furthermore, covenants in the Company's loan
agreements restrict the payment of dividends by the Company. If these covenants
are still in place at the time the Company decides to declare a dividend, a
waiver from the related lenders would have to be obtained. In addition, there
can be no assurance that dividends will be permitted under applicable law.
21
<PAGE>
Item 6. Selected Financial Data.
SELECTED FINANCIAL DATA
(in thousands, except share data)
<TABLE>
<CAPTION>
Years Ended March 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Gross income
Gain on sale of receivables ........................... $ 768 $ 311,606 $ 210,861 $ 146,529 $ 67,512
Commercial real estate valuation adjustments .......... (167,927) -- -- -- --
Interest .............................................. 305,039 236,494 161,402 91,737 42,929
Net servicing income .................................. 99,544 90,509 46,340 29,298 9,304
Other income .......................................... 15,767 21,553 9,227 4,252 2,252
----------- ----------- ----------- ----------- --------
Total gross income .............................. 253,191 660,162 427,830 271,816 121,997
----------- ----------- ----------- ----------- --------
Expenses
Compensation and benefits ............................. 192,753 161,992 82,170 52,203 23,812
Interest .............................................. 233,598 165,904 120,636 74,770 29,635
Provision for loan losses ............................. 6,215 5,668 3,043 285 1,935
General and administrative ............................ 166,619 101,633 44,940 18,022 9,627
Other charges ......................................... 147,621 -- -- -- --
----------- ----------- ----------- ----------- --------
Total expenses .................................. 746,806 435,197 250,789 145,280 65,009
----------- ----------- ----------- ----------- --------
Income (loss) before income taxes and minority interest .. (493,615) 224,965 177,041 126,536 56,988
Provision (benefit) for income taxes ..................... (67,510) 91,149 71,341 49,096 22,168
Minority interest in earnings (losses) of subsidiaries ... 152 (488) (304) 3,310 8,728
----------- ----------- ----------- ----------- --------
Net income (loss) ........................................ $ (426,257) $ 134,304 $ 106,004 $ 74,130 $ 26,092
=========== =========== =========== =========== ========
Basic earnings (losses) per common share (pro
forma for 1996) (1) .................................... $ $9.21) $ 2.90 $ 2.44 $ 2.01
=========== =========== =========== ===========
Diluted earnings (losses) per common share (pro
forma for 1996) (1) .................................... $ (9.21) $ 2.86 $ 2.40 $ 2.00
=========== =========== =========== ===========
Basic weighted average number of shares outstanding
(pro forma for 1996) (1) ............................... 46,283,940 46,330,810 43,361,253 36,942,363
=========== =========== =========== ===========
Diluted weighted average number of shares
outstanding (pro forma for 1996) (1) ................... 46,283,940 46,992,449 44,152,343 37,050,165
=========== =========== =========== ===========
</TABLE>
During fiscal 1995 and 1996, the Company paid cash dividends to Continental
Grain of $30,000 and $305, respectively.
<TABLE>
<CAPTION>
As of March 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Interest-only and residual certificates $ 722,012 $ 648,785 $ 445,005 $ 293,218 $ 143,031
Capitalized servicing rights .......... 105,273 74,292 29,353 11,689 --
Receivables held for sale, net ........ 1,082,046 724,305 621,798 301,855 75,504
Total assets .......................... 2,355,164 2,808,579 1,545,798 892,540 327,742
Due to affiliates ..................... 8,918 163 36,367 337,734 114,907
Short-term debt ....................... 512,797 366,104 25,299 -- --
Long-term debt ........................ 699,225 499,553 498,817 -- --
Total liabilities ..................... 2,147,192 2,161,642 1,136,726 597,721 243,579
Minority interest in subsidiaries ..... 4,721 629 1,288 -- 16,248
Stockholders' equity .................. 203,251 646,308 407,784 294,819 67,915
</TABLE>
- --------------------
(1) Because of the Company's December 1995 reorganization and changes in capital
structure, per share data for the year ended March 31, 1995 is not meaningful.
22
<PAGE>
SELECTED FINANCIAL DATA--(continued)
(dollars in thousands)
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Loan Originations:
Home equity, home improvement and other
residential mortgage loans:
Brokers ................................... $ 1,564,902 $ 1,031,465 $ 827,096 $ 505,587 $ 265,535
Correspondents ............................ 4,676,707 4,455,070 2,921,296 1,736,909 1,023,704
Direct retail ............................. 1,955,678 1,321,596 293,842 68,975 38,919
----------- ----------- ----------- ----------- -----------
Total home equity, home improvement and
other residential mortgage loans .......... 8,197,287 6,808,131 4,042,234 2,311,471 1,328,158
----------- ----------- ----------- ----------- -----------
Commercial real estate mortgage loans:
Conduit (ContiMAP(R)& affiliates) ......... 1,459,292 1,873,849 632,524 321,165 158,343
Keystone .................................. 1,104,121 -- -- -- --
----------- ----------- ----------- ----------- -----------
Total commercial real estate loans ........... 2,563,413 1,873,849 632,524 321,165 158,343
Triad auto loans ............................. 386,447 191,967 47,049 -- --
----------- ----------- ----------- ----------- -----------
Total loan originations ................... $11,147,147 $ 8,873,947 $ 4,721,807 $ 2,632,636 $ 1,486,501
=========== =========== =========== =========== ===========
Securitizations and sales:
ContiMortgage/ContiWest securitizations ...... $ 6,099,318 $ 6,150,000 $ 3,454,259 $ 2,030,000 $ 1,258,919
Other home equity, home improvement and
other residential mortgage sales .......... 1,568,840 596,132 335,991 270 33,772
----------- ----------- ----------- ----------- -----------
Total home equity, home improvement
and other residential mortgage sales ...... 7,668,158 6,746,132 3,790,250 2,030,270 1,292,691
----------- ----------- ----------- ----------- -----------
Commercial real estate mortgage loans:
Conduit (ContiMAP(R)& affiliates) ......... 581,343 896,407 742,259 185,980 89,000
Whole loan sales .......................... 465,783 601,100 -- -- --
Keystone .................................. 1,104,121 -- -- -- --
----------- ----------- ----------- ----------- -----------
Total commercial real estate mortgage loans .. 2,151,247 1,497,507 742,259 185,980 89,000
Triad auto loans ............................. 377,674 177,985 43,530 -- --
Strategic alliances .......................... 217,188 346,464 568,401 1,776,700 906,000
----------- ----------- ----------- ----------- -----------
Total securitizations and sales .............. $10,414,267 $ 8,768,088 $ 5,144,440 $ 3,992,950 $ 2,287,691
=========== =========== =========== =========== ===========
ContiMortgage Servicing Portfolio:
Number of loans serviced (at year end) ...... 194,032 157,365 104,568 65,121 38,740
Serviced loan portfolio (at year end) ........ $12,966,131 $10,135,785 $ 6,423,376 $ 3,863,575 $ 2,192,190
Delinquencies:
30-59 days ................................ 1.39% 1.50% 2.18% 1.81% 0.83%
60-89 days ................................ 0.51% 0.51% 0.68% 0.47% 0.36%
90 days and over .......................... 0.44% 0.35% 0.38% 0.23% 0.45%
----------- ----------- ----------- ----------- -----------
Total delinquencies (%) ................... 2.34% 2.36% 3.24% 2.51% 1.64%
=========== =========== =========== =========== ===========
Total delinquencies ($) ................... $ 303,802 $ 239,015 $ 208,084 $ 97,082 $ 35,980
=========== =========== =========== =========== ===========
Defaults:
Foreclosure ............................... 2.29% 2.31% 2.90% 2.42% 0.46%
Bankruptcy ................................ 1.65% 1.70% 1.15% 0.74% 0.41%
Real estate owned ......................... 1.04% 0.83% 0.52% 0.13% 0.09%
Loss mitigation & legal ................... 1.24% 0.74% 0.13% 0.25% 0.20%
----------- ----------- ----------- ----------- -----------
Total defaults (%) ........................ 6.22% 5.58% 4.70% 3.54% 1.16%
=========== =========== =========== =========== ===========
Total defaults ($) ........................ $ 806,656 $ 565,238 $ 302,164 $ 136,796 $ 25,486
=========== =========== =========== =========== ===========
</TABLE>
23
<PAGE>
SELECTED FINANCIAL DATA--(continued)
(dollars in thousands)
Loan Loss Experience on ContiMortgage's
Servicing Portfolio of Home Equity Loans
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Loan loss experience (1):
Average amount outstanding .................. $12,058,468 $ 8,166,407 $ 4,845,304 $ 2,858,790 $ 1,663,865
Net losses:
REMICs and loans held pending
securitization ........................ $ 125,357 $ 37,600 $ 12,719 3,686 $ 1,308
Loans and properties purchased out
of REMICs ............................. 6,722 21,162 3,576 -- --
----------- ----------- ----------- ----------- -----------
Total net losses ...................... $ 132,079 $ 58,762 $ 16,295 3,686 $ 1,308
=========== =========== =========== =========== ===========
Realized net losses as a percentage of
average amount outstanding:
REMICs and loans held pending
securitization ........................ 1.04% 0.46% 0.26% 0.13% 0.08%
Loans and properties purchased out
of REMICs ............................. 0.06% 0.26% 0.08% -- --
----------- ----------- ----------- ----------- -----------
Total realized net losses as a percentage
of average amount outstanding .............. 1.10% 0.72% 0.34% 0.13% 0.08%
=========== =========== =========== =========== ===========
</TABLE>
(1) See "Defaults and Losses" included in Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations for a discussion of
the Company's loss mitigation program.
24
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion should be read in conjunction with "Selected Financial Data" and
the Company's Consolidated Financial Statements and the Notes thereto. In
addition, this report includes a separate section Gain on Sale of Receivables
and Interest-only and Residual Certificates, which should be read in conjunction
with Results of Operations. Certain statements under this caption constitute
"forward-looking statements" under federal securities laws. See "Forward-looking
Statements" on page 3 of this annual report.
General
During fiscal 1999, ContiFinancial Corporation ("ContiFinancial" or the
"Company") incurred a net loss of $426.3 million and suffered a critical loss of
liquidity. See "Liquidity and Capital Resources." The Company is operating on a
negative cash flow basis and is dependent on various financing sources for its
continued operations. In order to fund new loans and asset originations and
purchases, the Company is dependent on its Purchase and Sale Facilities and
Repurchase Agreements (collectively, the "Warehouse Facilities"). The Company is
also dependent on continued access to its Revolving Credit Facility and
Commercial Paper Program (collectively, the "Bank Facilities"). The Company is
required to comply with various financial covenants under its outstanding
long-term debt, Bank Facilities and Warehouse Facilities. As of March 31, 1999,
the Company's leverage ratio exceeded the leverage ratio test under the
covenants of its outstanding long-term debt. As a result, the Company is
prevented from issuing additional unsecured debt until its leverage ratio is
below such test. Additionally, the Company would not have been in compliance
with several of the financial covenants of the Bank Facilities and Warehouse
Facilities at December 31, 1998 and March 31, 1999 had these agreements not been
amended. The Bank Facilities expire in August 1999, and the Warehouse Facilities
expire at various times from July 1999 through December 1999.
The Company's continued operations are dependent on the extension, renegotiation
or refinancing, as well as availability through scheduled maturity of the Bank
and Warehouse Facilities. The Company's ability to extend, renegotiate or
refinance its facilities depends on the successful completion of a transaction
with a buyer or equity investor. As a result, there is substantial doubt about
the Company's ability to continue as a going concern. See Note 1 to the
Consolidated Financial Statements.
In order to address this issue, the Company has been seeking a financially
strong acquirer or equity investor who can provide the necessary financing or
provide the Company's lenders with the requisite guarantees. The previously
announced discussions with Residential Funding Corporation, a subsidiary of
General Motors Acceptance Corporation, with respect to an acquisition of the
Company have terminated. The Company is in discussions with others to act as an
acquiror or equity investor and has commenced negotiations for a restructuring
with the providers of its Bank Facilities and Warehouse Facilities.
ContiFinancial engages in the consumer finance business by originating and
servicing primarily non-conforming home equity loans ("HELs"). ContiFinancial is
an originator, purchaser, seller, securitizer and servicer of home equity loans
made to borrowers whose borrowing needs may not be met by traditional financial
institutions due to credit exceptions or other factors. These loans are
primarily for debt consolidation, home improvements, education or refinancing,
and are most often secured by first mortgages on single family residential
properties.
Historically, the Company operated as a more diversified consumer and commercial
financial intermediary that originated, securitized and serviced various loan
products in addition to HELs. These products included commercial real estate
loans, high loan-to-value mortgage loans, non-prime auto loans, charged-off
consumer receivables, equipment leases and franchise loans. In fiscal 1999,
severe turbulence in the capital markets (see Discussion of Events During Fiscal
1999 below) contributed to significant losses and resulted in a critical loss of
liquidity that made it impossible for the Company to continue financing its
diversified product lines. As a result, the Company had to restrict its focus
primarily to the core HEL business and reduce or eliminate its involvement with
most other loan products. The Company's Consolidated Statement of Income for the
year ended March 31, 1999 reflects, under Commercial real estate valuation
adjustments and Other charges, total charges of $315.5 million related to losses
incurred as a result of the factors discussed above. See Note 4 to the
Consolidated Financial Statements.
25
<PAGE>
Discussion of Events During Fiscal 1999
Write-downs of Interest-only and Residual Certificates
During fiscal 1999, the Company recorded fair value adjustments to interest-only
and residual certificates totaling $329 million, resulting from
higher-than-estimated prepayment speeds and credit losses, and an increase to
the discount rate used in the valuation from 10% to 12% to reflect the capital
market's deteriorating view of the "sub-prime" industry in which the Company
operates. The Company believes its interest-only and residual certificates are
fairly valued at March 31, 1999, but can provide no assurances that future
prepayment and loss experience or changes in the required market discount rate
will not necessitate additional write-downs. If there are such additional
write-downs in future periods, the Company's income would be reduced and that
could cause the Company to report net losses for such periods. See Note 5 to the
Consolidated Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Gain on Sale of Receivables and
Interest-only and Residual Certificates".
Capital Markets Turbulence
The Company's operations were significantly and adversely affected by difficult
capital market conditions that commenced in the second quarter of fiscal 1999,
with the effects of these events, and their repercussions, continuing to affect
the Company's results in the third and fourth quarters. During the second
quarter, the economic instability in Asia and Russia precipitated a global debt
crisis (the "Debt Crisis") which caused a "flight to quality" by investors.
During this period, fixed income investors purchased large amounts of U.S.
Treasury securities, causing U.S. Treasury yields to decrease significantly. As
investor demand for U.S. Treasury securities increased, the demand for other
fixed income securities declined dramatically, causing yields on such other
securities to rise relative to U.S. Treasury securities. Since almost all of the
Company's loan originations were ultimately funded by the issuance of securities
backed by the loans it originates (securitization), these unusual interest rate
movements affected the market value of all of the Company's originations,
causing significant losses and leading to a critical loss of liquidity.
By late September, these unusual interest rate movements had caused the
near-collapse of a large hedge fund controlling over $90 billion in financial
assets. This event panicked the world's banking systems and further eroded the
value of financial assets. In October, one of the largest investors in the
subordinate classes of securities produced in commercial loan securitizations
(the "Investor") filed for bankruptcy protection under the weight of margin
calls by its lenders. These margin calls were made because of the loss in value
of the securities which collateralized the Investor's borrowings. This
bankruptcy removed a large source of liquidity from the commercial loan
securitization market.
The immediate impact of these events was an increase to the Company's margin
requirements under its Warehouse Facilities and significant losses in the
Company's related hedge positions in U.S. Treasury securities. Because the
Company's securities are priced based on a spread over the U.S. Treasury yield,
the Company's policy had been to hedge its inventory position by selling short
U.S. Treasury securities. During the "flight to quality" the Company's short
position lost money as Treasury yields declined, and its long position (its
inventory of loans) also lost value due to (i) a decline in demand for the
securities backed by its loans, and (ii) a sudden over supply in the whole loan
market as securitizers, en masse, attempted to sell their inventories to a
limited number of whole loan buyers. In response to the decline in market value
of the inventory securing the Warehouse Facilities, the Company's lenders made
margin calls for additional cash collateral. The most significant hedge losses
and margin calls occurred in the Company's commercial loan portfolio due to the
longer durations associated with these loans, and in the Company's high
loan-to-value business because of the more limited funding options available for
this product.
26
<PAGE>
To lessen the drain on liquidity caused by the margin calls, the Company had to
sell inventory to reduce its margin exposure and to generate cash premiums.
Large whole loan sales of HELs and commercial loans had to be executed near the
bottom of the market, with the twofold result being that the Company sold
portfolios at a loss (some under par, others at sales premiums less than the
purchase premiums) and had to close out the related hedge positions at a loss,
eliminating any possibility of recovery as the Debt Crisis eventually eased and
Treasury yields began to rise.
While the Debt Crisis abated for other sectors of the economy over the remainder
of fiscal 1999, its impact and subsequent repercussions continued to affect the
"sub-prime" industry in which the Company operates. The sudden and significant
loss of liquidity experienced throughout the industry, occurring within the
context of increasing market skepticism about the quality of earnings reported
under "gain-on-sale accounting," intensified capital market concerns about the
industry and effectively eliminated access to the capital markets as a source of
new liquidity. Although the Company was successful in the third and fourth
fiscal quarters in securitizing its products and selling its products on a whole
loan basis, its diminished liquidity position adversely affected the Company's
ability to continue to provide financing to its Strategic Alliance clients. The
continued viability of these client companies and the recoverability of the
Company's investments in and receivables from these companies became contingent
upon their ability to find alternative sources of financing. As the evolving
impact of the Debt Crisis on certain client companies became known, the Company
recorded write-downs or reserves against these balances.
Revised Business Strategy and Additional Capital Requirements
In response to the new market environment and the severe capital constraints
under which the Company must operate, the Company has taken various steps to
reposition its business. Going forward, the Company will focus on those
businesses that (i) generate positive cash flow, (ii) represent platforms for
further growth and diversification, (iii) have the ability to achieve a position
of market leadership, and (iv) reduce reliance on securitization as a sole
funding source. Given these operating considerations, the Company intends to
focus on its HEL origination business through ContiMortgage Corporation
("ContiMortgage"). ContiMortgage will continue its strategy to be a low cost
producer generating loan volume through multiple origination channels supported
by experienced servicing, collections and loss mitigation groups. ContiMortgage
will continue to (i) de-emphasize originations in its most cash intensive
correspondent channel of production, while also reducing the premiums paid for
correspondent loans, (ii) increase its higher margin broker and retail loan
production channel, and (iii) diversify loan funding strategies to increase the
level of whole loan sales and reduce reliance upon securitization.
There can be no assurances given that the Company will be successful in
implementing its revised business strategy, primarily because the Company has
debt obligations totaling $422 million as of July 13, 1999 that will mature in
August 1999. In addition, the Company's Warehouse Facilities expire at various
times from July 1999 through December 1999. The Company's continued operations
are dependent on the extension, renegotiation or refinancing, as well as
availability through scheduled maturity of the Bank and Warehouse Facilities.
The Company's ability to extend, renegotiate or refinance its facilities depends
on the successful completion of a transaction with a buyer or equity investor.
As a result, there is substantial doubt about the Company's ability to continue
as a going concern. In order to address this issue, the Company has been seeking
a financially strong acquirer or equity investor who can provide the necessary
financing or provide the Company's lenders with the requisite guarantees. The
previously announced discussions with Residential Funding Corporation, a
subsidiary of General Motors Acceptance Corporation, with respect to an
acquisition of the Company have terminated. The Company is in discussions with
others to act as an acquiror or equity investor and has commenced negotiations
for a restructuring with the providers of its Bank Facilities and Warehouse
Facilities.
27
<PAGE>
Commercial Real Estate Valuation Adjustments and Other Charges
The market disruptions, as detailed above, affected many participants in the
commercial real estate and sub-prime home equity industries, including several
of the Company's majority- and minority-owned affiliates. The worst affected
were those businesses whose products had a longer average life (e.g., commercial
mortgages), making those products more sensitive to changes in interest rates,
and those that dealt in niche products with limited funding options outside of
securitization (e.g., high loan-to-value mortgages). The working capital
required to operate such businesses increased dramatically as warehouse lenders
either abandoned the businesses entirely or significantly increased their margin
requirements. Due to the Company's diminished liquidity position, it was forced
to terminate or reduce the scope of its involvement in many business
relationships at significant losses.
In the Company's Consolidated Statements of Income for the year ended March 31,
1999, losses resulting from these adverse developments are included in
Commercial real estate valuation adjustments in the amount of $167.9 million and
Other charges in the amount of $147.6 million. Commercial real estate valuation
adjustments represent losses incurred in liquidating the Company's portfolio of
commercial real estate mortgage loans. At September 30, 1998, when the Company
decided to discontinue its commercial real estate lending activities, the
Company had commercial real estate loans totaling $970.4 million either held for
sale on its Consolidated Balance Sheet or sold with limited recourse under the
Company's asset purchase and sale facilities with certain financial institutions
(the "Purchase and Sale Facilities"). Other charges represents the write-down of
investments in and receivables from affiliated companies and Strategic Alliance
clients and costs incurred in terminating or reducing the scope of certain
business activities and restructuring the remaining businesses. Details of these
adjustments are provided in the table below:
28
<PAGE>
<TABLE>
<CAPTION>
Year Ended
March 31, 1999
--------------
(in thousands)
<S> <C>
Commercial real estate valuation adjustments:
Realized losses ........................................................... $109,768
Unrealized losses ......................................................... 58,159
--------
Total Commercial real estate valuation adjustments ............................. 167,927
--------
Other charges:
Write-offs and reserves on receivables from affiliates and Strategic
Alliance clients ......................................................... 91,921
Write-downs or losses on the disposition of investments in affiliates ..... 38,117
Severance for approximately 310 terminated employees ...................... 6,892
Exit costs (excluding severance) for reduction of commercial real estate
activity ................................................................. 5,764
Other restructuring costs ................................................. 4,927
--------
Total other charges ............................................................ 147,621
--------
Total commercial real estate valuation adjustments and other charges ........... $315,548
========
</TABLE>
The commercial real estate realized losses of $109.8 million consisted of $80.6
million from hedge losses and $29.2 million from sales of commercial loans.
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. The Company
hedged its resulting exposure to absolute movement in interest rates, typically
through the short sale of U.S. Treasury securities, interest rate futures
contracts or options on U.S. Treasury securities. 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, the market value of the loans declined due
to a decreased demand for the securities backed by the loans which, in turn,
caused a sudden over supply in the whole loan market. Due to the decline in the
market value of the loans, the Company's lenders made margin calls for
additional cash collateral. To satisfy the margin calls, the Company was forced
to sell loans at executions near the bottom of the market and close out the
related hedge positions at a loss.
In October 1998, the Company suspended issuing new loan purchase commitment
letters within ContiMAP(R) (a commercial mortgage conduit program) and decided
to sell its commercial loan exposure in an orderly liquidation process over a
reasonable period of time. At March 31, 1999, the Company had remaining net
commercial real estate loans of $257.6 million included in Receivables held for
sale in the accompanying Consolidated Balance Sheets and $217.4 million of
commercial real estate loans sold with limited recourse under the Company's
Purchase and Sale Facilities for a total exposure, on- and off-balance sheet, of
$475 million. As of June 15, 1999, the remaining portfolio of commercial real
estate loans had been reduced to approximately $154 million. The Company intends
to sell the remaining commercial real estate loans over the next six months. In
the future, the Company will limit its commercial real estate activities to loan
originations through Keystone Mortgage Partners LLC ("Keystone"), a subsidiary
of the Company. Keystone is a broker and servicer of commercial mortgage loans,
primarily to the insurance industry, but does not take principal risk.
In addition to the commercial mortgage exposure discussed above, at March 31,
1999, the Company had market exposure related to a $222 million commercial
mortgage portfolio, net of reserves, owned by Red Mountain Funding, L.L.C.
("RMF"), a commercial affiliate. Included in Other charges is a $27.2 million
reserve for margin call advances related to this portfolio paid on behalf of RMF
to a warehouse lender. With regard to the RMF margin advances, because the
Company would have to fund additional margin calls if such calls were to be
made, and because RMF does not have the financial resources to repay the Company
for the advances, the Company is exposed to market risk on the entire balance of
RMF's financed portfolio. As of June 15, 1999, the net balance remaining of the
RMF portfolio had been reduced to $133 million.
29
<PAGE>
The largest component of Other charges is $65 million of losses related to the
Company's high loan-to-value ("HLTV") mortgage business. This amount includes
the write-off of the Company's 24% equity investment in Empire Funding Holding
Corporation ("EFHC") in the amount of $27.6 million, and additional write-downs
of $37.4 million related to receivables from EFHC. Due to the adverse market
conditions which commenced in the second quarter of fiscal 1999, the
securitization of HLTV mortgage loans began to require large initial cash
investments, and warehouse financing for HLTV mortgage loans became very costly
and difficult to obtain. Because the Company no longer had the liquidity to
finance EFHC's operations, the Company entered into negotiations to terminate
its financial obligations to EFHC. In April 1999, the Company finalized and
executed an agreement with EFHC pursuant to which, among other things, the
Company relinquished all ownership interests in EFHC, and EFHC agreed to
transfer to the Company, subject to required third-party consents, certain
servicing rights, residual interests and interest-only strips (collectively, the
"Residual Interests") in exchange for the complete satisfaction of certain
outstanding debts and the termination of the related credit facilities. The fair
value of the Residual Interests was determined by the Company to be
approximately $72.7 million as of March 31, 1999, which value was the primary
basis for measuring the impairment of receivables from EFHC as of that date. As
a part of the agreement with EFHC, the Company was also required to provide EFHC
with a $25 million warehouse line of credit for a term of six months.
Also included in Other Charges is $21.4 million of losses on investments and
receivables related to affiliates and Strategic Alliance clients engaged in the
home equity business.
Effects on Liquidity
In the second quarter of fiscal 1999, interest rate spreads between U.S.
Treasury securities and securities backed by commercial real estate loans and,
to a lesser extent, securities backed by sub-prime home equity and other
residential mortgage loans, widened. As a result, the collateral value of the
loans declined, and the Company's warehouse lenders made margin calls for
additional cash collateral. 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, $49.7 million and $35.8 million during the
second, third and fourth 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. Hedge positions were closed in the fourth quarter due to liquidity
constraints. 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 has
made adjustments to its hedging strategy accordingly. See Securitizations -
Hedging Interest Rate Risk.
30
<PAGE>
During the third and fourth quarters 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 and March 31, 1999,
were $1.8 billion and $1.7 billion, respectively, compared with originations of
$2.5 billion during the three months ended September 30, 1998. The reduction was
focused on correspondent originations, as opposed to retail originations, since
the Company typically pays premiums in connection with the purchase of loans
from correspondents. 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 to reduce the level of
loan purchases from correspondent originations. The Company's objective with
respect to correspondent originations is to pursue a pricing policy that will
facilitate a continuous flow of cash positive whole loan sales.
In connection with the foregoing actions, the Company implemented a staff
reduction. Most of the positions eliminated related to home equity correspondent
originations and funding. During the third and fourth quarters of fiscal 1999,
charges against earnings of $6.9 million were recorded for severance plans
established for approximately 310 employees. At March 31, 1999, $3.9 million of
such accrual remained.
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 and fourth quarters of fiscal
1999, the Company executed whole loan sales of $782.6 million and $396.7
million, respectively, and executed three securitizations totaling $2.2 billion.
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 will be
less than that required under the previous strategy of maximizing securitization
size. In January 1999, in order to establish a consistent and committed whole
loan sale program, ContiMortgage entered into a two year agreement with a
financial institution to sell, with servicing released, not less than $2.25
billion and up to a maximum of $7.2 billion of home equity loans. See Note 13 to
the Consolidated Financial Statements. The agreement establishes a sale price
that can be adjusted upon occurrence of specific events. During the fourth
quarter of fiscal 1999 and the first quarter of fiscal 2000, ContiMortgage
executed sales totaling $60.0 million and approximately $167.3 million under
this agreement.
In the fourth quarter of fiscal 1999 and the first quarter of fiscal 2000, many
Warehouse Facility lenders reduced or terminated their Warehouse Facilities to
the Company. While the Company currently has sufficient warehouse lines to
operate on a daily basis, no assurance can be given that such warehouse
facilities will be extended when they come up for renewal commencing in July, or
that lenders will not terminate these facilities or reduce availability prior to
the scheduled maturity.
Results of Operations
In order to reduce its reliance on correspondent sources of loan production, the
Company has been pursuing a strategy of expanding its retail origination
capabilities through acquisitions (see Note 8 to the Company's Consolidated
Financial Statements); through the internal development of a centralized
direct-to-consumer HEL division (ContiDirect); and through the expansion of the
existing network of regional offices that originate loans through brokers. The
costs associated with originating loans through retail channels are primarily
compensation, marketing and other operating expenses, whereas the cost of
acquiring loans through the correspondent channel consists primarily of purchase
premiums, which are reflected in gain on sale of receivables. Consequently, the
expansion of the Company's retail operations has resulted in large increases in
operating expenses, partially offset by origination fee income that is reflected
in gain on sale of receivables.
31
<PAGE>
During the first two quarters of fiscal 1999, the Company continued to expand
most of its business channels, but the market disruptions that commenced in the
second quarter caused the Company to reduce the scope of its operations during
the third and fourth quarters of fiscal 1999. Because the Company believes its
retail operations account for the greatest part of the Company's franchise
value, most of the business reductions were directed toward non-retail
operations. Although large head count reductions were made by certain retail
subsidiaries to consolidate support functions, the Company continued to develop
the new ContiDirect division and completed the acquisition of a branch network
from a former Strategic Alliance client. Despite the scale back of operations
that occurred in the second half of fiscal 1999, total head count at the end of
fiscal 1999 exceeded by 16% the head count at the end of fiscal 1998 as a result
of the expansion that occurred in the first half of fiscal 1999, as well as the
Company's continued commitment to its retail platform.
Year Ended March 31, 1999 Compared to Year Ended March 31, 1998 and Year Ended
March 31, 1997
Net loss for the year ended March 31, 1999 was $426.3 million compared with net
income of $134.3 million and $106.0 million for the years ended March 31, 1998
and 1997, respectively. The Company's total gross income decreased 61.6% to
$253.2 million in fiscal 1999 from $660.2 million in fiscal 1998, which in turn
increased 54.3% from $427.8 million in fiscal 1997. As discussed previously in
the "Discussion of Events During Fiscal 1999," the net loss for the year ended
March 31, 1999 and the decline in gross income were primarily caused by (i)
downward commercial real estate valuation adjustments of $167.9 million, (ii)
other charges against earnings of $147.6 million, and (iii) ESR fair value
write-downs of $328.7 million, primarily to home equity ESR.
See "Gain on Sale of Receivables and Interest-only and Residual Certificates"
for a discussion of year-to-year changes in the amount and composition of gain
on sale of receivables. See also "Discussion of Events During Fiscal 1999 -
Commercial Real Estate Valuation Adjustments and Other Charges."
Interest Income and Expense
Interest income increased $68.5 million or 29.0% in fiscal 1999 over fiscal
1998, and increased $75.1 million or 46.5% in fiscal 1998 over fiscal 1997.
Interest expense increased $67.7 million or 40.8% in fiscal 1999 over fiscal
1998, and increased $45.3 million or 37.5% in fiscal 1998 over fiscal 1997.
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. Interest
income also includes accrued imputed interest on Excess Spread Receivables
("ESR"). In addition to the cost of financing loans pending sale or
securitization, interest expense includes the cost of financing the Company's
longer term capital requirements, including the cost of strategic acquisitions.
Net interest income in fiscal 1999 remained relatively flat at $71.4 million as
compared to $70.6 million in fiscal 1998. This resulted from an increase in
origination, securitization and sales volume in the first half of fiscal 1999,
offset by decreased volume in the second half of fiscal 1999. In fiscal 1998 as
compared to fiscal 1997, the Company's sales and securitization volume increased
significantly, contributing to a commensurate increase in the average level of
loans held in inventory pending securitization. As a result, net interest income
increased significantly, reaching $70.6 million in fiscal 1998 compared with
$40.8 million in fiscal 1997.
32
<PAGE>
Net Servicing Income
Net servicing income consists of servicing fees and prepayment penalties
collected from borrowers, and capitalized servicing activity. Net servicing
income increased $9.0 million or 10.0% in fiscal 1999 over fiscal 1998, and
increased $44.2 million or 95.3% in fiscal 1998 over fiscal 1997. The following
table presents the components of servicing income for fiscal 1999, 1998 and
1997:
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
(in thousands)
Capitalized servicing created ......................... $ 76,603 $ 63,609 $ 25,340
Premiums paid for capitalized prepayment penalties .... (20,939) (7,250) (1,336)
Amortization of capitalized servicing ................. (45,622) (18,670) (7,676)
Fees and prepayment penalty collections ............... 89,502 52,820 30,012
------------ ----------- -----------
Net servicing income .................................. $ 99,544 $ 90,509 $ 46,340
============ =========== ===========
Total ContiMortgage/ContiWest securitization volume ... $ 6,099,318 $ 6,150,000 $ 3,454,259
Average ContiMortgage servicing portfolio
(excluding warehouse) .............................. $ 10,518,800 $ 7,194,715 $ 4,448,975
</TABLE>
The increase of $13.0 million in capitalized servicing created in fiscal 1999
over fiscal 1998 was primarily related to an increase in the volume and value of
prepayment penalties being written on the Company's loans, as reflected in the
higher level of premiums being paid for such prepayment penalties. The increase
in capitalized servicing created in fiscal 1998 as compared to fiscal 1997 of
$38.3 million is primarily due to the Company's securitization volume in fiscal
1998 exceeding that of fiscal 1997 by $2.7 billion.
The increase in amortization of capitalized servicing of $27.0 million in fiscal
1999 from fiscal 1998 was primarily due to the large increase in capitalized
servicing created in fiscal 1998, which is being amortized in fiscal 1999. In
addition, because prepayment penalties have set expiration dates that may be as
short as six months, capitalized prepayment penalties are, on average, amortized
over a much shorter period than normal servicing fees.
The fees and prepayment penalty collections component of net servicing income
represents cash income earned from the servicing of loans in Real Estate
Mortgage Investment Conduits ("REMICs"), other trusts and other servicing
retained investor portfolios, and is primarily based on the level of loans
serviced and the types of ancillary fee income associated with the loans. Fees
and prepayment penalties collected in fiscal 1999 increased by $36.7 million
from fiscal 1998, primarily due to an increase of $3.3 billion in the average
balance of the ContiMortgage portfolio of loans serviced for others, an increase
in the percentage of prepaid loans with prepayment penalties, and a higher level
of late fees. The increase of $22.8 million in fiscal 1998 from 1997 was
primarily attributable to the $2.7 billion increase in the average balance of
the ContiMortgage portfolio of loans serviced for others.
Capitalized servicing rights reflected on the accompanying Consolidated Balance
Sheets consists of servicing assets recorded in connection with new
securitizations (i.e., the present value of future servicing income, net of
expenses), reduced by amortization of capitalized servicing from prior
securitizations. The following table presents an analysis of capitalized
servicing rights activity during the year ended March 31, 1999:
33
<PAGE>
Capitalized Servicing Rights (in thousands):
Balance as of March 31, 1998 ..................................... $ 74,292
New securitizations ........................................... 76,603
Amortization of capitalized servicing receivable .............. (45,622)
---------
Balance as of March 31, 1999 ..................................... $ 105,273
=========
Other income
Other income consists primarily of purchase premium refunds, gains (losses) on
marketable securities and mortgage banking fees. Other income decreased to $15.8
million in fiscal 1999 from $21.6 million in fiscal 1998 and increased in fiscal
1998 from $9.2 million in fiscal 1997. Purchase premium refunds are received
from certain correspondent origination sources when loans prepay within a
specified time period. Purchase premium refunds were $6.3 million in 1999, $8.1
million in 1998 and $4.6 million in 1997. Mortgage banking fees were $3.7
million in 1999, $3.4 million in 1998 and $1.2 million in 1997. In fiscal 1999,
Other income included loss from unconsolidated subsidiaries of $4.3 million and
gains on marketable securities of $4.7 million. In fiscal 1998, Other income
included income from unconsolidated subsidiaries of $5.4 million and income of
$1.1 million relating to the sale of stock warrants in a Strategic Alliance
company.
Compensation and benefits and General and administrative expenses
Years Ended March 31,
1999 1998 1997
-------- -------- -------
(dollars in thousands)
Compensation and benefits ............. $192,753 $161,992 $82,170
Less: incentive compensation .......... 6,169 31,252 24,580
-------- -------- -------
Compensation and benefits, net ........ $186,584 $130,740 $57,590
======== ======== =======
Year-end head count ................... 3,330 2,881 1,562
Average head count for the year ....... 3,329 2,191 1,008
General and administrative expenses $166,619 $101,633 $44,940
======== ======== =======
In fiscal 1999, compensation and benefits increased by $30.8 million or 19% from
fiscal 1998. However, net of incentive compensation of $6.2 million in fiscal
1999 and $31.3 million in fiscal 1998, the increase in compensation and benefits
in fiscal 1999 was $55.8 million or 43% over fiscal 1998, as compared to a 52%
increase in average head count. This difference in the percentage increase
between head count and net compensation and benefits for fiscal 1999 over fiscal
1998 reflects a change in the composition of the work force as a result of the
business restructuring that occurred in fiscal 1999. The increase in average
head count for fiscal 1999 was most significantly impacted by the acquisition of
FMD and Crystal in the latter part of fiscal 1998, which combined added over 400
employees, and by the fiscal 1999 start up of the ContiDirect retail division
and the acquisition of a branch network from a former Strategic Alliance client,
which combined added over 450 employees.
34
<PAGE>
The increase in net compensation in fiscal 1998 of $73.1 million over fiscal
1997 was consistent with the increase in average head count and primarily
reflected a number of retail acquisitions that were completed in the latter part
of fiscal 1996.
General and administrative expense ("G&A Expense") increased by $64.9 million or
64% in fiscal 1999 from fiscal 1998. This increase primarily reflects the
continued expansion of the Company's retail operations, but also reflects an
expansion of the Company's servicing operations in response to a 28% increase in
the size of the year-end servicing portfolio. The rate of increase in G&A
Expense in fiscal 1999 over fiscal 1998 exceeded the rate of increase in head
count for the same period (64% and 52%, respectively) because the increase in
head count was a net number consisting of increases in the Company's retail
operations, which require a higher level of G&A Expense, and decreases in
non-retail operations, which require less G&A Expense.
The increase in G&A Expense in fiscal 1998 of $56.7 million from fiscal 1997 was
consistent with the increase in average head count and primarily reflected a
number of retail acquisitions that were completed in the latter part of fiscal
1996.
Minority Interest
In fiscal 1999, minority interest was primarily attributable to the 25% minority
shareholders of Keystone. In fiscal 1998 and 1997, minority interest was
primarily attributable to the 44% minority shareholders of Triad prior to the
Company's March 1998 acquisition of that interest.
Gain on Sale of Receivables and Interest-only and Residual Certificates
General
A major source of income for the Company is the recognition of gains in
connection with securitizations and whole loan sales. In a typical
securitization, the Company sells loans or other assets to a special purpose
entity, established for the limited purpose of buying the assets from the
Company and transferring such assets to a trust, most often a REMIC. The REMIC
issues interest-bearing securities that are collateralized by the underlying
pool of mortgage loans or other assets, as the case may be. The proceeds are
used as consideration to purchase the assets from the Company. Typically, the
securities are sold at an amount that is the same (or nearly the same) as the
underlying mortgage loan amounts, and the Company retains a residual interest
that represents its right to receive, over the life of the securitization, the
excess of the weighted average coupon on the loans securitized over the sum of
the interest rate on the securities sold, a normal servicing fee, a trustee fee,
an insurance fee (where applicable) and the credit losses relating to the loans
or other assets securitized (the "Excess Spread Receivable" or "ESR"). In
accordance with SFAS No.125, the present value of the estimated ESR is treated
as additional sale proceeds and included in Gain on Sale of Receivables at the
time of securitization. In a securitization, the Company may also sell a portion
of the ESR in the form of interest-only securities. In a whole loan sale, the
Company sells its entire interest in the loans directly to an investor, with all
proceeds realized in cash at the time of sale. Gain on sale of receivables also
includes any adjustments to ESR that may result from the quarterly fair value
evaluation, and also includes points, origination fees and direct origination
costs associated with broker and direct retail mortgage originations; purchase
premiums associated with the acquisition of whole loans from correspondents;
hedge results; transaction costs; and fees earned in connection with
securitzation services provided to Strategic Alliance clients. All such fees and
costs are recognized in Gain on Sale of Receivables at the time the related
loans are sold or securitized. See "Accounting for ESR - Valuation Process and
Significant Assumptions" below.
35
<PAGE>
See Hedging Interest Rate Risk under Gain on Sale of Receivables for a
discussion of the impact of hedging activities on gain on sale of receivables.
ESR, reported as "Interest-only and residual certificates" in the accompanying
Consolidated Balance Sheets, is the present value of the retained residual
interest (as described above) that the Company expects to receive over the life
of a securitization, taking into consideration estimated prepayment speeds and
credit losses, and is discounted at a rate which the Company believes is an
appropriate risk-adjusted market rate of return for the ESR asset. ESR is
realized over the life of the securitization as cash distributions are received
from the trust.
As a credit enhancement to support the sale of senior collateralized securities,
the Company's ESR is subordinate to the rights of such senior securities. The
terms of the REMIC and other trust agreements generally require the
establishment of a level of over-collateralization, based largely on estimated
cumulative default and loss levels of the underlying pools of mortgages. The
required level of over-collateralization is attained by utilizing cash flows
otherwise distributable to ESR holders either to pay down outstanding principal
of senior interests or to fund segregated deposit accounts. At March 31, 1999,
over-collateralization of ContiMortgage/ContiWest REMICs totaled $195.8 million.
Gain on Sale of Receivables
The following table sets forth the components of gain on sale of receivables for
each of the last three fiscal years:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
(In thousands) March 31, 1999 March 31, 1998 March 31, 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Home equity/home improvement ..... $(11,930) $246,280 $186,123
Commercial real estate ........... (1,129) 37,058 16,420
Auto ............................. 14,610 20,781 4,976
Other ............................ (783) 7,487 3,342
-------- -------- --------
Total ........................ $ 768 $311,606 $210,861
======== ======== ========
</TABLE>
Gain on sale of receivables includes gain from current year's sales, net of fair
value adjustments for all securitizations, including prior years. Such fair
value adjustments were a negative $328.7 million in fiscal year 1999 and a
negative $63.3 million in fiscal year 1998. See "ESR Fair Value Adjustment"
below.
Gain on sale of receivables decreased to $0.8 million in fiscal 1999 from $311.6
million in fiscal 1998 primarily due to negative ESR fair value adjustments
recorded during fiscal 1999 of $328.7 million as compared to a negative fair
value adjustment of $63.3 million in fiscal 1998. Excluding the ESR fair value
adjustments, gain on sale of receivables decreased $45.4 million in fiscal 1999
as compared to fiscal 1998 and increased $100.7 million in fiscal 1998 as
compared to fiscal 1997. The components of these changes are discussed below.
Gain on Sales of Home Equity/Home Improvement Loans. The sale of home equity
loans, either through securitization or whole loan sale, accounts for the
largest component of gain on sale of receivables. Gains on sales of home equity
loans, excluding ESR fair value adjustments of $312.7 million in fiscal 1999 and
$63.3 million in fiscal 1998, were $300.8 million in fiscal 1999 compared with
$309.5 million in fiscal 1998 and $186.1 million in fiscal 1997. The fiscal 1999
fair value adjustment includes $14.4 million related to portfolios other than
ContiMortgage and ContiWest.
36
<PAGE>
The decrease in gain on sale of home equity loans of $8.7 million (excluding ESR
fair value adjustments) in fiscal 1999 from fiscal 1998 reflects an increase in
sale volume to $7.6 billion in fiscal 1999 from $6.7 billion in fiscal 1998,
offset by a decrease in the gain on sale profit percentage to 3.92% in fiscal
1999 from 4.59% in fiscal 1998. The reduced gain on sale percentage reflects
higher interest spreads required by investors during fiscal 1999, partially
offset by a lower cost to acquire the product due to the effect of liquidity
problems within the industry on the amount of purchase premiums paid for loans.
Notwithstanding the increase in fiscal 1999 volume over the prior year, the
Company experienced a significant decline in production volume in the third and
fourth fiscal quarters of 1999. Of total HEL origination production of $8.2
billion for fiscal 1999, $1.8 billion and $1.7 billion was produced in the third
and fourth fiscal quarters, respectively.
The increase in gain on sale of home equity loans of $123.4 million (excluding
ESR fair value adjustments of $63.3 million in 1998) in fiscal 1998 from fiscal
1997 reflects an increase in sale volume to $6.7 billion in fiscal 1998 from
$3.8 billion in fiscal 1997, offset by a decrease in the gain on sale profit
percentage to 4.59% in fiscal 1998 from 4.91% in fiscal 1997. The Company and
the industry in general were expanding rapidly in fiscal 1998, and profit
margins were reduced by increased competition.
Gain on Sales of Commercial Real Estate Loans. Due to the difficult capital
market conditions that commenced in the second quarter of fiscal 1999, the
Company discontinued its commercial real estate lending activities with the
exception of Keystone, which brokers loans to investors. In addition to losses
of $167.9 million reflected in the commercial real estate valuation adjustments
(see "Commercial Real Estate Valuation Adjustments and Other Charges"), the
Company recorded a loss on the sale of commercial real estate loans in fiscal
1999 of $1.1 million, which included revenues of $7.7 million from Keystone and
a loss of $8.8 million on the fiscal 1999 second quarter commercial mortgage
loan securitization.
In fiscal 1998, commercial real estate loan sales and securitizations generated
gains on sale of $37.1 million, up from $16.4 million in 1997, reflecting a
general expansion of the Company's commercial real estate lending activities.
Gain on Sales of Auto Loans. Gain on sale of receivables in connection with
automobile loan securitizations, exclusive of negative fair value adjustments of
$11.9 million, was $26.5 million in fiscal 1999, of which $24.5 million was
attributable to Triad. The ESR fair value adjustment was required due to greater
than estimated credit losses and a change in the discount rate assumption from
10% to 12%. Gain on sale of receivables for Triad securitizations, excluding the
ESR fair value write-downs, was $24.5 million in fiscal 1999 compared with $20.8
million in fiscal 1998. The increase is primarily due to an increase in
securitized volume of $199.7 million in fiscal 1999 compared to fiscal 1998.
This increase was partially offset by a decrease in the gain on sale profit
percentage due to a narrowing of the spread between the weighted average
interest rate on auto loans securitized and the pass-through interest rate on
securities sold. During fiscal 1999, investors demanded higher yields on these
securities due to adverse market conditions. The gain on sale profit percentage
for sales of auto loans was 7.0% in fiscal 1999 as compared to 11.7% in fiscal
1998.
Gain on sale of receivables for auto loans was $20.8 million in fiscal 1998
compared with $5.0 million in fiscal 1997. The increase was primarily due to an
increase in securitized volume of $134.5 million in fiscal 1998 compared to
fiscal 1997. The gain on sale profit percentage for sales of auto loans was
11.7% in fiscal 1999 as compared to 11.4% in fiscal 1997.
Gain on sales of Other Loans. Gain on sales of other loans primarily consists of
franchise loan and small equipment leasing activity. In fiscal 1999, the Company
discontinued the origination of small equipment leases because the
securitization of such loans became unprofitable due to the market disruptions
experienced during the year.
37
<PAGE>
ESR Fair Value Adjustments
The Company recorded negative fair value adjustments included in gain on sale of
receivables of $328.7 million in fiscal 1999 and $63.3 million in fiscal 1998.
The fiscal 1998 fair value adjustment primarily reflected accelerated
prepayments in the ContiMortgage/ContiWest portfolio. The following table
presents the components of the ESR fair value adjustments of $328.7 million
included in gain on sale of receivables for fiscal 1999:
ESR Fair Value Adjustments for Fiscal 1999 (in thousands):
<TABLE>
<CAPTION>
ContiMortgage Auto Other Total
------------- -------- -------- ---------
<S> <C> <C> <C> <C>
Actual and future credit losses ........... $(191,051) $ (9,028) $(12,078) $(212,157)
Actual and future prepayments ............. (81,380) -- -- (81,380)
Change in discount rate ................... (52,198) (2,885) (2,349) (57,432)
Changes in interest rates and other factors 26,280 -- (4,000) 22,280
--------- -------- -------- ---------
Total Fiscal 1999 ...................... $(298,349) $(11,913) $(18,427) $(328,689)
========= ======== ======== =========
</TABLE>
In fiscal 1999, the Company recorded negative fair value adjustments of $191
million related to credit losses in the ContiMortgage/ContiWest ESR portfolio.
During fiscal 1999, both the portfolio default rate and the loss severity on
liquidated accounts increased to levels exceeding those previously estimated.
The portfolio default rate, after having decreased over the first two quarters
of fiscal 1999, from 5.58% at March 31, 1998 to 5.32% at September 30, 1998,
increased sharply and unexpectedly over the final two quarters, to 5.82% at
December 31, 1998 and 6.22% at March 31, 1999. Loss severities, which had
declined significantly over the prior three years, stabilized in the first half
of fiscal 1999, and then increased sharply and unexpectedly during the second
half of fiscal 1999. These increases in default rates and severities not only
resulted in higher realized losses in fiscal 1999, but also caused the Company
to increase significantly its expectation of future losses. See further
discussion under "Accounting for ESR - Valuation Process and Significant
Assumptions - Credit Losses."
The increase in credit losses for auto loans of $9.0 million reflects an
increase in estimated future default rates based on actual experience to date
being greater than prior projections. Other credit losses of $12.1 million is
primarily related to ESR associated with home equity portfolios originated and
serviced by other companies, and the experience in these other portfolios in
fiscal 1999 was consistent with that experienced in the ContiMortgage/ContiWest
portfolio.
In fiscal 1999, the Company recorded negative fair value adjustments of $81.4
million related to prepayment speeds in excess of previous projections in the
ContiMortgage/ContiWest ESR portfolio. These higher prepayment levels were
driven by a significant decline in mortgage rates available to borrowers, caused
by the combination of (i) a long-term decline in market interest rates, (ii)
improvements in borrower credit due to the strong economy, and (iii) a
substantial increase in competition. This combination of factors caused
prepayments to reach levels that exceeded the Company's prior estimates. See
further discussion under "Accounting for ESR - Valuation Process and Significant
Assumptions - Prepayment Speeds."
In fiscal 1999, the Company recorded negative fair value adjustments of $57.4
million related to a change in the discount rate assumption used in determining
the fair value of its ESR portfolio. Due to the capital market's deteriorating
view of the sub-prime industry as evidenced by higher investor spreads on
securitizations, the Company concluded that its prior discount rate assumption
of 10% no longer represented an appropriate market rate of return on its ESR
portfolio. Accordingly, at March 31, 1999, the Company increased its ESR
discount rate to 12%, which the Company believes is an appropriate
risk-adjusted, market rate of return consistent with the inherent prepayment and
loss risks associated with the portfolio and the assumptions about such risks
that the Company applied in its fair value assessment at March 31, 1999.
38
<PAGE>
A number of other factors can affect the fair value analysis of ESR, although
typically to a much lesser extent than losses, prepayments and the discount
rate. In fiscal 1999, the Company recorded positive ESR fair value adjustments
totaling $22.3 million, primarily reflecting the beneficial impact of falling
interest rates on its securitized adjustable rate portfolios.
The Company believes its interest-only and residual certificates are fairly
valued at March 31, 1999 but can provide no assurances that future prepayment
and loss experience or changes in the required market discount rate will not
necessitate additional write-downs. Such write-downs would reduce the income of
future periods and could cause the Company to report net losses for such
periods. See Note 5 to the Consolidated Financial Statements.
Hedging Interest Rate Risk
One of the most significant variables in the determination of gain (loss) on
sale of receivables is the spread between the weighted average coupon on the
portfolio of loans to be sold or securitized (the "Portfolio Rate") and the
weighted average pass-through rate or yield to be paid to the purchasers of the
securities or whole loans (the "Pass-through Rate"). In the interim period
between the loan commitment and the securitization or sale of such loans (the
"Warehousing Period"), the Company is exposed to interest rate risk because the
Portfolio Rate is fixed as of the loan commitment dates, but the Pass-through
Rate is not fixed until the pricing of the securitization or sale. If market
interest rates were to rise during the Warehousing Period, the spread between
the Portfolio Rate and the Pass-through Rate would narrow, and the market value
of the loans would decline.
Through the end of the third quarter of fiscal 1999, the Company mitigated this
interest rate exposure primarily through short sales of U.S. Treasury securities
and U.S. Treasury interest rate futures contracts. These instruments were used
because the Pass-through Rates on the securities are established as a spread
over the U.S. Treasury yield for a comparable maturity. This hedging strategy
was effective to the extent that the Pass-through Rates required by investors
moved in sync with U.S. Treasury yields, which had been the case historically.
However, during a "flight-to-quality" that occurred during the second and third
quarters of fiscal 1999, the relationship between Pass-through Rates and U.S.
Treasury yields broke down, and the Company incurred significant losses because
it lacked the liquidity to meet the ongoing margin calls necessary to maintain
its hedge positions until prior market relationships were restored.
The Company revised its hedging strategy in the fourth quarter of fiscal 1999.
The Company now manages its hedge positions by using a combination of Eurodollar
futures, U.S. Treasury securities, financial futures contracts and options on
U.S. Treasury instruments. Recent research has shown that changes in interest
rate swap levels are more positively correlated to the changes in market yields
for the Company's assets than U.S. Treasury securities because of the liquidity
premium attached to U.S. Treasury securities. The use of interest rate swaps is
designed to reduce the Company's exposure to both the absolute movements in U.S.
Treasury yields and the widening in the spread relationship between the
Company's assets and U.S. Treasury yields. Since executing individual swap
contracts to match the volume fluctuations and amortization of the Company's
underlying assets is cumbersome, expensive and involves counterparty risk, the
Company sells a series of Eurodollar futures contracts that match the amount and
timing of the estimated cash flows on the assets to be hedged. This transaction
is designed to approximate the economics of an interest rate swap. In addition,
the Company uses options on U.S. Treasury instruments to hedge its assets
against wide swings in rates.
39
<PAGE>
The Company only hedges a portion of its total exposure to interest rate risk;
consequently, even if the hedging strategy works as intended, the Company would
still incur net losses to the fair value of its interest rate sensitive assets
in a rising interest rate environment. Even to the extent that the Company does
hedge its interest rate exposure, there can be no assurances provided that the
Company's hedging strategy will produce the intended results.
The Company accounts for its positions using the hedge method of accounting.
Positions are designated as hedges against specific market exposures, and senior
management monitors the correlation between the change in market value of the
hedge instruments and the assets being hedged. Under the hedge method of
accounting, gains or losses on hedge instruments are recognized at the time the
gains or losses on the assets being hedged are recognized. In the event a high
degree of correlation is not maintained, the hedge instruments are then marked
to market. If a hedge instrument matures or is terminated prior to the maturity
or sale of the designated hedged asset or liability, the realized gain or loss
on the hedge instrument would be deferred until the maturity or sale of the
designated asset or liability. If a designated asset or liability matures or is
sold prior to the maturity or termination of the hedge instrument, the hedge
instrument would be marked to market at that time.
Unrealized hedge gains or losses related to the Company's warehouse and pipeline
positions are reflected in the Company's lower-of-aggregate-cost-or-market
evaluation of receivables held for sale and are ultimately recognized upon the
sale or securitization of the related receivables and included in gains or
losses on sales of receivables. Hedge gains or losses related to the Company's
ESR portfolio are recognized on a current basis in gains or losses on sales of
receivables because the ESR portfolio is recorded at fair value. Hedge
transactions are expected to occur within one year.
With respect to ContiMortgage/ContiWest securitizations and whole loan sales,
gain on sale included hedge losses of $27,330, $11,946 and $5,413 in fiscal
1999, 1998 and 1997, respectively. In fiscal 1999, hedge losses relating to the
commercial loan portfolio totaled $88,614, of which $80,574 was reflected in
Commercial real estate valuation adjustments and $8,040, relating to a
securitization, was included in gain on sale.
40
<PAGE>
Interest-only and Residual Certificates
At March 31, 1999 and 1998, the Company's ESR portfolio consisted of the
following :
<TABLE>
<CAPTION>
March 31, Percentage March 31, Percentage
1999 of Total 1998 of Total
-------- ---------- -------- ----------
($ in thousands)
<S> <C> <C> <C> <C>
Home equity:
ContiMortgage/ContiWest .... $611,320 84.7% $555,884 85.7%
Other servicers ............ 24,800 3.4 37,428 5.8
-------- -------- -------- --------
Total home equity ......... 636,120 88.1 593,312 91.5
Home improvement ............. 4,046 0.5 7,919 1.2
Commercial real estate ....... 6,263 0.9 8,233 1.3
Auto ......................... 69,804 9.7 28,223 4.3
Leases ....................... 4,615 0.6 8,960 1.4
Franchise .................... 1,164 0.2 2,138 0.3
-------- -------- -------- --------
Total ESR portfolio ....... $722,012 100.0% $648,785 100.0%
======== ======== ======== ========
</TABLE>
The changes in ESR from March 31, 1997 to March 31, 1999 are presented in the
table below:
Interest-only and residual certificates (in thousands):
1999 1998
--------- ---------
Balance at beginning of year .......................... $ 648,785 $ 445,005
New securitizations ................................ 446,238 462,585
Cash distributions from REMICs and trusts .......... (122,075) (70,580)
Accruals of imputed interest income ................ 57,091 41,991
Fair value adjustments (see discussion below) ...... (328,689) (63,300)
Other sales, purchases and recourse payments, net .. 20,662 (166,916)
--------- ---------
Balance at end of year ................................ $ 722,012 $ 648,785
========= =========
Although ESR does not carry a stated rate of interest, it represents the present
value of an estimated stream of future cash flows. Accordingly, over the life of
the asset imputed interest income is accrued, and as a result, the carrying
value of ESR is increased. As cash distributions are received, ESR is reduced.
The aggregate value of ESR at March 31, 1999 was $722.0 million, compared with
$648.8 million at March 31, 1998.
Accounting for ESR - Valuation Process and Significant Assumptions
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfer and Servicing of Financial Assets and Extinguishment of
Liabilities," the fair value of the retained ESR is accounted for as a component
of sale proceeds. Consequently, the Company recognizes a gain upon completion of
the securitization.
In accordance with SFAS No. 134, "Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise," the Company continues to classify ESR as "trading
securities." As such, they are carried at fair value in the Consolidated Balance
Sheets. Unrealized changes in ESR fair value are included in Gain on sale of
receivables on the accompanying Consolidated Statements of Income in the period
of the change.
41
<PAGE>
The Company has, from time to time, completed sales of ESR as either sales with
limited recourse or Net Interest Margin Securities ("NIMS") sales. Nevertheless,
there is only a limited market for the sale of ESR. Consequently, the Company
estimates the fair value of ESR through the application of a discounted cash
flow analysis, which requires the use of various assumptions. A significant
factor affecting the level of estimated future ESR cash flows is the rate at
which the underlying principal of the securitized loans is reduced. Prepayments
represent principal reductions in excess of contractually scheduled reductions,
and prepayment speeds are generally expressed as an annualized Conditional (or
Constant) Prepayment Rate ("CPR"). Estimated future CPR is a significant
assumption in the determination of ESR fair value. Additional significant
assumptions include estimated future credit losses and the discount rate.
The Company continuously monitors the fair value of ESR and reviews the factors
expected to influence future CPR and credit losses. In developing assumptions
regarding estimated future CPR, the Company considers a variety of factors, many
of which are interrelated. These factors include, among other things, historical
performance, characteristics of borrowers (e.g. credit quality and loan-to-value
relationships) and market factors that influence competition. If changes in
assumptions regarding estimated future CPR or credit losses are necessary, ESR
fair value is adjusted accordingly.
Assumptions regarding future CPR and credit losses are subject to volatility
that could materially affect operating results. Both the amount and timing of
estimated ESR cash flows are dependent on the performance of the underlying
loans, and actual cash flows may vary significantly from expectations. If actual
prepayments or credit losses were to exceed the assumptions used to determine
ESR fair value, the ESR carrying value would be reduced through a charge to
earnings, which could cause the Company to report losses in future periods.
Similarly, actual prepayments or credit losses that are less than the
assumptions used to determine ESR fair value could result in an increase in ESR
carrying value and earnings in future periods. See "Gain on Sale of Receivables
and Interest-Only and Residual Certificates" in Note 5 to the Consolidated
Financial Statements for discussion of ESR Fair Value Assumptions.
42
<PAGE>
Prepayment Speeds
The following table presents historical data as well as estimated future CPR for
ContiMortgage/ContiWest related ESR amounts, which represent 85% of the
Company's total ESR value at March 31, 1999.
<TABLE>
<CAPTION>
REMICs by Year of Issue (a)
---------------------------
($ in millions)
1995 and
earlier 1996 1997 1998 1999 Total
------- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Pool balances:
Original ....................... $2,368 $2,030 $3,454 $6,150 $6,099 $20,101
At March 31, 1999 .............. $ 510 $ 582 $1,323 $3,899 $5,653 $11,967
Fair value of ESR ................. $ 22 $ 30 $ 64 $ 224 $ 271 $ 611
CPR:
Actual life-to-date ............. 24.5% 28.7% 31.9% 26.3% 10.0% 22.2%
Estimated for the remaining
pool over its estimated
remaining life .................. 26.2% 27.1% 26.9% 27.9% 29.2% 28.3%
</TABLE>
(a) This table includes ContiMortgage/ContiWest REMICs, based on fiscal years
ended March 31.
In developing assumptions regarding estimated future CPR, the Company considers
a variety of factors, many of which are interrelated. The Company's CPR
assumptions are subject to review and potential adjustment each quarter. Since
CPR, by its nature, tends to be volatile, monthly variations in either direction
may not be indicative of longer term trends. These factors include, among other
things, historical performance, characteristics of borrowers and market factors
that influence competition.
For example, historical performance indicates that the rate of prepayments
within a portfolio generally increases from a low level shortly after loan
origination and peaks in approximately 12 to 15 months. Subsequently, as the
loan portfolio "seasons," the level of prepayments generally declines. This is
commonly referred to as the prepayment "ramp" or "curve". For the most part, the
fiscal 1999 securitizations included in the table have not yet reached the
estimated peak of the prepayment ramp. Consequently, actual life-to-date CPR for
those transactions is lower than that of the prior years' transactions.
Conversely, REMICs for fiscal years prior to fiscal 1999 are approaching or are
past the peak of their respective prepayment ramps, and prepayments are
generally expected to decline over the remaining life of these securitizations.
Once a loan portfolio has passed the peak of the prepayment ramp, actual
life-to-date CPR will be greater than the estimated remaining CPR.
As stated previously, the Company's weighted average assumption for estimated
future CPR for ContiMortgage/ContiWest REMICs was increased during fiscal 1999
from 27% to 28%. The increase was required due to the higher levels of actual
prepayments over those previously estimated. These higher prepayment levels were
driven by a significant decline in interest rates available to borrowers, caused
by the combination of (i) a long-term decline in interest rates, (ii)
improvements in borrower credit due to the strong economy, and (iii) a
substantial increase in competition. The market disruptions of fiscal 1999 seem
to have reversed the trends in interest rates and competition, and prepayment
speeds began to moderate in the second half of the fiscal year.
The shape of the prepayment curve (i.e., rate of CPR increase, timing of the
peak, timing and extent of subsequent decline, absolute CPR levels, etc.) may
vary considerably based upon the characteristics of the underlying loans. For
example, prepayment speeds for variable-rate loans significantly exceed
prepayment speeds for fixed-rate loans, and specific terms, such as the
existence of prepayment penalties, will further influence prepayment
performance. For various reasons, historical performance may not necessarily be
indicative of future performance. Nevertheless, it is one of many factors that
are considered.
43
<PAGE>
Credit Losses
Like prepayment assumptions, there are a variety of interrelated factors that
the Company considers in determining future credit loss assumptions, such as
historical experience, default frequency, loss severity and the length of the
foreclosure and liquidation process. The following table presents historical
credit loss information as well as estimated future credit losses for the
ContiMortgage/ContiWest REMIC portfolios, including loans and properties
purchased out of the REMIC portfolios, for the fiscal years ended March 31, 1999
and 1998.
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Annualized Loss rate as a percentage of average pool balances:
Weighted average life-to-date loss rate as of fiscal year end ..... 0.71% 0.47%
Estimated loss rate over remaining REMIC lives .................... 0.98% 0.62%
Aggregate losses as a percent of original pool balances:
Actual life-to-date (including losses on loans purchased out of
REMICs) .......................................................... 1.04% 0.51%
Estimated over entire life (i.e., historical plus future losses) .. 2.91% 1.84%
Estimated future credit losses (undiscounted) ........................ $375 million $185 million
</TABLE>
In fiscal 1999, ESR fair value write-downs of $191.0 million were recorded
related to credit losses in ContiMortgage/ContiWest related ESR portfolios. See
"ESR Fair Value Adjustments" above for further discussion.
Discount Rate
The Company determines the discount rate utilized in determining fair value by
selecting a rate that it believes is commensurate with the risks involved. The
Company recognizes that the ESR discount rate when interacting with the other
two assumptions, 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. The future
cash flows estimated as of March 31, 1999 and March 31, 1998, taking into
consideration estimated prepayment rates and credit losses, were discounted at
rates of 12% and 10%, respectively, to arrive at the fair value amounts
presented in the accompanying Consolidated Balance Sheets. See "ESR Fair Value
Adjustments" above for further discussion.
Sensitivity of Changes in ESR Fair Value Assumption
If actual prepayments, credit losses or discount rate 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
ContiMortgage/ContiWest'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 fair value for ContiMortgage/ContiWest related ESR
while keeping the absolute value of the other two assumptions constant. The
impact of changes in these assumptions are not linear. As of March 31, 1999,
changes in the assumptions would have approximately the following impact on fair
value:
44
<PAGE>
Factor Change Fair value impact
------ ------ -----------------
Annual CPR +100 basis points $(30 million)
Annual CPR -100 basis points $ 31 million
Annual credit losses + 10 basis points $(32 million)
Annual credit losses - 10 basis points $ 32 million
Discount rate +100 basis points $(25 million)
Discount rate -100 basis points $ 27 million
Liquidity and Capital Resources
The following discussion of Liquidity and Capital Resources should be read in
conjunction with the separate discussion of Gain on Sale of Receivables and
Interest-only and Residual Certificates. Also, see "Discussion of Events During
Fiscal 1999" at the beginning of this Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Funding Requirements
The Company requires continued access to short- and long-term sources of funding
for its operations. The Company's primary cash requirements include the funding
of (i) mortgage, loan and lease originations and purchases pending their pooling
and sale, (ii) premiums paid in connection with the acquisition of correspondent
loans, (iii) fees and expenses incurred in connection with its securitization
program, (iv) over-collateralization or reserve account requirements in
connection with loans and leases pooled and sold, (v) ongoing administrative and
other operating expenses, (vi) payments related to tax obligations, (vii)
interest and principal payments relating to the Company's long-term debt and
short-term borrowed funds, (viii) the costs of sales under the Company's
Warehouse Facilities, and (ix) the cost of any new acquisitions and subsequent
contingent purchase price payments on prior acquisitions.
The Company's Revolving Credit Facility and Commercial Paper Program (together,
the "Bank Facilities") mature in August 1999 resulting in a funding requirement
of $422.0 million at such time. The Company's continued operations are dependent
on the extension, renegotiation or refinancing of the Bank Facilities. See the
discussion below under "Sources of Liquidity and Capital".
In a securitization, the Company recognizes a gain on the sale of loans or
assets securitized upon the closing of the securitization, but does not receive
the majority of the cash representing such gain until it realizes the Excess
Spread Receivables, which occurs over the actual lives of the loans or other
assets securitized. Home equity securitizations are cash flow negative upon
their initial execution, primarily as a result of premiums paid to acquire loans
from correspondent sources.
The Company has taken steps to improve the cash flow characteristics of its
business activities. For example, the Company has implemented a home equity
whole loan sale strategy to accelerate recapture of origination costs.
Furthermore, development of the Company's retail home equity origination
platform provides a source of cash income through origination points and fees.
The reduction in correspondent origination volume has significantly reduced the
total amount of premiums paid to originate a loan. Market events have also
contributed to the improved cash flow characteristics of the Company. As
competition has decreased, the cost of originating correspondent loans has also
dropped significantly, benefiting the Company through lower purchase premiums.
45
<PAGE>
Sources of Liquidity and Capital
The Company's primary sources of liquidity are sales of loans and other assets
through securitization and whole loan sales; the sale of loans and other assets
under the Warehouse Facilities; the issuance of shares of common stock; and the
issuance of long-term debt and short-term borrowed funds.
The Company had $1.7 billion of committed and $1.3 billion of uncommitted sale
capacity under the Warehouse Facilities as of March 31, 1999. As of March 31,
1999, the Company had utilized $1.5 billion of the capacity under the Warehouse
Facilities. The Purchase and Sale Facilities allow the Company to sell, with
limited recourse, interests in designated pools of loans and other assets. The
Repurchase Agreements allow the Company to sell receivables held for sale to a
financial institution under an agreement to repurchase the receivables. As of
July 13, 1999, the Company had the following Warehouse Facilities which expire
between July 1999 and December 1999 (amounts in thousands):
<TABLE>
<CAPTION>
Committed Uncommitted Total
Expiration Facility Facility Facility
---------- --------- ----------- ----------
<S> <C> <C> <C>
Demand $ -- $ 715,000 $ 715,000
July, 1999 92,000 -- 92,000
September, 1999 250,000 450,000 700,000
December, 1999 300,000 200,000 500,000
-------- ---------- ----------
Total Warehouse Facilities $642,000 $1,365,000 $2,007,000
======== ========== ==========
</TABLE>
The Bank Facilities expire on August 20, 1999, and the Warehouse Facilities
expire at various times from July 1999 through December 1999. The Company's
continued operations are dependent on the extension, renegotiation or
refinancing, as well as availability through scheduled maturity of the Bank and
Warehouse Facilities. The Company's ability to extend, renegotiate or refinance
its facilities depends on the successful completion of a transaction with a
buyer or equity investor. As a result, there is substantial doubt about the
Company's ability to continue as a going concern.
In order to address this issue, the Company has been seeking a financially
strong acquirer or equity investor who can provide the necessary financing or
provide the Company's lenders with the requisite guarantees. The previously
announced discussions with Residential Funding Corporation, a subsidiary of
General Motors Acceptance Corporation, with respect to an acquisition of the
Company have terminated. The Company is in discussions with others to act as an
acquiror or equity investor and has commenced negotiations for a restructuring
with the providers of its Bank Facilities and Warehouse Facilities.
The Company is operating on a negative cash flow basis and is dependent on
various financing sources for its continued operations. In order to fund new
loans and asset originations and purchases, the Company is dependent on its
ability to fund loans and other assets under its Warehouse 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,
or the inability of the Company to access such markets due to the Company's
financial condition, 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 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
Warehouse Facilities and the Bank Facilities would have a material adverse
effect on the Company. If the Company's lenders do not renew, renegotiate or
refinance the Warehouse Facilities or the Bank Facilities or if the lenders
terminate these facilities or reduce availability prior to the scheduled
maturity, it would have a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - General" for further discussion.
46
<PAGE>
The Company is required to comply with various financial covenants under its
outstanding Senior Notes, Revolving Credit Facility and Commercial Paper
Program, as well as under certain provisions of two of the Repurchase
Agreements, including, among other things, leverage ratios, minimum net worth
tests and interest coverage ratios. As of December 31, 1998 and continuing
through March 31, 1999, the Company's leverage ratio exceeded the leverage ratio
test under the covenants of its outstanding Senior Notes. As a result, the
Company is prevented from issuing additional unsecured debt until its leverage
ratio is below such test. As of December 31, 1998, the Company and two of its
lenders agreed to amend certain provisions of the Repurchase Agreements.
Amendments were received from the Repurchase Agreement lenders changing the
leverage ratio to 2.75 to 1. These Repurchase Agreements were again amended as
of March 31, 1999. One agreement was amended to remove all financial covenants
through August 20, 1999, while the other removed the financial covenants to the
maturity date of the facility of July 1, 1999. As of December 31, 1998, amended
financial covenants were also received changing the leverage and fixed charge
ratios and the minimum net worth test in the Bank Facilities, and lenders agreed
to exclude certain charges from the covenant ratio calculations. As of March 31,
1999, the Bank Facilities and certain of the Warehouse Facilities amended the
related agreements to eliminate the financial covenants and borrowing base
provisions, among other things. As part of the bank amendment, the Company
agreed to reduce commitments under the Bank Facilities by 75% of the total
proceeds received by the Company for the sale of Triad Financial Corporation
("Triad"). On June 11, 1999, the sale of Triad was closed, and the Bank
Facilities commitments were reduced by approximately $95 million. If the above
mentioned amendments had not been obtained, the Company would not have been in
compliance with the covenants. The Company was in compliance with the amended
covenants of the Revolving Credit Facility, the Commercial Paper Program and the
Repurchase Agreements as of March 31, 1999. As part of the December amendments
to the Revolving Credit Facility, the Company has agreed to prepay the Revolving
Credit Facility on August 20, 1999, which makes the Revolving Credit Facility
coterminous with the Commercial Paper Program. As part of the March amendments,
the interest rate of the Revolving Credit Facility and the Commercial Paper
Program were increased to LIBOR plus 300 basis points.
Without an equity infusion 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 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 monthly
servicer advances, up to an aggregate outstanding of $85 million, 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. See Note 9 to the Consolidated
Financial Statements "Subservicing Agreement" for further discussion.
In May 1999, Continental Grain extended a short-term warehouse financing
facility to the Company for a maximum amount of $60.0 million. Availability
under the facility is subject to a combined maximum amount of $85 million of
this facility and the servicer advances facility, and terminates upon the
earlier of October 1, 1999 or a change in control of the Company.
47
<PAGE>
On June 11, 1999, the Company sold its interest in Triad to Fairlane Credit LLC,
a wholly-owned subsidiary of Ford Motor Credit Company. The sale of Triad
resulted in a gain to the Company of approximately $20 million and provided
gross proceeds of approximately $134 million through sale proceeds, repayment of
intercompany debt and net return of intercompany warehouse financing. Of this
amount, approximately $95 million was used to pay down the Company's Bank
Facilities, thereby reducing the commitments under the Bank Facilities by the
pay down amount.
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 March 31, 1999, $22.6 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 is through the sale of NIMS, which generated
proceeds of $159.7 million in fiscal 1998. No such sales were recorded in fiscal
1999, and the Company does not intend to pursue such sales in the foreseeable
future, rather, the Company intends to retain ESR in the portfolio allowing ESR
cash flow to build over time.
On February 18, 1999, Standard & Poor's lowered its senior unsecured debt and
long-term debt credit ratings to B-. On May 20, 1999, Moody's Investors Service
downgraded the Company's long-term debt ratings to Caa1. On June 4, 1999, Fitch
IBCA reduced the Company's long-term debt rating to CCC+.
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 March 31, 1999, $312.5 million of
commercial paper was outstanding. As of March 1999, the Company was fully drawn
under the Company's Commercial Paper Program and its $200 million unsecured
Revolving Credit Facility.
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.
See Note 10 to the Consolidated Financial Statements for further discussion of
the Company's short- and long-term borrowings. See Note 14 to the Consolidated
Financial Statements for further discussion of the Company's sales of assets
with recourse and loan warehousing activities.
48
<PAGE>
Financial Position - March 31, 1999 compared with March 31, 1998
Stockholders' equity decreased $443.0 million from $646.3 million at March 31,
1998 to $203.3 million at March 31, 1999. This decrease was primarily the result
of net losses of $426.3 million incurred in fiscal 1999 as discussed in
"Discussion of Events During Fiscal 1999" and "Results of Operations".
Equity investments in unconsolidated subsidiaries decreased $48.7 million from
$53.7 million at March 31, 1998 to $5.0 million at March 31, 1999, primarily due
to the impairment and resulting write-down of investments and related cost in
excess of equity acquired in affiliated companies in fiscal 1999, as detailed in
"Discussion of Events During Fiscal 1999 Commercial Real Estate Valuation
Adjustments and Other Charges".
Cost in excess of equity acquired increased $29.7 million from $55.7 million at
March 31, 1998 to $85.4 million at March 31, 1999, primarily due to the
acquisition of a 75% interest in Keystone. Keystone is a broker and servicer of
commercial mortgage loans, primarily to the insurance industry, but does not
take principal risk. Also see Note 8 to the Consolidated Financial Statements
for further discussion.
At March 31, 1998, the Company mitigated its interest rate exposure primarily
through short sales of U.S. Treasury securities and U.S. Treasury interest rate
futures contracts. The short sales of U.S. Treasury securities and related
purchase of securities under agreements to resell were reflected on the
accompanying Consolidated Balance Sheets as Securities sold but not yet
purchased and Securities purchased under agreements to resell. The Company
revised its hedging strategy in the fourth quarter of fiscal 1999, and by March
31, 1999, had closed out its short positions in U.S Treasury securities. See
"Gain on Sale of Receivables and Interest-only and Residual Certificates -
Hedging Interest Rate Risk".
Other assets increased $16.2 million, from $35.9 million at March 31, 1998 to
$52.1 million at March 31, 1999, primarily due to an increase in marketable
securities and margin deposits.
Other significant events affecting financial position are discussed in "Gain on
Sale of Receivables and Interest-only and Residual Certificates" relating to
Interest-only and residual certificates and Receivables held for sale; "Results
of Operations - Net Servicing Income" relating to Capitalized servicing rights;
and Note 10 to the Consolidated Financial Statements relating to short- and
long-term debt.
Dividend Policy
The Company has no current intention to pay cash dividends on its Common Stock.
As a holding company, the ability of the Company to pay dividends is dependent
upon the receipt of dividends or other payments from its subsidiaries. Any
future determination as to the payment of dividends will be at the discretion of
the Company's Board of Directors and will depend upon the Company's operating
results, financial condition and capital requirements, contractual restrictions,
general business conditions and such other factors as the Company's Board of
Directors deems relevant. Furthermore, covenants in the Company's loan
agreements restrict the payment of dividends by the Company. If these covenants
are still in place at the time the Company decides to declare a dividend, a
waiver from the related lenders would have to be obtained. In addition, there
can be no assurance that dividends will be permitted under applicable law.
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 also from the
impact of noncompliance by certain significant counterparties, including
Strategic Alliances.
49
<PAGE>
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) 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 March, 15, Complete
Year 2000 issues and formulate plans to 1998
address them.
- ------------------------------------------------------------------------------------------------------
Systems Inventory and Assessment -
Inventory all hardware, software and April 15, Substantially A portion of the
computerized systems and identify those 1998 Complete* facilities assessment
requiring Year 2000 remediation. is incomplete.
- ------------------------------------------------------------------------------------------------------
Remediation - Modify or replace all
hardware, software and computerized August 31, Substantially Awaiting Year 2000
systems that are not Year 2000 1998 Complete* compliant software
compliant. upgrades from some
vendors.
- ------------------------------------------------------------------------------------------------------
Testing - Test modifications to and
replacements of all hardware, software December 31, Substantially Awaiting Year 2000
and computerized systems 1998 Complete* compliant software
for Year 2000 compliance. upgrades from some
vendors.
- ------------------------------------------------------------------------------------------------------
Implementation - Integrate the
remediated and tested hardware, March 31, Partially Anticipated
software and computerized systems 1999 Completed* completion date:
into the Company's operations. July 31, 1999.
- ------------------------------------------------------------------------------------------------------
</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.
50
<PAGE>
The Company did not meet its March 31, 1999 target date for completion of its
Year 2000 project due to the unavailability of Year 2000 compliant systems from
some vendors. The Company expects these systems to be available for remediation,
testing and implementation by July 31, 1999. In addition, facilities inventory
and assessment, remediation, testing and implementation will be completed by
July 31, 1999.
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 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. ContiMortgage, the Company's largest home equity
originator, uses a loan servicing system under a service arrangement with a
vendor. This system interfaces with related key ancillary systems which are
operated and maintained in-house and complete the servicing function. Conversion
to a new system and servicing software could take up to twelve months.
Accordingly, a large part of the Company's remediation effort currently focuses
on ensuring that ContiMortgage'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 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.
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.
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 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 credit reporting agencies have stated 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.
51
<PAGE>
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 $1.7 million on the Year 2000 issue. The Company
presently believes, based on the information obtained during the systems
inventory and assessment phase, that the Year 2000 issue will not have a
material adverse impact on its computer systems or operations. However, the
interdependent nature of the Company's operations, in particular its substantial
reliance on third party vendors, makes it impossible to say with certainty that
the Year 2000 issue will not have a material adverse impact on those computer
systems and operations. The Company will reassess the 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.
Competition
The home equity lender market is highly competitive. The Company faces
competition from other consumer finance lenders, mortgage lenders, mortgage
brokers, commercial banks, mortgage banks, large securities firms, smaller
boutique securities firms, credit unions, thrift institutions, credit card
issuers and finance companies. In addition, in recent years so-called government
sponsored agencies such as FHLMC have been exploring their possible entry into
the industry. Many of these competitors are substantially larger than the
Company and have more capital and other resources, as well as a lower cost of
funds. However, competition can take many forms, including convenience in
obtaining a loan, customer service, marketing and distribution channels, terms
provided and interest rates charged to borrowers.
As more fully discussed under "Discussion of Events During Fiscal 1999 - Market
Turbulence," the operations of many participants in the sub-prime industry in
which the Company operates were significantly and adversely affected by capital
market turbulence in fiscal 1999. The resulting loss of liquidity experienced
throughout the industry, occurring within the context of increasing market
skepticism about the quality of earnings reported under "gain-on sale
accounting," intensified capital market concerns about the industry and
effectively eliminated access to the capital markets as a source of new
liquidity. Lack of liquidity forced many competitors to exit the industry. As a
result of the decrease in competition, the cost to acquire correspondent product
declined dramatically; however, the benefit of this decline was offset by
investor demand for higher yields on securitization and whole loan sale
transactions. This increase in the Company's effective cost of funds may make it
more difficult to compete on the basis of price against the larger financial
institutions.
Although the Company has diversified its origination capabilities with the
acquisition of home equity companies with retail capabilities, correspondent
loans are expected to remain a significant part of the Company's home equity
loan production program. As a purchaser of correspondent loans, the Company is
exposed to fluctuations in the cost of correspondent loans resulting from
changes in competition.
52
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The primary market risk exposure that the Company faces is interest rate risk.
The Company is most vulnerable to changes in U.S. Treasury yields, LIBOR yields,
and the yield spread requirements of the investors who buy the Company's
securities and loans. The Company's material exposures of interest rate
sensitive financial instruments, which are entered into for other than trading
purposes, are its committed pipeline of loans, its loan inventories (including
off-balance-sheet exposures), its interest-only and residual certificates, its
capitalized servicing rights, and the various derivative financial instruments
that the Company uses to manage the interest rate risk related to the
aforementioned other financial instruments. The overall objective of the
Company's interest rate risk management policies is to mitigate the effect of
changing interest rates on the fair value of its other financial instruments.
See Note 14 to the accompanying Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Position and Results of
Operations - "Hedging Interest Rate Risk," for further discussion of financial
instruments and the Company's hedging policies.
The Company does not have an ongoing hedging program to manage interest rate
risk associated with its interest-only and residual certificates and its
capitalized servicing rights. The primary risk involved is that a decline in
interest rates could result in an acceleration of prepayment speeds that would
adversely impact the fair value of these assets. However, because of the
relatively short average lives of the Company's home equity loans, prepayment
speeds related to the Company's portfolios are not as interest rate sensitive as
those of traditional mortgage products; therefore, the Company believes it would
require a substantial and sustained decline in interest rates, beyond what the
Company would consider to be a "reasonably possible near-term change," to impact
prepayment speeds to a material extent. The Company is also exposed to basis
risk in its portfolio of interest-only and residual certificates in that a
portion of the Company's securities have interest rates that adjust on a monthly
basis, whereas the interest rates on the loans that collateralize the securities
may be fixed or have adjustment intervals and indices that are different than
those of the underlying securities.
As part of its interest rate risk management process, the Company performs
various sensitivity analyses that attempt to quantify the net change in fair
value of its interest rate sensitive financial instruments. These analyses
assume hypothetical scenarios of instantaneous and permanent shifts in the U.S.
Treasury and/or LIBOR yield curves. The Company employs various discounted cash
flow models to determine the fair value of its interest rate sensitive financial
instruments under these scenarios. The primary assumptions used in the
discounted cash flow models are prepayment rates, credit losses, discount rates
and investor yield spread requirements. See Management's Discussion and Analysis
of Financial Position and Results of Operations - "Accounting for ESR -
Valuation Process and Significant Assumptions."
Using the sensitivity analysis described above, as of March 31, 1999, the
Company estimates that a parallel, instantaneous and permanent increase in the
U.S. Treasury yield curve of 50 basis points (.50%), all else being constant,
would result in an aggregate decrease in the fair value of its interest rate
sensitive financial instruments (derivative and other) of approximately $27
million; an instantaneous and permanent increase in the LIBOR yield curve of 50
basis points (.50%), all else being constant, would result in an aggregate
decrease in the fair value of its interest rate sensitive financial instruments
(derivative and other) of approximately $0.3 million; an instantaneous and
permanent increase in the discount rate of 120 basis points (1.20%), all else
being constant, would result in an aggregate decrease in the fair value of its
interest rate sensitive financial instruments (derivative and other) of
approximately $35 million; and an instantaneous and permanent increase in the
investor yield spread requirement of 50 basis points (.50%), all else being
constant, would result in an aggregate decrease in the fair value of its
interest rate sensitive financial instruments (derivative and other) of
approximately $33 million.
53
<PAGE>
The Company assumed there would be no material change in prepayment speeds under
the interest rate change scenarios presented above. The Company estimates that a
100 basis points (1.0%) increase in prepayment speeds would decrease the fair
value of the interest-only and residual certificates by approximately $30
million and would decrease the fair value of the capitalized servicing rights by
$0.2 million (net of the estimated benefit from increased prepayment penalty
income). See Management's Discussion and Analysis of Financial Position and
Results of Operations - "Sensitivity of Changes in ESR Fair Value Assumptions"
for the effect of changes in prepayment speeds and other assumptions on the
interest-only and residual certificates.
These sensitivity analyses are limited by the fact that that they are performed
at a particular point in time and do not incorporate other factors that may
impact the fair value of the Company's interest rate sensitive financial
instruments in each scenario. The above scenarios do not reflect the Company's
expectations regarding future movements in interest rates or prepayment speeds.
Consequently, the preceding estimates should not be viewed as a forecast.
54
<PAGE>
Item 8. Financial Statements and Supplementary Data.
CONTIFINANCIAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants .................................. 56
Consolidated Balance Sheets as of March 31, 1999 and 1998 ................. 57
Consolidated Statements of Income for the years ended
March 31, 1999, 1998 and 1997 ........................................... 58
Consolidated Statements of Changes in Stockholders'
Equity for the years ended March 31, 1999, 1998 and 1997 ................ 59
Consolidated Statements of Cash Flows for the years
ended March 31, 1999, 1998 and 1997 ..................................... 60
Notes to Consolidated Financial Statements ................................ 62
55
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
and Stockholders of
ContiFinancial Corporation:
We have audited the accompanying consolidated balance sheets of ContiFinancial
Corporation (a Delaware corporation) and subsidiaries as of March 31, 1999 and
1998, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ContiFinancial
Corporation and its subsidiaries as of March 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended March 31, 1999 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has incurred a significant
operating loss in fiscal 1999 and suffered a critical loss of liquidity that
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
/s/ ARTHUR ANDERSEN LLP
New York, New York
July 14, 1999
56
<PAGE>
CONTIFINANCIAL CORPORATION
Consolidated Balance Sheets as of March 31, 1999 and 1998
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Assets
------
Cash and cash equivalents ........................................................................ $ 112,839 $ 173,588
Restricted cash .................................................................................. 4,072 1,147
Securities purchased under agreements to resell .................................................. -- 857,649
Receivables held for sale:
Receivables held for sale ..................................................................... 1,089,410 726,990
Allowance for loan losses ..................................................................... (7,364) (2,685)
---------- ----------
Receivables held for sale, net ................................................................... 1,082,046 724,305
Other receivables ................................................................................ 95,984 117,678
Due from affiliates .............................................................................. 53,680 46,922
Interest-only and residual certificates .......................................................... 722,012 648,785
Capitalized servicing rights ..................................................................... 105,273 74,292
Premises and equipment, net of accumulated depreciation of $13,454
and $7,951 as of March 31, 1999 and 1998, respectively ........................................ 23,792 18,887
Cost in excess of equity acquired ................................................................ 85,388 55,738
Equity investments in unconsolidated subsidiaries ................................................ 4,978 53,660
Taxes receivable ................................................................................. 13,024 --
Other assets ..................................................................................... 52,076 35,928
---------- ----------
Total assets ............................................................................ $2,355,164 $2,808,579
========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Accounts payable ................................................................................. $ 90,412 $ 91,179
Securities sold but not yet purchased ............................................................ -- 847,470
Receivables sold under agreements to repurchase .................................................. 804,524 245,556
Due to affiliates ................................................................................ 8,918 163
Short-term debt .................................................................................. 512,797 366,104
Taxes payable .................................................................................... -- 81,190
Long-term debt ................................................................................... 699,225 499,553
Other liabilities ................................................................................ 31,316 30,427
---------- ----------
Total liabilities ....................................................................... 2,147,192 2,161,642
---------- ----------
Commitments and contingencies
Minority interest in subsidiaries ................................................................ 4,721 629
Stockholders' equity:
Preferred stock (par value $0.01 per share; 25,000,000 shares authorized; none
issued at March 31, 1999 and 1998) ......................................................... -- --
Common stock (par value $0.01 per share; 250,000,000 shares authorized;
47,657,539 shares issued at March 31, 1999 and 1998) ....................................... 477 477
Paid-in capital ............................................................................... 398,209 399,776
Retained earnings (accumulated deficit) ....................................................... (163,301) 262,956
Treasury Stock (910,169 and 201,209 shares of common stock, at cost, at
March 31, 1999 and 1998, respectively) ..................................................... (25,106) (5,794)
Deferred compensation ......................................................................... (7,028) (11,107)
---------- ----------
Total stockholders' equity .............................................................. 203,251 646,308
---------- ----------
Total liabilities and stockholders' equity .............................................. $2,355,164 $2,808,579
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
57
<PAGE>
CONTIFINANCIAL CORPORATION
Consolidated Statements of Income
for the years ended March 31, 1999, 1998 and 1997
(in thousands, except share data)
<TABLE>
<CAPTION>
Years Ended March 31,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Gross income:
Gain on sale of receivables ..................................................... $ 768 $ 311,606 $ 210,861
Commercial real estate valuation adjustments (Note 4) ........................... (167,927) -- --
Interest ........................................................................ 305,039 236,494 161,402
Net servicing income ............................................................ 99,544 90,509 46,340
Other income .................................................................... 15,767 21,553 9,227
----------- ----------- -----------
Total gross income ........................................................ 253,191 660,162 427,830
----------- ----------- -----------
Expenses:
Compensation and benefits ....................................................... 192,753 161,992 82,170
Interest ........................................................................ 233,598 165,904 120,636
Provision for loan losses ....................................................... 6,215 5,668 3,043
General and administrative ...................................................... 166,619 101,633 44,940
Other charges (Note 4) .......................................................... 147,621 -- --
----------- ----------- -----------
Total expenses ............................................................ 746,806 435,197 250,789
----------- ----------- -----------
Income (loss) before income taxes and minority interest ............................ (493,615) 224,965 177,041
Provision (benefit) for income taxes (Note 12) ..................................... (67,510) 91,149 71,341
----------- ----------- -----------
Income (loss) before minority interest ............................................. (426,105) 133,816 105,700
Minority interest in earnings (losses) of subsidiaries ............................. 152 (488) (304)
----------- ----------- -----------
Net income (loss) ......................................................... $ (426,257) $ 134,304 $ 106,004
=========== =========== ===========
Basic earnings (loss) per common share ............................................. $ (9.21) $ 2.90 $ 2.44
=========== =========== ===========
Diluted earnings (loss) per common share ........................................... $ (9.21) $ 2.86 $ 2.40
=========== =========== ===========
Basic weighted average number of shares
outstanding ............................................................ 46,283,940 46,330,810 43,361,253
=========== =========== ===========
Diluted weighted average number of shares
outstanding ............................................................ 46,283,940 46,992,449 44,152,343
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
58
<PAGE>
CONTIFINANCIAL CORPORATION
Consolidated Statements of Changes in Stockholders'
Equity for the years ended March 31, 1999, 1998
and 1997
(in thousands, except share data)
<TABLE>
<CAPTION>
Number of Shares
of Common Stock Retained Total
--------------------- Common Paid-in Earnings Treasury Deferred Stockholders'
Issued Treasury Stock Capital (Deficit) Stock Compensation Equity
------ -------- ----- ------- --------- ----- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1996 ......... 44,378,953 -- $444 $294,701 $ 22,648 $ -- $(22,974) $ 294,819
Net income ........................ -- -- -- -- 106,004 -- -- 106,004
Exercise of options ............... 11,382 -- -- 240 -- -- -- 240
Forfeiture of restricted stock .... -- 33,931 -- -- -- (712) 712 --
Restricted stock awards ........... -- (6,000) -- 88 -- 126 (214) --
Amortization of deferred
compensation .................... -- -- -- -- -- -- 6,721 6,721
---------- ------- ---- -------- --------- -------- -------- ---------
Balance at March 31, 1997 ......... 44,390,335 27,931 444 295,029 128,652 (586) (15,755) 407,784
Net income ........................ -- -- -- -- 134,304 -- -- 134,304
Common stock issued in public
offering ........................ 3,220,000 -- 32 100,746 -- -- -- 100,778
Repurchase of common stock ........ -- 193,700 -- -- -- (5,636) -- (5,636)
Exercise of options ............... 47,204 -- 1 994 -- -- -- 995
Forfeiture of restricted stock .... -- 15,978 -- -- -- (335) 335 --
Restricted stock awards ........... -- (36,400) -- 364 -- 763 (1,127) --
Amortization of deferred
compensation .................... -- -- -- 2,643 -- -- 5,440 8,083
---------- ------- ---- -------- --------- -------- -------- ---------
Balance at March 31, 1998 ......... 47,657,539 201,209 477 399,776 262,956 (5,794) (11,107) 646,308
Net loss .......................... -- -- -- -- (426,257) -- -- (426,257)
Repurchase of common stock ........ -- 806,300 -- -- -- (22,052) -- (22,052)
Forfeiture of restricted stock .... -- 2,065 -- (54) -- (10) 64 --
Restricted stock awards ........... -- (99,405) -- 325 -- 2,750 (3,075) --
Amortization of deferred
compensation .................... -- -- -- (1,838) -- -- 7,090 5,252
---------- ------- ---- -------- --------- -------- -------- ---------
Balance at March 31, 1999 ......... 47,657,539 910,169 $477 $398,209 $(163,301) $(25,106) $ (7,028) $ 203,251
========== ======= ==== ======== ========= ======== ======== =========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
59
<PAGE>
CONTIFINANCIAL CORPORATION
Consolidated Statements of Cash Flows
for the years ended March 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------------------------
Cash flows from operating activities: 1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss) ............................................................... $ (426,257) $ 134,304 $ 106,004
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Amortization of deferred compensation ........................................ 7,090 5,440 6,721
Depreciation and amortization ................................................ 18,037 9,106 4,536
Impairment of equity investments in and receivables from
unconsolidated subsidiaries (net of dividends received) ..................... 100,332 (4,919) --
Minority interest in earnings (losses) of subsidiaries ....................... 152 (488) (304)
Provision (benefit) for deferred taxes ....................................... (87,607) 72,449 5,680
Provision for loan losses .................................................... 6,215 5,668 3,043
Net changes in operating assets and liabilities:
(Increase) decrease in restricted cash ....................................... (2,925) (683) 156
(Increase) decrease in receivables held for sale:
Originations and purchases ................................................ (23,114,278) (23,644,616) (16,094,071)
Sales and principal repayments ............................................ 22,748,593 23,544,786 15,774,222
(Increase) decrease in due from affiliates and other receivables ............. (27,121) (78,071) (34,858)
Increase in interest-only and residual certificates .......................... (73,227) (203,780) (150,701)
Increase in capitalized servicing rights ..................................... (30,981) (44,939) (17,664)
Increase (decrease) in accounts payable ...................................... (15,647) 17,359 (5,612)
(Increase) decrease in securities purchased under agreements to resell
less the increase (decrease) in securities sold but not yet purchased ..... 10,179 (11,348) 315
Increase (decrease) in trade receivables sold under agreements to
repurchase ................................................................ 558,968 (5,983) 251,539
Increase (decrease) in taxes payable ......................................... 302 6,613 13,520
Other, net ................................................................... (14,149) 844 (15,950)
------------ ------------ ------------
Net cash used in operating activities ..................................... (342,324) (198,258) (153,424)
------------ ------------ ------------
Cash flows from investing activities:
Acquisitions of majority-owned subsidiaries (net of cash acquired) ........... (25,203) (10,315) (28,277)
Acquisitions of minority-owned subsidiaries .................................. (1,565) (44,385) --
Purchase of premises and equipment, net ...................................... (12,585) (13,922) (3,535)
Proceeds from sale of unconsolidated subsidiaries 1,857 -- --
------------ ------------ ------------
Net cash used in investing activities ..................................... (37,496) (68,622) (31,812)
------------ ------------ ------------
</TABLE>
(continued)
60
<PAGE>
CONTIFINANCIAL CORPORATION
Consolidated Statements of Cash Flows,
continued for the years ended March 31,
1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------------------------
1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from financing activities:
Increase (decrease) in due to affiliates, net ....................... 8 (48,156) 17,972
Increase (decrease) in notes payable to affiliates .................. -- -- (324,000)
Increase in short-term debt ......................................... 146,332 340,573 25,000
Increase in long-term debt .......................................... 199,778 714 498,423
Proceeds from exercise of employee stock options .................... -- 995 240
Debt issuance costs ................................................. (4,766) -- (12,982)
Repurchase of common stock .......................................... (22,052) (5,636) --
Net proceeds from common stock offering ............................. -- 100,778 --
Other, net .......................................................... (229) -- (696)
-------- -------- ---------
Net cash provided by financing activities ....................... 319,071 389,268 203,957
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents ...................... (60,749) 122,388 18,721
Cash and cash equivalents at beginning of year ........................... 173,588 51,200 32,479
-------- -------- ---------
Cash and cash equivalents at end of year .................................. $112,839 $173,588 $ 51,200
======== ======== =========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
61
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
1. FINANCIAL RESULTS AND LIQUIDITY
During fiscal 1999, ContiFinancial Corporation's ("ContiFinancial" or the
"Company") operations were significantly and adversely affected by difficult
capital market conditions that commenced in the second quarter, with the effects
of these events, and their repercussions, continuing to affect the Company's
results in the third and fourth quarters. The Company incurred a net loss of
$426,257 and suffered a critical loss of liquidity in fiscal 1999 that made it
impossible for the Company to continue financing its diversified product lines
and investments. As a result, the Company has restricted its focus primarily to
originating and servicing non-conforming home equity loans.
The Company is operating on a negative cash flow basis and is dependent on
various financing sources for its continued operations. In order to fund new
loans and asset originations and purchases, the Company is dependent on its
Purchase and Sale Facilities and Repurchase Agreements (collectively, the
"Warehouse Facilities"). The Company is also dependent on continued access to
its Revolving Credit Facility and Commercial Paper Program (collectively, the
"Bank Facilities"). The Company is required to comply with various financial
covenants under its outstanding long-term debt, Bank Facilities and Warehouse
Facilities. As of March 31, 1999, the Company's leverage ratio exceeded the
leverage ratio test under the covenants of its outstanding long-term debt. As a
result, the Company is prevented from issuing additional unsecured debt until
its leverage ratio is below such test. Additionally, the Company would not have
been in compliance with several of the financial covenants of the Bank
Facilities and Warehouse Facilities at December 31, 1998 and March 31, 1999 had
these agreements not been amended. The Bank Facilities expire in August 1999,
and the Warehouse Facilities expire at various times from July 1999 through
December 1999.
The Company's continued operations are dependent on the extension, renegotiation
or refinancing, as well as availability through scheduled maturity of the Bank
and Warehouse Facilities. The Company's ability to extend, renegotiate or
refinance its facilities depends on the successful completion of a transaction
with a buyer or equity investor. As a result, there is substantial doubt about
the Company's ability to continue as a going concern. The accompanying
consolidated financial statements have been prepared assuming the Company will
continue as a going concern. Accordingly, the financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
In order to address this issue, the Company has been seeking a financially
strong acquirer or equity investor who can provide the necessary financing or
provide the Company's lenders with the requisite guarantees. The previously
announced discussions with Residential Funding Corporation, a subsidiary of
General Motors Acceptance Corporation, with respect to an acquisition of the
Company have terminated. The Company is in discussions with others to act as an
acquiror or equity investor and has commenced negotiations for a restructuring
with the providers of its Bank Facilities and Warehouse Facilities.
2. NATURE OF BUSINESS
The Company was incorporated in Delaware on September 29, 1995. The Company,
together with its subsidiaries, engages in the consumer finance business by
62
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
originating and servicing primarily non-conforming home equity loans ("HELs").
Through ContiMortgage Corporation ("ContiMortgage") and ContiWest Corporation
("ContiWest"), the Company is an originator, purchaser, seller, securitizer and
servicer of home equity loans made to borrowers whose borrowing needs may not be
met by traditional financial institutions due to credit exceptions or other
factors. The loans are sold to whole loan investors or securitized in the form
of Real Estate Mortgage Investment Conduits ("REMICs"), owner trusts or grantor
trusts. All of the securitized loans are sold on a servicing retained basis. The
outstanding principal balance of ContiMortgage's mortgage servicing portfolio at
March 31, 1999 and 1998 was $12,966,131 and $10,135,785, respectively.
Historically, the Company operated as a more diversified consumer and commercial
financial intermediary that originated, securitized and serviced various loan
products in addition to HELs. These products included commercial real estate
loans, high loan-to-value mortgage loans, non-prime auto loans, charged-off
consumer receivables, equipment leases and franchise loans. In fiscal 1999,
severe turbulence in the capital markets (see Note 1 - Financial Results and
Liquidity) caused the Company to incur significant losses and resulted in a
critical loss of liquidity that made it impossible for the Company to continue
financing its diversified product lines. As a result, the Company had to
restrict its focus primarily to the core HEL business and reduce or eliminate
its involvement with most other loan products.
ContiMortgage is subject to minimum capital requirements imposed by the states
in which it operates, with the highest being $250. In addition, ContiMortgage is
required by the U.S. Department of Housing and Urban Development to maintain
minimum capital of $250 plus an amount based on the volume of Federal Housing
Authority business. Furthermore, ContiMortgage is required by the Federal
National Mortgage Association ("FNMA") to maintain minimum capital of $250 plus
0.20% of the principal balance of the portfolio being serviced for FNMA.
ContiFinancial Services is registered as a broker/dealer with the Securities and
Exchange Commission ("SEC") and is subject to the SEC's Uniform Net Capital Rule
15c3-1, under which the ratio of aggregate indebtedness to net capital, as
defined, may not exceed 15 to 1. At March 31, 1999, ContiFinancial Services' net
capital, as defined, totaled $2,335 which was $2,235 in excess of the SEC
regulatory requirement of $100; its ratio of aggregate indebtedness to net
capital was .0112 to 1.
The Company's business may be affected by many factors including real estate and
other asset values, the level of and fluctuations in interest rates, changes in
the securitization market and competition. In addition, the Company's operations
require continued access to short- and long-term sources of cash.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
Company and its majority- owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities and results of operations. Actual
results could differ from these estimates.
63
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
Income Recognition
See Note 5 for a discussion of "Gain on Sale of Receivables and Interest-Only
and Residual Certificates."
Net servicing income consists of servicing fees and prepayment penalties
collected from borrowers, and capitalized servicing activity. The fee and
prepayment penalty income component represents cash income earned from the
servicing of loans in REMICs, other trusts and other servicing retained
portfolios and is primarily based on the level of assets serviced and the types
of ancillary fee income associated with the loans. 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 both premiums paid for prepayment penalties acquired and amortization of
capitalized servicing from prior securitizations.
Interest income is recorded as earned. Interest income primarily represents the
interest earned on the loans ("Receivables") during the warehousing period (the
period prior to their securitization or sale) and the accrual of interest income
on the interest-only and residual certificates ("ESR"). Receivables are placed
on non-accrual status when they become sixty days past due. When a Receivable is
classified as non-accrual, the accrual of interest income ceases, and all
interest income previously accrued and unpaid on such Receivable is reversed.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid debt instruments purchased with an
original maturity of no more than three months to be cash equivalents.
Restricted cash includes amounts segregated in connection with the sale of
mortgage loans with limited recourse and amounts specifically designated for pay
downs of warehouse financing.
Hedging Interest Rate Risk
See Note 14 for a discussion of the Company's hedging activities.
Receivables Held for Sale/Receivables Sold Under Agreements to Repurchase
Receivables held for sale include mortgages, loans, leases and other assets the
Company plans to sell or securitize, and other related assets. Receivables held
for sale are stated at the lower of aggregate cost or market. Market value is
determined by outstanding commitments from investors or current investor yield
requirements, adjusted for unrealized hedging gains or losses, as appropriate.
Based on current purchases of whole loans, the carrying amount of receivables
held for sale is a reasonable estimate of fair value.
Receivables sold under agreements to repurchase are recorded at the amounts at
which the receivables will be repurchased, plus accrued interest. The agreements
mature through December 31, 1999 and, at March 31, 1999 had interest rates
ranging from 5.64% to 7.45%.
On January 1, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 125 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities" ("SFAS 125") which addresses the
accounting for transfers of financial assets in which the transferor has some
64
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
continuing involvement either with the assets transferred or with the
transferee. A transfer of financial assets in which the transferor surrenders
control over those assets is accounted for as a sale to the extent that
consideration other than beneficial interest in the transferred assets is
received in exchange. SFAS 125 requires that liabilities and derivatives
incurred or obtained by transferors as part of a transfer of financial assets be
initially measured at fair value, if practicable. In addition, SFAS 125 requires
that servicing assets and liabilities be subsequently amortized over their
estimated life and assessment of asset impairment be based on such assets' fair
value.
Allowance for Loan Losses
The allowance for loan losses represents an amount considered by management to
be adequate to cover estimated losses and valuation adjustments related to the
balance of mortgage and non-prime auto receivables held for sale and mortgage
receivables sold with limited recourse. The allowance for loan losses is based
upon periodic analysis of the portfolio, economic conditions and trends,
historical credit loss experience, borrowers' ability to repay and collateral
values. The Company's charge-off policy is based on a review of each individual
receivable.
Other Receivables
Other receivables consist primarily of servicing advances, accrued interest on
loans and other receivables, servicing income receivables and, in fiscal 1998,
advances made to Strategic Alliances in the form of working capital lines and
subordinated debt.
Capitalized Servicing Rights
Upon sale or securitization of servicing retained receivables, the fair value
associated with the right to service such receivables is capitalized. The
Company determines fair value based on the present value of estimated net future
cash flows relating to servicing. Net future cash flows consist of servicing
fees received relating to sold receivables and prepayment penalties, where
applicable, reduced by direct servicing expenses. Capitalized servicing rights
are amortized in proportion to and over the period of estimated net future
servicing cash flow.
The Company capitalized $76,603 and $63,609 of servicing rights during the
fiscal years ended March 31, 1999 and 1998, respectively. During the same
periods, amortization of these assets was $45,622 and $18,670, respectively. At
March 31, 1999 and 1998, the carrying value of capitalized servicing rights
approximated fair value. The Company periodically reviews capitalized servicing
rights for valuation impairment. This review is performed on a disaggregated
basis for the predominant risk characteristics of the underlying loans which are
loan type, loan-to-value ratio and the strength of the prepayment penalty. Due
to the relatively short average life of the loan products, they are not as
sensitive to changes in interest rates as traditional mortgage products. As
such, the Company does not consider interest rates alone to be a predominant
risk characteristic for purposes of valuation impairment. Impairment is
recognized in a valuation allowance for each disaggregated stratum in the period
of impairment.
Premises and Equipment, Net of Accumulated Depreciation
Premises and equipment are carried at cost and depreciated on a straight-line
basis over the estimated useful lives of the assets. Leasehold improvements are
65
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
amortized over the lesser of the useful lives of the improvements or term of the
leases. The estimated useful lives of premises and equipment and leasehold
improvements are generally between two to twelve years.
Cost in excess of equity acquired
Cost in excess of equity acquired represents the excess of investments in
subsidiaries over the net asset value at acquisition, adjusted for subsequent
amortization. Amortization is recorded on a straight line basis over the
estimated useful life of the capitalized asset, based on the nature of the
business acquired, but not to exceed 25 years. The Company uses discounted
income projections for the respective subsidiary over the remaining life of the
assets to evaluate for possible impairment. During fiscal 1999, the Company
recognized impairment losses of $29.9 million relating to certain equity
investments in unconsolidated subsidiaries, as reflected in Other charges in the
accompanying Consolidated Statement of Income. See Note 4 for further
discussion.
Other Assets
Other assets is primarily comprised of deferred bond issuance costs, margin and
other deposits, marketable securities and prepaid expenses.
Stock Based Compensation
In October 1995, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") which was
effective beginning in fiscal 1997. SFAS 123 allows companies either to continue
to account for stock-based employee compensation plans under existing accounting
standards or to adopt a fair value based method of accounting for stock options
as compensation expense over the service period (generally the vesting period)
as defined in the standard. SFAS 123 requires that if a company continues to
account for stock options under Accounting Principles Board ("APB") Opinion No.
25, it must provide pro forma net income and earnings per share information "as
if " the new fair value approach had been adopted. The Company continues to
account for stock based compensation under APB Opinion No. 25.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
("SFAS 130") which is effective for fiscal years beginning after December 15,
1997. SFAS 130 establishes standards for reporting comprehensive income and its
components in a full set of general-purpose financial statements. SFAS 130
requires that all components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The adoption of this standard did not have an impact on the
Company's financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for reporting information about operating segments in annual financial
statements and in interim financial reports. The Company's business is domestic
in nature with no operations outside the United States. The Company utilizes a
66
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
common support platform for management of its operations, consisting of shared
management strategies. Management views its operations as one segment;
accordingly, there are no specific operating or geographic disclosures required
pursuant to SFAS 131.
In June 1998, the FASB 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, 2000. 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
Consolidated Balance Sheets and measure them at fair value. The Company is
currently evaluating the impact of SFAS 133 on its financial position and
results of operations.
In October 1998, the FASB issued SFAS No. 134 "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" ("SFAS 134"). SFAS 134 requires that after the
securitization of a mortgage loan held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed security as a trading
security. After the securitization of mortgage loans held for sale, an entity
engaged in mortgage banking activities should classify the resulting
mortgage-backed securities or other retained interests based on its ability and
intent to sell or hold those investments. SFAS 134 is effective for the first
fiscal quarter beginning after December 15, 1998. The Company adopted SFAS 134
on January 1, 1999. The adoption of this Statement did not have an impact on the
Company's financial position and results of operations.
Earnings Per Common Share
Common shares issued by the Company plus the effect of equivalent common shares
under the restricted stock awards and stock option plans are included in basic
and diluted earnings per common share, as appropriate, from the date of issuance
(see Notes 6 and 11). Basic and diluted earnings per share are computed using
the weighted average number of shares outstanding in accordance with SFAS No.
128 "Earnings Per Share," adopted in fiscal 1998. The effects of this statement
have been applied to fiscal 1997 results. Diluted earnings per share equals
basic earnings per share in fiscal 1999, as the dilutive calculation would have
an antidilutive impact as a result of the net loss incurred in that fiscal year.
Consolidated Statements of Cash Flows--Supplemental Disclosures
Total interest paid was $222,453, $164,772 and $119,223 for the years ended
March 31, 1999, 1998, and 1997, respectively. Total income taxes paid were
$20,298, $59,684 and $45,624 for the years ended March 31, 1999, 1998 and 1997,
respectively. Through June 4, 1997, federal income taxes were paid on a current
basis to Continental Grain in accordance with the provisions of the Tax Sharing
Agreement (see Note 9). As such, these amounts were included in total income
taxes paid for the year ended March 31, 1997.
Reclassifications
Certain reclassifications of prior years' amounts have been made to conform to
the current year presentation.
67
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
4. COMMERCIAL REAL ESTATE VALUATION ADJUSTMENTS AND OTHER CHARGES
The Company's operations were significantly and adversely affected by difficult
capital market conditions that commenced in the second quarter of fiscal 1999,
with the effects of these events, and their repercussions, continuing to affect
the Company's results in the third and fourth quarters. During the second
quarter, fixed income investors purchased large amounts of U.S. Treasury
securities in a "flight to quality," causing U.S. Treasury yields to decrease
significantly. As investor demand for U.S. Treasury securities increased, the
demand for other fixed income securities declined dramatically, causing yields
on such other securities to rise relative to U.S. Treasury securities. Since
almost all of the Company's loan originations were ultimately funded by the
issuance of securities backed by the loans it originates (securitization), these
unusual interest rate movements affected the market value of all of the
Company's originations, causing significant losses and leading to a critical
loss of liquidity.
These market disruptions affected many participants in the commercial real
estate and sub-prime home equity industries, including several of the Company's
majority- and minority-owned affiliates. The worst affected were those
businesses whose products had a longer average life (e.g., commercial
mortgages), making those products more sensitive to changes in interest rates,
and those businesses that dealt in niche products with limited funding options
outside of securitization (e.g., high loan-to-value mortgages). The working
capital required to operate such businesses increased dramatically as warehouse
lenders either abandoned the businesses entirely or significantly increased
their margin requirements. Due to the Company's diminished liquidity position,
it was forced to terminate or reduce the scope of its involvement in many
business relationships at significant losses.
In the Company's Consolidated Statements of Income for the year ended March 31,
1999, losses resulting from these adverse developments are included in
Commercial real estate valuation adjustments in the amount of $167.9 million and
Other charges in the amount of $147.6 million. Commercial real estate valuation
adjustments represent losses incurred in liquidating the Company's portfolio of
commercial real estate mortgage loans. At September 30, 1998, when the Company
decided to discontinue its commercial real estate lending activities, the
Company had commercial real estate loans totaling $970.4 million either held for
sale on its Consolidated Balance Sheet or sold with limited recourse under the
Company's asset purchase and sale facilities (the "Purchase and Sale
Facilities"). Other charges represents the write-down of investments in and
receivables from affiliated companies and Strategic Alliance clients and costs
incurred in terminating or reducing the scope of certain business activities and
restructuring the remaining businesses. Details of these adjustments are
provided in the table below:
68
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
<TABLE>
<CAPTION>
Year Ended
March 31, 1999
--------------
<S> <C>
Commercial real estate valuation adjustments:
Realized losses ............................................................... $109,768
Unrealized losses ............................................................. 58,159
--------
Total Commercial real estate valuation adjustments ................................. 167,927
--------
Other charges:
Write-offs and reserves on receivables from affiliates and Strategic
Alliance clients ............................................................ 91,921
Write-downs or losses on the disposition of investments in affiliates ......... 38,117
Severance for approximately 310 terminated employees .......................... 6,892
Exit costs (excluding severance) for reduction of commercial real estate
activity .................................................................... 5,764
Other restructuring costs ..................................................... 4,927
--------
Total other charges ................................................................ 147,621
--------
Total commercial real estate valuation adjustments and other charges ............... $315,548
========
</TABLE>
The commercial real estate realized losses of $109,768 consisted of $80,574 from
hedge losses and $29,194 from sales of commercial loans. 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. The Company hedged its
resulting exposure to absolute movement in interest rates, typically through the
short sale of U.S. Treasury securities, interest rate futures contracts or
options on U.S. Treasury securities. 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, the market value of the loans declined due to a
decreased demand for the securities backed by the loans which in turn caused a
sudden over supply in the whole loan market. Due to the decline in the market
value of the loans, the Company's lenders made margin calls for additional cash
collateral. To satisfy the margin calls, the Company was forced to sell loans at
executions near the bottom of the market and close out the related hedge
positions at a loss.
At March 31, 1999, the Company had remaining net commercial real estate loans of
$257.6 million included in Receivables held for sale in the accompanying
Consolidated Balance Sheets and $217.4 million of commercial real estate loans
sold with limited recourse under the Company's Purchase and Sale Facilities for
a total exposure, on- and off-balance sheet, of $475 million. As of June 15,
1999, the remaining commercial real estate loans exposure had been reduced to
approximately $154 million. In addition, as further explained below, at March
31, 1999, the Company had market exposure related to $222 million of commercial
real estate loans owned by Red Mountain Funding, L.L.C. ("RMF"), a commercial
affiliate. As of June 15, 1999, the net balance remaining of the RMF portfolio
had been reduced to $133 million.
The largest component of Other charges is $65.0 million of losses related to the
Company's high loan-to-value ("HLTV") mortgage business. This amount includes
69
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
the write-off of the Company's 24% equity investment in Empire Funding Holding
Corporation ("EFHC") in the amount of $27.6 million, and additional write-downs
of $37.4 million related to receivables from EFHC. Due to the adverse market
conditions which commenced in the second quarter of fiscal 1999, the
securitization of HLTV mortgage loans began to require large initial cash
investments, and warehouse financing for HLTV mortgage loans became very costly
and difficult to obtain. Because the Company no longer had the liquidity to
finance EFHC's operations, the Company entered into negotiations to terminate
its financial obligations to EFHC. In April 1999, the Company finalized and
executed an agreement with EFHC pursuant to which, among other things, the
Company relinquished all ownership interests in EFHC, and EFHC agreed to
transfer to the Company, subject to required third-party consents, certain
servicing rights, residual interests and interest-only strips (collectively, the
"Residual Interests") in exchange for the complete satisfaction of certain
outstanding debts and the termination of the related credit facilities. The fair
value of the Residual Interests was determined by the Company to be
approximately $72.7 million as of March 31, 1999, which value was the primary
basis for measuring the impairment of receivables from EFHC as of that date. As
a part of the agreement with EFHC, the Company was also required to provide EFHC
with a $25 million warehouse line of credit with a term of six months.
Also included in Other charges is $21.4 million of losses on investments and
receivables related to affiliates and Strategic Alliance clients engaged in the
home equity business, and a $27.2 million reserve for margin call advances paid
on behalf of RMF to a warehouse lender. With regard to the RMF margin advances,
because the Company would have to fund additional margin calls if such calls
were to be made, and because RMF does not have the financial resources to repay
the Company for the advances, the Company is exposed to market risk on the
entire balance of RMF's financed portfolio, which was $222 million at March 31,
1999.
5. GAIN ON SALE OF RECEIVABLES AND INTEREST-ONLY AND RESIDUAL CERTIFICATES
Gain on sale of receivables
A major source of income for the Company is the recognition of gains in
connection with securitizations and whole loan sales. In a typical
securitization, the Company sells loans or other assets to a special purpose
entity, established for the limited purpose of buying the assets from the
Company and transferring such assets to a trust, most often a REMIC. The REMIC
issues interest-bearing securities that are collateralized by the underlying
pool of mortgage loans or other assets, as the case may be. The proceeds are
used as consideration to purchase the assets from the Company. Typically, the
securities are sold at an amount that is the same (or nearly the same) as the
underlying mortgage loan amounts, and the Company retains a residual interest
that represents its right to receive, over the life of the securitization, the
excess of the weighted average coupon on the loans securitized over the sum of
the interest rate on the securities sold, a normal servicing fee, a trustee fee,
an insurance fee (where applicable) and the credit losses relating to the loans
or other assets securitized (the "Excess Spread Receivable" or "ESR"). In
accordance with SFAS No. 125, the present value of the estimated ESR is treated
as additional sale proceeds and included in Gain on Sale of Receivables at the
time of securitization. In a securitization, the Company may also sell a portion
of the ESR in the form of interest-only securities. In a whole loan sale, the
Company sells its entire interest in the loans directly to an investor, with all
proceeds realized in cash at the time of sale. Gain on sale of receivables also
includes any adjustments to ESR that may result from the quarterly fair value
evaluation, and also includes points, origination fees and direct origination
costs associated with broker and direct retail mortgage originations; purchase
premiums associated with the acquisition of whole loans from correspondents;
hedge results; transaction costs; and fees earned in connection with
securitzation services provided to Strategic Alliance clients. All such fees and
70
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CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
costs are recognized in Gain on Sale of Receivables at the time the related
loans are sold or securitized. See Note 14 for a discussion of the impact of
hedging activities on gain on sale of receivables.
Interest-only and residual certificates
ESR, reported as "Interest-only and residual certificates" in the accompanying
Consolidated Balance Sheets, is the present value of the retained residual
interest (as described above) that the Company expects to receive over the life
of a securitization, taking into consideration estimated prepayment speeds and
credit losses, and discounted at a rate which the Company believes is an
appropriate risk-adjusted market rate of return for the ESR asset. ESR is
realized over the life of the securitization as cash distributions are received
from the trust.
In accordance with SFAS No. 134, "Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise," the Company continues to classify ESR as "trading
securities". As such, they are carried at fair value in the Consolidated Balance
Sheets. Unrealized changes in ESR fair value are included in Gain on sale of
receivables on the accompanying Consolidated Statements of Income in the period
of the change.
At March 31, 1999 and 1998, the Company's ESR portfolio was comprised of the
following:
March 31, March 31,
1999 1998
---- ----
Home Equity:
ContiMortgage/ContiWest $611,320 $555,884
Other Servicers ............................ 24,800 37,428
-------- --------
Total Home Equity .. 636,120 593,312
Home Improvement ............................... 4,046 7,919
Commercial Real Estate ......................... 6,263 8,233
Auto ........................................... 69,804 28,223
Leases ......................................... 4,615 8,960
Franchise ...................................... 1,164 2,138
-------- --------
Total ESR Portfolio $722,012 $648,785
======== ========
ESR fair value assumptions
The Company has, from time to time, completed sales of ESR as either sales with
limited recourse or Net Interest Margin Securities ("NIMS") sales. Nevertheless,
there is only a limited market for the sale of ESR. Consequently, the Company
estimates the fair value of ESR through the application of a discounted cash
flow analysis, which requires the use of various assumptions. A significant
factor affecting the level of estimated future ESR cash flows is the rate at
which the underlying principal of the securitized loans is reduced. Prepayments
represent principal reductions in excess of contractually scheduled reductions;
prepayment speeds are generally expressed as an annualized Conditional (or
Constant) Prepayment Rate ("CPR"). Estimated future CPR is a significant
71
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
assumption in the determination of ESR fair value. Additional assumptions
include estimated future credit losses and the discount rate.
The Company continuously monitors the fair value of ESR and reviews the factors
expected to influence future CPR and credit losses. In developing assumptions
regarding estimated future CPR, the Company considers a variety of factors, many
of which are interrelated. These include, among other things, historical
performance, characteristics of borrowers (e.g. credit quality and loan-to-value
relationships) and market factors that influence competition. If changes in
assumptions regarding estimated future CPR or credit losses are necessary, ESR
fair value is adjusted accordingly.
Assumptions regarding future CPR and credit losses are subject to volatility
that could materially affect operating results. Both the amount and timing of
estimated ESR cash flows are dependent on the performance of the underlying
loans, and actual cash flows may vary significantly from expectations. If actual
prepayments or credit losses were to exceed the assumptions used to determine
ESR fair value, the ESR carrying value would be reduced through a charge to
earnings, which could cause the Company to report losses in future periods.
Similarly, actual prepayments or credit losses that are less than the
assumptions used to determine ESR fair value could result in an increase in ESR
carrying value and earnings in future periods. See further discussion under "ESR
Fair Value Adjustments" below.
The following table presents historical data as well as estimated future CPR for
ContiMortgage/ContiWest related ESR, which represent 85% of the Company's total
ESR value at March 31, 1999.
<TABLE>
<CAPTION>
REMICs by Year of Issue (a)
---------------------------
(dollars in millions)
1995 and
earlier 1996 1997 1998 1999 Total
------- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Pool balances:
Original .............................. $2,368 $2,030 $3,454 $6,150 $6,099 $20,101
At March 31, 1999 ..................... $ 510 $ 582 $1,323 $3,899 $5,653 $11,967
Fair value of ESR ........................ $ 22 $ 30 $ 64 $ 224 $ 271 $ 611
CPR:
Actual life-to-date ................... 24.5% 28.7% 31.9% 26.3% 10.0% 22.2%
Estimated for the remaining
pool over its estimated
remaining life ........................ 26.2% 27.1% 26.9% 27.9% 29.2% 28.3%
</TABLE>
(a) This table includes ContiMortgage/ContiWest REMICs, based on fiscal years
ended March 31.
In developing assumptions regarding estimated future CPR, the Company considers
a variety of factors, many of which are interrelated. The Company's CPR
assumptions are subject to review and potential adjustment each quarter. CPR, by
its nature, tends to be volatile, monthly variations in either direction may not
be indicative of longer term trends. These include, among other things,
historical performance, characteristics of borrowers, and market factors that
influence competition.
72
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
The Company's weighted average assumption for estimated future CPR for
ContiMortgage/ContiWest REMICs was increased during fiscal 1999 from 27% to 28%.
In fiscal 1999, ESR fair value write-downs of $81.4 million were recorded
related to accelerated prepayment experience in the ContiMortgage/ContiWest ESR
portfolios. See "ESR Fair Value Adjustments" below.
Like prepayment assumptions, there are a variety of interrelated factors that
the Company considers in determining future credit loss assumptions, such as
historical experience, default frequency, loss severity and the length of the
foreclosure and liquidation process. The following table presents historical
credit loss information, as well as estimated future credit losses, for
ContiMortgage/ContiWest REMICs, including loans and properties purchased out of
the REMICs. Annual loss rates represent losses as a percentage of the average
loan principal outstanding for such year.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Annualized Loss rates as a percentage of average pool balances:
- ---------------------------------------------------------------
Weighted average life-to-date loss rate as of fiscal year end ..................... 0.71% 0.47%
Estimated loss rate over remaining REMIC lives .................................... 0.98% 0.62%
Aggregate losses as a percentage of original pool balances:
- -----------------------------------------------------------
Actual life-to-date (including losses on loans purchased out of REMICs) ........... 1.04% 0.51%
Estimated over entire life (i.e., historical plus future losses) .................. 2.91% 1.84%
Estimated future credit losses (undiscounted) ........................................ $375 million $185 million
</TABLE>
In fiscal 1999, ESR fair value write-downs of approximately $191 million were
recorded related to credit losses in ContiMortgage/ContiWest related ESR
portfolios. See "ESR Fair Value Adjustments" below.
The Company determines the discount rate utilized in determining fair value by
selecting a rate that it believes is commensurate with the risks involved. The
Company recognizes that the ESR discount rate when interacting with the other
two assumptions, 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. The future
cash flows estimated as of March 31, 1999 and March 31, 1998, taking into
consideration estimated prepayment rates and credit losses, were discounted at
rates of 12% and 10%, respectively, to arrive at the fair value amounts
presented in the accompanying Consolidated Balance Sheets. In fiscal 1999, ESR
fair value write-downs of $57.4 million were recorded related to the change in
discount rate from 10% to 12%. See "ESR Fair Value Adjustments" below for
further discussion.
ESR fair value adjustments
The Company recorded negative fair value adjustments included in gain on sale of
receivables of $328.7 million in fiscal 1999 and $63.3 million in fiscal 1998.
The fiscal 1998 fair value adjustments primarily reflected accelerated
prepayments in the ContiMortgage/ContiWest portfolio. The following table
73
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
presents the components of the ESR fair value adjustments of $328.7 million
included in gain on sale of receivables for fiscal 1999:
ESR Fair Value Adjustments for Fiscal 1999 (in thousands):
<TABLE>
<CAPTION>
ContiMortgage Auto Other Total
------------- ---- ----- -----
<S> <C> <C> <C> <C>
Actual and future credit losses .................. $(191,051) $ (9,028) $(12,078) $(212,157)
Actual and future prepayments .................... (81,380) -- -- (81,380)
Change in discount rate .......................... (52,198) (2,885) (2,349) (57,432)
Changes in interest rates and other factors ...... 26,280 -- (4,000) 22,280
--------- -------- -------- ---------
Total Fiscal 1999 ...................... $(298,349) $(11,913) $(18,427) $(328,689)
========= ======== ======== =========
</TABLE>
The Company believes its interest-only and residual certificates are fairly
valued at March 31, 1999 but can provide no assurances that future prepayment
and loss experience or changes in the required market discount rate will not
necessitate additional write-downs. Such write-downs would reduce the income of
future periods and could cause the Company to report net losses for such
periods.
Sensitivity of changes in ESR fair value assumption
If actual prepayments, credit losses or discount rate 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
ContiMortgage/ContiWest'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 fair value for ContiMortgage/ContiWest related ESR
while keeping the absolute value of the other two assumptions constant. The
impact of changes in these assumptions are not linear. As of March 31, 1999,
changes in the assumptions would have approximately the following impact on fair
value:
Factor Change Fair value impact
------ ------ -----------------
Annual CPR +100 basis points $(30 million)
Annual CPR -100 basis points $ 31 million
Annual credit losses + 10 basis points $(32 million)
Annual credit losses - 10 basis points $ 32 million
Discount rate +100 basis points $(25 million)
Discount rate -100 basis points $ 27 million
74
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
6. STOCKHOLDERS' EQUITY
On June 4, 1997, the Company completed a primary offering of 2,800,000 shares of
common stock; an additional 420,000 shares were issued to cover over-allotments.
The proceeds of the offering to the Company, net of expenses and underwriting
discount, were $100.8 million. The net proceeds were used for general corporate
purposes including funding loan originations and purchases, supporting
securitization transactions (including the retention of ESR), supporting other
working capital needs and financing certain strategic acquisitions. The offering
reduced Continental Grain's ownership of the Company from 81% to 75% and caused
the vesting of certain outstanding employee stock options.
The following table presents a reconciliation of basic and diluted earnings
(loss) per common share.
<TABLE>
<CAPTION>
Year ended March 31,
--------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) ............................................ $ (426,257) $ 134,304 $ 106,004
=========== =========== ===========
Basic weighted average number of
shares outstanding ......................................... 46,283,940 46,330,810 43,361,253
Adjustments for dilutive shares outstanding:
Restricted shares .......................................... -- 194,190 246,576
Options .................................................... -- 467,449 544,514
----------- ----------- -----------
Diluted weighted average number of
shares outstanding ......................................... 46,283,940 46,992,449 44,152,343
=========== =========== ===========
Earnings (loss) per common share:
Basic ................................................... $ (9.21) $ 2.90 $ 2.44
=========== =========== ===========
Diluted ................................................. $ (9.21) $ 2.86 $ 2.40
=========== =========== ===========
</TABLE>
For the year ended March 31, 1999, diluted earnings per share equals basic
earnings per share, as the dilutive calculation would have an antidilutive
impact as a result of the net loss incurred in that fiscal year. Options to
purchase 295,000 and 347,319 shares of common stock, at weighted average strike
prices of $31.78 and $30.88, were outstanding during the third and fourth
quarters of fiscal 1998, respectively, but were not included in the computation
of diluted earnings per 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 fiscal
1998, the Company repurchased 193,700 shares at an average cost of $29.07 per
share. During fiscal 1999, 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").
75
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
7. ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses and related additions and deductions to the
allowance for the years ended March 31, 1999, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
Balance at Reversals
Year Ended Beginning Acquired from Additions Charged and Balance at End
March 31, of Year Acquisitions to Expenses Charge-offs of Year
- ---------- ---------- ------------- ----------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
1999 $2,685 $ -- $6,215 $(1,536) $7,364
1998 3,747 654 5,668 (7,384) 2,685
1997 1,824 1,547 3,043 (2,667) 3,747
</TABLE>
8. ACQUISITIONS
On November 8, 1996, the Company purchased 100% of the outstanding stock of
California Lending Group, Inc., d/b/a United Lending Group ("ULG"), a west
coast-based home equity lender specializing in retail originations via direct
mail and telemarketing throughout the United States.
On November 15, 1996 ContiMortgage purchased 100% of Royal Mortgage Partners,
L.P., d/b/a Royal MortgageBanc ("Royal"), a California-based broker and retail
originator of fixed and adjustable rate home equity loans.
On November 21, 1996, the Company purchased 53.5% of the common stock of Triad
Financial Corporation ("Triad"), an additional 2.5% of the common stock in
January 1997 and the remaining 44% of the common stock in March 1998. Triad is a
California-based auto finance company specializing in origination of non-prime
auto finance contracts for used and new vehicles. Subsequent to March 31, 1999,
the Company sold its interest in Triad. See Note 16 for further discussion.
On December 16, 1996, ContiMortgage purchased 100% of the outstanding stock of
Resource One Consumer Discount Company, Inc. ("Resource One"), a
Pennsylvania-based home equity lender specializing in retail origination via
direct mail, television and telemarketing.
On October 1, 1997, ContiMortgage purchased 100% of the equity of Fidelity
Mortgage Decisions Corporation ("Fidelity"). Fidelity, headquartered in
Lincolnshire, Illinois, is a correspondent and retail originator of fixed and
adjustable rate home equity loans.
On January 8, 1998, ContiMortgage purchased 100% of the equity of Crystal
Mortgage Company, Inc. ("Crystal") and its subsidiary Lenders M.D., Inc.
("Lenders"). Crystal is a retail mortgage broker, and Lenders is a mortgage
bank. Both Crystal and Lenders are based in Amherst, Ohio, and work together to
originate conforming and non-conforming mortgage loans.
In April 1998, the Company acquired, for approximately $18.0 million, a 75%
interest in Keystone Mortgage Partners L.L.C. ("Keystone"). Keystone is a broker
and servicer of commercial mortgage loans, primarily to the insurance industry,
but does not take principal risk.
76
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
In January 1999, ContiMortgage acquired a branch network for a purchase price of
approximately $4.8 million, consisting of the forgiveness of a note receivable
and assumption of certain debt.
ULG, Royal, Triad, Resource One, Fidelity, Crystal, Keystone and the branch
network are collectively referred to as the "Acquisitions". These transactions
have been accounted for as purchases, and the results of operations have been
included in the Company's results of operations since the effective acquisition
dates. The aggregate purchase price of the Acquisitions during fiscal 1999, 1998
and 1997 was approximately $25,000, $11,000 and $38,000, respectively. As a
result of the Acquisitions, approximately $34,000, $9,000 and $35,000 of cost in
excess of equity acquired was recorded during fiscal 1999, 1998 and 1997,
respectively, which is being amortized on a straight-line basis over periods not
to exceed 25 years, based on the nature of the business acquired. Certain
acquisitions' terms provide for payments which are contingent upon future
earnings or employment of key management. Such contingent payments are recorded
as additions to cost in excess of equity acquired or compensation, as is
appropriate.
On December 5, 1997, the Company acquired, for approximately $30,000, 24% of the
equity of EFHC. EFHC owns 100% of Empire Funding Corp. ("Empire"). Empire,
headquartered in Austin, Texas, originates, services and securitizes high
loan-to-value home improvement loans. The Company's appropriate share of EFHC's
results of operations have been included in the Company's Consolidated
Statements of Income in "Other Income" beginning December 5, 1997. In the second
half of fiscal 1999, the investment and related goodwill totaling $27,653 was
written off as a result of impairment and is reflected in Other charges in the
accompanying Consolidated Statements of Income. See Note 4 for further
discussion.
During fiscal 1998, the Company made other equity investments in unconsolidated
subsidiaries totaling approximately $15,000.
9. RELATED PARTY TRANSACTIONS
Due from Affiliates
Due from affiliates primarily consists of subordinated loans, financed
residuals, receivables related to hedge reimbursement, receivables for margin
call advances and related interest receivable. During the year ended March 31,
1999, certain amounts were deemed uncollectible, resulting in a charge of
$70,618 which has been reflected in Other charges in the Company's Consolidated
Statements of Income (see Note 4).
Due to Affiliates
On February 14, 1996, Continental Grain and the Company entered into a Tax
Sharing Agreement which (i) defines their respective rights and obligations with
respect to Federal, state, local and all other taxes for all taxable periods
both prior to and after the IPO and (ii) governed the conduct of all audits and
other tax matters relating to the Company. Pursuant to the Tax Sharing
Agreement, for each jurisdiction that a consolidated or combined return was
filed with Continental Grain, the Company was charged or credited for its
77
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
respective income tax liability or refund that would have been payable or
received by the Company for such year, or portion thereof, determined as if the
Company had filed a separate income tax return computed in accordance with that
jurisdiction's prevailing income tax laws and regulations as applied to the
Company as if it were a separate taxpayer. Effective June 4, 1997, upon the
completion of the primary offering of common stock, Continental Grain's
ownership of the Company decreased from 81% to 75%. Consequently, from that
date, the Company was no longer included in Continental Grain's consolidated
U.S. Federal income tax return, however, the Company does continue to file
certain consolidated or combined state returns with Continental Grain. Due to
affiliates of $8,918 as reflected in the accompanying Consolidated Balance
Sheets as of March 31, 1999 primarily represents amounts payable to Continental
Grain under the Tax Sharing Agreement.
Affiliate Charges
On February 14, 1996, the Company entered into an agreement with Continental
Grain (the "Services Agreement") under which Continental Grain provides the
Company with certain corporate services through March 31, 1999 and on a
year-to-year basis thereafter.
Continental Grain incurs certain general and administrative expenses on behalf
of the Company. Expenses directly attributable to the Company, such as occupancy
and communication charges, are directly charged to the Company. The
determination of other general and administrative expenses incurred by
Continental Grain and applicable to the Company is based first, on identifying
specific expenses that are directly attributable to its operations and second,
on estimating that portion of general and administrative expenses of Continental
Grain used to support the operations of the Company based on the service hours
attributable to the Company and the asset base of the Company. Management
believes that the method of allocation of general and administrative expenses is
reasonable. The amount of such indirect expenses charged to the Company was
$2,060, $2,138 and $1,749 for the years ended March 31, 1999, 1998 and 1997,
respectively. On February 14, 1996, Continental Grain and the Company entered
into a sublease agreement with subsequent amendments (the "Sublease Agreement")
for the utilization of the facilities leased from Continental Grain. The
Sublease Agreement requires a payment of approximately $1,229 through February
2000.
Subservicing Agreement
On November 1, 1998, ContiMortgage (the "Servicer"), Continental Grain and
Manufacturers and Traders Trust Company (the "Trustee") entered into a
subservicing agreement (the "Subservicing Agreement"). Pursuant to the
Subservicing Agreement, Continental Grain, as subservicer, agrees to advance to
the Trustee on each monthly remittance date an amount equal to the delinquency
advance, if any, that is required to be made by the Servicer under the Pooling
and Servicing Agreements related to certain ContiMortgage/ContiWest
securitizations, but not in excess of $85 million of aggregate outstanding
advances. As compensation for this service, Continental Grain is entitled to
receive a subservicing fee. The amount paid by the Servicer to Continental Grain
was $582 for the year ended March 31, 1999.
In May 1999, Continental Grain extended a short-term warehouse financing
facility to the Company for a maximum amount of $60.0 million. Availability
under the facility is subject to a combined maximum amount of $85 million of
this facility and the servicer advances facility under the Subservicing
Agreement.
78
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
Employee Benefits Allocation Agreement
On February 14, 1996, Continental Grain and the Company entered into an employee
benefits allocation agreement (the "Employee Benefits Allocation Agreement")
which permitted the Company's employees to continue to participate in the
Continental Grain employee benefit plans. The cost of the Company's employees'
participation in these programs was allocated to the Company based on the actual
cost of benefit accruals and an allocated cost of administration of the plans
and overhead. Effective April 1, 1998, the Company discontinued its
participation in the Continental Grain health care plan and obtained independent
coverage, and effective July 1, 1998, the Company discontinued participation in
the Continental Grain pension plan (see Note 11).
10. DEBT
Short-term and long-term debt at March 31, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
-------- --------
<S> <C> <C>
Short-term debt:
Commercial paper ....................................................... $312,477 $270,708
Revolving Credit Facility .............................................. 200,000 95,000
Current portion of long-term debt ...................................... 320 396
-------- --------
Total short-term debt ..................................................... $512,797 $366,104
======== ========
Long-term debt:
8 3/8% Senior Notes, $300 million face amount, due 2003 ................ $299,405 $299,295
7 1/2% Senior Notes, $200 million face amount, due 2002 ................ 199,547 199,412
8 1/8% Senior Notes, $200 million face amount, due 2008 ................ 199,792 --
Capitalized lease ...................................................... 481 846
-------- --------
Total long-term debt ...................................................... $699,225 $499,553
======== ========
</TABLE>
On August 14, 1996, the Company issued $300 million of unsecured senior notes
(the "8 3/8% Senior Notes") due August 15, 2003. Proceeds to the Company, net of
underwriting fees, market discount and other costs were $287,742. Interest on
these notes is payable semi-annually on February 15 and August 15 commencing
February 15, 1997.
On March 12, 1997, the Company issued $200 million of unsecured senior notes
(the "7 1/2% Senior Notes") due March 15, 2002. Proceeds to the Company, net of
underwriting fees, market discount and other costs were $197,700. Interest on
these notes is payable semi-annually on March 15 and September 15 commencing
September 15, 1997.
79
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
On April 2, 1998, the Company issued $200 million of unsecured senior notes (the
"8 1/8% Senior Notes) due April 1, 2008 (together with the 8 3/8% Senior Notes
and the 7 1/2% Senior Notes, the "Senior Notes"). Proceeds to the Company, net
of underwriting fees, market discount and other costs, were $188,264. Interest
on these notes is payable semi-annually on April 1 and October 1 commencing
October 1, 1998. The Senior 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.
The Senior Notes are equal in right of payment with all existing and future
senior indebtedness of the Company and will be senior in right of payment to all
future subordinated indebtedness of the Company.
On January 8, 1997, the Company closed a $200 million unsecured revolving credit
facility (the "Revolving Credit Facility"). The three-year Revolving Credit
Facility has several interest rate pricing alternatives, including the prime
rate, London Inter-Bank Offered Rates ("LIBOR") and federal funds rate. The
amount available under the Revolving Credit Facility is formula-driven, based on
certain of the Company's consolidated assets. The weighted average interest rate
on the Revolving Credit Facility was 6.68% and 6.57% for fiscal 1999 and 1998,
respectively, and the rate in effect on March 31, 1999 was 7.36.%.
On September 9, 1997, the Company initiated a $275 million one year renewable
unsecured Commercial Paper Program ("Commercial Paper Program") backed by an
irrevocable direct-pay letter of credit that is being provided by a syndicate of
banks. On August 21, 1998, the Company increased its Commercial Paper Program
from $275.0 million to $317.5 million. The weighted average interest rate on the
Commercial Paper Program was 5.42% and 5.62% for fiscal 1999 and 1998,
respectively, and the rate in effect on March 31, 1999 was 4.92%.
The Company is required to comply with various financial covenants under its
outstanding Senior Notes, Revolving Credit Facility and Commercial Paper
Program, as well as under certain provisions of two of the Repurchase
Agreements, including, among other things, leverage ratios, minimum net worth
tests and interest coverage ratios. As of December 31, 1998 and continuing
through March 31, 1999, the Company's leverage ratio exceeded the leverage ratio
test under the covenants of its outstanding Senior Notes. As a result, the
Company is prevented from issuing additional unsecured debt until its leverage
ratio is below such test. As of December 31, 1998, the Company and two of its
lenders agreed to amend certain provisions of the Repurchase Agreements.
Amendments were received from the Repurchase Agreement lenders changing the
leverage ratio to 2.75 to 1. These Repurchase Agreements were again amended as
of March 31, 1999. One agreement was amended to remove all financial covenants
through August 20, 1999, while the other removed the financial covenants to the
maturity date of the facility of July 1, 1999. As of December 31, 1998, amended
financial covenants were also received changing the leverage and fixed charge
ratios and the minimum net worth test in the Bank Facilities, and lenders agreed
to exclude certain charges from the covenant ratio calculations. As of March 31,
1999 the Bank Facilities and certain of the Warehouse Facilities amended the
related agreements to eliminate the financial covenants and borrowing base
provisions, among other things. As part of the bank amendment, the Company
agreed to reduce commitments under the Bank Facilities by 75% of the total
proceeds received by the Company for the sale of Triad. On June 11, 1999, the
sale of Triad was closed, and the Bank Facilities commitments were reduced by
approximately $95 million. If the above mentioned amendments had not been
obtained, the Company would not have been in compliance with the covenants. The
Company was in compliance with the amended covenants of the Revolving Credit
80
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
Facility, the Commercial Paper Program and the Repurchase Agreements as of March
31, 1999. As part of the December amendments to the Revolving Credit Facility,
the Company has agreed to prepay the Revolving Credit Facility on August 20,
1999, which makes the Revolving Credit Facility coterminous with the Commercial
Paper Program. As part of the March amendments, the interest rates of the
Revolving Credit Facility and the Commercial Paper Program were increased to
LIBOR plus 300 basis points.
11. EMPLOYEE BENEFITS
Effective July 1, 1998, the Company adopted the ContiFinancial Employee Savings
Plan and discontinued its participation in the Continental Grain pension plan.
The pension benefits accrued to employees from the Continental Grain pension
plan were transferred to the ContiFinancial Retirement Annuity Plan ("qualified
plan") and the newly adopted Supplemental Retirement Plan ("SERP"). The accrual
of additional benefits ceased under the qualified plan and continued to accrue
under the SERP for certain employees.
The accumulated benefit obligation and the fair value of the plan assets for the
qualified plan at March 31, 1999 were $3,405 and $3,596, respectively. The
accumulated benefit obligation at March 31, 1999 for the SERP, which is
currently unfunded, was $386.
For the year ended March 31, 1999, costs for the Supplemental Retirement plan
were $283. Under the Continental Grain pension plan, the Company reimbursed
Continental Grain for the actual cost of benefit accruals and an allocable cost
of administration and overhead. Pension costs charged to the Company by
Continental Grain were $465 and $374 for the years ended March 31, 1998 and
1997, respectively. For the year ended March 31, 1999, costs for the
ContiFinancial Employee Savings Plan were $3,811.
In fiscal 1997, post-retirement health care coverage under Continental Grain's
Salaried Health Care Plan was available on a cost sharing basis to retired
employees. Post-retirement health care costs were $419 for fiscal 1997. The
Company's participation in this plan ceased in 1998 and, consequently, no
post-retirement health care costs were expensed during the years ended March 31,
1998 and 1999.
The Company has in effect an incentive compensation program which is a formula
plan based on pretax income targets. In fiscal 1999, there was a discretionary
bonus plan. Incentive compensation for the years ended March 31, 1999, 1998 and
1997 was $6,169, $31,252 and $24,580, respectively.
Upon acquisition of ULG, the Company established a long-term incentive plan for
certain key employees of ULG. The program is a formula plan based on after-tax
income. The Company recognized $3,609 and $200 in expense for this plan for the
years ended March 31, 1998 and 1997, respectively. No expense was recorded in
fiscal 1999.
1995 Long-Term Stock Incentive Plan
The Company has adopted the Stock Plan pursuant to which the Company is
authorized to grant certain key employees 5,437,895 of options and restricted
stock. In fiscal 1999, 1998 and 1997, the Company granted stock options and
restricted stock under the Stock Plan as shown in the tables below.
The Company applies APB Opinion No. 25 and the related interpretations in
accounting for the Stock Plan. In October 1995, the FASB issued SFAS 123. If
81
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
fully adopted, SFAS 123 would have changed the method for measurement and
recognition of stock-based compensation on plans similar to those of the
Company. As permitted, the Company elected not to adopt the accounting
prescribed by SFAS 123. However, as required, the Company has adopted the
disclosure requirements of SFAS 123. Pro forma disclosures as if the Company had
adopted the expense recognition requirements under SFAS 123 are presented below.
Stock options granted under the Stock Plan are nonqualified stock options that:
(1) are granted at prices which are equal to the market value of the stock on
the date of grant; (2) subject to a grantee's continued employment with the
Company, vest at various periods over a three to four year period; and (3)
expire ten years subsequent to the award.
A summary of the status of the Company's stock options as of March 31, 1999,
1998 and 1997 and the changes during the respective years is presented below:
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998 March 31, 1997
---------------------------- --------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year ............ 3,428,815 $22.91 2,484,730 $21.41 2,623,500 $21.11
Granted ........................ 811,400 6.24 1,053,500 26.38 50,000 35.63
Exercised ...................... -- -- (47,204) 21.11 (11,382) 21.11
Forfeited ...................... (162,791) 24.46 (62,211) 22.70 (177,388) 21.11
--------- --------- ---------
Outstanding at end of
year ......................... 4,077,424 $19.50 3,428,815 $22.91 2,484,730 $21.41
========= ========= =========
Options exercisable at
end of year .................. 2,601,981 $20.33 1,903,252 $21.38 491,946 $21.26
========= ========= =========
</TABLE>
The fair value of each option granted during fiscal 1999, 1998 and 1997 was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions: (1) dividend yield of zero, (2) expected volatility
of 94.45% for fiscal 1999, 39.70% for fiscal 1998 and 49.75% for fiscal 1997,
(3) risk-free interest rate of 4.50% for fiscal 1999, 5.85% for fiscal 1998 and
6.32% for fiscal 1997, and (4) expected life of 3.5 years. The weighted average
fair value of options granted during fiscal 1999, 1998 and 1997 was $4.07, $9.63
and $15.33, respectively.
Had compensation cost for the Company's fiscal 1999, 1998 and 1997 grants for
stock options been determined consistent with SFAS 123, the Company's pro forma
net income and pro forma net income per common share for fiscal 1999, 1998 and
1997 would be:
82
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998 March 31, 1997
------------------------ ------------------------- -------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) .................. $(426,257) $(430,275) $134,304 $131,540 $106,004 $99,730
Net income (loss) per common
share:
Basic ...................... $(9.21) $(9.30) $2.90 $2.84 $2.44 $2.30
Diluted .................... $(9.21) $(9.30) $2.86 $2.80 $2.40 $2.25
</TABLE>
Restricted stock granted under the Stock Plan is recorded as deferred
compensation in the accompanying Consolidated Statements of Changes in
Stockholders' Equity. The deferred compensation is amortized over the vesting
period of the restricted stock. The restricted stock vests over a 3 to 4 year
period and is subject to the employee's continued employment with the Company.
In connection with amortization of deferred compensation, the Company recorded
compensation expense of $7,090, $5,440 and $6,721 in fiscal 1999, 1998 and 1997,
respectively.
A summary of the status of the Company's restricted stock as of March 31, 1999,
1998 and 1997 and the changes during those years is presented below:
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1999 March 31, 1999
---------------------------- --------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year ............. 1,253,168 $21.36 1,245,551 $21.07 1,330,532 $21.00
Granted ......................... 99,405 30.94 36,400 30.99 6,000 35.63
Forfeited ....................... (2,065) 30.94 (15,978) 21.00 (33,931) 21.00
Vested and transferable ......... (28,290) 21.69 (12,805) 21.00 (57,050) 21.00
--------- --------- ---------
Outstanding at end
of year ....................... 1,322,218 $22.06 1,253,168 $21.36 1,245,551 $21.07
========= ========= =========
</TABLE>
83
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
12. INCOME TAXES
Provision (benefit) for income taxes included in the Consolidated Statements of
Income represent the following:
Current Deferred Total
------- -------- -----
Year ended March 31, 1999
Federal ............................. $17,526 $(72,101) $(54,575)
State and local ..................... 2,571 (15,506) (12,935)
------- -------- --------
$20,097 $(87,607) $(67,510)
======= ======== ========
Year ended March 31, 1998
Federal ............................. $15,687 $ 59,608 $ 75,295
State and local ..................... 3,013 12,841 15,854
------- -------- --------
$18,700 $ 72,449 $ 91,149
======= ======== ========
Year ended March 31, 1997
Federal ............................. $54,137 $ 4,661 $ 58,798
State and local ..................... 11,524 1,019 12,543
------- -------- --------
$65,661 $ 5,680 $ 71,341
======= ======== ========
The following table reconciles the "expected" tax provision, computed by
applying the U.S. Federal statutory tax rate to income (loss) before income
taxes and minority interest, to the Company's actual effective tax rate and
expense:
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998 March 31, 1997
----------------------------- ------------------------- -------------------------
Percent of Pre- Percent of Pre- Percent of Pre-
Amount Tax Earnings Amount Tax Earnings Amount Tax Earnings
------ --------------- ------ --------------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" tax provision ........ $(172,765) 35.0% $78,738 35.0% $61,963 35.0%
State and local taxes, net of Federal
income tax effect ..................... (21,803) 4.4% 10,236 4.6% 8,055 4.6%
Goodwill and other equity write-
downs not deductible for tax .......... 6,948 (1.4)% 1,078 .5% 440 .2%
Valuation allowance ...................... 115,325 (23.4)% -- -- -- --
Other .................................... 4,785 (1.0)% 1,097 .5% 883 .5%
-------- ---- ------- ---- ------- ----
Total ................................. $(67,510) 13.6% $91,149 40.6% $71,341 40.3%
========= ==== ======= ==== ======= ====
</TABLE>
84
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
The effects of temporary differences that give rise to deferred tax assets and
deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
March 31,
----------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Deferred Tax Assets:
Interest-only and residual certificates ........................... $ 23,313 $ -- $ --
Reserves not currently deductible ................................. 73,689 5,268 1,069
Compensation related .............................................. 7,929 4,985 5,136
Net operating loss carryforwards .................................. 40,534 -- --
Other ............................................................. -- 1,874 2,776
Deferred Tax Liabilities:
Capitalized servicing rights ...................................... (27,777) (25,986) (11,081)
Interest-only and residual certificates ........................... -- (73,531) (12,942)
Other ............................................................. (2,363) (217) (115)
--------- --------- --------
Net deferred tax asset (liability) before valuation
allowance ............................................................ 115,325 (87,607) (15,157)
Valuation allowance .................................................. (115,325) -- --
--------- --------- --------
Net deferred tax asset (liability) ................................... $ -- $ (87,607) $(15,157)
========= ========= ========
</TABLE>
Due to the Company's ownership of REMIC residual certificates, the current
Federal income tax provision for the fiscal year ended March 31, 1999 is based
on excess inclusion generated by the ownership of these certificates.
The Company expects a Federal income tax refund of approximately $11 million as
a result of carrying back a tax loss from its year ended March 31, 1999 to March
31, 1998. After the carryback, the Company will have net operating loss
carryforwards of approximately $107 million expiring in years 2004 through 2019.
SFAS No. 109 requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion of the deferred tax
assets will not be realized. The Company has provided a valuation allowance for
the entire amount of the net deferred tax asset since it is more likely than not
that the net deferred tax asset will not be realized.
13. COMMITMENTS AND CONTINGENCIES
In addition to utilizing facilities leased by Continental Grain, the Company's
operations are conducted from leased facilities located in various areas of the
United States. These leases have clauses which provide for increases in rent in
the event of increases in real estate taxes and maintenance costs. Rental
expense for the years ended March 31, 1999, 1998 and 1997 was $14,558, $8,595
and $3,470, respectively. The Company also has a capital lease on certain
machinery and equipment included as part of "Premises and equipment". The future
minimum lease payments under the Company's operating and capital leases, are as
follows:
85
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
Operating Capital
Fiscal Year Leases Leases
- ----------- --------- -------
2000 ............................... 19,263 384
2001 ............................... 15,064 287
2002 ............................... 11,252 143
2003 ............................... 8,462 104
2004 ............................... 4,757 --
Thereafter ......................... 25,670 --
------- ----
.................................... $84,468 $918
=======
Less: amounts
representing interest .............. (116)
----
Present value of net
minimum lease payments ............ 802
Less: current maturities ........... (320)
----
Long-term obligation ............... $482
====
Whole Loan Sale Agreement
In January 1999, ContiMortgage entered into a two year agreement with a
financial institution to sell a base commitment amount of $1.1 billion in fiscal
2000 and $1.0 billion in fiscal 2001 of home equity loans at prices adjusted
monthly based on floating market yields. The amount required to be sold under
the agreement may be less than the base commitment amount if the Company's
monthly production volume of qualifying loans falls below a specified level.
Litigation
The Company is involved in certain litigation arising in the normal course of
business. The Company believes that any liability with respect to such legal
actions, individually or in the aggregate, is not likely to be material to the
Company's consolidated financial position or results of operations.
14. FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET ACTIVITIES
Sales of Assets with Recourse
During fiscal 1999, 1998 and 1997, the Company utilized agreements with
financial institutions (the "Purchasers") to sell, with limited recourse,
interests in designated pools of receivables. Under the agreements, the
Purchasers have given the Company a right of first refusal to repurchase such
receivables prior to third-party sales. Pursuant to the recourse provisions of
these agreements, the Company is responsible for losses incurred by the
Purchasers on third-party sales of the receivables up to either 5% or 10% of the
86
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
sale amounts. The agreements are guaranteed by the Company. The Company monitors
its exposure associated with these agreements and records recourse provisions as
necessary. During fiscal 1999, 1998 and 1997, the Company utilized these
agreements to sell receivables totaling approximately $13,315,694, $12,836,121
and $7,350,000, respectively. At March 31, 1999 and 1998, approximately $715,000
and $758,000, respectively, were outstanding and reflected as reductions in
Receivables held for sale in the Consolidated Balance Sheets.
During fiscal 1997 and prior years, the Company sold, with limited recourse,
interests in certain ESR for $201,045. At March 31, 1999 and 1998, $22,621 and
$100,867, respectively, of such sales were outstanding and reflected as
reductions in Interest-only and residual certificates in the accompanying
Consolidated Balance Sheets. Under the recourse provisions of the agreements,
the Company is responsible for losses incurred by the purchaser within an agreed
upon range. The agreements are guaranteed by Continental Grain for an agreed
upon fee.
Hedging Interest Rate Risk
One of the most significant variables in the determination of gain (loss) on
sale of receivables is the spread between the weighted average coupon on the
portfolio of loans to be sold or securitized (the "Portfolio Rate") and the
weighted average pass-through rate or yield to be paid to the purchasers of the
securities or whole loans (the "Pass-through Rate"). In the interim period
between the loan commitment and the securitization or sale of such loans (the
"Warehousing Period"), the Company is exposed to interest rate risk because the
Portfolio Rate is fixed as of the loan commitment dates, but the Pass-through
Rate is not fixed until the pricing of the securitization or sale. If market
interest rates were to rise during the Warehousing Period, the spread between
the Portfolio Rate and the Pass-through Rate would narrow, and the market value
of the loans would decline.
Through the end of the third quarter of fiscal 1999, the Company mitigated this
interest rate exposure primarily through short sales of U.S. Treasury securities
and U.S. Treasury interest rate futures contracts. These instruments were used
because the Pass-through Rates on the securities are established as a spread
over the U.S. Treasury yield for a comparable maturity. This hedging strategy
was effective to the extent that the Pass-through Rates required by investors
moved in sync with U.S. Treasury yields, which had been the case historically.
However, during a "flight-to-quality" that occurred during the second and third
quarters of fiscal 1999, the relationship between Pass-through Rates and U.S.
Treasury yields broke down, and the Company incurred significant losses because
it lacked the liquidity to meet the ongoing margin calls necessary to maintain
its hedge positions until prior market relationships were restored. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company revised its hedging strategy in the fourth quarter of fiscal 1999.
The Company now manages its hedge positions by using a combination of Eurodollar
futures, U.S. Treasury securities, financial futures contracts and options on
U.S. Treasury instruments. Recent research has shown that changes in interest
rate swap levels are more positively correlated to the changes in market yields
for the Company's assets than U.S. Treasury securities because of the liquidity
premium attached to U.S. Treasury securities. The use of interest rate swaps is
designed to reduce the Company's exposure to both the absolute movements in U.S.
Treasury yields and the widening in the spread relationship between the
Company's assets and U.S. Treasury yields. Since executing individual swap
contracts to match the volume fluctuations and amortization of the Company's
underlying assets is cumbersome, expensive and involves counterparty risk, the
Company sells a series of Eurodollar futures contracts that match the amount and
timing of the projected cash flows on the assets to be hedged. This transaction
is designed to approximate the economics of an interest rate swap. In addition,
the Company uses options on U.S. Treasury instruments to hedge its assets
against wide swings in rates.
87
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
The Company only hedges a portion of its total exposure to interest rate risk;
consequently, even if the hedging strategy works as intended, the Company would
still incur net losses to the fair value of its interest rate sensitive assets
in a rising interest rate environment. Even to the extent that the Company does
hedge its interest rate exposure, there can be no assurances provided that the
Company's hedging strategy will produce the intended results.
The Company accounts for its positions using the hedge method of accounting.
Positions are designated as hedges against specific market exposures, and senior
management monitors the correlation between the change in market value of the
hedge instruments and the assets being hedged. Under the hedge method of
accounting, gains or losses on hedge instruments are recognized at the time the
gains or losses on the assets being hedged are recognized. In the event a high
degree of correlation is not maintained, the hedge instruments are then marked
to market. If a hedge instrument matures or is terminated prior to the maturity
or sale of the designated hedged asset or liability, the realized gain or loss
on the hedge instrument would be deferred until the maturity or sale of the
designated asset or liability. If a designated asset or liability matures or is
sold prior to the maturity or termination of the hedge instrument, the hedge
instrument would be marked to market at that time.
Unrealized hedge gains or losses related to the Company's warehouse and pipeline
positions are reflected in the Company's lower-of-aggregate-cost-or-market
evaluation of receivables held for sale and are ultimately recognized upon the
sale or securitization of the related receivables and included in gains or
losses on sales of receivables. Hedge gains or losses related to the Company's
ESR portfolio are recognized on a current basis in gains or losses on sales of
receivables because the ESR portfolio is recorded at fair value. Hedge
transactions are expected to occur within one year.
The short sales of U.S. Treasury securities and related purchase of securities
under agreements to resell are reflected on the accompanying Consolidated
Balance Sheets as Securities sold but not yet purchased and Securities purchased
under agreements to resell. Securities sold but not yet purchased are recorded
on a trade date basis and are carried at their sale amount. Securities purchased
under agreements to resell are recorded on a trade date basis and are carried at
the amounts at which the securities will be subsequently resold, plus accrued
interest.
With respect to ContiMortgage/ContiWest securitizations and whole loan sales,
gain on sale included hedge losses of $27,330, $11,946 and $5,413 in fiscal
1999, 1998 and 1997, respectively. In fiscal 1999, hedge losses relating to the
commercial loan portfolio totaled $88,614, of which $80,574 was reflected in
Commercial real estate valuation adjustments and $8,040, relating to a
securitization, was included in gain on sale.
88
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
The following table identifies the notional or contractual amounts and
unrealized gains (losses) in connection with hedging activities as of March 31,
1999 and 1998:
<TABLE>
<CAPTION>
1999
-------------------------------------------
Unrealized
Assets Liabilities Gain/(loss)
------ ----------- -----------
<S> <C> <C> <C>
U.S. Treasury Futures Contracts $ -- $ 245,700 $1,867
Eurodollar Futures -- 5,548,000 97
Put Options on U.S. Treasury Securities 228,000 279,250 863
Call Options on U.S. Treasury Securities 57,750 58,750 (58)
1998
-------------------------------------------
Unrealized
Assets Liabilities Gain/(loss)
------ ----------- -----------
U.S. Treasury Futures Contracts $ -- $543,200 $1,082
Short sales of U.S. Treasury Securities -- 815,060 (3,088)
</TABLE>
Fair Value of Financial Instruments
The following disclosures of fair value were determined by management using
available market information and appropriate valuation methodologies.
Considerable judgment is necessary to interpret market data and develop
estimated fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize on disposition
of the financial instruments. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
The Company's financial instruments recorded at contractual amounts that
approximate market or fair value primarily consist of securities purchased under
agreements to resell, receivables held for sale, other receivables, due from
affiliates, other assets (as to the components representing financial
instruments), accounts payable, securities sold but not yet purchased,
receivables sold under agreements to repurchase, due to affiliates, taxes
payable and receivable, other liabilities and, in fiscal 1998, short-term debt.
As these amounts are short term in nature and/or generally bear market rates of
interest, the carrying amounts of these instruments are reasonable estimates of
their fair values. Interest-only and residual certificates are recorded at fair
value (see Note 5), and the carrying value of capitalized servicing also
approximated fair value at March 31, 1999 and 1998 (see Note 3).
The fair value of the Company's long-term debt, excluding capital leases, was
$519,063 based upon quoted market prices at March 31, 1999. The carrying value
of long-term debt at March 31, 1998 approximated fair value based on quoted
market prices. Due to the current financial condition of the Company and the
doubt as to the Company's ability to obtain financing, a determination of fair
value of the short-term debt could not be made as of March 31, 1999.
Although management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been comprehensively
revalued for the purposes of the accompanying Consolidated Financial Statements
since that date, and current estimates of fair value may differ significantly
from the amounts presented herein.
89
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
Credit Risk
The Company is exposed to on-balance sheet credit risk related to its
receivables and Interest-only and residual certificates. The Company is exposed
to off-balance sheet credit risk related to loans which the Company has
committed to originate or buy and loans and ESR sold with limited recourse.
The Company may utilize securities purchased under agreements to resell as part
of its interest rate management strategy. These instruments expose the Company
to credit risk which is measured as the loss the Company would record if
counterparties failed to perform pursuant to terms of their contractual
obligations and the value of the collateral held, if any, was not adequate to
cover such losses. The Company monitors the market value of the assets acquired
to ensure their adequacy as compared to the amount at which the securities will
be resold. The Company may require the counterparty to deposit additional
collateral or reduce the loan balance when necessary. The interest rate on these
instruments depends upon, among other things, the underlying collateral, the
term of the agreement and the credit quality of the counterparty. At March 31,
1998 and 1997, these instruments had a weighted average interest rate of 5.3%
and 5.1%, respectively. The Company transacts these resale agreements primarily
with three institutional broker/dealers.
The Company is a party to financial instruments with off-balance sheet credit
risk in the normal course of business. These financial instruments include
commitments to extend credit to borrowers, commitments to purchase loans from
correspondents and recourse provided on loans sold to investors in prior years.
The Company has a first or second lien position on all of its loans, and the
combined loan-to-value ratio ("CLTV") permitted by the Company's mortgage
underwriting guidelines generally may not exceed 90%. The CLTV represents the
combined first and second mortgage balances as a percentage of the appraised
value of the mortgaged property, with the appraised value determined by an
appraiser with appropriate professional designations. A title insurance policy
is required for all loans.
As of March 31, 1999 and 1998, the Company had outstanding commitments to extend
credit or purchase loans in the amount of $456,460 and $666,380, respectively.
As these amounts are short term in nature and/or generally bear market rates of
interest, the contractual amounts of these instruments are reasonable estimates
of their fair values.
Commitments to extend credit or to purchase a loan are granted for a period of
thirty days and are contingent upon the borrower and the borrower's collateral
satisfying the Company's underwriting guidelines. Since many of the commitments
are expected to expire without being exercised, the total commitment amount does
not necessarily represent future cash requirements or future credit risk.
The Company monitors concentrations of credit risk associated with business
conducted with financial institutions and minimizes credit risk by avoiding a
concentration with any single financial institution. As of March 31, 1999, and
1998 the majority of loans with on-balance-sheet and off-balance-sheet credit
risk were collateralized by properties located throughout the United States.
Warehousing Exposure
The Company utilizes warehouse financing in the form of asset purchase and sale
facilities with certain financial institutions and funding agreements under
90
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
agreements to repurchase, collectively the ("Warehouse Facilities") to
facilitate the accumulation of securitizable products prior to securitization or
sale. As of March 31, 1999 and 1998, the Company had $1,667,000, and $2,780,000
of committed warehousing, and $1,270,000 and $3,100,000 of uncommitted
warehousing, respectively. As of March 31, 1999 and 1998, $1,519,737 and
$1,003,747, respectively, was drawn down. Warehouse commitments are typically
for a term of one year or less and are designated to fund only securitizable
assets. The majority of the assets remain in the Warehouse Facilities for a
period of up to 90 days at which point they are securitized and sold to
institutional investors. As these amounts are short term in nature and/or
generally bear market rates of interest, the contractual amounts of these
instruments are reasonable estimates of their fair values. As of July 13, 1999,
the Company had $642,000 and $1,365,000 of committed and uncommitted
warehousing, respectively.
Affiliate Warehouse Line
The Company has made margin advances to a warehouse lender on behalf of Red
Mountain Funding, LLC ("RMF"), an unconsolidated commercial mortgage affiliate
in which the Company owns a 48% equity interest. One of the Company's warehouse
facilities contains cross-default provisions that could be triggered in the
event RMF defaults on its warehouse line. In order to avoid the possibility of
being declared in default under its own credit facilities, the Company would
have to fund additional margin calls if required. Consequently, in addition to
the on-balance-sheet credit risk related to the outstanding margin advances, the
Company also has off-balance-sheet interest rate and credit risk related to the
entire outstanding balance of the RMF portfolio, net of reserves, which was $222
million at March 31, 1999. As of June 15, 1999, that exposure had been reduced
to $133 million as a result of loan sales.
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents the quarterly results of operations for the years
ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended
June 30, September 30, December 31, March 31,
1998 1998 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Gross income .................................. $ 142,116 $ 10,855 $ 125,568 $ (25,348)
Net income (loss) ............................. 6,020 (114,251) (58,800) (259,226)
Basic earnings (loss) per common share ........ 0.13 (2.48) (1.27) (5.62)
Diluted earnings (loss) per common share ...... $ 0.13 $ (2.48) $ (1.27) $ (5.62)
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
June 30, September 30, December 31, March 31,
1997 1997 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Gross income .................................. $ 134,023 $ 158,130 $ 177,255 $ 190,754
Net income .................................... 26,873 34,837 35,140 37,454
Basic earnings per common share ............... 0.60 0.74 0.75 0.80
Diluted earnings per common share ............. $ 0.59 $ 0.73 $ 0.74 $ 0.79
</TABLE>
91
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(in thousands, except share data and where noted)
16. SUBSEQUENT EVENT
Sale of Triad
On June 11, 1999, the Company sold its interest in Triad to Fairlane Credit LLC,
a wholly-owned subsidiary of Ford Motor Credit Company. The sale of Triad
resulted in a gain of approximately $20 million, which will be reported in the
first quarter of fiscal 2000, and provided gross proceeds of approximately $134
million through sale proceeds, repayment of intercompany debt and net return of
intercompany warehouse financing. Of this amount, approximately $95 million was
used to pay down the Company's Bank Facilities thereby reducing the commitments
under the Bank Facilities by the pay down amount.
92
<PAGE>
1 Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
93
<PAGE>
Part III.
Item 10. Directors and Executive Officers of the Registrant.
The Company incorporates by reference herein information in its
proxy statement which complies with the information called for by
Item 10 of the Form 10-K. The proxy will be filed at a later date,
that is not more than 120 days after the end of the Company's 1999
fiscal year, with the Commission.
Item 11. Executive Compensation.
The Company incorporates by reference herein information in its
proxy statement which complies with the information called for by
Item 11 of the Form 10-K. The proxy will be filed at a later date,
that is not more than 120 days after the end of the Company's 1999
fiscal year, with the Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The Company incorporates by reference herein information in its
proxy statement which complies with the information called for by
Item 12 of the Form 10-K. The proxy will be filed at a later date,
that is not more than 120 days after the end of the Company's 1999
fiscal year, with the Commission.
Item 13. Certain Relationships and Related Transactions.
The Company incorporates by reference herein information in its
proxy statement which complies with the information called for by
Item 13 of the Form 10-K. The proxy will be filed at a later date,
that is not more than 120 days after the end of the Company's 1999
fiscal year, with the Commission.
Part IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits.
(1) Financial Statements
See Item 8. "Financial Statements and Supplementary Data."
(2) Financial Statement Schedules
No financial statement schedules are included because of the
absence of the conditions under which they are required or because
the information is included in the financial statements or the
notes thereto.
(3) Exhibits
94
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company (1)
3.2 Restated By-laws of the Company*
4.1 Indenture between the Company and the Trustee with form of Indenture Note (1)
10.1 Indemnification Agreement between the Company and Continental Grain (1)
10.2 Tax Sharing Agreement between the Company and Continental Grain (1)
10.3 Employee Benefit Allocation Agreement between the Company and Continental Grain (2)
10.4 Services Agreement between the Company and Continental Grain (1)
10.5 Note Purchase Agreement between the Company and Continental Grain (1)
10.6 Common Stock Registration Rights Agreement between the Company and Continental Grain (1)
10.7 Indenture Note Registration Rights Agreement between the Company and Continental Grain (1)
10.8 Sublease Agreement between the Company and Continental Grain (1)
10.9 ContiFinancial Corporation 1995 Long -Term Stock Incentive Plan (1)
10.10 ContiFinancial Services Long -Term Incentive Compensation Plan (1)
10.11 1997 ContiFinancial Services Division Incentive Compensation Plan (1)
10.12 1997 ContiMortgage Corporation Incentive Compensation Plan (1)
10.13a Form of Stock Option Agreement (1)
10.13b Form of Stock Option Agreement*
10.14 Form of Restricted Stock Award Agreement (1)
10.15 Agreement of Lease between LC/N Keith Valley Limited Partnership I and ContiTrade Services
Corporation and amendments thereto (1)
10.16 ContiFinancial Corporation Directors Retainer Fee Plan (1)
10.17 Assignment and Transfer of Excess Spread Receivables between
Continental Grain and certain subsidiaries of the Company (1)
10.18 Secured Promissory Note (2)
10.19 Indenture - 83/8 % Senior Notes due 2003 (3)
10.20 First Amendment to Note Purchase Agreement (4)
10.21 First Supplemental Indenture (5)
10.22 Revolving credit facility-Credit Agreement (6)
10.23 Letter of Credit and Reimbursement Agreement (8)
10.24 Subservicing Agreement*
10.25 Addendum Number 1 to Subservicing Agreement dated December 1, 1998*
10.26 Addendum Number 2 to Subservicing Agreement dated March 1, 1999*
10.27 Addendum Number 3 to Subservicing Agreement dated March 1, 1999*
10.28 Purchase and Sale Agreement with Continental Grain Company*
10.29 THIRD AMENDMENT to the Credit Agreement*
10.30 THIRD AMENDMENT to the Letter of Credit and Reimbursement Agreement*
10.31 Indenture, dated as of March 1, 1997 (9)
10.32 Indenture, dated as of March 4, 1998 (10)
11.1 Computation of the Company's earnings per common share*
12.1 Ratio of Earnings to Fixed Charges*
21.1 List of Subsidiaries of the Company*
23.2 Consent of Arthur Andersen LLP (2)
23.3 Consent of Arthur Andersen LLP *
24.1 Attorneys-In-Fact and Agents for James J. Bigham (2)
24.2 Attorneys-In-Fact and Agents for Paul J. Fribourg (2)
24.3 Attorneys-In-Fact and Agents for John W. Spiegel (2)
24.4 Attorneys-In-Fact and Agents for Donald L. Staheli (2)
24.5 Attorneys-In-Fact and Agents for John P. Tierney (2)
24.6 Attorneys-In-Fact and Agents for Lawrence G. Weppler (2)
24.7 Attorneys-In-Fact and Agents for Daniel J. Willett (2)
24.8 Attorneys-In-Fact and Agents for Michael J. Zimmerman (7)
27.1 Financial Data Schedule for the fiscal year ended March 31, 1999*
</TABLE>
- ----------
* Filed herewith
(1) Incorporated by reference to the exhibit of the same number from the
Company's Registration Statement on Form S-1, File No. 33-98016.
95
<PAGE>
(2) Incorporated by reference to the exhibit of the same number from the
Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1996, File No. 1-14074.
(3) Incorporated by reference to exhibit 10.2 from the Company's quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1996, File
No. 1-14074.
(4) Incorporated by references to exhibit 10.3 from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1996, File
No. 1-14074.
(5) Incorporated by references to exhibit 10.4 from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1996, File
No. 1-14074.
(6) Incorporated by reference to exhibit 10.5 from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended December 31, 1996, File
No. 1-14074.
(7) Incorporated by reference to exhibit 24.8 from the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1997, File No.
1-14074.
(8) Incorporated by reference to exhibit 10.23 from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1997, File
No. 1-14074.
(9) Incorporated by reference to the exhibits of the Company's Registration
Statement on Form S-4, File No. 333-23963.
(10) Incorporated by reference to the exhibits of the Company's
Registration Statement on Form S-3, File No. 333-3852588.
(b) Reports on Form 8-K.
None.
(c) Exhibits. See (a) (3) above.
(d) Financial Statement Schedules. See (a) (2) above.
96
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, ContiFinancial Corporation has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CONTIFINANCIAL CORPORATION
By: /s/ James E. Moore
-----------------------------------------------
James E. Moore
President, Chief Executive Officer and Director
Date: July 14, 1999
Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ James E. Moore President, Chief Executive Officer July 14, 1999
- --------------------------- and Director (Principal Executive
James E. Moore Officer)
/s/ Frank W. Baier Senior Vice President and Chief July 14, 1999
- --------------------------- Financial Officer (Principal
Frank W. Baier Financial Officer)
/s/ Daniel J. Egan Senior Vice President and Principal July 14, 1999
- --------------------------- Accounting Officer
Daniel J. Egan
* Director and Chairman of the Board July 14, 1999
- ---------------------------
James J. Bigham
* Director July 14, 1999
- ---------------------------
Paul J. Fribourg
* Director July 14, 1999
- ---------------------------
John W. Spiegel
* Director July 14, 1999
- ---------------------------
Donald L. Staheli
* Director July 14, 1999
- ---------------------------
John P. Tierney
* Director July 14, 1999
- ---------------------------
Lawrence G. Weppler
* Director July 14, 1999
- ---------------------------
Michael J. Zimmerman
By: /s/ James E. Moore
-----------------------
James E. Moore
Attorney-In-Fact
</TABLE>
97
<PAGE>
Exhibit Index
Exhibit
No. Description
- ------- -----------
3.2 Restated By-laws of the Company
10.13b Form of Stock Option Agreement
10.24 Subservicing Agreement
10.25 Addendum Number 1 to Subservicing Agreement dated December 1, 1998
10.26 Addendum Number 2 to Subservicing Agreement dated March 1, 1999
10.27 Addendum Number 3 to Subservicing Agreement dated March 1, 1999
10.28 Purchase and Sale Agreement with Continental Grain Company
10.29 THIRD AMENDMENT to the Credit Agreement
10.30 THIRD 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
21.1 List of Subsidiaries of the Company
23.3 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule for the fiscal year ended March 31, 1999
98
Exhibit 3.2
RESTATED
BY-LAWS
of
ContiFinancial Corporation
(A Delaware Corporation)
------------------------
ARTICLE 1
DEFINITIONS
As used in these By-laws, unless the context otherwise
requires, the term:
1.1 "Assistant Secretary" means an Assistant Secretary of the
Corporation.
1.2 "Assistant Treasurer" means an Assistant Treasurer of the
Corporation.
1.3 "Board" means the Board of Directors of the Corporation.
1.4 "Business Day" means any day which is not a Saturday, a
Sunday, or a day on which banks are authorized to close in the City of New York.
1.5 "By-laws" means the by-laws of the Corporation, as amended
from time to time.
1.6 "Certificate of Incorporation" means the certificate of
incorporation of the Corporation, as amended, supplemented or restated from time
to time.
1.7 "Chairman" means the Chairman of the Board of Directors of
the Corporation.
<PAGE>
2
1.8 "Chief Financial Officer" means the Chief Financial
Officer of the Corporation.
1.9 "Corporation" means ContiFinancial Corporation.
1.10 "Directors" means directors of the Corporation.
1.11 "Entire Board" means all directors of the Corporation in
office, whether or not present at a meeting of the Board, but disregarding
vacancies.
1.12 "General Corporation Law" means the General Corporation
Law of the State of Delaware, as amended from time to time.
1.13 "Office of the Corporation" means the executive office of
the Corporation, anything in Section 131 of the General Corporation Law to the
contrary notwithstanding.
1.14 "President" means the President of the Corporation.
1.15 "Secretary" means the Secretary of the Corporation.
1.16 "Stockholders" means stockholders of the Corporation.
1.17 "Treasurer" means the Treasurer of the Corporation.
1.18 "Vice President" means a Vice President of the
Corporation.
<PAGE>
3
ARTICLE 2
STOCKHOLDERS
2.1 Place of Meetings. Every meeting of stockholders shall be
held at the office of the Corporation or at such other place within or without
the State of Delaware as shall be specified or fixed in the notice of such
meeting or in the waiver of notice thereof.
2.2 Annual Meeting. A meeting of stockholders shall be held
annually for the election of Directors and the transaction of other business on
the second Thursday of August (or, if such day is not a Business Day, then on
the next Business Day) at such hour as may be determined by the Board or at such
other date and hour as may be determined by the Board and designated in the
notice of meeting or in the waiver of notice thereof.
2.3 Deferred Meeting for Election of Directors, Etc. If the
annual meeting of stockholders for the election of Directors and the transaction
of other business is not held within the month specified in Section 2.2 hereof,
the Board shall call a meeting of stockholders for the election of Directors and
the transaction of other business as soon thereafter as convenient.
2.4 Special Meetings. A special meeting of stockholders,
unless otherwise prescribed by statute, may be called at any time by the Board,
the Chairman of the Board or by the President. At any special meeting of
<PAGE>
4
stockholders, no business may be transacted other than (i) such business stated
in the notice thereof given pursuant to Section 2.6 hereof or in any waiver of
notice thereof given pursuant to Section 2.7 hereof (in a form prepared by the
Secretary) or (ii) such business as is related to the purpose or purposes of
such meeting and which is properly brought before the meeting by or at the
direction of the Board.
2.5 Fixing Record Date. For the purpose of (a) determining the
Stockholders entitled (i) to notice of or to vote at any meeting of Stockholders
or any adjournment thereof or (ii) to receive payment of any dividend or other
distribution or allotment of any rights, or to exercise any rights in respect of
any change, conversion or exchange of stock; or (b) any other lawful action, the
Board may fix a record date, which record date shall not precede the date upon
which the resolution fixing the record date was adopted by the Board and which
record date shall not be (x) in the case of clause (a)(i) above, more than
sixty nor less than ten days before the date of such meeting and (y) in the case
of clause (a)(ii) or (b) above, more than sixty days prior to such action. If
no such record date is fixed:
2.5.1 the record date for determining Stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close
<PAGE>
5
of business on the day next preceding the day on which the meeting is
held; and
2.5.2 the record date for determining stockholders
for any purpose other than those specified in Section 2.5.1 shall be at
the close of business on the day on which the Board adopts the resolution
relating thereto.
Then a determination of Stockholders entitled to notice of or to vote at any
meeting of Stockholders has been made as provided in this Section 2.5, such
determination shall apply to any adjournment thereof unless the Board fixes a
new record date for the adjourned meeting.
2.6 Notice of Meetings of Stockholders. Except as otherwise
provided in Section 2.7 hereof, whenever under the provisions of any statute,
the Certificate of Incorporation or these By-laws, Stockholders are required or
permitted to take any action at a meeting, written notice shall be given stating
the place, date and hour of the meeting and, in the case of a special meeting,
the purpose or purposes for which the meeting is called. Unless otherwise
provided by any statute, the Certificate of Incorporation or these By-laws, a
copy of the notice of any meeting shall be given, personally or by mail, not
less than ten nor more than sixty days before the date of the meeting, to each
Stockholder entitled to notice of or to vote at such meeting. If mailed, such
notice shall be deemed to be given when deposited in the United States mail,
with postage prepaid, directed to the Stockholder at his or her address
<PAGE>
6
as it appears on the records of the Corporation. An affidavit of the Secretary
or an Assistant Secretary or of the transfer agent of the Corporation that the
notice required by this Section 2.6 has been given shall, in the absence of
fraud, be prima facie evidence of the facts stated therein. When a meeting is
adjourned to another time or place, notice need not be given of the adjourned
meeting if the time and place thereof are announced at the meeting at which the
adjournment is taken, and at the adjourned meeting any business may be
transacted that might have been transacted at the meeting as originally called.
If, however, the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each Stockholder of record entitled to
vote at the meeting.
2.7 Waivers of Notice. Whenever the giving of any notice is
required by statute, the Certificate of Incorporation or these By-laws, a waiver
thereof, in writing, signed by the Stockholder or Stockholders entitled to said
notice, whether before or after the event as to which such notice is required,
shall be deemed equivalent to notice. Attendance by a Stockholder at a meeting
shall constitute a waiver of notice of such meeting except when the Stockholder
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business on the ground that the meeting has
not been lawfully called or convened.
<PAGE>
7
2.8 List of Stockholders. The Secretary shall prepare and
make, or cause to be prepared and made, at least ten days before every meeting
of Stockholders, a complete list of the Stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
Stockholder and the number of shares registered in the name of each Stockholder.
Such list shall be open to the examination of any Stockholder, the Stockholder's
agent or attorney, at the Stockholder's expense, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten days prior
to the meeting, either at a place within the city where the meeting is to be
held, which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any Stockholder who is present. The Corporation
shall maintain the list of Stockholders in written form or in another form
capable of conversion into written form within a reasonable time. Upon the
willful neglect or refusal of the Directors to produce such a list at any
meeting for the election of Directors, they shall be ineligible for election to
any office at such meeting. The stock ledger shall be the only evidence as to
who are the Stockholders entitled to examine the stock ledger, the list of
Stockholders or the books of the Corporation, or to vote in person or by proxy
at any meeting of Stockholders.
<PAGE>
8
2.9 Quorum of Stockholders; Adjournment. Except as otherwise
provided by any statute, the Certificate of Incorporation or these By-laws, the
holders of a majority of all outstanding shares of stock entitled to vote at any
meeting of Stockholders, present in person or represented by proxy, shall
constitute a quorum for the transaction of any business at such meeting. Then a
quorum is once present to organize a meeting of Stockholders, it is not broken
by the subsequent withdrawal of any Stockholders. The holders of a majority of
the shares of stock present in person or represented by proxy at any meeting of
Stockholders, including an adjourned meeting, whether or not a quorum is
present, may adjourn such meeting to another time and place. Shares of its own
stock belonging to the Corporation or to another corporation, if a majority of
the shares entitled to vote in the election of directors of such other
corporation is held, directly or indirectly, by the Corporation, shall neither
be entitled to vote nor be counted for quorum purposes; provided, however, that
the foregoing shall not limit the right of the Corporation to vote stock,
including but not limited to its own stock, held by it in a fiduciary capacity.
2.10 Voting; Proxies. Unless otherwise provided in the
Certificate of Incorporation, every Stockholder of record shall be entitled at
every meeting of Stockholders to one vote for each share of capital stock
standing in his or her name on the record of Stockholders determined in
accordance with Section 2.5 hereof. If the Certificate of
<PAGE>
9
Incorporation provides for more or less than one vote for any share on any
matter, each reference in the By-laws or the General Corporation Law to a
majority or other proportion of stock shall refer to such majority or other
proportion of the votes of such stock. The provisions of Sections 212 and 217 of
the General Corporation Law shall apply in determining whether any shares of
capital stock may be voted and the persons, if any, entitled to vote such
shares; but the Corporation shall be protected in assuming that the persons in
whose names shares of capital stock stand on the stock ledger of the Corporation
are entitled to vote such shares. Holders of redeemable shares of stock are not
entitled to vote after the notice of redemption is mailed to such holders and a
sum sufficient to redeem the stocks has been deposited with a bank, trust
company, or other financial institution under an irrevocable obligation to pay
the holders the redemption price on surrender of the shares of stock. At any
meeting of Stockholders (at which a quorum was present to organize the meeting),
all matters, except as otherwise provided by statute or by the Certificate of
Incorporation or by these By-laws, shall be decided by a majority of the votes
cast at such meeting by the holders of shares present in person or represented
by proxy and entitled to vote thereon, whether or not a quorum is present when
the vote is taken. Directors may be elected either by written ballot or by voice
vote. In voting on any other question on which a vote by ballot is required by
law or is demanded by any Stockholder entitled to vote, the
<PAGE>
10
voting shall be by ballot. Each ballot shall be signed by the Stockholder voting
or the Stockholder's proxy and shall state the number of shares voted. On all
other questions, the voting may be by voice vote. Each Stockholder entitled to
vote at a meeting of Stockholders may authorize another person or persons to act
for such Stockholder by proxy. The validity and enforceability of any proxy
shall be determined in accordance with Section 212 of the General Corporation
Law. A Stockholder may revoke any proxy that is not irrevocable by attending the
meeting and voting in person or by filing an instrument in writing revoking the
proxy or by delivering a proxy in accordance with applicable law bearing a later
date to the Secretary.
2.11 Voting Procedures and Inspectors of Election at Meetings
of Stockholders. The Corporation, in advance of any meeting of Stockholders,
shall appoint one or more inspectors to act at the meeting and make a written
report thereof. The Corporation may designate one or more persons as alternate
inspectors to replace any inspector who fails to act. If no inspector or
alternate is able to act at a meeting, the person presiding at the meeting shall
appoint, one or more inspectors to act at the meeting. Each inspector, before
entering upon the discharge of his or her duties, shall take and sign an oath
faithfully to execute the duties of inspector with strict impartiality and
according to the best of his or her ability. The inspectors shall (a) ascertain
the number of shares outstanding and the voting power of each, (b) determine the
shares represented
<PAGE>
11
at the meeting and the validity of proxies and ballots, (c) count all votes and
ballots, (d) determine and retain for a reasonable period a record of the
disposition of any challenges made to any determination by the inspectors, and
(e) certify their determination of the number of shares represented at the
meeting and their count of all votes and ballots. The inspectors may appoint or
retain other persons or entities to assist the inspectors in the performance of
their duties. The date and time of the opening and the closing of the po11s for
each matter upon which the Stockholders will vote at a meeting shall be
determined by the person presiding at the meeting and shall be announced at the
meeting. No ballot, proxies or votes, or any revocation thereof or change
thereto, shall be accepted by the inspectors after the closing of the po11s
unless the Court of Chancery of the State of Delaware upon application by a
Stockholder shall determine otherwise.
2.12 Conduct of Meetings. (a) At each meeting of Stockholders,
the President, or in the absence of the President, the Chairman, or if there is
no Chairman or if there be one and the Chairman is absent, a Vice President, and
in case more than one Vice President shall be present, that Vice President
designated by the Board (or in the absence of any such designation, the most
senior Vice President, based on age, present), shall act as chairman of the
meeting. The Secretary, or in his or her absence one of the Assistant
Secretaries, shall act as secretary of the meeting. In case none of the officers
above designated to
<PAGE>
12
act as chairman or secretary of the meeting, respectively, shall be present, a
chairman or a secretary of the meeting, as the case may be, shall be chosen by a
majority of the votes cast at such meeting by the holders of shares of capital
stock present in person or represented by proxy and entitled to vote at the
meeting.
(b) Only persons who are nominated in accordance with
the following procedures shall be eligible for election as Directors.
Nominations of persons for election to the Board may be made at an annual
meeting or special meeting of Stockholders (i) by or at the direction of the
Board, (ii) by any nominating committee or person appointed by the Board or
(iii) by any Stockholder of the Corporation entitled to vote for the election of
Directors at the meeting who complies with the provisions of the following
paragraph (persons nominated in accordance with (iii) above are referred to
herein as "Stockholder nominees").
In addition to any other applicable requirements, all
nominations of Stockholder nominees must be made by written notice given by or
on behalf of a Stockholder of record of the Corporation (the "Notice of
Nomination"). The Notice of Nomination must be delivered personally to, or
mailed to, and received at the principal executive offices of the Corporation,
addressed to the attention of the Secretary, not less than 90 days nor more than
120 days prior to the annual meeting or special meeting of Stockholders;
provided, however, that in the event that less
<PAGE>
13
than 40 days' notice or prior public disclosure of the date of the meeting is
given or made to Stockholders, notice by the Stockholder to be timely, must be
received no later than the close of business on the 10th day following the day
on which such notice of the date of the meeting was mailed or such public
disclosure was made. Such Notice of Nomination shall set forth (i) the name and
record address of the Stockholder proposing to make nominations, (ii) the class
and number of shares of capital stock held of record, held beneficially and
represented by proxy held by such person as of the record date for the meeting
and as of the date of such Notice of Nomination, (iii) all information regarding
each Stockholder nominee that would be required to be set forth in a definitive
proxy statement filed with the Securities and Exchange Commission pursuant to
Section 14 of the Exchange Act, or any successor statute thereto, and the
written consent of each such Stockholder nominee to serve if elected, and (iv)
all other information that would be required to be filed with the Securities and
Exchange Commission if the person proposing such nominations were a participant
in a solicitation subject to Section 14 of the Exchange Act or any successor
statute thereto. The chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting, that any proposed nomination of a
Stockholder nominee was not made in accordance with the foregoing procedures
and, if he should so determine, he shall declare to the meeting and the
defective nomination shall be discarded. For purposes of Sections 2.12(b) and
<PAGE>
14
(c), public disclosure shall be deemed to be first made when disclosure of such
date of the annual meeting of Stockholders is first made in a press release
reported by the Dow Jones News Services, Associated Press or comparable national
news service, or in a document publicly filed by the Corporation with the
Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the
Exchange Act or any successor statute thereto.
(c) At any annual meeting of Stockholders, only such
business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual meeting of Stockholders, (i)
business must be specified in the notice of meeting (or any supplement thereto)
given by or at the direction of the Board, (ii) otherwise properly brought
before the meeting by or at the direction of the Board or (iii) otherwise
properly brought before the meeting by a Stockholder in accordance with the
terms of the following paragraph (business brought before the meeting in
accordance with (iii) above is referred to as "Stockholder business")
In addition to any other applicable requirements, all
proposals of Stockholder business must be made by written notice given by or on
behalf of a Stockholder of record of the Corporation (the "Notice of Business").
The Notice of Business must be delivered personally to, or mailed to, and
received at the principal executive offices of the Corporation, addressed to the
attention of the Secretary, not less than 90 days nor more than 120 days
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15
prior to the annual meeting of Stockholders; provided, however, that in the
event that less than 40 days' notice or prior public disclosure of the date of
the meeting is given or made to Stockholders, notice by the Stockholder to be
timely, must be received no later than the close of business on the 10th day
following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made. Such Notice of Business shall set forth (i) the
name and record address of the Stockholder proposing such Stockholder business,
(ii) the class and number of shares of capital stock held of record, held
beneficially and represented by proxy held by such person as of the record date
for the meeting and as of the date of such Notice of Business, (iii) a brief
description of the Stockholder business desired to be brought before the annual
meeting and the reasons for conducting such Stockholder business at the annual
meeting, (iv) any material interest of the Stockholder in such Stockholder
business and (v) all other information that would be required to be filed with
the Securities and Exchange Commission if the person proposing such Stockholder
business were a participant in a solicitation subject to Section 14 of the
Exchange Act. Notwithstanding anything in these By-laws to the contrary, no
business shall be conducted at the annual meeting of Stockholders except in
accordance with the procedures set forth in this Section 2.12(c), provided,
however, that nothing in this Section 2.12(c) shall be deemed to preclude
discussion by any Stockholder of any business properly
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16
brought before the annual meeting in accordance with said procedure. The
chairman of the meeting shall, if the facts warrant, determine and declare to
the meeting, that business was not properly brought before the meeting in
accordance with the foregoing procedures and, if he should so determine, he
shall declare to the meeting and any such business not properly brought before
the meeting shall not be transacted.
2.13 Order of Business. The order of business at all meetings
of Stockholders shall be as determined by the chairman of the meeting, but the
order of business to be followed at any meeting at which a quorum is present may
be changed by a majority of the votes cast at such meeting by the holders of
shares of capital stock present in person or represented by proxy and entitled
to vote at the meeting.
2.14 Action by Shareholders. Notwithstanding the provisions of
section 228 of the General Corporation Law (or any successor statute), any
action required or permitted by the General Corporation Law to be taken at any
annual or special meeting of Stockholders of the Corporation may be taken only
at such an annual or special meeting of Stockholders and cannot be taken by
written consent without a meeting.
ARTICLE 3
Directors
3.1 General Powers. Except as otherwise provided in the
Certificate of Incorporation, the business and
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17
affairs of the Corporation shall be managed by or under the direction of the
Board. The Board may adopt such rules and regulations, not inconsistent with the
Certificate of Incorporation or these By-laws or applicable laws, as it may deem
proper for the conduct of its meetings and the management of the Corporation. In
addition to the powers expressly conferred by these By-laws, the Board may
exercise all powers and perform all acts that are not required, by these By-laws
or the Certificate of Incorporation or by statute, to be exercised and performed
by the Stockholders.
3.2 Number; Qualification; Term of Office. The Board shall
consist of not less than three or more than 15 members. The exact number of
Directors within the minimum and maximum limitations specified in the preceding
sentence shall be fixed from time to time by resolution adopted by a majority of
the entire Board then in office, whether or not present at a meeting. Directors
need not be stockholders. The Directors shall be divided into three classes with
the term of office of the first class to expire at the first annual meeting of
Stockholders of the Corporation next following the end of the Corporation's
fiscal year ending March 31, 1996, the term of office of the second class to
expire at the first annual meeting of Stockholders of the Corporation next
following the end of the Corporation's fiscal year ending March 31, 1997 and the
term of office of the third class to expire at the annual meeting of
Stockholders of the Corporation next following the end of the Corporation's
fiscal year ending March 31, 1998. At
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18
each annual meeting of Stockholders following such initial election as specified
above, Directors elected to succeed those Directors whose terms expire shall be
elected for a term of office to expire at the third succeeding annual meeting of
Stockholders after their election. Each director shall hold office until a
successor is elected and qualified or until the Director's death, resignation or
removal.
3.3 Election. Directors shall, except as otherwise required by
statute or by the Certificate of Incorporation, be elected by a plurality of the
votes cast at a meeting of stockholders by the holders of shares present in
person or represented by proxy at the meeting and entitled to vote in the
election.
3.4 Newly Created Directorships and Vacancies. Unless
otherwise provided in the Certificate of Incorporation, newly created
Directorships resulting from any increase in the authorized number of Directors
and vacancies occurring in the Board for any other reason, may be filled by the
affirmative votes of a majority of the entire Board, although less than a
quorum, or by a sole remaining Director, and Directors so chosen shall hold
office for a term expiring at the annual meeting of Stockholders at which the
term of the class to which they have been elected expires, or, in each case
until their respective successors are duly elected and qualified, or until the
respective Directors' earlier death, resignation or removal.
3.5 Resignation. Any Director may resign at any time by
written notice to the Corporation. Such resignation
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19
shall take effect at the time therein specified, and, unless otherwise specified
in such resignation, the acceptance of such resignation shall not be necessary
to make it effective.
3.6 Removal. Any one or more or all of the Directors may be
removed, at any time, but only for cause by the Stockholders having at least a
majority in voting power of the then issued and outstanding shares of capital
stock of the Corporation.
3.7 Compensation. Each Director, in consideration of his or
her service as such, shall be entitled to receive from the Corporation such
amount per annum or such fees for attendance at Directors' meetings, or both, as
the Board may from time to time determine, together with reimbursement for the
reasonable out-of-pocket expenses, if any, incurred by such Director in
connection with the performance of his or her duties. Each Director who shall
serve as a member of any committee of Directors in consideration of serving as
such shall be entitled to such additional amount per annum or such fees for
attendance at committee meetings, or both, as the Board may from time to time
determine, together with reimbursement for the reasonable out-of-pocket
expenses, if any, incurred by such Director in the performance of his or her
duties. Nothing contained in this Section 3.7 shall preclude any Director from
serving the Corporation or its subsidiaries in any other capacity and receiving
proper compensation therefor.
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20
3.8 Times and Places of Meetings. The Board may hold meetings,
both regular and special, either within or without the State of Delaware. The
times and places for holding meetings of the Board may be fixed from time to
time by resolution of the Board or (unless contrary to a resolution of the
Board) in the notice of the meeting.
3.9 Annual Meetings. On the day when and at the place where
the annual meeting of stockholders for the election of Directors is held, and as
soon as practicable thereafter, the Board may hold its annual meeting, without
notice of such meeting, for the purposes of organization, the election of
officers and the transaction of other business. The annual meeting of the Board
may be held at any other time and place specified in a notice given as provided
in Section 3.11 hereof for special meetings of the Board or in a waiver of
notice thereof.
3.10 Regular Meetings. Regular meetings of the Board may be
held without notice at such times and at such places as shall from time to time
be determined by the Board.
3.11 Special Meetings. Special meetings of the Board may be
called by the Chairman, the President or the Secretary or by any two or more
Directors then serving on at least one day's notice to each Director given by
one of the means specified in Section 3.14 hereof other than by mail, or on at
least three days' notice if given by mail. Special meetings shall be called by
the Chairman, President or
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21
Secretary in like manner and on like notice on the written request of any two or
more of the Directors then serving.
3.12 Telephone Meetings. Directors or members of any committee
designated by the Board may participate in a meeting of the Board or of such
committee by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting pursuant to this Section 3.12 shall constitute
presence in person at such meeting.
3.13 Adjourned Meetings. A majority of the Directors present
at any meeting of the Board, including an adjourned meeting, whether or not a
quorum is present, may adjourn such meeting to another time and place. At least
one day's notice of any adjourned meeting of the Board shall be given to each
Director whether or not present at the time of the adjournment, if such notice
shall be given by one of the means specified in Section 3.14 hereof other than
by mail, or at least three days' notice if by mail. Any business may be
transacted at an adjourned meeting that might have been transacted at the
meeting as originally called.
3.14 Notice Procedure. Subject to Sections 3.11 and 3.15
hereof, whenever, under the provisions of any statute, the Certificate of
Incorporation or these By-laws, notice is required to be given to any Director,
such notice shall be deemed given effectively if given in person or by
telephone, by mail addressed to such Director at such
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22
Director's address as it appears on the records of the Corporation, with postage
thereon prepaid, or by telegram, telex, telecopy or similar means addressed as
aforesaid.
3.15 Waiver of Notice. Whenever the giving of any notice is
required by statute, the Certificate of Incorporation or these By-laws, a waiver
thereof, in writing, signed by the person or persons entitled to said notice,
whether before or after the event as to which such notice is required, shall be
deemed equivalent to notice. Attendance by a person at a meeting shall
constitute a waiver of notice of such meeting except when the person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business on the ground that the meeting has not been
lawfully called or convened. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the Directors or a committee of
Directors need be specified in any written waiver of notice unless so required
by statute, the Certificate of Incorporation or these By-laws.
3.16 Organization. At each meeting of the Board, the Chairman,
or in the absence of the Chairman the President, or in the absence of the
President a chairman chosen by a majority of the Directors present, shall
preside. The Secretary shall act as secretary at each meeting of the Board. In
case the Secretary shall be absent from any meeting of the Board, an Assistant
Secretary shall perform the duties of secretary at such meeting; and in the
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23
absence from any such meeting of the Secretary and all Assistant Secretaries,
the person presiding at the meeting may appoint any person to act as secretary
of the meeting.
3.17 Quorum of Directors. The presence in person of a majority
of the entire Board shall be necessary and sufficient to constitute a quorum for
the transaction of business at any meeting of the Board, but a majority of a
smaller number may adjourn any such meeting to a later date.
3.18 Action by Majority Vote. Except as otherwise expressly
required by statute, the Certificate of Incorporation or these By-laws, the act
of a majority of the Directors present at a meeting at which a quorum is present
shall be the act of the Board.
3.19 Action Without Meeting. Unless otherwise restricted by
the Certificate of Incorporation or these By-laws, any action required or
permitted to be taken at any meeting of the Board or of any committee thereof
may be taken without a meeting if all Directors or members of such committee, as
the case may be, consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the Board or committee.
ARTICLE 4
COMMITTEES OF THE BOARD
The Board may, by resolution passed by a vote of the entire
Board, designate one or more committees, each committee to consist of one or
more of the Directors of the Corporation. The Board may designate one or more
Directors
<PAGE>
24
as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of such committee. If a member of a committee
shall be absent from any meeting, or disqualified from voting thereat, the
remaining member or members present and not disqualified from voting, whether or
not such member or members constitute a quorum, may, by a unanimous vote,
appoint another member of the Board to act at the meeting in the place of any
such absent or disqualified member. Any such committee, to the extent provided
in the resolution of the Board passed as aforesaid, shall have and may exercise
all the powers and authority of the Board in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to be
impressed on all papers that may require it, but no such committee shall have
the power or authority of the Board in reference to amending the Certificate of
Incorporation, adopting an agreement of merger or consolidation under section
251 or section 252 of the General Corporation Law, recommending to the
stockholders (a) the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, or (b) a dissolution of the Corporation or a
revocation of a dissolution, or amending the By-laws of the Corporation; and,
unless the resolution designating it expressly so provides, no such committee
shall have the power and authority to declare a dividend, to authorize the
issuance of stock or to adopt a certificate of ownership and merger pursuant to
Section 253 of the General Corporation Law.
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25
Unless otherwise specified in the resolution of the Board designating a
committee, at all meetings of such committee a majority of the total number of
members of the committee shall constitute a quorum for the transaction of
business, and the vote of a majority of the members of the committee present at
any meeting at which there is a quorum shall be the act of the committee. Each
committee shall keep regular minutes of its meetings. Unless the Board otherwise
provides, each committee designated by the Board may make, alter and repeal
rules for the conduct of its business. In the absence of such rules each
committee shall conduct its business in the same manner as the Board conducts
its business pursuant to Article 3 of these By-laws.
ARTICLE 5
OFFICERS
5.1 Positions. The officers of the Corporation shall be a
President, a Secretary, a Treasurer or a Chief Financial Officer and such other
officers as the Board may appoint, including a Chairman, one or more Vice
Presidents and one or more Assistant Secretaries and Assistant Treasurers, who
shall exercise such powers and perform such duties as shall be determined from
time to time by the Board. The Board may designate one or more Vice Presidents
as Executive Vice Presidents and may use descriptive words or phrases to
designate the standing, seniority or areas of special competence of the Vice
Presidents elected or appointed by it. Any number of offices may be held by the
same
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26
person unless the Certificate of Incorporation or these By-laws otherwise
provide.
5.2 Appointment. The officers of the Corporation shall be
chosen by the Board at its annual meeting or at such other time or times as the
Board shall determine.
5.3 Compensation. The compensation of all officers of the
Corporation shall be fixed by the Board. No officer shall be prevented from
receiving a salary or other compensation by reason of the fact that the officer
is also a Director.
5.4 Term of Office. Each officer of the Corporation shall hold
office for the term for which he or she is elected and until such officer's
successor is chosen and qualifies or until such officer's earlier death,
resignation or removal. Any officer may resign at any time upon written notice
to the Corporation. Such resignation shall take effect at the date of receipt of
such notice or at such later time as is therein specified, and, unless otherwise
specified, the acceptance of such resignation shall not be necessary to make it
effective. The resignation of an officer shall be without prejudice to the
contract rights of the Corporation, if any. Any officer elected or appointed by
the Board may be removed at any time, with or without cause, by vote of a
majority of the entire Board. Any vacancy occurring in any office of the
Corporation shall be filled by the Board. The removal of an officer without
cause shall be without prejudice to the officer's contract
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27
rights, if any. The election or appointment of an officer shall not of itself
create contract rights.
5.5 Fidelity Bonds. The Corporation may secure the fidelity of
any or all of its officers or agents by bond or otherwise.
5.6 Chairman. The Chairman, if one shall have been appointed,
shall preside at all meetings of the Board and shall exercise such powers and
perform such other duties as shall be determined from time to time by the Board.
5.7 President. The President shall be the Chief Executive
Officer of the Corporation and shall have general supervision over the business
of the Corporation, subject, however, to the control of the Board and of any
duly authorized committee of Directors. The President shall preside at all
meetings of the Stockholders and at all meetings of the Board at which the
Chairman (if there be one) is not present. The President may sign and execute in
the name of the Corporation deeds, mortgages, bonds, contracts and other
instruments except in cases in which the signing and execution thereof shall be
expressly delegated by the Board or by these By-laws to some other officer or
agent of the Corporation or shall be required by statute otherwise to be signed
or executed and, in general, the President shall perform all duties incident to
the office of President of a corporation and such other duties as may from time
to time be assigned to the President by the Board.
5.8 Vice Presidents. At the request of the President, or, in
the President's absence, at the request of
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28
the Board, the Vice Presidents shall (in such order as may be designated by the
Board or, in the absence of any such designation, in order of seniority based on
age) perform all of the duties of the President and, in so performing, shall
have all the powers of, and be subject to all restrictions upon, the President.
Any Vice President may sign and execute in the name of the Corporation deeds,
mortgages, bonds, contracts or other instruments, except in cases in which the
signing and execution thereof shall be expressly delegated by the Board or by
these By-laws to some other officer or agent of the Corporation, or shall be
required by statute otherwise to be signed or executed, and each Vice President
shall perform such other duties as from time to time may be assigned to such
Vice President by the Board or by the President.
5.9 Secretary. The Secretary shall attend all meetings of the
Board and of the Stockholders and shall record all the proceedings of the
meetings of the Board and of the stockholders in a book to be kept for that
purpose, and shall perform like duties for committees of the Board, when
required. The Secretary shall give, or cause to be given, notice of all special
meetings of the Board and of the stockholders and shall perform such other
duties as may be prescribed by the Board or by the President, under whose
supervision the Secretary shall be. The Secretary shall have custody of the
corporate seal of the Corporation, and the Secretary, or an Assistant Secretary,
shall have authority to impress the same on any instrument requiring
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29
it, and when so impressed the seal may be attested by the signature of the
Secretary or by the signature of such Assistant Secretary. The Board may give
general authority to any other officer to impress the seal of the Corporation
and to attest the same by such officer's signature. The Secretary or an
Assistant Secretary may also attest all instruments signed by the President or
any Vice President. The Secretary shall have charge of all the books, records
and papers of the Corporation relating to its organization and management, shall
see that the reports, statements and other documents required by statute are
properly kept and filed and, in general, shall perform all duties incident to
the office of Secretary of a corporation and such other duties as may from time
to time be assigned to the Secretary by the Board or by the President.
5.10 Treasurer or Chief Financial Officer. The Treasurer or
Chief Financial Officer shall have charge and custody of, and be responsible
for, all funds, securities and notes of the Corporation; receive and give
receipts for moneys due and payable to the Corporation from any sources
whatsoever; deposit all such moneys and valuable effects in the name and to the
credit of the Corporation in such depositaries as may be designated by the
Board; against proper vouchers, cause such funds to be disbursed by checks or
drafts on the authorized depositaries of the Corporation signed in such manner
as shall be determined by the Board and be responsible for the accuracy of the
amounts of all moneys so disbursed; regularly enter or cause to be entered
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30
in books or other records maintained for the purpose full and adequate account
of all moneys received or paid for the account of the Corporation; have the
right to require from time to time reports or statements giving such information
as the Treasurer or Chief Financial Officer may desire with respect to any and
all financial transactions of the Corporation from the officers or agents
transacting the same; render to the President or the Board, whenever the
President or the Board shall require the Treasurer or Chief Financial Officer so
to do, an account of the financial condition of the Corporation and of all
financial transactions of the Corporation; exhibit at all reasonable times the
records and books of account to any of the Directors upon application at the
office of the Corporation where such records and books are kept; disburse the
funds of the Corporation as ordered by the Board; and, in general, perform all
duties incident to the office of Treasurer or Chief Financial Officer of a
corporation and such other duties as may from time to time be assigned to the
Treasurer or Chief Financial Officer by the Board or the President.
5.11 Assistant Secretaries and Assistant Treasurers. Assistant
Secretaries and Assistant Treasurers shall perform such duties as shall be
assigned to them by the Secretary or by the Treasurer or Chief Financial
Officer, respectively, or by the Board or by the President.
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ARTICLE 6
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
6.1 Execution of Contracts. The Board, except as otherwise
provided in these By-laws, may prospectively or retroactively authorize any
officer or officers, employee or employees or agent or agents, in the name and
on behalf of the Corporation, to enter into any contract or execute and deliver
any instrument, and any such authority may be general or confined to specific
instances, or otherwise limited.
6.2 Loans. The Board may prospectively or retroactively
authorize the President or any other officer, employee or agent of the
Corporation to effect loans and advances at any time for the Corporation from
any bank, trust company or other institution, or from any firm, corporation or
individual, and for such loans and advances the person so authorized may make,
execute and deliver promissory notes, bonds or other certificates or evidences
of indebtedness of the Corporation, and, when authorized by the Board so to do,
may pledge and hypothecate or transfer any securities or other property of the
Corporation as security for any such loans or advances. Such authority conferred
by the Board may be general or confined to specific instances, or otherwise
limited.
6.3 Checks, Drafts, Etc. All checks, drafts and other orders
for the payment of money out of the funds of the Corporation and all evidences
of indebtedness of the
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Corporation shall be signed on behalf of the Corporation in such manner as shall
from time to time be determined by resolution of the Board.
6.4 Deposits. The funds of the Corporation not otherwise
employed shall be deposited from time to time to the order of the Corporation
with such banks, trust companies, investment banking firms, financial
institutions or other depositaries as the Board may select or as may be selected
by an officer, employee or agent of the Corporation to whom such power to select
may from time to time be delegated by the Board.
ARTICLE 7
STOCK AND DIVIDENDS
7.1 Certificates Representing Shares. The shares of capital
stock of the Corporation shall be represented by certificates in such form
(consistent with the provisions of Section 158 of the General Corporation Law)
as shall be approved by the Board. Such certificates shall be signed by the
Chairman, the President or a Vice President and by the Secretary or an Assistant
Secretary or the Treasurer or Chief Financial Officer or an Assistant Treasurer,
and may be impressed with the seal of the Corporation or a facsimile thereof.
The signatures of the officers upon a certificate may be facsimiles, if the
certificate is countersigned by a transfer agent or registrar other than the
Corporation itself or its employee. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has
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been placed upon any certificate shall have ceased to be such officer, transfer
agent or registrar before such certificate is issued, such certificate may,
unless otherwise ordered by the Board, be issued by the Corporation with the
same effect as if such person were such officer, transfer agent or registrar at
the date of issue.
7.2 Transfer of Shares. Transfers of shares of capital stock
of the Corporation shall be made only on the books of the Corporation by the
holder thereof or by the holder's duly authorized attorney appointed by a power
of attorney duly executed and filed with the Secretary or a transfer agent of
the Corporation, and on surrender of the certificate or certificates
representing such shares of capital stock properly endorsed for transfer and
upon payment of all necessary transfer taxes. Every certificate exchanged,
returned or surrendered to the Corporation shall be marked "Cancelled," with the
date of cancellation, by the Secretary or an Assistant Secretary or the transfer
agent of the Corporation. A person in whose name shares of capital stock shall
stand on the books of the Corporation shall be deemed the owner thereof to
receive dividends, to vote as such owner and for all other purposes as respects
the Corporation. No transfer of shares of capital stock shall be valid as
against the Corporation, its stockholders and creditors for any purpose, except
to render the transferee liable for the debts of the Corporation to the extent
provided by law, until such transfer shall have been entered
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on the books of the Corporation by an entry showing from and to whom
transferred.
7.3 Transfer and Registry Agents. The Corporation may from
time to time maintain one or more transfer offices or agents and registry
offices or agents at such place or places as may be determined from time to time
by the Board.
7.4 Lost, Destroyed, Stolen and Mutilated Certificates. The
holder of any shares of capital stock of the Corporation shall immediately
notify the Corporation of any loss, destruction, theft or mutilation of the
certificate representing such shares, and the Corporation may issue a new
certificate to replace the certificate alleged to have been lost, destroyed,
stolen or mutilated. The Board may, in its discretion, as a condition to the
issue of any such new certificate, require the owner of the lost, destroyed,
stolen or mutilated certificate, or his or her legal representatives, to make
proof satisfactory to the Board of such loss, destruction, theft or mutilation
and to advertise such fact in such manner as the Board may require, and to give
the Corporation and its transfer agents and registrars, or such of them as the
Board may require, a bond in such form, in such sums and with such surety or
sureties as the Board may direct, to indemnify the Corporation and its transfer
agents and registrars against any claim that may be made against any of them on
account of the continued existence of any such certificate so alleged to have
been
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lost, destroyed, stolen or mutilated and against any expense in connection with
such claim.
7.5 Rules and Regulations. The Board may make such rules and
regulations as it may deem expedient, not inconsistent with these By-laws or
with the Certificate of Incorporation, concerning the issue, transfer and
registration of certificates representing shares of its capital stock.
7.6 Restriction on Transfer of Stock. A written restriction on
the transfer or registration of transfer of capital stock of the Corporation, if
permitted by Section 202 of the General Corporation Law and noted conspicuously
on the certificate representing such capital stock, may be enforced against the
holder of the restricted capital stock or any successor or transferee of the
holder, including an executor, administrator, trustee, guardian or other
fiduciary entrusted with like responsibility for the person or estate of the
holder. Unless noted conspicuously on the certificate representing such capital
stock, a restriction, even though permitted by Section 202 of the General
Corporation Law, shall be ineffective except against a person with actual
knowledge of the restriction. A restriction on the transfer or registration of
transfer of capital stock of the Corporation may be imposed either by the
Certificate of Incorporation or by an agreement among any number of stockholders
or among such stockholders and the Corporation. No restriction so imposed shall
be binding with respect to capital stock issued prior to the adoption
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36
of the restriction unless the holders of such capital stock are parties to an
agreement or voted in favor of the restriction.
7.7 Dividends, Surplus, Etc. Subject to the provisions of the
Certificate of Incorporation and of law, the Board
7.7.1 may declare and pay dividends or make other
distributions on the outstanding shares of capital stock in such amounts
and at such time or times as it, in its discretion, shall deem advisable
giving due consideration to the condition of the affairs of the
Corporation;
7.7.2 may use and apply, in its discretion, any of
the surplus of the Corporation in purchasing or acquiring any shares of
capital stock of the Corporation, or purchase warrants therefor, in
accordance with law, or any of its bonds, debentures, notes, scrip or
other securities or evidences of indebtedness; and
7.7.3 may set aside from time to time out of such
surplus or net profits such sum or sums as, in its discretion, it may
think proper, as a reserve fund to meet contingencies, or for equalizing
dividends or for the purpose of maintaining or increasing the property or
business of the Corporation, or for any purpose it may think conducive to
the best interests of the Corporation.
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ARTICLE 8
INDEMNIFICATION
8.1 Indemnity Undertaking. To the extent not prohibited by
law, the Corporation shall indemnify any person who is or was made, or
threatened to be made, a party to any threatened, pending or completed action,
suit or proceeding (a "Proceeding"), whether civil, criminal, administrative or
investigative, including, without limitation, an action by or in the right of
the Corporation to procure a judgment in its favor, by reason of the fact that
such person, or a person of whom such person is the legal representative, is or
was a Director or officer of the Corporation, or is or was serving as a
director, officer, employee or agent or in any other capacity at the request of
the Corporation for any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise (an "Other Entity") while serving as a
Director or officer of the Corporation, against judgments, fines, penalties,
excise taxes, amounts paid in settlement and costs, charges and expenses
(including attorneys' fees and disbursements) actually and reasonably incurred
by such person in connection with such Proceeding if such person acted in good
faith and in a manner such person believed to be in or not opposed to the best
interests of the Corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
To the extent specified by the Board
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at any time and to the extent not prohibited by law, the Corporation may
indemnify any person who is or was made, or threatened to be made, a party to
any threatened, pending or completed Proceeding, whether civil, criminal,
administrative or investigative, including, without limitation, an action by or
in the right of the Corporation to procure a judgment in its favor, by reason of
the fact that such person is or was an employee or agent of the Corporation, or
is or was serving as a director, officer, employee or agent or in any other
capacity at the request of the Corporation for any Other Entity, against
judgments, fines, penalties, excise taxes, amounts paid in settlement and costs,
charges and expenses (including attorneys' fees and disbursements) actually and
reasonably incurred by such person in connection with such Proceeding if such
person acted in good faith and in a manner such person believed to be in or not
opposed to the best interests of the Corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful.
8.2 Advancement of Expenses. The Corporation shall, from time
to time, reimburse or advance to any Director or officer or other person
entitled to indemnification hereunder the funds necessary for payment of
expenses, including attorneys' fees and disbursements, incurred in connection
with any Proceeding, in advance of the final disposition of such Proceeding;
provided, however, that, if required by the General Corporation Law, such
<PAGE>
39
expenses incurred by or on behalf of any Director or officer or other person may
be paid in advance of the final disposition of a Proceeding only upon receipt by
the Corporation of an undertaking, by or on behalf of such Director or officer
(or other person indemnified hereunder), to repay any such amount so advanced if
it shall ultimately be determined by final judicial decision from which there is
no further right of appeal that such Director, officer or other person is not
entitled to be indemnified for such expenses.
8.3 Rights Not Exclusive. The rights to indemnification and
reimbursement or advancement of expenses provided by, or granted pursuant to,
this Article 8 shall not be deemed exclusive of any other rights to which a
person seeking indemnification or reimbursement or advancement of expenses may
have or hereafter be entitled under any statute, the Certificate of
Incorporation, these By-laws, any agreement (including any policy of insurance
purchased or provided by the Corporation under which directors, officers,
employees and other agents of the Corporation are covered), any vote of
stockholders or disinterested Directors or otherwise, both as to action in his
or her official capacity and as to action in another capacity while holding such
office.
8.4 Continuation of Benefits. The rights to indemnification
and reimbursement or advancement of expenses provided by, or granted pursuant
to, this Article 8 shall continue as to a person who has ceased to be a Director
or
<PAGE>
40
officer (or other person indemnified hereunder) and shall inure to the benefit
of the executors, administrators, legatees and distributees of such person.
8.5 Insurance. The Corporation shall have power to purchase
and maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of an Other
Entity, against any liability asserted against such person and incurred by such
person in any such capacity, or arising out of such persons status as such,
whether or not the Corporation would have the power to indemnify such person
against such liability under the provisions of this Article 8, the Certificate
of Incorporation or under section 145 of the General Corporation Law or any
other provision of law.
8.6 Binding Effect. The provisions of this Article 8 shall be
a contract between the Corporation, on the one hand, and each Director and
officer who serves in such capacity at any time while this Article 8 is in
effect and any other person entitled to indemnification hereunder, on the other
hand, pursuant to which the Corporation and each such Director, officer or other
person intend to be, and shall be legally bound. No repeal or modification of
this Article 8 shall affect any rights or obligations with respect to any state
of facts then or theretofore existing or thereafter arising or any proceeding
theretofore or
<PAGE>
41
thereafter brought or threatened based in whole or in part upon any such state
of facts.
8.7 Procedural Rights. The rights to indemnification and
reimbursement or advancement of expenses provided by, or granted pursuant to,
this Article 8 shall be enforceable by any person entitled to such
indemnification or reimbursement or advancement of expenses in any court of
competent jurisdiction. Neither the failure of the Corporation (including its
Board, its independent legal counsel and its Stockholders) to have made a
determination prior to the commencement of such action that such indemnification
or reimbursement or advancement of expenses is proper in the circumstances nor
an actual determination by the Corporation (including its Board, its independent
legal counsel and its Stockholders) that such person is not entitled to such
indemnification or reimbursement or advancement of expenses shall constitute a
defense to the action or create a presumption that such person is not so
entitled. Such a person shall also be indemnified for any expenses incurred in
connection with successfully establishing his or her right to such
indemnification or reimbursement or advancement of expenses, in whole or in
part, in any such proceeding.
8.8 Service Deemed at Corporation's Request. Any Director or
officer of the Corporation serving in any capacity in (a) another corporation of
which a majority of the shares entitled to vote in the election of its directors
is held, directly or indirectly, by the Corporation or
<PAGE>
42
(b) any employee benefit plan of the Corporation or any corporation referred to
in clause (a) shall be deemed to be doing so at the request of the Corporation.
8.9 Election of Applicable Law. Any person entitled to be
indemnified or to reimbursement or advancement of expenses as a matter of right
pursuant to this Article 8 may elect to have the right to indemnification or
reimbursement or advancement of expenses interpreted on the basis of the
applicable law in effect at the time of the occurrence of the event or events
giving rise to the applicable Proceeding, to the extent permitted by law, or on
the basis of the applicable law in effect at the time such indemnification or
reimbursement or advancement of expenses is sought. Such election shall be made,
by a notice in writing to the Corporation, at the time indemnification or
reimbursement or advancement of expenses is sought; provided, however, that if
no such notice is given, the right to indemnification or reimbursement or
advancement of expenses shall be determined by the law in effect at the time
indemnification or reimbursement or advancement of expenses is sought.
ARTICLE 9
BOOKS AND RECORDS
9.1 Books and Records. There shall be kept at the principal
office of the Corporation correct and complete records and books of account
recording the financial transactions of the Corporation and minutes of the
<PAGE>
43
proceedings of the stockholders, the Board and any committee of the Board. The
Corporation shall keep at its principal office, or at the office of the transfer
agent or registrar of the Corporation, a record containing the names and
addresses of all stockholders, the number and class of shares held by each and
the dates when they respectively became the owners of record thereof.
9.2 Form of Records. Any records maintained by the Corporation
in the regular course of its business, including its stock ledger, books of
account, and minute books, may be kept on, or be in the form of, punch cards,
magnetic tape, photographs, microphotographs, or any other information storage
device, provided that the records so kept can be converted into clearly legible
written form within a reasonable time. The Corporation shall so convert any
records so kept upon the request of any person entitled to inspect the same.
9.3 Inspection of Books and Records. Except as otherwise
provided by law, the Board shall determine from time to time whether, and, if
allowed, when and under what conditions and regulations, the accounts, books,
minutes and other records of the Corporation, or any of them, shall be open to
the stockholders for inspection.
ARTICLE 10
SEAL
The corporate seal shall have inscribed thereon the name of
the Corporation, the year of its organization
<PAGE>
44
and the words "Corporate Seal, Delaware." The seal may be used by causing it or
a facsimile thereof to be impressed or affixed or otherwise reproduced.
ARTICLE 11
FISCAL YEAR
The fiscal year of the Corporation shall be fixed, and may be
changed, by resolution of the Board.
ARTICLE 12
PROXIES AND CONSENTS
Unless otherwise directed by the Board, the Chairman, the
President, any Vice President, the Secretary or the Treasurer or Chief Financial
Officer, or any one of them, may execute and deliver on behalf of the
Corporation proxies respecting any and all shares or other ownership interests
of any Other Entity owned by the Corporation appointing such person or persons
as the officer executing the same shall deem proper to represent and vote the
shares or other ownership interests so owned at any and all meetings of holders
of shares or other ownership interests, whether general or special, and/or to
execute and deliver consents respecting such shares or other ownership
interests; or any of the aforesaid officers may attend any meeting of the
holders of shares or other ownership interests of such Other Entity and thereat
vote or exercise any or all other powers of the Corporation as the holder of
such shares or other ownership interests.
<PAGE>
45
ARTICLE 13
EMERGENCY BY-LAWS
Unless the Certificate of Incorporation provides otherwise, the
following provisions of this Article 13 shall be effective during an emergency,
which is defined as when a quorum of the Corporation's Directors cannot be
readily assembled because of some catastrophic event. During such emergency:
13.1 Notice to Board Members. Any one member of the Board or
any one of the following officers: Chairman, President, any Vice President,
Secretary, or Treasurer or Chief Financial Officer, may call a meeting of the
Board. Notice of such meeting need be given only to those Directors whom it is
practicable to reach, and may be given in any practical manner, including by
publication and radio. Such notice shall be given at least six hours prior to
commencement of the meeting.
13.2 Temporary Directors and Quorum. One or more officers of
the Corporation present at the emergency Board meeting, as is necessary to
achieve a quorum, shall be considered to be Directors for the meeting, and shall
so serve in order of rank, and within the same rank, in order of seniority. In
the event that less than a quorum of the Directors are present (including any
officers who are to serve as Directors for the meeting), those Directors present
(including the officers serving as Directors) shall constitute a quorum.
<PAGE>
46
13.3 Actions Permitted To Be Taken. The Board as constituted
in Section 13.2, and after notice as set forth in Section 13.1 may:
13.3.1 prescribe emergency powers to any officer
of the Corporation;
13.3.2 delegate to any officer or Director, any of
the powers of the Board;
13.3.3 designate lines of succession of officers
and agents, in the event that any of them are unable to discharge their
duties;
13.3.4 relocate the principal place of business,
or designate successive or simultaneous principal places of business; and
13.3.5 take any other convenient, helpful or
necessary action to carry on the business of the Corporation.
ARTICLE 14
AMENDMENTS
The Board may from time to time adopt, amend or repeal the
By-laws; provided, however, that any By-laws adopted or amended by the Board may
be amended or repealed, and any By-laws may be adopted, by a vote of the
Stockholders having at least a majority in voting power of the then issued and
outstanding shares of capital stock of the Corporation.
CONTIFINANCIAL CORPORATION
1998 NONQUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT (the "Agreement"), is made effective as of the
10th day of December, 1998, (hereinafter called the "Date of Grant"), between
ContiFinancial Corporation, a Delaware corporation (hereinafter called the
"Company"), and N A M E (hereinafter called the "Participant"):
R E C I T A L 5:
WHEREAS, the Company has adopted the ContiFinancial
Corporation 1995 Long-Term Stock Incentive Plan (the "Plan"), which Plan (i) is
incorporated herein by reference and made a part of this Agreement, and (ii)
defines the capitalized terms used but not otherwise defined herein; and
WHEREAS, the Committee has determined to grant the option
provided for herein (the "Option") to the Participant pursuant to the Plan and
the terms set forth herein.
NOW THEREFORE, in consideration of the mutual covenants
hereinafter set forth, the parties hereto agree as follows:
1. Grant of the Option. The Company hereby grants to the
Participant the right and option (the "Option") to purchase, on the terms and
conditions hereinafter set forth, all or any part of an aggregate of __________
Shares, subject to adjustment as set forth in the Plan. The purchase price of
the Shares subject to the Option shall be $6.00 per Share (the "Exercise
Price"). The Option is intended to be a non-qualified stock option, and is not
intended to be treated as an option that complies with Section 422 of the
Internal Revenue Code of 1986, as amended.
2. Vesting.
(a) Subject to the Participant's continued employment with the
Company and to the Committee's power, in its sole discretion, to accelerate the
vesting on all or part of the Option at any time, the Option shall vest and
become exercisable:
<PAGE>
Vesting Date Shares Which Vest
December 10, 1998
December 10, 1999
December 10, 2000
At any given time, the portion (if any) of the Option which
has become vested and exercisable as described above (or pursuant to Section
2(c) below) is hereinafter referred to as the "Vested Portion".
(b) If the Participant's employment with the Company is
terminated for any reason except as set forth in Section 2(d) and (e) below
prior to December 10, 2008, the Option shall, to the extent not then vested, be
canceled by the Company without consideration and the Vested Portion of the
Option shall remain exercisable for the period set forth in Section 3(a)below.
(c) Notwithstanding any other provision of this Agreement to
the contrary, a Change of Control (as defined in the Plan) shall not apply and
shall not accelerate the vesting period of the grant.
(d) If the Participant's employment with the Company is
terminated by reason of death or Disability, the option to the extent not vested
shall become fully vested and remain exercisable for the period set forth in
Section 3(a) below.
(e) If the Participants employment with the Company is
terminated without Cause or for Good Reason, the option to the extent not vested
shall become fully vested and remain exercisable for a period set forth in
Section 3(a) below.
<PAGE>
3. Exercise of Option.
(a) Period of Exercise. Subject to the provisions of the Plan
and this Agreement, the Participant may exercise all or any part of the Vested
Portion of the Option at any time, subject to compliance with any trading
policies of the Company which may be in effect from time to time, prior to the
earliest to occur of:
(i) the tenth anniversary of the Date of Grant;
(ii) one year following the date of the Participant's
termination of employment due to death or "Disability";
(iii) six months following the date of the Participant's
termination of employment by the Company without "Cause" or for "Good Reason";
and
(iv) the date of the Participant's termination of employment
by the Company for "Cause" or by the Participant for any reason;
Notwithstanding the foregoing, in the event a Participant is
unable to exercise the Option during any of the periods described in clauses
(ii) or (iii) above due to restrictions set forth in any trading policy of the
Company which is then in effect, the Option shall, subject to clause (i) above,
remain exercisable until such time as the exercise of the Option is permitted
under such policy or otherwise permitted by the Board of Directors of the
Company.
For purposes of this Agreement:
"Cause" shall mean "Cause" as defined in any employment
agreement then in effect between the Participant and the Company or if not
defined therein or, if there shall be no such agreement, (i) Participant's
engagement in misconduct which is materially injurious to the Company or its
affiliates, (ii) Participant's continued failure to substantially perform his
duties to the Company, (iii) Participant's repeated dishonesty in the
performance of his duties to the Company, (iv) Participant's commission of an
act or acts constituting any (x) fraud against, or misappropriation or
embezzlement from the Company or any of its affiliates, (y) crime involving
moral turpitude, or (z) offense that could result in a jail sentence of at least
30 days or (v) Participant's material breach of any confidentiality or
non-competition covenant entered into between the Participant and the Company.
The determination of the existence of Cause shall
<PAGE>
be made by the Committee in good faith, which determination shall be final and
conclusive for purposes of this Agreement;
"Good Reason" shall mean the diminution of title, position or
responsibilities or reduction in base salary; and
"Disability" shall mean "disability" as defined in any
employment agreement then in effect between the Participant and the Company or
if not defined therein or if there shall be no such agreement, as defined in the
Company's long-term disability plan as in effect from time to time, or if there
shall be no plan or if not defined therein, the Participant's becoming
physically or mentally incapacitated and consequent inability for a period of
six (6) months in any twelve (12) consecutive month period to perform his duties
to the Company.
(b) Method of Exercise.
(i) Subject to Section 3(a), the Vested Portion of the Option
may be exercised by delivering to the Company at its principal office written
notice of intent to so exercise; provided that, the Option may be exercised with
respect to whole Shares only. Such notice shall specify the number of Shares for
which the Option is being exercised and shall be accompanied by payment in full
of the Exercise Price. The payment of the Exercise Price shall be made in cash
or its equivalent, or, if and to the extent permitted by the Committee, by
exchanging Shares owned by the Participant (which are not the subject of any
pledge or other security interest and which have been owned by the Participant
for at least 6 months), or by a combination of the foregoing, provided that the
combined value of all cash and cash equivalents and the Fair Market Value of any
such Shares so tendered to the Company as of the date of such tender is at least
equal to the aggregate Exercise Price.
(ii) Notwithstanding any other provision of the Plan or this
Agreement to the contrary, the Option may not be exercised prior to the
completion of any registration or qualification of the Option or the Shares
under applicable state and federal securities or other laws, or under any ruling
or regulation of any governmental body or national securities exchange that the
Committee shall in its sole discretion determine to be necessary or advisable.
(iii) Upon the Company's determination that the Option has
been validly exercised as to any of the Shares, the Company shall issue
certificates in the Participant's name for such Shares. However, the Company
shall not be liable to the Participant for damages relating to any delays in
issuing the certificates to him, any loss of the certificates, or any mistakes
or errors in the issuance of the certificates or in the certificates themselves.
<PAGE>
(iv) In the event of the Participant's death, the Vested
Portion of the Option shall remain exercisable by the Participant's executor or
administrator, or the person or persons to whom the Participant's rights under
this Agreement shall pass by will or by the laws of descent and distribution as
the case may be, to the extent set forth in Section 3 (a). Any heir or legatee
of the Participant shall take rights herein granted subject to the terms and
conditions hereof.
4. No Right to Continued Employment. Neither the Plan nor this
Agreement shall be construed as giving the Participant the right to be retained
in the employ of, or in any consulting relationship to, the Company or any
Affiliate. Further, the Company or an Affiliate may at any time dismiss the
Participant or discontinue any consulting relationship, free from any liability
or any claim under the Plan or this Agreement, except as otherwise expressly
provided herein.
5. Legend on Certificates. The certificates representing the Shares
purchased by exercise of the Option shall be subject to such stop transfer
orders and other restrictions as the Committee may deem advisable under the Plan
or the rules, regulations, and other requirements of the Securities and Exchange
Commission, any stock exchange upon which such Shares are listed, and any
applicable Federal or state laws, and the Committee may cause a legend or
legends to be put on any such certificates to make appropriate reference to such
restrictions.
6. Transferability. The Option may not be assigned, alienated,
pledged, attached, sold or otherwise transferred or encumbered by the
Participant otherwise than by will or by the laws of descent and distribution or
pursuant to a QDRO, and any such purported assignment, alienation, pledge,
attachment, sale, transfer or encumbrance shall be void and unenforceable
against the Company or any Affiliate; provided that the designation of a
beneficiary shall not constitute an assignment, alienation, pledge, attachment,
sale, transfer or encumbrance. No such permitted transfer of the Option to heirs
or legatees of the Participant shall be effective to bind the Company unless the
Committee shall have been furnished with written notice thereof and a copy of
such evidence as the Committee may deem necessary to establish the validity of
the transfer and the acceptance by the transferee or transferees of the terms
and conditions hereof. During the Participant's lifetime, the Option is
exercisable only by the Participant.
7. Withholding. The Participant agrees to make appropriate
arrangements with the Company for satisfaction of any applicable
<PAGE>
federal, state or local income tax, withholding requirements or like
requirements, including the payment to the Company at the time of exercise of,
or other settlement in respect of, the Option of all such taxes and requirements
and the Company shall be authorized to take such action as may be necessary in
the opinion of the Company's counsel (including, without limitation, withholding
Shares otherwise deliverable to the Participant hereunder and/or withholding
amounts from any compensation or other amount owing from the Company to the
Participant) to satisfy all obligations for the payment of such taxes.
8. Securities Laws. Upon the acquisition of any Shares pursuant to
the exercise of the Option, Participant will make or enter into such written
representations, warranties and agreements as the Committee may reasonably
request in order to comply with applicable securities laws or with this
Agreement.
9. Notices. Any notice necessary under this Agreement shall be
addressed to the Company in care of its Secretary at the principal executive
office of the Company and to the Participant at the address appearing in the
personnel records of the Company for such Participant or to either party at such
other address as either party hereto may hereafter designate in writing to the
other. Any such notice shall be deemed effective upon receipt thereof by the
addressee.
10.Choice of Law. THE INTERPRETATION, PERFORMANCE AND ENFORCEMENT OF
THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
11.Option Subject to Plan. By entering into this Agreement the
Participant agrees and acknowledges that the Participant has received and read a
copy of the Plan. The Option is subject to the Plan. The terms and provisions of
the Plan as it may be amended from time to time are hereby incorporated herein
by reference. In the event of a conflict between any term or provision contained
herein and a term or provision of the Plan, the applicable terms and provisions
of the Plan will govern and prevail.
12.Signature in Counterparts. This Agreement may be signed in
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement.
CONTIFINANCIAL CORPORATION
By:_____________________________________
NAME
_____________________________________
EXECUTION COPY
SUBSERVICING AGREEMENT
SUBSERVICING AGREEMENT dated as of November 1, 1998 by and among
ContiMortgage Corporation, a Delaware corporation (the "Servicer"), ContiWest
Corporation, a Nevada corporation, ContiSecurities Asset Funding Corp., a
Delaware corporation (the "Depositor"), Continental Grain Company, a Delaware
corporation (the "Subservicer") and Manufacturers and Traders Trust Company, a
New York banking corporation (the "Trustee"), in its capacity as Trustee under
various Pooling and Servicing Agreements listed on the attached Schedule A,
which Schedule may be amended from time to time by delivery of notice thereof to
the parties hereto and to the related Certificate Insurers (the "Pooling
Agreements") and on behalf of the related securitization trusts (the "Trusts")
formed pursuant to the Pooling Agreements.
WHEREAS, the Servicer and the Trustee have previously entered into
the Pooling Agreements, among the Servicer, the Trustee, the Depositor and the
other parties named therein pursuant to which the Servicer is to act as servicer
to service and administer certain mortgage loans (the "Mortgage Loans") owned by
the Trusts in accordance with the Pooling Agreements;
WHEREAS, the Servicer, pursuant to Section 8.03 of the Pooling
Agreements, desires to appoint the Subservicer to perform certain of the
Servicer's servicing obligations under the Pooling Agreements;
WHEREAS, the Depositor on behalf of the Trusts desires the
Subservicer to perform certain of the Servicer's servicing obligations to
benefit the Trusts; and
WHEREAS, the Trusts wish to obtain the benefit of the subservicing
arrangements to be provided by the Subservicer.
NOW, THEREFORE, in consideration of the premises and mutual
covenants hereinafter set forth, the parties hereto, intending to be legally
bound, hereby agree as follows:
DEFINITIONS
Definitions. The following terms have the following meanings when
used in this Agreement.
"Agreement" means this Subservicing Agreement, and all amendments
hereof and supplements hereto.
"Business Day" means any day that is not a Saturday, Sunday or other
day on which commercial banking institutions in The City of New York, or in the
city in which the principal corporate trust office of the Trustee is located,
are authorized or obligated by law or executive order to be closed, and when
used with reference to the determination of LIBOR, shall also exclude any day on
which banks are not open for dealings in dollar deposits in the London interbank
market.
"Delinquency Advances" with respect to any Trust, has the meaning
set forth in the related Pooling Agreement.
<PAGE>
"Depositor" has the meaning set forth in the introductory paragraph
hereto.
"LIBOR" means, with respect to any period commencing on a Monthly
Remittance Date and ending on the day before the next Monthly Remittance Date,
the rate of interest (calculated on a per annum basis) equal to the one month
London Interbank Offered Rate as reported on the display designated as "Page
3750" on the Telerate Service (or such other display as may replace Page 3750 on
the Telerate Service) on the related LIBOR Determination Date.
"LIBOR Determination Date" means, with respect to any period
commencing on a Monthly Remittance Date and ending on the day before the next
Monthly Remittance Date, the second Business Day prior to such earlier Monthly
Remittance Date.
"Monthly Remittance Date" means the 10th day of each month or, if
such day is not a Business Day, the Business Day succeeding such day.
"Mortgage Loans" has the meaning set forth in the first WHEREAS
clause in the Recitals.
"Person" means any legal person, including any individual,
corporation, limited liability company, partnership, joint venture, association,
joint stock company, trust, unincorporated organization or government or any
agency or political subdivision thereof.
"Pooling Agreements" has the meaning set forth in the introductory
paragraph hereto.
"Reimbursement Available Funds" has the meaning set forth in Section
2.03(b) hereof.
"Right" has the meaning set forth in Section 6.02 hereof.
"Servicer" has the meaning set forth in the introductory paragraph
hereto.
"Subservicer" has the meaning set forth in the introductory
paragraph hereto.
"Subservicer Advance" has the meaning set forth in Section 2.02(a)
hereof.
"Subservicer Advance Notice" has the meaning set forth in Section
2.02(b) hereof.
"Subservicing Fee" has the meaning set forth in Section 2.03(a)
hereof.
"Trustee" has the meaning set forth in the introductory paragraph
hereto
"Trusts" has the meaning set forth in the introductory paragraph
hereto.
Other Terms. Capitalized terms used but not defined herein shall
have the meanings ascribed to such terms in the related Pooling Agreements.
THE SERVICER AND THE SUBSERVICER
Appointment of the Subservicer; Direction to Trustee. Pursuant to
the Pooling Agreements, the Servicer and the Trusts hereby appoint the
Subservicer to perform certain of the Servicer's servicing obligations under the
Pooling Agreements as set forth in Section 2.02 hereof, which appointment the
Subservicer hereby accepts. The Subservicer agrees to perform the obligations
set forth in Section 2.02 hereof in accordance with the servicing standards set
forth in the Pooling Agreements. The Subservicer undertakes no obligations of
the Servicer under the Pooling Agreements other
<PAGE>
than those expressly set forth in Section 2.02 hereof. Nothing in this Agreement
shall relieve the Servicer of its obligations under the Pooling Agreements or in
any way limit such obligations.
The Depositor hereby directs the Trustee to execute and deliver this
Agreement on behalf of each Trust.
Obligations of the Subservicer.
(a) The Subservicer hereby agrees to advance, until such advancing
obligation terminates pursuant to Section 4.01(a) hereof, to the Trustee on
behalf of the Trusts, on a Trust-by-Trust basis, on each Monthly Remittance
Date, an amount (the "Subservicer Advance") equal to the Delinquency Advance (if
any) for each Trust for such Monthly Remittance Date, provided that, in no event
shall the Subservicer be required to advance on any Monthly Remittance Date
aggregate Subservicer Advances for all Trusts in excess of $85,000,000, less the
amount of any outstanding unreimbursed Subservicer Advances. In the event that
the aggregate Subservicer Advances which Subservicer makes on any Monthly
Remittance Date are less than the aggregate Delinquency Advances required to be
made to the Trusts on that Monthly Remittance Date under the Pooling Agreements,
then the Subservicer shall allocate the Subservicer Advances among the Trusts
pro rata to the Delinquency Advances for each Trust, and the difference between
the Subservicer Advance and the total Delinquency Advance shall be advanced to
the Trust by the Servicer as a Delinquency Advance. The parties hereto agree
that if the Servicer is not required to advance any portion of a Delinquency
Advance as set forth in the relevant sections of the Pooling Agreements, then
the Subservicer shall likewise not be required to make any Subservicer Advance
with respect thereto.
(b) No later than Noon on the Business Day preceding each Monthly
Remittance Date the Servicer shall deliver to the Subservicer and the Trustee a
notice (the "Subservicer Advance Notice"), in the form of Exhibit I hereto,
setting forth the amount of the Subservicer Advance, if any due on such Monthly
Remittance Date.
Subservicing Fee; Reimbursement for Subservicer Advances; Priority.
(a) As compensation for the rendering of the services specified
herein, the Subservicer shall be entitled to receive a subservicing fee (the
"Subservicing Fee") from each Trust. The Subservicing Fee for any period shall
equal the product of (i) LIBOR plus 137 basis points, (ii) 1/360, (iii) the
number of days in the period, and (iv) the average amount of unreimbursed
Subservicer Advances during the period. In no event shall the Subservicing Fee
payable to the Subservicer for any month exceed the Servicing Fee payable to the
Servicer. The amount of any Subservicer Fee paid to the Subservicer shall
reduce, dollar-for-dollar, the amount of the Servicing Fee payable to the
Servicer.
(b) (i) The Servicer collects principal, interest and certain fees
on the Mortgage Loans, as agent for and on behalf of the Trusts pursuant to and
in accordance with the Pooling Agreements. The portion of these collections that
is
<PAGE>
available, in accordance with the terms and provisions of the Pooling
Agreements, for the reimbursement of Delinquency Advances and the payment of the
Servicing Fee is referred to herein as the "Reimbursement Available Funds." The
Reimbursement Available Funds are owned by and are the property of, the related
Trusts.
(ii) The Servicer agrees that it shall have no claim against the
Trusts to receive or retain any portion of the reimbursement for Subservicer
Advances. The Subservicer acknowledges that the Servicer, in paying the
Subservicing Fee and such reimbursement amounts to the Subservicer, is paying
such amounts on behalf of the Trusts only, solely from funds and assets of the
Trust, and is not liable to the Subservicer to pay any such amounts from its own
funds. The parties hereto agree that the Servicer shall be acting in the
capacity as agent of the Trusts when it performs its collection duties in
accordance with the Pooling Agreements and remittance duties hereunder.
(c) On each Business Day, the Subservicer shall be paid, by
remittance by the Servicer acting as an agent of the Trusts, out of the
Reimbursement Available Funds, available on that day, an amount equal to any
accrued but unpaid Subservicing Fee through the end of the prior day. After
payment of the Subservicing Fee, the Servicer shall be paid, by remittance by
the Servicer acting as an agent of the Trusts, out of the Reimbursement
Available Funds an amount equal to any accrued but unpaid Servicing Fee. The
excess of the Subservicer Fee due on any Business Day over the amount of
Subservicer Fee actually paid on such Business Day shall be carried forward and
shall be paid first out of the Reimbursement Available Funds before any other
amounts are paid under this subsection on each Business Day thereafter until
such carried-forward amounts are paid in full.
(d) On each Business Day, following the payment of the Subservicing
Fee and the Servicing Fee, the remaining amount, if any, of available
Reimbursement Available Funds shall be used to reimburse the Subservicer, by
remittance by the Servicer acting as an agent of the Trusts, for Subservicer
Advances made by the Subservicer and the Servicer for Delinquency Advances made
by the Servicer through the prior day. Prior to the termination pursuant to
Section 4.01(a) of the Subservicer's obligation to advance, the remaining
Reimbursement Available Funds shall be reimbursed to the Subservicer and the
Servicer in the proportion that the outstanding unreimbursed Subservicer
Advances made by the Subservicer bear to the outstanding unreimbursed
Delinquency Advances made by the Servicer. After the Subservicer's obligations
to advance have been terminated pursuant to Section 4.01(a) hereof, all
remaining Reimbursement Available Funds shall first be used to reimburse the
Subservicer for outstanding unreimbursed Subservicer Advances.
(e) Notwithstanding anything herein to the contrary, the parties
hereto agree that the sum of (i) the Subservicing Fee paid to the Subservicer,
plus (ii) the Servicing Fee paid to the Servicer, shall never exceed the
Servicing Fee which would otherwise be payable under the terms of the Pooling
Agreements, if the effect of this Agreement were not taken into account.
Notwithstanding anything herein to the contrary, the parties hereto agree that
the sum of (i) any reimbursement for Subservicer Advances made by the
Subservicer, plus (ii)
<PAGE>
any reimbursement for Delinquency Advances made by the Servicer, shall never
exceed the reimbursement for Delinquency Advances which would otherwise be
payable under the terms of the Pooling Agreements, if the effect of this
Agreement were not taken into account.
REPRESENTATIONS, WARRANTIES AND COVENANTS
Representations, Warranties and Covenants of the Subservicer. The
Subservicer hereby represents and warrants to the Trustee as follows:
(a) The Subservicer is a Delaware corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and is in compliance with the laws of each state necessary to enable it to
perform its obligations under the terms of this Agreement; the Subservicer has
the full corporate power and authority to execute and deliver this Agreement and
to perform in accordance herewith; the execution, delivery and performance of
this Agreement by the Subservicer and the consummation of the transactions
contemplated hereby have been duly and validly authorized; this Agreement
evidences the valid, binding and enforceable obligation of the Subservicer; and
all requisite corporate action has been taken by the Subservicer to make this
Agreement valid and binding upon the Subservicer in accordance with its terms;
(b) Neither the execution and delivery of this Agreement, nor the
fulfillment of or compliance with the terms and conditions of this Agreement,
will conflict with or result in a breach of any of the terms, conditions or
provisions of the Subservicer's charter or by-laws or any material agreement or
instrument to which the Subservicer is now a party or by which it is bound, or
constitute a default or result in an acceleration under any of the foregoing, or
result in the violation of any law, rule, regulation, order, judgment or decree
to which the Subservicer or its property is subject;
(c) There is no action, suit, proceeding, or investigation pending
or, to the knowledge of the Subservicer, threatened against the Subservicer
which, either in any one instance or in the aggregate, may result in any
material adverse change in the business, operations, financial condition,
properties or assets of the Subservicer, or in any material impairment of the
right or ability of the Subservicer to carry on its business, or of any action
taken or to be taken in connection with the obligations of the Subservicer
contemplated herein, or which would materially impair the ability of the
Subservicer to perform under the terms of this Agreement; and
(d) No consent, approval, authorization or order of any court or
governmental agency or body is required for the execution, delivery and
performance by the Subservicer of or compliance by the Subservicer with this
Agreement or the consummation of the transactions contemplated by this
Agreement, or if required, such approval has been obtained prior to the date
hereof.
Representations, Warranties and Covenants of the Servicer. The
Servicer hereby represents and warrants to the Subservicer and the Trustee as
follows:
(a) The Servicer is a Delaware corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and is in
compliance
<PAGE>
with the laws of each state necessary to enable it to perform its obligations
under the terms of this Agreement; the Servicer has the full corporate power and
authority to execute and deliver this Agreement and to perform in accordance
herewith; the execution, delivery and performance of this Agreement by the
Servicer and the consummation of the transactions contemplated hereby have been
duly and validly authorized; this Agreement evidences the valid, binding and
enforceable obligation of the Servicer; and all requisite corporate action has
been taken by the Servicer to make this Agreement valid and binding upon the
Servicer in accordance with its terms;
(b) Neither the execution and delivery of this Agreement, nor the
fulfillment of or compliance with the terms and conditions of this Agreement,
will conflict with or result in a breach of any of the terms, conditions or
provisions of the Servicer's charter or by-laws or any material agreement or
instrument to which the Servicer is now a party or by which it is bound, or
constitute a default or result in an acceleration under any of the foregoing, or
result in the violation of any law, rule, regulation, order, judgment or decree
to which the Servicer or its property is subject;
(c) There is no action, suit, proceeding, or investigation pending
or, to the knowledge of the Servicer, threatened against the Servicer which,
either in any one instance or in the aggregate, may result in any material
adverse change in the business, operations, financial condition, properties or
assets of the Servicer, or in any material impairment of the right or ability of
the Servicer to carry on its business substantially as now conducted, or of any
action taken or to be taken in connection with the obligations of the Servicer
contemplated herein, or which would materially impair the ability of the
Servicer to perform under the terms of this Agreement; and
(d) No consent, approval, authorization or order of any court or
governmental agency or body is required for the execution, delivery and
performance by the Servicer of or compliance by the Servicer with this Agreement
or the consummation of the transactions contemplated by this Agreement, or if
required, such approval has been obtained prior to the date hereof.
REMOVAL; RESIGNATION; MERGER; ASSIGNMENT
Term of Agreement; Termination of Subservicing.
(a) (i) The Subservicer's obligation to make Subservicer Advances
hereunder shall terminate on October 15, 1999 except as such obligation may be
terminated earlier as set forth in this Section 4.01(a) and such obligation may
be extended if agreed to in writing by the Servicer and the Subservicer, with
notice given to the other parties hereto and the related Certificate Insurers.
The Servicer may terminate the Subservicer upon five days prior written notice
to each of the other parties hereto and the related Certificate Insurers, and
upon such termination the Subservicer's obligation to make Subservicer Advances
shall simultaneously terminate. In the event that the Servicer resigns or is
terminated pursuant to the terms of the Pooling Agreements, (x) the Trustee or a
successor servicer may terminate the Subservicer without payment of any fee and
upon such termination the Subservicer's obligation to make Subservicer Advances
shall
<PAGE>
simultaneously terminate or (y) the Subservicer may immediately terminate its
obligation to make Subservicer Advances upon notice to the parties hereto and
the related Certificate Insurers.
(ii) In the event that the Subservicer fails to timely receive
any amounts due and payable to it from any Trust, the Subservicer may terminate
its obligation to make Subservicer Advances upon five days notice to each of the
other parties hereto and the related Certificate Insurers.
(b) Notwithstanding any termination of the Subservicer's advancing
obligation, the Subservicer's right to reimbursement for unpaid Subservicing
Fees and unreimbursed Subservicer Advances shall survive any such termination
until such amounts have been paid in full. Following any termination of the
Subservicer hereunder, the Servicer (or, if applicable, the successor Servicer
appointed pursuant to the related Pooling Agreement) shall, on behalf of the
related Trust, be required to continue to remit to the Subservicer amounts due
to it in respect of unpaid Subservicing Fees and unreimbursed Subservicer
Advances, as calculated in and provided by Article II hereof until such amounts
have been paid in full.
Merger or Consolidation of the Subservicer. The Subservicer may be
merged or consolidated with or into any Person, or transfer all or substantially
all of its assets to any Person, in which case any Person resulting from any
merger or consolidation to which the Subservicer shall be a party, or any Person
succeeding to the business of the Subservicer, shall be the successor of the
Subservicer, as the case may be, hereunder, without the execution or filing of
any paper or any further act on the part of any of the parties hereof, anything
herein to the contrary notwithstanding; provided, however, that the successor or
surviving Person to the Subservicer shall be qualified to act as a subservicer
in accordance with Section 8.03 of the Pooling Agreements.
Assignment. With the prior written consent of the Servicer and the
Certificate Insurer with respect to the related Trust, the Subservicer may
assign its rights and obligations hereunder to any institution which qualifies
as a "Subservicer" under each Pooling Agreement.
LIMITATION ON LIABILITY; INDEMNIFICATION
Limitation on Liability of the Subservicer; Indemnification.
(a) The Subservicer and any director, officer, employee or agent of
the Subservicer may rely in good faith on any document of any kind which, prima
facie, is properly executed and submitted by any Person respecting any matters
arising thereunder. The Subservicer and any director, officer, employee or agent
of the Subservicer shall be indemnified and held harmless by the Servicer
against any loss, liability or expense incurred in connection with any legal
action relating to this Agreement or the Pooling Agreements, other than any
loss, liability or expense incurred by reason of willful misfeasance, bad faith
or gross negligence in the performance of its duties hereunder.
(b) To the extent that the Subservicer incurs any loss, liability or
expense arising out of or in connection with this Agreement, the Servicer hereby
assigns to the Subservicer the Servicer's right to indemnification from the
Trust Estate
<PAGE>
pursuant to Section 8.05 of the Pooling Agreements; provided, however, that in
the event the Servicer seeks indemnification pursuant to Section 8.05 of the
Pooling Agreements for itself from the Trust Estate, the Subservicer shall be
indemnified pursuant to clause (a) hereof.
(c) The Subservicer shall not be under any obligation to appear in,
prosecute or defend any legal action, unless such action is directly related to
its duties under this Agreement and in its opinion, does not involve it in any
expense or liability; provided, however, that the Subservicer may in its
discretion undertake any such action which it may deem necessary or desirable
with respect to this Agreement and the rights and duties of the parties hereto.
In such event, pursuant to clause (b) above, the legal expenses and costs of
such action and any liability resulting therefrom (except any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or gross negligence
in the performance of duties hereunder) shall be expenses, costs and liabilities
of either the Servicer or the Trust Estate. In the case of such reimbursement
from the Trust Estate, the Subservicer shall be entitled to be reimbursed
therefor only from the amounts otherwise distributable on the Class R
Certificates as and to the extent provided in Section 8.05 of the Pooling
Agreements, any such right of reimbursement being prior to the rights of the
Class R Certificateholders to receive any such amount.
Indemnification of the Trustee. The Trustee and any director,
officer, employee or agent of the Trustee shall be indemnified and held harmless
by the Servicer against any loss, liability or expense incurred in connection
with any legal action relating to this Agreement or the Pooling Agreements,
other than any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or gross negligence by the Trustee or by reason of
reckless disregard of its obligations and duties hereunder.
MISCELLANEOUS
Inconsistencies with Pooling Agreements; Amendment to Subservicing
Agreement and the Pooling Agreements.
(a) This Agreement may be amended from time to time by written
agreement signed by the parties hereto.
(b) The Servicer hereby agrees that it shall not amend the Pooling
Agreements in any way that would affect the rights or obligations of the
Subservicer hereunder without the prior written consent of the Subservicer.
(c) In the event that this Agreement is determined to constitute an
amendment to the Pooling Agreements, then this Agreement shall be deemed to
amend the Pooling Agreement as follows: (i) The Servicer, the Trustee and the
Trust may enter into Sub-servicing Agreements with a Person meeting the
qualifications set forth in the Pooling Agreement and may have obligations under
such agreement with respect to the subservicer including without limitation the
obligation to make reimbursements for Delinquency Advances and to pay the
Servicing Fee, provided that such obligations do not exceed the obligations
otherwise set forth in the Pooling Agreements with respect to the Servicer; and
(ii) Continental Grain Company and any other Person to which the Servicer, the
Trustee and the Certificate Insurer have consented in writing shall be eligible
to act as a sub-servicer notwithstanding anything to the contrary therein.
<PAGE>
Indulgences, Etc. Neither the failure nor any delay on the part of
any party to exercise any right, remedy, power or privilege (each, a "Right")
under this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any Right preclude any other or further exercise of the same
or of any other Right, nor shall any waiver of any Right with respect to any
occurrence be construed as a waiver of such Right with respect to any other
occurrence. No waiver shall be effective unless it is in writing and is signed
by the party asserted to have granted such waiver.
Controlling Law; Jurisdiction.
(a) This Agreement and all questions relating to its validity,
interpretation, performance and enforcement (including, without limitation,
provisions concerning limitations of actions), shall be governed by and
construed in accordance with the laws of the State of New York, notwithstanding
any conflict-of-laws doctrines of the State of New York or other jurisdictions
to the contrary, and without the aid of any canon, custom or rule of law
requiring construction against the draftsman.
(b) The parties hereto hereby irrevocably submit to the jurisdiction
of the United States District Court for the Southern District of New York and
any court in the State of New York located in the City and County of New York,
and any appellate court from any thereof, in any action, suit or proceeding
brought against it or in connection with this Agreement or any of the related
documents or the transactions contemplated hereunder or for recognition or
enforcement of any judgment, and the parties hereto hereby irrevocably and
unconditionally agree that all claims in respect of any such action or
proceeding may be heard or determined in such New York State court or, to the
extent permitted by law, in such federal court. The parties hereto agree that a
final judgment in any such action, suit or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on the judgment or in any other
manner provided by law. To the extent permitted by applicable law, the parties
hereto hereby waive and agree not to assert by way of motion, as a defense or
otherwise in any such suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of such courts, that the suit, action or
proceeding is brought in an inconvenient forum, that the venue of the suit,
action or proceeding is improper or that the related documents or the subject
matter thereof may not be litigated in or by such courts.
Waiver of Jury Trial. Each of the parties hereby irrevocably waives
all right to a trial by jury in any action, proceeding or counterclaim arising
out of or relating to this Agreement, any other transaction document or any
instrument or document delivered hereunder or thereunder.
Notices. All notices, requests, demands and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly given, made and received only when delivered
(personally, by courier service such as FedEx, or by other messenger) against
receipt or three days after when deposited in the United States mails, first
class postage prepaid, addressed as set forth below:
(i) If to Servicer:
ContiMortgage Corporation
One Conti Park
338 South Warminster Road
Hatboro, Pennsylvania 19040-3430
Attention: Senior Vice President
and Chief Counsel
Telephone:(215) 347-3404
Fax:(215) 347-3400
<PAGE>
(ii) If to Subservicer:
Continental Grain Company
277 Park Avenue
New York, New York 10172
Attention: Senior Corporate Vice President
and Chief Legal Counsel
Telephone:(212) 207-5100
Fax:(212) 207-5799
(iii) If to the Trustee:
Manufacturers and Traders Trust Company
One M&T Plaza
Buffalo, New York 14203-2399
Telephone:(716) 842-4387
Fax:(716) 842-5905
Attention: Corporate Trust Administration
In addition, notice by mail shall be by air mail if posted outside
of the continental United States. Any party may alter the address to which
communications or copies are to be sent by giving notice of such change of
address in conformity with the provisions of this paragraph for the giving of
notice.
Binding Nature of Agreement. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective permitted
successors and assigns notwithstanding any provision of any Pooling Agreement
that might deem this Agreement to be binding only upon the Servicer or
Subservicer.
Provisions Separable. The provisions of this Agreement are
independent of and separate from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
Counterparts. For the purpose of facilitating the execution of this
Agreement and or other purposes, this Agreement may be executed simultaneously
in any number of counterparts, each of which shall be deemed to be an original,
and together shall constitute and be one and the same instrument.
Entire Agreement; Amendment of this Agreement. This Agreement
contains the entire understanding between the parties hereto with respect to the
subject matter hereof, and supersedes all prior and contemporaneous agreements
and understandings, inducements or conditions, express or implied, oral or
written, except as herein contained. The express terms hereof control and
supersede any course of performance and/or usage of the trade inconsistent with
any of the terms hereof.
<PAGE>
This Agreement may not be modified or amended other than by an agreement in
writing. This Agreement may not be amended in a manner adverse to the interests
of the related Certificate Insurers without the prior written consent of such
related Certificate Insurers.
Paragraph Headings. The paragraph headings in this Agreement are for
convenience only; they form no part of this Agreement and shall not affect its
interpretation.
Advice from Counsel. The parties understand that this Agreement is a
legally binding agreement that may affect such party's rights. Each party
represents to the other that it has received legal advice from counsel of its
choice regarding meaning and legal significance of this Agreement and that it is
satisfied with its legal counsel and the advice received from it.
Judicial Interpretation. Should any provision of this Agreement or
any of the other transaction documents require judicial interpretation, it is
agreed that a court interpreting or construing the same shall not apply a
presumption that the terms hereof shall be more strictly construed against any
Person by reason of the rule of construction that a document is to be construed
more strictly against the Person who itself or through its agent prepared the
same, it being agreed that all Parties have participated in the preparation of
this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their proper and duly authorized officers as of the
date first above written.
CONTIMORTGAGE CORPORATION,
as Servicer and as Seller
By: /s/ Margaret M. Curry
---------------------------------------
Name: Margaret M. Curry
Title: Senior Vice President
By: /s/ Daniel J. Egan
---------------------------------------
Name: Daniel J. Egan
Title: Senior Vice President CONTINENTAL
GRAIN COMPANY, as Subservicer
By: /s/ Mark R. Baker
---------------------------------------
Name: Mark R. Baker
Title: Senior Vice President
CONTISECURITIES ASSET FUNDING CORP.,
as Depositor
By: /s/ John Banu
---------------------------------------
Name: John Banu
Title: Authorized Signatory
By: /s/ Jay Remis
---------------------------------------
Name: Jay Remis
Title: Authorized Signatory
CONTIWEST CORPORATION,
as Seller
By: /s/ Joy Tolbert
---------------------------------------
Name: Joy Tolbert
Title: Vice President
By: /s/ Todd Hart
---------------------------------------
Name: Todd Hart
Title: Assistant Secretary
[Signature Page to Subservicing Agreement]
<PAGE>
MANUFACTURERS AND TRADERS
TRUST COMPANY,
as Trustee and on behalf of the Trusts
By: /s/ Neil B. Witoff
---------------------------------------
Name: Neil B. Witoff
Title: Assistant Vice President
For the purpose of Section 6.01(c)
only and as to acceptability of
Subservicer under the related
Pooling Agreements
CONSENTED TO BY:
MBIA INSURANCE CORPORATION
By: /s/ Theresa Murray
---------------------------------------
Name: Theresa Murray
Title: Vice President and Manager
FINANCIAL GUARANTY INSURANCE COMPANY
By: /s/ Barry Lites
---------------------------------------
Name: Barry Lites
Title: Vice President
[Signature Page to Subservicing Agreement-con't]
<PAGE>
SCHEDULE A
List of Pooling Agreements
SERIES POOLING AGREEMENT
1994-3 Pooling and Servicing Agreement, dated as of June 1, 1994,
among ContiSecurities Asset Funding Corp., as Depositor,
ContiMortgage Corporation, as Servicer and as Seller and
Manufacturers and Traders Trust Company, as Trustee
1994-4 Pooling and Servicing Agreement, dated as of August 1, 1994,
among ContiSecurities Asset Funding Corp., as Depositor,
ContiMortgage Corporation, as Servicer and as Seller and
Manufacturers and Traders Trust Company, as Trustee
1994-5 Pooling and Servicing Agreement, dated as of December 1,
1994, among ContiSecurities Asset Funding Corp., as
Depositor, ContiMortgage Corporation, as Servicer and as
Seller and Manufacturers and Traders Trust Company, as
Trustee
1995-1 Pooling and Servicing Agreement, dated as of March 1, 1995,
among ContiSecurities Asset Funding Corp., as Depositor,
ContiMortgage Corporation, as Servicer and as Seller and
Manufacturers and Traders Trust Company, as Trustee
1995-2 Pooling and Servicing Agreement, dated as of May 1, 1995,
among ContiSecurities Asset Funding Corp., as Depositor,
ContiMortgage Corporation, as Servicer and as Seller and
Manufacturers and Traders Trust Company, as Trustee
1995-3 Pooling and Servicing Agreement, dated as of August 1, 1995,
among ContiSecurities Asset Funding Corp., as Depositor,
ContiMortgage Corporation, as Servicer and as Seller and
Manufacturers and Traders Trust Company, as Trustee
1995-4 Pooling and Servicing Agreement, dated as of November 1,
1995, among ContiSecurities Asset Funding Corp., as
Depositor, ContiMortgage Corporation, as Servicer and as
Seller and Manufacturers and Traders Trust Company, as
Trustee
1996-1 Pooling and Servicing Agreement, dated as of February 1,
1996, among ContiSecurities Asset Funding Corp., as
Depositor, ContiMortgage Corporation, as Servicer and as
Seller and Manufacturers and Traders Trust Company, as
Trustee
1996-2 Pooling and Servicing Agreement, dated as of June 1, 1996,
among ContiSecurities Asset Funding Corp., as Depositor,
ContiMortgage Corporation, as Servicer and as Seller and
Manufacturers and Traders Trust Company, as Trustee
1996-3 Pooling and Servicing Agreement, dated as of August 1, 1996,
among ContiSecurities Asset Funding Corp., as Depositor,
ContiMortgage Corporation, as Servicer and as Seller and
Manufacturers and Traders Trust Company, as Trustee
1996-4 Pooling and Servicing Agreement, dated as of December 1,
1996, among ContiSecurities Asset Funding Corp., as
Depositor, ContiMortgage Corporation, as Servicer and as
Seller, ContiWest Corporation, as Seller and Manufacturers
and Traders Trust Company, as Trustee
1997-1 Pooling and Servicing Agreement, dated as of February 1,
1997, among ContiSecurities Asset Funding Corp., as
Depositor, ContiMortgage Corporation, as Servicer and as
Seller, ContiWest Corporation, as Seller and Manufacturers
and Traders Trust Company, as Trustee
1997-2 Pooling and Servicing Agreement, dated as of March 1, 1997,
among ContiSecurities Asset Funding Corp., as Depositor,
ContiMortgage Corporation, as Servicer and as Seller,
ContiWest Corporation, as Seller and Manufacturers and
Traders Trust Company, as Trustee
<PAGE>
1997-3 Pooling and Servicing Agreement, dated as of June 1, 1997,
among ContiSecurities Asset Funding Corp., as Depositor,
ContiMortgage Corporation, as Servicer and as Seller,
ContiWest Corporation, as Seller and Manufacturers and
Traders Trust Company, as Trustee
1997-4 Pooling and Servicing Agreement, dated as of September 1,
1997, among ContiSecurities Asset Funding Corp., as
Depositor, ContiMortgage Corporation, as Servicer and as
Seller, ContiWest Corporation, as Seller and Manufacturers
and Traders Trust Company, as Trustee
1997-5 Pooling and Servicing Agreement, dated as of December 1,
1997, among ContiSecurities Asset Funding Corp., as
Depositor, ContiMortgage Corporation, as Servicer and as
Seller, ContiWest Corporation, as Seller and Manufacturers
and Traders Trust Company, as Trustee
1998-1 Pooling and Servicing Agreement, dated as of March 1, 1998,
among ContiSecurities Asset Funding Corp., as Depositor,
ContiMortgage Corporation, as Servicer and as Seller,
ContiWest Corporation, as Seller and Manufacturers and
Traders Trust Company, as Trustee
1998-2 Pooling and Servicing Agreement, dated as of June 1, 1998,
among ContiSecurities Asset Funding Corp., as Depositor,
ContiMortgage Corporation, as Servicer and as Seller,
ContiWest Corporation, as Seller and Manufacturers and
Traders Trust Company, as Trustee
1998-3 Pooling and Servicing Agreement, dated as of September 1,
1998, among ContiSecurities Asset Funding Corp., as
Depositor, ContiMortgage Corporation, as Servicer and as
Seller, ContiWest Corporation, as Seller and Manufacturers
and Traders Trust Company, as Trustee
<PAGE>
EXHIBIT I
Form of Subservicer Advance Notice
____________, ______
Continental Grain Company
277 Park Avenue
New York, New York 10172
Attention: _____________
Re: Subservicing Agreement, dated November 1, 1998;
Notice of Subservicer Advance
Pursuant to Section 2.02(b) of the Subservicing Agreement, dated as
of November 1, 1998 (the "Subservicing Agreement"), among ContiMortgage
Corporation (the "Servicer"), ContiWest Corporation, as Seller, ContiSecurities
Asset Funding Corp., as Depositor, Continental Grain Company (the "Subservicer")
and Manufacturers and Traders Trust Company (the "Trustee"), the undersigned
hereby notifies you that a Subservicer Advance in the amount of $_________ is
due on the Monthly Remittance Date occurring on ________, ______. The
computation of the amount of the Subservicer Advance is set forth below.
<TABLE>
<CAPTION>
Sum of Interest Amount on
Remittance Amount and deposit in related Amount of
Name of Principal Remittance Principal and Delinquency Amount of
Trust Amount Interest Account Advance Subservicer Advance
- --------- --------------------- ------------------ ----------- -------------------
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
Totals
</TABLE>
Please remit the amount of the Subservicer Advance directly to
Manufacturers and Traders Trust Company (the "Trustee") at the account listed
below by Noon on the Business Day preceding the Monthly Remittance Date.
To:
Account No:
Reference:
Very truly yours,
CONTIMORTGAGE CORPORATION, as Servicer
By: __________________________________
Name:
Title:
cc: Manufacturers and Traders Trust Company
One M&T Plaza
Buffalo, New York 14203-2399
Tel: (716) 842--4387
Fax: (716) 842--5905
Attention: Corporate Trust Administration
ADDENDUM NUMBER 1 TO SUBSERVICING AGREEMENT
Dated as of December 1, 1998
Reference is made to that certain Subservicing Agreement dated as of November 1,
1998 (the "Sub-Servicing Agreement") by and among ContiMortgage Corporation, a
Delaware corporation (the "Servicer"), ContiWest Corporation, a Nevada
corporation, ContiSecurities Asset Funding Corp., a Delaware corporation (the
"Depositor"), Continental Grain Company, a Delaware corporation (the
"Subservicer") and Manufacturers and Traders Trust Company, a New York banking
corporation (the "Trustee"), in its capacity as Trustee under various Pooling
and Servicing Agreements listed on attached thereto which Schedule may be
amended from time to time by delivery of notice thereof to the parties hereto
and to the related Certificate Insurers (the "Pooling Agreements") and on behalf
of the related securitization trusts (the "Trusts") formed pursuant to the
Pooling Agreements.
Terms capitalized herein and not defined herein shall have their respective
meanings set forth in the Sub-Servicing Agreement.
The parties to the Sub-Servicing Agreement hereby agree to
amend the Schedule to the Sub-Servicing Agreement by adding thereto a reference
to the Pooling Agreement relating to the Depositors Series 1998-4 securitization
Trust, with the result that the Series 1998-4 Trust will be one of the Trusts
covered by the Sub-Servicing Agreement.
Consistent with the foregoing, the following is hereby added to the Schedule:
Series Pooling Agreement
- ------ -----------------
1998-4 Pooling and Servicing Agreement, dated as of December 1,
1998, among ContiSecurities Asset Funding Corp., as Depositor,
ContiMortgage Corporation, as Servicer and as Seller, ContiWest
Corporation, as Seller and Manufacturers and Traders Trust
Company, as Trustee.
IN WITNESS WHEREOF, the parties have caused this Addendum Number 1 to be
executed and delivered by their proper and duly authorized officers as of the
date first above written.
CONTIMORTGAGE CORPORATION,
as Servicer and as Seller
By: /s/ Margaret M. Curry
----------------------------------------
Name: Margaret M. Curry
Title: Senior Vice President
<PAGE>
By: /s/ Daniel J. Egan
----------------------------------------
Name: Daniel J. Egan
Title: Senior Vice President
CONTINENTAL GRAIN COMPANY,
as Subservicer
By: /s/ Mark R. Baker
----------------------------------------
Name: Mark R. Baker
Title: Corporate Senior Vice President
CONTISECURITIES ASSET FUNDING CORP.,
as Depositor
By: /s/ John Banu
----------------------------------------
Name: John Banu
Title: Authorized Signatory
By: /s/ Mary Rapoport
----------------------------------------
Name: Mary Rapoport
Title: Authorized Signatory
CONTIWEST CORPORATION,
as Seller
By: /s/ Joy B. Tolbert
----------------------------------------
Name: Joy B. Tolbert
Title: Vice President
By: /s/ Todd Hart
----------------------------------------
Name: Todd Hart
Title: Assistant Secretary
MANUFACTURERS AND TRADERS
TRUST COMPANY,
as Trustee and on behalf of the Trusts
By: /s/ Neil Witoff
----------------------------------------
Name: Neil Witoff
Title: Assistant Vice President
[Signature Page to Addendum Number 1 to Subservicing Agreement]
ADDENDUM NUMBER 2 TO SUBSERVICING AGREEMENT
Dated as of March 1, 1999
Reference is made to that certain Subservicing Agreement dated as of November 1,
1998 (the "Sub-Servicing Agreement") by and among ContiMortgage Corporation, a
Delaware corporation (the "Servicer"), ContiWest Corporation, a Nevada
corporation, ContiSecurities Asset Funding Corp., a Delaware corporation (the
"Depositor"), Continental Grain Company, a Delaware corporation (the
"Subservicer") and Manufacturers and Traders Trust Company, a New York banking
corporation (the "Trustee"), in its capacity as Trustee under various Pooling
and Servicing Agreements listed on attached thereto which Schedule may be
amended from time to time by delivery of notice thereof to the parties hereto
and to the related Certificate Insurers (the "Pooling Agreements") and on behalf
of the related securitization trusts (the "Trusts") formed pursuant to the
Pooling Agreements.
Terms capitalized herein and not defined herein shall have their respective
meanings set forth in the Sub-Servicing Agreement.
The parties to the Sub-Servicing Agreement hereby agree to amend the Schedule to
the Sub-Servicing Agreement by adding thereto a reference to the Pooling
Agreement relating to the Depositor's Series 1999-1 securitization Trust, with
the result that the Series 1999-1 Trust will be one of the Trusts covered by the
Sub-Servicing Agreement.
Consistent with the foregoing, the following is hereby added to the Schedule:
Series Pooling Agreement
- ------ -----------------
1999-1 Pooling and Servicing Agreement, dated as of March 1, 1999 among
ContiSecurities Asset Funding Corp., as Depositor, ContiMortgage
Corporation, as Servicer and as Seller, ContiWest Corporation, as
Seller and Manufacturers and Traders Trust Company, as Trustee.
IN WITNESS WHEREOF, the parties have caused this Addendum Number 2 to be
executed and delivered by their proper and duly authorized officers as of the
date first above written.
CONTIMORTGAGE CORPORATION, as Servicer and as Seller
By: /s/ Margaret M. Curry
-------------------------------------
Name: Margaret Curry
Title: Senior Vice President
By: /s/ Daniel J. Egan
-------------------------------------
Name: Daniel Egan
Title: Senior Vice President
<PAGE>
CONTINENTAL GRAIN COMPANY, as Subservicer
By: /s/ Mark R. Baker
-------------------------------------
Name: Mark R. Baker
Title: Corporate Senior Vice President
CONTISECURITIES ASSET FUNDING CORP., as Depositor
By: /s/ John Banu
-------------------------------------
Name: John Banu
Title: Authorized Signatory
By: /s/ Mary Rapoport
-------------------------------------
Name: Mary Rapoport
Title: Authorized Signatory
CONTIWEST CORPORATION, as Seller
By: /s/ Joy Tolbert
-------------------------------------
Name: Joy Tolbert
Title: Vice President
By: /s/ Todd Hart
-------------------------------------
Name: Todd Hart
Title: Assistant Secretary
MANUFACTURERS AND TRADERS TRUST COMPANY,
as Trustee and on behalf of the Trusts
By: /s/ Neil B. Witoff
-------------------------------------
Name: Neil Witoff
Title: Assistant Vice President
ADDENDUM NUMBER 3 TO SUBSERVICING AGREEMENT
Dated as of March 1, 1999
Reference is made to that certain Subservicing Agreement dated as of November 1,
1998 (the "Sub-Servicing Agreement") by and among ContiMortgage Corporation, a
Delaware corporation (the "Servicer"), ContiWest Corporation, a Nevada
corporation, ContiSecurities Asset Funding Corp., a Delaware corporation (the
"Depositor"), Continental Grain Company, a Delaware corporation (the
"Subservicer") and Manufacturers and Traders Trust Company, a New York banking
corporation (the "Trustee"), in its capacity as Trustee under various Pooling
and Servicing Agreements listed on attached thereto which Schedule may be
amended from time to time by delivery of notice thereof to the parties hereto
and to the related Certificate Insurers (the "Pooling Agreements") and on behalf
of the related securitization trusts (the "Trusts") formed pursuant to the
Pooling Agreements.
Terms capitalized herein and not defined herein shall have their respective
meanings set forth in the Sub-Servicing Agreement.
The parties to the Sub-Servicing Agreement hereby agree to amend the Schedule to
the Sub-Servicing Agreement by adding thereto a reference to the Pooling
Agreement relating to the Depositor's Series 1999-2 securitization Trust, with
the result that the Series 1999-2 Trust will be one of the Trusts covered by the
Sub-Servicing Agreement.
Consistent with the foregoing, the following is hereby added to the Schedule:
Series Pooling Agreement
- ------ -----------------
1999-2 Pooling and Servicing Agreement, dated as of March 1, 1999 among
ContiSecurities Asset Funding Corp., as Depositor, ContiMortgage
Corporation, as Servicer and as Seller, ContiWest Corporation, as
Seller and Manufacturers and Traders Trust Company, as Trustee.
IN WITNESS WHEREOF, the parties have caused this Addendum Number 3 to be
executed and delivered by their proper and duly authorized officers as of the
date first above written.
CONTIMORTGAGE CORPORATION, as Servicer and as Seller
By: /s/ Margaret M. Curry
-------------------------------------
Name: Margaret Curry
Title: Senior Vice President
By: /s/ Daniel J. Egan
-------------------------------------
Name: Daniel Egan
Title: Senior Vice President
<PAGE>
CONTINENTAL GRAIN COMPANY, as Subservicer
By: /s/ Mark R. Baker
-------------------------------------
Name: Mark R. Baker
Title: Corporate Senior Vice President
CONTISECURITIES ASSET FUNDING CORP., as Depositor
By: /s/ John Banu
-------------------------------------
Name: John Banu
Title: Authorized Signatory
By: /s/ Mary Rapoport
-------------------------------------
Name: Mary Rapoport
Title: Authorized Signatory
CONTIWEST CORPORATION, as Seller
By: /s/ Joy Tolbert
-------------------------------------
Name: Joy Tolbert
Title: Vice President
By: /s/ Todd Hart
-------------------------------------
Name: Todd Hart
Title: Assistant Secretary
MANUFACTURERS AND TRADERS TRUST COMPANY,
as Trustee and on behalf of the Trusts
By: /s/ Neil B. Witoff
-------------------------------------
Name: Neil Witoff
Title: Assistant Vice President
PURCHASE AND SALE AGREEMENT
between
CONTINENTAL GRAIN COMPANY
and
CONTI SECURITIES ASSET FUNDING CORP. III
Dated as of May 26, 1999
<PAGE>
Page
----
ARTICLE I DEFINITIONS ................................................... 1
Section 1.1. Definitions ........................................ 1
Section 1.2. Usage of Terms ..................................... 8
ARTICLE II PROCEDURES FOR PURCHASES OF ELIGIBLE ASSETS .................. 8
Section 2.1. Obligation to Purchase ............................. 8
Section 2.2. Delivery of Documents; Initial Purchase of Assets .. 8
Section 2.3. Delivery of Documents; Subsequent Purchases of
Eligible Assets .................................... 10
Section 2.4. Wet Funded Purchases ............................... 10
Section 2.5. Purchase Requests .................................. 10
Section 2.6. Tranche Term Selection ............................. 11
Section 2.7. Survival of Representations ........................ 11
Section 2.8. Proceeds of Eligible Assets ........................ 12
ARTICLE III DISTRIBUTIONS ............................................... 12
Section 3.1. Distributions on Eligible Assets ................... 12
ARTICLE IV TRANSFERS OF ELIGIBLE ASSETS BY PURCHASER .................... 13
Section 4.1. Purchaser Sale ..................................... 13
Section 4.2. Required Sale Events ............................... 14
Section 4.3. Effect of Required Sale Event ...................... 14
Section 4.4. Bankruptcy Event ................................... 15
Section 4.5. Mandatory Repurchase ............................... 15
Section 4.6. Seller's Right of Repurchase ....................... 15
ARTICLE V INTENT OF PARTIES ............................................. 16
Section 5.1. Intent of Parties; Protective Security Interest .... 16
ARTICLE VI REPRESENTATIONS AND WARRANTIES ............................... 17
Section 6.1. Seller's Representations and Warranties ............ 17
ARTICLE VII COVENANTS OF SELLER ......................................... 21
Section 7.1. Seller's Covenants ................................. 21
ARTICLE VIII FEES AND OTHER COSTS ....................................... 23
Section 8.1. Net Securities Amount .............................. 23
Section 8.2. Hold Harmless ...................................... 23
Section 8.3. Definition of Taxes ................................ 23
Section 8.4. After-Tax Calculation .............................. 23
Section 8.5. Contest, Payment, Interest ......................... 23
Section 8.6. Definition of "After-Tax Basis"; Tax Savings ....... 24
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<PAGE>
Page
----
ARTICLE IX TERMINATION .................................................. 24
Section 9.1. Events of Termination .............................. 24
Section 9.2. Term ............................................... 26
ARTICLE X MISCELLANEOUS PROVISIONS ...................................... 26
Section 10.1. Payment ............................................ 26
Section 10.2. Remedies ........................................... 26
Section 10.3. Exceeding Available Amount ......................... 26
Section 10.4. Exclusive Benefit of Parties; Assignment ........... 26
Section 10.5. Amendment; Waivers ................................. 27
Section 10.6. Effect of Invalidity of Provisions ................. 27
Section 10.7. Governing Law ...................................... 27
Section 10.8. Submission to Jurisdiction; Waiver of Trial by
Jury ............................................... 27
Section 10.9. Jurisdiction Not Exclusive ......................... 27
Section 10.10. Notices ............................................ 27
Section 10.11. Entire Agreement ................................... 28
Section 10.12. Purchaser's Investment Representation .............. 28
Section 10.13. Indemnification .................................... 28
Section 10.14. Headings ........................................... 29
Section 10.15. Execution in Counterparts .......................... 29
SCHEDULES AND EXHIBITS
Schedule I Residential Mortgage Product Underwriting Guidelines
For "C" Risk Mortgage Products S-l
Exhibit A Form of Guarantee A-l
Exhibit B Form of Receipt, Grant and Assignment B-l
Exhibit C Form of Securities Purchase Request C-1
Exhibit D Form of Legal Opinion of Seller D-1
Exhibit E Form of Legal Opinion of Guarantor E-1
Exhibit F Form of Repurchase Notification F-l
ii
<PAGE>
PURCHASE AND SALE AGREEMENT
PURCHASE AND SALE AGREEMENT (this "Agreement"), dated as of May 26,
1999, between CONTINENTAL GRAIN COMPANY, a Delaware corporation ("Purchaser"),
and CONTISECURITIES ASSET FUNDING CORP. III, a Delaware corporation ("Seller").
WHEREAS, Seller desires to sell from time to time to Purchaser
certain Eligible Assets (as hereinafter defined), and Purchaser desires to
purchase such Eligible Assets, each in accordance with the terms and conditions
set forth in this Agreement;
NOW, THEREFORE, the parties, in consideration of the premises and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and intending to be legally bound, hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1. Definitions. As used in this Agreement, the following
terms shall have the following meanings:
"Adjusted Net Securities Amount": As of any date of determination
(including the date of any sale or deemed sale hereunder), with respect to the
Eligible Assets forming part of any Tranche or portion thereof (as applicable),
the related Net Securities Amount less the related Retained Securities Amount,
if any.
"Adjusted Tranche Amount": As of any date of determination in
respect of any Eligible Assets subject to a Purchase hereunder, the related
Initial Tranche Amount less the sum of (x) all payments of principal received by
Purchaser in respect of such Eligible Assets on or prior to such date and (y)
all payments of interest received by Purchaser allocable to the related
Purchased Accrued Interest, if any, included in the Initial Tranche Amount for
such Eligible Assets.
"After-Tax Basis": As defined in Section 8.6 hereof.
"Aggregate Adjusted Tranche Amount": At any date, the aggregate sum
of the Adjusted Tranche Amounts as of such date in respect of all Eligible
Assets that are subject to a Purchase hereunder.
"Alternative Financing": As defined in Section 2.6 hereof.
"Asset File": As defined in the Custodial Agreement.
"Available Amount": As of any date of determination, the lesser of
the following amounts: (x) $85,000,000 less the sum of (i) the then-outstanding
Aggregate
<PAGE>
Adjusted Tranche Amount and (ii) the then-outstanding Subservicer Advances; and
(y) $60,000,000 less the then-outstanding Aggregate Adjusted Tranche Amount.
"Borrower": The person who has executed the promissory note
evidencing the person's obligations under a Franchise Loan.
"Business Day": A day on which banks and the New York Stock Exchange
are open for business in New York, New York and on which dealings in United
States dollars are carried on in the London interbank market.
"Change of Control": The acquisition by any person, entity or
"group" within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act
(excluding, for this purpose, Purchaser or any of its subsidiaries, or any
employee benefit plan of Purchaser or any of its subsidiaries) of "beneficial
ownership" within the meaning of Rule 13d-3 promulgated under the Exchange Act
of more than 50% of either the then-outstanding shares of the common stock of
Seller or Guarantor or the combined voting power of Seller's or Guarantor's
then-outstanding voting securities entitled to vote generally in the election of
directors.
"Collateral": As defined in Section 5.1 hereof.
"Collateralized Note": A promissory note made in favor of Seller and
secured by pools of any of the Eligible Assets described in clauses (i), (ii)
and (iii) of the definition of the term "Eligible Assets" in this Section 1.1;
provided, however, that the obligor under such Note has pledged and hypothecated
to Seller, and has granted to Seller a continuing lien upon and first priority
security interest in, collateral comprised of such Eligible Assets; and provided
further, however, that Seller assigns to Purchaser all of Sellers interest in
such lien and security interest as of the related Purchase Date.
"Custodial Agreement": With respect to Eligible Assets consisting of
Mortgage Products, the Custodial Agreement dated as of March 31, 1999 among
Seller, Purchaser and the Custodian. With respect to any other type of Eligible
Assets, such other applicable agreement as Seller, Purchaser and the related
Custodian may enter into from time to time.
"Custodian": With respect to Eligible Assets consisting of Mortgage
Products, Manufacturers and Traders Trust Company, a New York banking
corporation. With respect to any other type of Eligible Assets, such custodian
as the parties shall mutually approve from time to time.
"Default Rate": As defined in Section 10.1 hereof.
"Eligible Assets": Any of the following types of assets:
(i) Mortgage Products;
(ii) Motor Vehicle Loans;
2
<PAGE>
(iii) Franchise Loans; and
(iv) Collateralized Notes.
"Eligible Asset Schedule": As defined in Section 2.5 hereof.
"Event of Termination": As defined in Section 9.1 hereof.
"Exchange Act": The Securities Exchange Act of 1934, as amended.
"Franchise Loan": All of Seller's right, title and interest in and
to a loan evidenced by a promissory note and secured by Franchise Loan
Collateral.
"Franchise Loan Collateral": All of the following which has been
pledged to Seller to secure a Franchise Loan: all of a Borrower's right, title
and interest in and to all receivables, goods, documents, instruments, chattel
paper, inventory, equipment, general intangibles, contracts (other than the
franchise agreement and the license thereunder), certificates of title,
fixtures, money, securities, deposits, credits, claims, demands, assets, other
personal property and real property, owned, leased, acquired, held, used, sold
or consumed in connection with a nationally recognized franchise involved in the
restaurant or quick-lube business and any other property, rights and interests
of the Borrower which at any time relate to, arise out of or exist in connection
with the foregoing; any and all additions and accessions to any of the
foregoing, all improvements thereto and all substitutions and replacements
therefor; and all products and proceeds thereof.
"Gain Amount": With respect to any sale or deemed sale of any
Eligible Assets by Purchaser hereunder, that portion of the realized net
proceeds (inclusive of accrued interest) in excess of the sum of (i) the related
Adjusted Tranche Amount and (ii) the related Adjusted Net Securities Amount, in
each case computed as of the date of such sale or deemed sale, which portion
Purchaser shall remit to Seller pursuant to Section 4.3. The Gain Amount shall
be calculated separately for each Eligible Asset sold or deemed sold by
Purchaser.
"Guarantee": A guarantee in substantially the form of Exhibit A
hereto, executed by Guarantor in favor of Purchaser.
"Guarantor": ContiFinancial Corporation, a Delaware corporation, and
the indirect owner of Seller.
"Indemnified Party": As defined in Section 10.15(a) hereof.
"Indenture": As defined in Section 7.1(c) hereof.
"Initial Tranche Amount": With respect to any Eligible Asset or
groups of Eligible Assets subject to a Purchase hereunder, the purchase amount
paid for the related Eligible Assets by Purchaser on the related Purchase Date,
such purchase amount being equal to the sum of (i) the product of (x) the
Principal of the related Eligible Assets as of
3
<PAGE>
such Purchase Date and (y) the related Purchase Price Percentage plus (ii) the
Purchased Accrued Interest, if any, with respect to such Eligible Assets as of
such Purchase Date.
"LIBOR": As of any date of determination, the rate for deposits in
U.S. Dollars for a period most closely approximating the Tranche Term that
appears on the Telerate Page 3750 as of 11:00 a.m. London time, on such date. If
such rate does not appear on Telerate Page 3750 by 9:00 a.m. New York City time,
on such date, the rate for such date will be determined on the basis of the
rates at which deposits in U.S. dollars are offered by four major banks (chosen
by Purchaser) in the London interbank market as of approximately 11:00 a.m.,
London time, on such date to prime banks in the London interbank market for a
period of the relevant Tranche Term commencing on the applicable Date. Purchaser
will request the principal London office of each such bank to provide a
quotation of its rate. If at least two quotations are provided, the rate for
such date will be the arithmetic mean of the quotations. If fewer than two
quotations are provided as requested, the rate for such date will be the
arithmetic mean of the rates quoted by major banks in New York City as of 11:00
a.m., local time in New York City, on such date for loans in U.S. dollars to
leading European banks for a period of the Tranche Term commencing on such date.
"Losses": Any and all out-of-pocket losses, claims, damages,
liabilities or expenses (including reasonable attorneys' fees and disbursements)
directly incurred by any person specified in this Agreement, resulting from
transactions entered into under this Agreement (other than liability for Taxes).
Losses must be accounted for and presented for reimbursement documented in
reasonable detail. For the avoidance of doubt, if in any sale or deemed sale of
Eligible Assets by Purchaser hereunder, the realized net sale proceeds
(inclusive of accrued interest) are less than the sum of the related Adjusted
Tranche Amount and the related Adjusted Net Securities Amount (in each case
computed as of the date of such sale or deemed sale), the amount of such
shortfall shall be deemed a Loss hereunder.
"Market Movement Allowance": For each Purchase, the amount of
diminution in the Market Value of the related Eligible Assets (expressed as a
percentage) that may occur before the occurrence of a Required Sale Event with
respect to such Eligible Assets, as described in Section 4.2 hereof.
"Market Value": For each day of determination in respect of a
Purchase, the market value (expressed as a percentage of par) of the related
Eligible Asset as determined by Seller (subject to the provisions of Section 4.2
hereof) and taking into account (i) credit rating; (ii) credit worthiness of the
account debtor, lessee or other obligors (including third party credit
enhancements); (iii) realizable distress sale liquidation value; (iv)
impediments (legal or otherwise) to prompt and effective enforcement; (v)
general industry and overall economic conditions; (vi) current interest rates;
(vii) availability of purchasers; and (viii) such other considerations as
reasonably appropriate in the circumstances.
"Monoline Insurance Company": Ambac Assurance Corporation, MBIA
Insurance Corporation, Financial Guaranty Insurance Company, Capital Markets
4
<PAGE>
Assurance Corporation, Financial Security Assurance Inc. or GE Mortgage
Insurance Company.
"Mortgage Products": All of Seller's right, title and interest in
and to one or more commercial, residential, mixed use or multifamily first
mortgage loans, second mortgage loans or home equity lines of credit, any of
which can bear either fixed or variable rates of interest. Mortgage Products may
include, without limitation, interests in warehouse facilities, urban or
suburban office buildings, mobile homes, manufactured housing, congregate care
and assisted living facilities, nursing homes, retail shopping centers, Title I
products, SBA products and timeshare estates.
"Mortgaged Property": Property underlying a Mortgage Product, or in
the case of a Mortgage Product which is an equity line of credit, the property
securing such line of credit.
"Motor Vehicle Loans": All of Seller's right, title and interest in
and to one or more non-cancelable, conditional sale contracts (including
security agreements, operating leases, and direct financing equipment leases),
or motor vehicle finance loans, including, as applicable, schedules, supplements
and amendments, under which the purchase or lease of specified motor vehicles is
financed at a specified monthly rate.
"Net Securities Amount": With respect to any Tranche Period which
has terminated, the amount produced for the related Tranche or portion thereof
(as applicable) corresponding to such Tranche Period by application of the
following formula:
TR x TA x AD
------------
360
For purposes of this formula, "TR" represents the Tranche Rate applicable to
such Tranche or portion thereof (as applicable), "TA" represents the Adjusted
Tranche Amount with respect to such Tranche or portion thereof (as applicable),
and "AD" represents the actual number of days elapsed during such Tranche
Period. Notwithstanding the foregoing, no provision of this Agreement shall
require the payment or permit the collection of any Net Securities Amount in
excess of the maximum permitted by applicable law, and no Net Securities Amount
shall be considered paid if at any time payment is rescinded or must be returned
for any reason.
"Principal": With respect to any Eligible Asset, as of any date of
determination, the unamortized principal balance of such Eligible Asset as of
such date.
"Purchase": Any purchase of Eligible Assets by Purchaser from Seller
pursuant to the terms hereof and of the applicable Purchase Request. For
purposes of this Agreement, an Eligible Asset shall be deemed "subject to a
Purchase" commencing on the related Purchase Date and continuing until such date
as such Eligible Asset is sold or deemed sold by Purchaser pursuant to the
provisions hereof (including any sale of such Eligible Asset to Seller as
provided herein).
5
<PAGE>
"Purchase Date": With respect to any Purchase, the date on which
Purchaser purchases the related Eligible Assets from Seller.
"Purchase Price Percentage": With respect to any Purchase, the
Market Value percentage of the Principal paid by Purchaser for the Principal
portion of the related Eligible Assets (expressed as a percentage of par) as set
forth in the related Purchase Request, which percentage shall be reasonably
satisfactory to Purchaser. In connection with the initial Purchase involving
Mortgage Products, any percentage not in excess of 95% in the case of
residential Mortgage Products or 87% in the case of non-residential Mortgage
Products shall be deemed satisfactory to Purchaser.
"Purchase Request": A request for the purchase of Eligible Assets in
the form of Exhibit C hereto.
"Purchased Accrued Interest": With respect to any Eligible Assets
that are part of any Purchase hereunder, the interest accrued thereon as of the
related Purchase Date pursuant to the terms of such Eligible Assets (and
assuming that, pursuant to any "record date" provision relating to such Eligible
Assets, upon Purchaser's purchase thereof, Purchaser will be entitled to receive
such accrued interest on the next scheduled interest payment date for such
Eligible Assets).
"Recourse Amount": As of any date of determination, (i) with respect
to Eligible Assets which consist of residential Mortgage Products, five percent
of the related Adjusted Tranche Amount as of such date; and (ii) with respect to
all other Eligible Assets, ten percent of the related Adjusted Tranche Amount as
of such date; provided, however, in each case, that the Recourse Amount shall be
fixed upon the earlier of (i) a Required Sale Event or (ii) an Event of
Termination.
"Repurchase Assets": The Eligible Assets identified on a Repurchase
Notification.
"Repurchase Notification": A Repurchase Notification in the form
attached hereto as Exhibit F.
"Required Sale Event": An event described in Section 4.2 hereof,
which triggers a sale of Eligible Assets pursuant to Section 4.3 hereof.
"Retained Securities Amount": With respect to the Eligible Assets
forming part of any Tranche or portion thereof, the related Net Securities
Amount actually received and retained by Purchaser.
"Seller's Account": Seller's account at a designated bank in New
York, New York, as specified in the applicable Purchase Request.
"Subsequent Conditions": As defined in Section 2.4 hereof.
"Subservicer Advance": As defined in the Subservicing Agreement.
6
<PAGE>
"Subservicing Agreement": The Subservicing Agreement dated as of
November 1, 1998 by and among ContiMortgage Corporation, ContiWest Corporation,
ContiSecurities Asset Funding Corp., Manufacturers and Traders Trust Company and
Purchaser.
"Taxes": As defined in Section 8.3 hereof.
"Term": As defined in Section 9.2 hereof.
"Tranche": The Eligible Assets specified on any particular Purchase
Request; provided, however, that any Eligible Assets which are sold or deemed
sold by Purchaser pursuant to the provisions hereof shall no longer be regarded
as part of a Tranche hereunder. For purposes of the foregoing, if Seller elects
to replace one or more non-conforming Eligible Assets with one or more
conforming Eligible Assets as provided in Section 7.1(h) hereof, then upon such
replacement, (i) the non-conforming Eligible Assets shall be treated as if they
had been sold by Purchaser to Seller on the replacement date at a price equal to
the related Adjusted Tranche Amount plus the related Adjusted Net Securities
Amount and shall no longer be regarded as included in any Tranche, and (ii) the
conforming Eligible Assets shall be treated as if they had been purchased by
Purchaser from Seller on the replacement date at a price equal to the Adjusted
Tranche Amount plus the Adjusted Net Securities Amount of the non-conforming
Eligible Assets and shall thereafter be regarded as included in the same Tranche
in which the non-conforming Eligible Assets had formerly been included.
"Tranche Period": With respect to any Tranche or portion thereof (as
applicable), the period commencing on the day Purchaser receives a payment of
principal or interest with respect to the related Eligible Assets and ending on
(and including) the day preceding the earliest of the following: (i) the day on
which the next such payment is received; (ii) the day upon which Purchaser sells
or is deemed to have sold one or more of the Eligible Assets included in the
Tranche or portion thereof (as applicable) pursuant to the provisions hereof,
including any sale to Seller as provided herein; and (iii) the end of the
related Tranche Term. For purposes of the initial Tranche Period, Purchaser
shall be deemed to have received such a payment with respect to the Eligible
Assets in the related Tranche on the related Purchase Date.
"Tranche Rate": With respect to any Tranche, LIBOR plus 1.37% per
annum. The Tranche Rate shall reset at the beginning of each Tranche Period
based on LIBOR determined as of two Business Days prior to the beginning of such
Tranche Period.
"Tranche Selection Notice": As defined in Section 2.05 hereof.
"Tranche Term": With respect to a Tranche or portion thereof (as
applicable), a period of one, two or three months, or such other period as may
be mutually agreeable to the parties hereto, commencing on a Business Day
selected by Seller and Purchaser pursuant to this Agreement. If the parties
cannot agree, the Tranche Term shall be one month.
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"Wet Funded Eligible Asset": As defined in Section 2.4 hereof.
"Wet Funded Purchase": As defined in Section 2.4 hereof.
Section 1.2. Usage of Terms. With respect to all terms used in this
Agreement: (i) the singular includes the plural and the plural includes the
singular; (ii) words importing any gender include the other gender; (iii) the
words "and" and "or" are used in the conjunctive or disjunctive as the sense and
circumstances may require; (iv) references to "writing" include printing,
typing, lithography and other means of reproducing words in a visible form; (v)
references to agreements and other contractual instruments include all
subsequent amendments thereto or changes therein entered into in accordance with
their respective terms and not prohibited by this Agreement; (vi) references to
any person shall include its permitted successors and assigns; (vii) any form of
the word "include" shall be deemed to be followed by the words "without
limitation"; (viii) the phrase "in and to" shall be deemed to include "under"
and "with respect to" whenever appropriate; (ix) the words "herein," "hereof"
and "hereunder" and other words of similar import refer to this Agreement as a
whole and not to any particular Article, Section or other subdivision of this
Agreement; and (x) Article, Section, Schedule and Exhibit references, unless
otherwise specified, refer to Articles and Sections of and Schedules and
Exhibits to this Agreement. Unless otherwise stated in this Agreement, in the
computation of a period of time from a specified date to a later specified date,
the word "from" means "from and including" and the words "to" and "until" each
mean "to but excluding."
ARTICLE II
PROCEDURES FOR PURCHASES OF ELIGIBLE ASSETS
Section 2.1. Obligation to Purchase. Subject to Sections 2.2 and 2.3
hereof and the other terms and conditions of this Agreement, at the request of
Seller from time to time during the Term, Purchaser shall purchase Eligible
Assets from Seller at the related Initial Tranche Amount for any such Eligible
Assets; provided, however, that each Initial Tranche Amount shall be at least
$5,000,000; and provided further, however, that no purchase of Eligible Assets
shall be requested by Seller if, immediately following such purchase, the
Available Amount would be less than zero.
Section 2.2. Delivery of Documents; Initial Purchase of Assets.
Prior to the initial Purchase of Eligible Assets:
(a) Purchaser shall have received a certificate of the Secretary of
Seller certifying (i) a copy of Seller's articles of incorporation; (ii) a copy
of Seller's bylaws; (iii) the names and signatures of the officers authorized on
its behalf to execute this Agreement and any other documents to be delivered by
it hereunder (on which Purchaser may conclusively rely until such time as
Purchaser shall receive from Seller a revised certificate); and (iv) a copy of
the resolutions of Seller's Board of Directors approving this Agreement.
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(b) Purchaser shall have received a certificate of the Assistant
Secretary of Guarantor certifying (i) a copy of Guarantor's articles of
incorporation; (ii) a copy of Guarantor's bylaws; (iii) the names and signatures
of the officers authorized on its behalf to execute the Guarantee, and any other
documents to be delivered by it thereunder (on which Purchaser may conclusively
rely until such time as Purchaser shall receive from Guarantor a revised
certificate); and (iv) a copy of the resolutions of the Board of Directors of
Guarantor approving the Guarantee.
(c) There shall be in full force and effect from Guarantor a duly
executed Guarantee.
(d) Purchaser shall have received an opinion of the Counsel to
Seller in substantially the form of Exhibit D hereto.
(e) Purchaser shall have received an opinion of the Chief Counsel to
Guarantor in substantially the form of Exhibit E hereto.
(f) Seller shall have (i) delivered to Purchaser or its designee
evidence, satisfactory to Purchaser, of the transfer of the ownership of the
related Eligible Assets from Seller to Purchaser, (ii) delivered to Purchaser or
its designee the related Asset Files and (iii) filed with the Secretary of the
State of New York and the City Register of New York County UCC-l financing
statements, in each case naming Seller as "debtor" and Purchaser as "secured
party" and describing the Collateral.
(g) Seller shall have instructed the applicable debtor, trustee,
paying agent, authenticating agent, transfer agent, registrar, predecessor in
interest, owner (if the Eligible Assets are in the form of a security
agreement), or servicer, if any, in respect of the related Eligible Assets to
reflect on their books and records the transfer of such Eligible Assets to
Purchaser, as owner or secured party (if the Eligible Assets are in the form of
a security agreement).
(h) Purchaser shall have received the most recent available
servicing or like reports, if any, with respect to the Eligible Assets.
(i) Purchaser and/or any independent contractor appointed by
Purchaser shall have completed such investigation as Purchaser may reasonably
require with respect to each Eligible Asset which is the subject of such
Purchase and the results of such investigation (and all other legal and
documentary matters with respect to such Eligible Asset) shall be satisfactory
to Purchaser.
(j) The bond power or transfer instrument for the related Eligible
Asset shall be executed by appropriate officers of Seller.
(k) Seller shall have obtained (i) all necessary approvals, consents
or authorizations, if any, pursuant to any agreements, indentures, loan or
credit agreements or other instruments to which Seller is a party or by which
its assets are bound, and (ii) all necessary approvals, consents or
authorizations, if any, from any federal, state or local regulatory authority
having jurisdiction over Seller or its assets.
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Section 2.3. Delivery of Documents; Subsequent Purchases of Eligible
Assets. Prior to any Purchase of Eligible Assets after the initial Purchase of
Eligible Assets, the actions, conditions and deliveries specified in subsections
(c), (f), (g), (h), (i), (j) and (k) of Section 2.2 hereof shall have been
taken, satisfied or made, as the case may be on or before the related Purchase
Date.
Section 2.4. Wet Funded Purchases. Notwithstanding Sections 2.2 and
2.3 hereof (but subject to the other provisions hereof), Purchaser hereby agrees
to purchase Eligible Assets from Seller without the actions, conditions and
deliveries specified in subsections (f), (g), (h), (i) and (j) of Section 2.2
hereof being taken, satisfied or made on (as the case may be) or before the
related Purchase Date; provided, however, that (i) Seller shall have delivered
to Purchaser and the Custodian at least one Business Day prior to the related
Purchase Date an Eligible Asset Schedule with respect to the Eligible Assets
being sold to Purchaser in connection with the Purchase being entered into on
such Purchase Date (each such Purchase, a "Wet Funded Purchase"), and (ii)
Seller shall have delivered to Purchaser an officer's certificate certifying
that, with respect to each such Eligible Asset purchased pursuant to a Wet
Funded Purchase (each such Eligible Asset, a "Wet Funded Eligible Asset"), (x)
such Wet Funded Eligible Asset is a closed loan and (y) Seller or its authorized
agent is in possession of the original executed promissory note that evidences
the indebtedness of the related Borrower with respect to such Wet Funded
Eligible Asset. In connection with any Wet Funded Purchase, Seller agrees to
deliver or cause to be delivered to the Custodian, within three Business Days
after the related Purchase Date, the Asset Files with respect to all of the Wet
Funded Eligible Assets purchased on such Purchase Date. Seller further agrees to
take, satisfy or make (as applicable) the actions, conditions and deliveries
specified in subsections (f), (g), (h), (i) and (j) of Section 2.2 hereof
(collectively, the "Subsequent Conditions") with respect to such Wet Funded
Eligible Assets within five Business Days after the related Purchase Date. In
the event that Seller fails to deliver the Asset File relating to any Wet Funded
Eligible Asset or to satisfy the Subsequent Conditions with respect to such Wet
Funded Eligible Asset (in each case within the three-Business Day period
described above), then at Purchaser's election, such Wet Funded Eligible Asset
shall be treated as a non-conforming Eligible Asset within the meaning of
Section 7.1(h) hereof.
Section 2.5. Purchase Requests. Seller shall deliver to Purchaser a
Purchase Request at least five Business Days prior to the proposed Purchase Date
for any Purchase (unless otherwise agreed by the parties). Purchaser shall
indicate its acceptance or declination of each Purchase Request by completing
the appropriate section of the Purchase Request and returning the copy thereof
to Seller; provided, however, that Purchaser hereby agrees to accept such
Purchase Request if the Initial Tranche Amount relating to such Purchase Request
(together with the aggregate Initial Tranche Amount relating to any Purchase
Requests then outstanding) would not exceed the Available Amount and if all of
the conditions to such Purchase provided for in this Agreement (including,
without limitation, Section 2.2 hereof) have been satisfied.
Each Purchase Request accepted by Purchaser shall be irrevocable and
binding on Purchaser and Seller. Seller shall indemnify Purchaser and hold it
harmless
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against any Losses incurred by Purchaser as a result of any failure by Seller to
timely deliver the Eligible Assets subject to such Purchase, which losses shall
be limited to costs incurred by Purchaser by reason of the liquidation or
reemployment of funds acquired by Purchaser to fund such Purchase. In addition,
Purchaser shall undertake to take all commercially reasonable steps to mitigate
Seller's indemnity hereunder. Purchaser shall indemnify Seller and hold it
harmless against any Losses incurred by Seller as a result of any failure by
Purchaser to purchase (to the extent that Purchaser is obligated to do so) the
Eligible Assets subject to any Purchase Request accepted by Purchaser, which
losses shall be limited to excess interest costs or net repurchase obligations
incurred by Seller in making alternative arrangements for disposition or
financing of the Eligible Assets for up to 90 days ("Alternative Financing")
which shall be calculated as the sum of (A) the difference between (i) the total
interest cost or the repurchase price of such Eligible Assets (net of the
purchase price received by Seller related thereto), in each case paid by Seller
in connection with the Alternative Financing at the end of the relevant Tranche
Period for the related Eligible Assets, and (ii) the Net Securities Amount which
would have been received by Purchaser if Purchaser held the Eligible Assets for
the balance of the then existing Tranche Period for such Eligible Assets and
such Eligible Assets had amortized in accordance with their terms; and (B)
reasonable transaction costs, if any, incurred by Seller in connection with the
Alternative Financing. In any event, Seller shall undertake to take all
commercially reasonable steps to mitigate Purchaser's indemnity hereunder. Each
Purchase shall cover the Eligible Assets identified in a schedule (the "Eligible
Asset Schedule") attached to the related Purchase Request. Each Purchase Request
shall specify the type of Eligible Asset, the Purchase Price Percentage and date
of such requested Purchase, the Initial Tranche Amount together with the Tranche
Term and Tranche Rate requested by Seller with respect thereto in accordance
with Section 2.6 hereof, the Market Movement Allowance, Recourse Amount, Gain
Amount and such other matters as may be specified on the form of the Purchase
Request attached hereto as Exhibit C. On the applicable Purchase Date, Purchaser
shall pay to Seller the Initial Tranche Amount for the related Eligible Assets
against receipt of the documents required to be delivered by Seller pursuant to
Section 2.2, 2.3 or 2.4 hereof, as the case may be.
Section 2.6. Tranche Term Selection. Seller shall, at least three
Business Days prior to the expiration of any Tranche Term, provide Purchaser
with a notice requesting a new Tranche Term for application to the related
Tranche (a "Tranche Selection Notice"). The Tranche Selection Notice may be
oral, promptly confirmed by Seller in writing, and shall be deemed to be an
irrevocable offer by Seller to Purchaser to apply the requested Tranche Term to
the related Tranche. Failure to provide written confirmation of an oral Tranche
Selection Notice shall not affect the irrevocability of any such Notice.
Notwithstanding the foregoing provisions of this Section, Purchaser, in its
reasonable discretion, may select a new Tranche Term if (i) Seller fails to
provide a Tranche Selection Notice on a timely basis or (ii) Purchaser
determines, in its reasonable discretion, that any Tranche Term requested by
Seller is unavailable.
Section 2.7. Survival of Representations. The terms and conditions
of the purchase of each Eligible Asset shall be as set forth in this Agreement.
Seller will be deemed on each Purchase Date to have made to Purchaser the
representations and warranties set forth in Section 6.1 hereof in respect of the
Eligible Assets comprising the
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related Purchase and such representations and warranties of Seller shall be true
and correct on and as of such Purchase Date and throughout the Term for as long
as such Eligible Assets are held by Purchaser.
Section 2.8. Proceeds of Eligible Assets. The transfer and sale
hereby of all of Seller's right, title and interest in and to each Eligible
Asset shall include all proceeds, products and profits derived therefrom,
including, without limitation, all scheduled payments of principal of and
interest on such Eligible Assets and other amounts due or payable or to become
due or payable in respect thereof and proceeds thereof including, without
limitation, all moneys, goods and other tangible or intangible property received
upon the liquidation or sale thereof.
ARTICLE III
DISTRIBUTIONS
Section 3.1. Distributions on Eligible Assets.
(a) Seller shall instruct the applicable paying agent, servicer or
other appropriate party with respect to each Eligible Asset subject to a
Purchase hereunder, to remit to Purchaser, at the times required by the terms of
such Eligible Asset, by wire transfer in immediately available funds (to the
extent that Seller may require the same under the terms of the related Eligible
Assets), all distributions thereon or with respect thereto in accordance with
Purchaser's payment instructions.
(b) Upon receipt of any payment of principal with respect to any
Eligible Asset, Purchaser shall apply such principal payment so received to
reduce the Adjusted Tranche Amount of the applicable Tranche.
(c) Upon receipt of any payment of principal or interest with
respect to any Eligible Assets subject to a Purchase hereunder, the prior
Tranche Period of the related Tranche shall terminate and a new Tranche Period
shall begin, and Purchaser shall compute and either remit to Seller or, at
Seller's option, deposit in an account maintained by Purchaser on behalf of
Seller, the amount (if any) by which the aggregate amount of any interest
payments received by Purchaser in respect of such Tranche (less, in the case of
the first interest payment received by Purchaser, the amount, if any, of the
Purchased Accrued Interest paid by Purchaser with respect to the related
Tranche) exceeds the related Net Securities Amount with respect to the Tranche
Period then ending. For the avoidance of doubt, that portion of the interest
payments received by Purchaser (exclusive of the amount of any Purchased Accrued
Interest) in respect of any Tranche and not remitted to Seller (or deposited in
an account maintained by Purchaser on Seller's behalf) may be retained by
Purchaser.
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ARTICLE IV
TRANSFERS OF ELIGIBLE ASSETS BY PURCHASER
Section 4.1. Purchaser Sale. Subject to the provisions of Section
10.12 hereof, Purchaser may, at its election, and without the consent of Seller,
at any time during this Agreement sell, transfer, convey, pledge or assign any
or all of its right, title and interest in, to or under, or grant a security
interest in, any Eligible Assets purchased by Purchaser hereunder, including the
servicing fees and rights relating to such Eligible Assets. Prior to effecting
any sale or other disposition of its right, title and interest in any Eligible
Asset, Purchaser shall offer to Seller between the hours of 8:00 a.m. and 6:00
p.m. on any Business Day (by oral notice to such effect, promptly confirmed in
writing) the right to purchase the offered Eligible Assets in whole from it.
Within the time periods specified below, Seller shall notify Purchaser of its
intent to so purchase the offered Eligible Assets:
<TABLE>
<CAPTION>
If Purchaser makes Seller shall notify
offer to sell to Seller Purchaser of intent to purchase
----------------------- -------------------------------
<S> <C>
Between 8:00 a.m. and 10:00 a.m. on any Before noon on the next
Business Day succeeding Business Day
Between 10:00 a.m. and 6:00 p.m. on any Before noon on the second
Business Day succeeding Business Day
</TABLE>
If Seller fails to notify Purchaser of its intention to purchase the related
Eligible Assets within the time periods set forth above, then Seller shall be
deemed to have declined Purchaser's offer to purchase the related Eligible
Assets. If Seller determines to effect such a purchase, Seller shall, on the
fifth Business Day next succeeding the Business Day on which Seller accepted the
offer to purchase the related Eligible Assets from Purchaser pursuant to this
Section, pay to Purchaser the related Adjusted Tranche Amount and the related
Adjusted Net Securities Amount (in each case computed as of such fifth Business
Day). In connection with any such sale of Eligible Assets to Seller, Purchaser
shall comply with the provisions of Section 4.6(c) hereof (with all of the
Eligible Assets then being sold to Seller being deemed Repurchase Assets for
this purpose). For purposes of this Section 4.1, a "sale or other disposition"
of Eligible Assets shall be deemed not to include a grant of a lien upon or
security interest in, or a sale or assignment pursuant to a master repurchase or
similar agreement of, any of Purchaser's right, title or interest in or to such
Eligible Assets so long as the terms of the agreement or other instrument
effecting any such grant, sale or assignment permit Purchaser to reacquire the
property subject to the grant, sale or assignment free and clear of any liens,
claims or encumbrances and do not otherwise prevent or hinder Purchaser from
performing its obligations hereunder (including its obligations under Section
4.6 hereof).
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Section 4.2. Required Sale Events. For purposes of this Agreement, a
"Required Sale Event" shall be deemed to have occurred under any of the
following circumstances:
(a) On a weekly basis, Seller, in respect of each Purchase, shall
determine the Market Value of each Eligible Asset which has been purchased by
Purchaser and not disposed of, and shall notify Purchaser thereof. If Purchaser
shall in good faith disagree with the Market Value of any such Eligible Asset as
so determined by Seller, Purchaser shall notify Seller and Purchaser and Seller
shall endeavor in good faith to reach an agreement on the Market Value of such
Eligible Assets. If Purchaser and Seller cannot agree on the Market Value, a
"Required Sale Event" will be deemed to have occurred.
(b) If, in respect of any Purchase, the Market Value of the Eligible
Assets at any time has declined from the Market Value of the Eligible Assets as
of the relevant Purchase Date by an amount exceeding the applicable Market
Movement Allowance, a "Required Sale Event" shall be deemed to have occurred.
(c) A "Required Sale Event" shall also be deemed to have occurred on
any day if the sum of (x) the Aggregate Adjusted Tranche Amount with respect to
all Eligible Assets then subject to a Purchase hereunder and (y) the amount of
Subservicer Advances outstanding on such day exceeds $85,000,000. In such event,
a Required Sale Event shall be deemed to have occurred only with respect to that
portion of such Eligible Assets necessary to reduce the sum described above to
$85,000,000 or less.
Section 4.3. Effect of Required Sale Event. Upon the occurrence of a
Required Sale Event, Purchaser shall in a commercially reasonable manner sell
the affected Eligible Assets, subject to Seller's obligation to indemnify
Purchaser against any resulting Losses from such sale up to the applicable
Recourse Amount for such Eligible Assets. Prior to effecting any such sale,
Purchaser shall offer to Seller the right to purchase such Eligible Assets from
it at a price equal to the related Adjusted Tranche Amount, plus the related
Adjusted Net Securities Amount. If Seller fails to exercise its right of
purchase within the time set forth in Section 4.1 and Purchaser sells the
Eligible Assets (through private or public sale) to a third party, Purchaser
shall promptly provide a notification to Seller of such event, setting forth the
net sales proceeds inclusive of accrued interest received (after giving effect
to all selling and related expenses, including the fees and expenses of any
consultants, brokers or attorneys) and shall notify Seller of all Losses
incurred and invoice Seller (with supporting detail) for the amount due to
Purchaser, up to the amount of the Recourse Amount. Upon receipt of such
invoice, Seller shall pay to Purchaser the Recourse Amount to the extent
necessary to indemnify Purchaser against the Losses sustained. If, as a result
of the sale of the Eligible Assets, the realized net sales proceeds (inclusive
of accrued interest, if any) on the related Eligible Assets exceed the related
Adjusted Tranche Amount plus the related Adjusted Net Securities Amount, then
Purchaser shall pay any such excess up to the Gain Amount to Seller and retain
the balance of such proceeds.
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Notwithstanding the foregoing, Purchaser shall be entitled, at its
option, upon the occurrence of a Required Sale Event, to retain any such
Eligible Assets; provided, however, that Purchaser shall have obtained bona fide
bids to purchase such Eligible Assets from at least two independent third
parties and Purchaser matches the higher bid for such Eligible Assets; and
provided further, however, that in the event Purchaser is unable reasonably to
obtain at least two bids to purchase such Eligible Assets as described in the
preceding sentence, Purchaser may nevertheless retain such Eligible Assets at
such price as reasonably determined by Purchaser in a commercially reasonable
manner. In the event Purchaser opts to match such bid or retain such Eligible
Assets at a commercially reasonable price, then such retention by Purchaser
shall be treated in all respects as a sale by Purchaser to a third party
pursuant to this Section 4.3 (with the realized net sales proceeds being deemed
to be equal to the amount of the bid being matched or the commercially
reasonable price, as applicable), and Purchaser shall fulfill all of its
obligations to Seller as provided for in this Section 4.3 in the same manner as
if such Eligible Assets were sold to a third party hereunder.
Section 4.4. Bankruptcy Event. With respect to Seller's right of
purchase set forth in Section 4.1, Section 4.3 and Section 4.6, if, a bankruptcy
event occurs, as described in Section 9.1(d) below, involving either Seller or
Guarantor, during the period after which Seller has notified Purchaser of its
intention to purchase the offered Eligible Assets but before the expiration of
the five Business Day period in which Seller has to effect such purchase,
Purchaser shall be released from its obligation to sell such Eligible Assets to
Seller and may sell such Eligible Assets (through private or public sale) to any
third party.
Section 4.5. Mandatory Repurchase. On the date which is two Business
Days prior to any funding date under the Subservicing Agreement, Seller shall
purchase from Purchaser, and Purchaser shall sell to Seller, Eligible Assets to
the extent necessary so that the Aggregate Adjusted Tranche Amount does not
exceed $0. Seller shall effect such mandatory repurchase of Eligible Assets by
delivering a Repurchase Notification covering such Eligible Assets in accordance
with Section 4.6 hereof.
Section 4.6. Seller's Right of Repurchase.
(a) At the request of Seller pursuant to a Repurchase Notification
in the form attached hereto as Exhibit F, Seller shall have the right to
purchase, and Purchaser shall be obligated to sell, Repurchase Assets from
Purchaser at a price equal to the sum of the Adjusted Tranche Amount of the
Repurchase Assets plus the Adjusted Net Securities Amount of the Repurchase
Assets.
Seller shall deliver a Repurchase Notification by 10:00 a.m., New
York time, on the second Business Day prior to the proposed repurchase date
(unless otherwise agreed by the parties).
(b) Upon receipt of the payment referred to in Section 4.6(a)
hereof, Purchaser shall sell, assign, transfer and otherwise convey to Seller
all of Purchaser's right, title and interest in and to the Repurchase Assets,
shall release any lien it may have
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on the Repurchase Assets (including any lien granted pursuant to Section 5.1
hereof), shall return any related trust receipt or participation certificate and
shall reduce both the related Adjusted Tranche Amount and the Aggregate Adjusted
Tranche Amount accordingly.
(c) In connection with any sale pursuant to a Repurchase
Notification (including a Repurchase Notification delivered pursuant to Section
4.5 hereof), Purchaser hereby agrees and covenants as follows:
(i) To deliver to Seller or its designee evidence, reasonably
satisfactory to Seller, of the transfer of the ownership of, and the
release of any lien on, the related Repurchase Assets from Purchaser to
Seller (it being understood and agreed that Purchaser's transfer of
ownership shall be without any representation or warranty except that the
Repurchase Assets are not subject to any liens, claims or encumbrances
created by Purchaser or any third party deriving rights from Purchaser);
(ii) To instruct the applicable debtor, trustee, paying agent,
authenticating agent, transfer agent, registrar, predecessor in interest,
owner (if the Repurchase Assets are in the form of a security agreement),
or servicer, if any, in respect of the related Repurchase Assets to
reflect on their books and records the transfer of such Repurchase Assets
to Seller, as owner or secured party (if the Repurchase Assets are in the
form of a security agreement);
(iii) If requested by Seller, to deliver the most recent
servicing or like reports received by Purchaser, if any, with respect to
the Repurchase Assets; and
(iv) To promptly turn over to Seller any principal, interest
or other payments in respect of the Repurchase Assets that Purchaser may
thereafter receive (whether due to the "record date" provisions relating
to the Repurchase Assets or otherwise).
ARTICLE V
INTENT OF PARTIES
Section 5.1. Intent of Parties; Protective Security Interest.
Purchaser and Seller confirm that the transactions contemplated herein are
intended as purchases and sales rather than as loan transactions. In the event,
for any reason, and solely in such event, that any transaction hereunder is
construed by any court or regulatory authority as a loan or other than a
purchase and sale of all Eligible Assets, Seller shall be deemed to have hereby
pledged to Purchaser as security for the performance by Seller of all of its
obligations from time to time arising hereunder and under any and all Purchases
effected pursuant hereto, and shall be deemed to have granted to Purchaser a
perfected security interest in, all of Seller's right, title and interest in and
to all of the Eligible Assets sold to Purchaser hereunder and all distributions
in respect thereof, and the proceeds of any and
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all of the foregoing, and the servicing fees and rights in the foregoing
(including the right to contract for servicing) (collectively, whether now
existing or hereafter acquired, the "Collateral"). Seller represents that, with
respect to all Eligible Assets in the form of a participation certificate or
other instrument evidencing ownership of an underlying pool of assets, there is
and will continuously be an effective UCC filing evidencing the security
interest of the issuer or indenture trustee (as the case may be), for the
benefit of the holders of such certificate or instrument, in such pool of
assets, including any chattel paper related to such assets. Seller also
represents that, with respect to all Collateralized Notes, there is and will
continuously be an effective UCC filing naming Seller the secured party (or an
assignee thereof) with respect to the Eligible Assets, including any related
chattel paper, underlying such Notes. Seller shall, with respect to each
Purchase, execute a Receipt and Assignment substantially in the form of Exhibit
B hereto, as applicable, pursuant to which Seller shall reconfirm its grant to
Purchaser of a first priority security interest in, and lien upon, the
Collateral. In furtherance of the foregoing, (i) this Agreement shall constitute
a security agreement, (ii) Purchaser shall have all of the rights of a secured
party with respect to the Collateral pursuant to applicable law and (iii) Seller
shall execute all documents, including but not limited to financing statements
under the Uniform Commercial Code as in effect in any applicable jurisdictions,
as Purchaser may reasonably require to effectively perfect and evidence
Purchaser's first priority security interest in the Collateral. Seller also
covenants not to pledge, assign or grant any security interest to any other
party in any Eligible Asset subject to a Purchase hereunder.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
Section 6.1. Seller's Representations and Warranties. Seller hereby
represents and warrants to Purchaser, as of the date hereof and as of each
Purchase Date, as follows:
(a) All Documents True and Correct. All representations and
warranties made and all information and documents or copies of documents
furnished to Purchaser pursuant to or in connection with this Agreement are and
will be true and correct at the time when made and at all times thereafter under
this Agreement or, if limited to a specific date, as of the date to which they
refer.
(b) Due Organization. Seller is duly organized and validly existing
under the laws of the state of Delaware, and is qualified to do business in each
jurisdiction in which the failure to so qualify would have a material adverse
effect upon its business; has the authority under its charter and bylaws and
applicable law to enter into this Agreement and to perform all acts contemplated
hereby or in connection herewith; and has taken all corporate action necessary
to authorize the execution and delivery of this Agreement and the performance of
its terms.
(c) Binding Obligations. This Agreement and every other document to
be executed by Seller pursuant to this Agreement is and will be a legal, valid,
binding and
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subsisting obligation of Seller, enforceable in accordance with its respective
terms, except that (a) such enforcement may be subject to bankruptcy,
insolvency, reorganization, moratorium or other similar laws (whether statutory,
regulatory or decisional) now or hereafter in effect relating to creditors'
rights generally and (b) the remedy of specific performance and injunctive and
other forms of equitable relief may be subject to certain equitable defenses and
to the discretion of the court before which any proceeding therefor may be
brought, whether a proceeding at law or in equity.
(d) No Violation. The consummation of the transactions contemplated
by this Agreement do not and will not result in the breach of any provision of
the charter or bylaws of Seller or result in the breach of any provision of, or
conflict with or constitute a default under or result in the acceleration of any
obligation under, any agreement, indenture, loan or credit agreement or other
instrument to which Seller, the Eligible Assets or any of Seller's property is
subject, or result in the violation of any law, rule, regulation, order,
judgment or decree to which Seller, the Eligible Assets or Seller's property is
subject.
(e) No Litigation. There is no action, suit, proceeding, inquiry or
investigation, at law or in equity, or before, or by any court, public board or
body pending or, in each case, as to which Seller has received service of
process, or, to Seller's knowledge, threatened against or affecting Seller,
which will adversely affect the validity or enforceability of this Agreement or
Seller's ability to carry out its obligations hereunder.
(f) Financial Statements. The audited financial statements of
Guarantor and its consolidated subsidiaries as of March 31, 1998 and the
unaudited financial statements of Guarantor and its consolidated subsidiaries as
of December 31, 1998, heretofore furnished to Purchaser, fairly present the
financial position of Guarantor and its consolidated subsidiaries on a
consolidated basis as of such date and the period then ended, and subsequent to
the date of said financial statements there has been no material adverse change
in the financial condition of Guarantor and its consolidated subsidiaries on a
consolidated basis.
(g) No Consent. No consent, approval, authorization or order of any
court or governmental agency or body is required for the sale of any Eligible
Assets hereunder or the execution, delivery and performance by Seller of or
compliance by Seller with this Agreement or the consummation of the transactions
contemplated hereby or thereby.
(h) Truth of Schedules. The information pertaining to the Eligible
Assets set forth in the relevant schedules and reports furnished to Purchaser by
Seller in respect of the Eligible Assets is true and correct in all material
respects.
(i) Transfer of Eligible Assets. All actions necessary to transfer
to Purchaser the interests in the Eligible Assets subject to Purchase hereunder
have been or are currently being taken and Seller has not offered or sold, and
will not offer or sell, any Eligible Assets in any manner that would render the
issuance and sale of the Eligible
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Assets a violation of Section 5 of the Securities Act of 1933, as amended, or
any state securities or "Blue Sky" laws or require registration pursuant
thereto, nor has it authorized, nor will it authorize, any person to act in such
manner.
(j) Representations with Respect to Eligible Assets. With respect to
the Eligible Assets subject to any Purchase Request, Seller represents and
warrants to Purchaser with respect to each such Eligible Asset as follows:
(i) such Eligible Asset is owned by Seller free from all liens
and encumbrances and will be transferred to Purchaser free from all liens
and encumbrances;
(ii) the documentation evidencing such Eligible Asset,
including any leases, notes, guarantees, mortgages, security agreements,
waivers and/or other instruments are true, valid and genuine and represent
existing valid and enforceable obligations in accordance with their terms,
except only as such enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement
of creditors' rights generally and by general principles of equity
(whether considered in a proceeding or action in equity or at law), and
all parties to each Eligible Asset had full legal capacity to execute all
documents relating to such Eligible Asset and convey the estate therein
purported to be conveyed;
(iii) all signatures, names, addresses, amounts and other
statements entered in the documentation referred to in clause (ii) are, to
the best knowledge of Seller, true and correct;
(iv) the transaction yielding or underlying such Eligible
Asset conforms to all applicable laws, rules, regulations, ordinances and
orders;
(v) the obligations of the obligor under any Eligible Asset is
not subject to any defense, claim, counterclaim or set off of which Seller
has knowledge;
(vi) all mortgages, security interests and other liens in
favor of Seller in any collateral underlying such Eligible Asset are
valid, perfected and enforceable and (except as specifically identified by
Seller) rank prior to all other mortgages, liens and security interests;
and
(vii) any Eligible Asset consisting of a participation
certificate or other ownership instrument evidencing an interest in an
underlying pool of assets represents 100% of the senior interest in such
pool.
(k) Residential Mortgage Products. Seller represents and warrants to
Purchaser with respect to each Mortgage Product consisting of an interest in a
residential property in a pool of Eligible Assets that each such Mortgage
Product (i) shall be an "`A' Risk Mortgage Product" as determined in accordance
with customary standards for the mortgage lending industry, (ii) shall be a "`B'
Risk Mortgage Product" as determined in
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accordance with customary standards or the mortgage lending industry, or (iii)
shall be a "`C' Risk Mortgage Product" which shall have been originated in
conformity with and shall meet, as of the Date of Purchase, underwriting
guidelines no less stringent than those specified in Schedule I attached hereto.
(1) Multi-Family Mortgage Products. Seller represents and warrants
to Purchaser with respect to each Mortgage Product consisting of an interest in
a multi-family property that such Mortgage Product shall be of a type and
quality eligible for inclusion in a securitized pool which would be expected to
issue a security which would be rated in one of the investment grade generic
rating categories by any nationally recognized statistical rating agency;
provided, that either (i) the aggregate principal balance of such pool exceeded
$70,000,000 and, in order to be eligible for such rating, the structure of such
pool would not require more than 10% of the securities issued by such pool to be
subordinated to the class of securities eligible for such rating, or (ii) such
pool would be eligible for credit enhancement by a Monoline Insurance Company.
(m) Other Mortgage Products. Seller represents and warrants to
Purchaser with respect to each Mortgage Product, excepting residential mortgage
products which are addressed in subsection (k) or (1) above, that such Mortgage
Product shall be of a type and quality eligible for inclusion in a securitized
pool which would be expected to issue a security which would be rated in one of
the investment grade generic rating categories by any nationally recognized
statistical rating agency; provided, that either (i) the aggregate principal
balance of such pool exceeded $25,000,000 and, in order to be eligible for such
rating, the structure of such pool would not require more than 25% of the
securities issued by such pool to be subordinated to the class of securities
eligible for such rating, or (ii) such pool would be eligible for credit
enhancement by a Monoline Insurance Company.
(n) Motor Vehicle Loans. Seller represents and warrants to Purchaser
with respect to each motor vehicle loan constituting an Eligible Asset hereunder
that such motor vehicle loan shall be of a type and quality usually eligible for
inclusion in a securitized pool which would be expected to issue a security
which would be rated in one of the investment grade generic rating categories by
any nationally recognized statistical rating agency; provided, that either (i)
the aggregate principal balance of such pool exceeded $40,000,000 and, in order
to be eligible for such rating, the structure of such pool would not require
more than 10% of the securities issued by such pool to be subordinated to the
class of securities eligible for such rating, or (ii) such pool would be
eligible for credit enhancement by a Monoline Insurance Company.
(o) Franchise Loans. Seller represents and warrants to Purchaser
with respect to each Franchise Loan constituting an Eligible Asset hereunder
that such Franchise Loan shall be of a type and quality eligible for inclusion
in a securitized pool which would be expected to issue a security which would be
rated in one of the investment grade generic rating categories by any nationally
recognized statistical rating agency; provided, that either (i) the aggregate
principal balance of such pool exceeded $25,000,000 and, in order to be eligible
for such rating, the structure of such pool would not require more than 25% of
the securities issued by such pool to be subordinated to the
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class of securities eligible for such rating, or (ii) such pool would be
eligible for credit enhancement by a Monoline Insurance Company.
(p) Collateralized Notes. Seller represents and warrants to
Purchaser with respect to each Collateralized Note purchased hereunder that such
Collateralized Note is secured by Eligible Assets which conform to the
appropriate representations and warranties set forth in subsections (j) through
(o) above.
ARTICLE VII
COVENANTS OF SELLER
Section 7.1. Seller's Covenants. So long as the Agreement remains in
effect or Seller shall have any obligations hereunder, Seller hereby covenants
and agrees with Purchaser as follows:
(a) Financial Statements. Promptly upon preparation, but in no event
later than 90 days following the end of each fiscal quarter, Seller shall
deliver to Purchaser the Financial Statements of Guarantor and its consolidated
subsidiaries as of the end of each fiscal quarter. In the event the parties
hereto agree to extend the term of this Agreement, promptly upon preparation,
Seller shall deliver to Purchaser financial statements of Guarantor, and its
consolidated subsidiaries as of the end of each fiscal year, as described in
Section 6.1(f) hereof.
(b) Reports. Seller shall with respect to any Eligible Assets
serviced by Seller or any of its affiliates or otherwise use its best efforts to
cause to be delivered to Purchaser periodically the report, if any, prepared by
the relevant trustee or servicer setting forth payment activity, defaults and
delinquencies with respect to the underlying loans or receivables in respect of
each Eligible Asset acquired by Purchaser and shall prepare and deliver reports
each month, detailing, with respect to all Purchases, all of the information
necessary for Purchaser to determine the Market Value of such Eligible Assets,
including such information as Purchaser may from time to time reasonably request
including, but not limited to, purchase activity and valuation of Eligible
Assets, which reports shall be rendered within 15 days of the information as to
which they pertain becoming available.
(c) Compliance with Laws. Seller will comply in all material
respects with all laws, rules and regulations to which it is or may become
subject.
(d) Conduct of Business. Seller will, and will cause each of its
subsidiaries to do all things necessary to remain duly organized or
incorporated, validly existing and in good standing as a domestic corporation or
limited liability company, as the case may be, in its jurisdiction of
organization or incorporation, as the case may be, and maintain all requisite
authority to conduct its business in each jurisdiction in which its business is
conducted as presently conducted.
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(e) Parent. Guarantor shall, at all times, directly or indirectly,
own at least 50% of the common stock of Seller, and no "Event of Default" as
such term is defined in the Indenture dated as of August 15, 1996 between
Guarantor and the Chase Manhattan Bank as Trustee (the "Indenture") with respect
to the senior notes, due 2003, shall have occurred, nor an event which would
constitute an "Event of Default" under the Indenture, has occurred during the
term of this Agreement.
(f) Maintenance of Capital. At all times during this Agreement,
Seller shall possess sufficient net capital and liquid assets (or ability to
access the same) to satisfy its obligations as they become due in the normal
course of business.
(g) Notifications. Seller will notify Purchaser in writing of any of
the following promptly upon learning of the occurrence thereof, describing the
same and, if applicable, any remedial steps being taken with respect thereto:
(i) The occurrence or likelihood of occurrence of an Event of
Termination hereunder;
(ii) The institution of any litigation, arbitration proceeding
or governmental proceeding which, in the opinion of counsel to Seller,
could have a material adverse effect on Seller, any of its subsidiaries,
the Eligible Assets or Guarantor;
(iii) The entry of any judgment or decree against Seller or
any of its subsidiaries or Guarantor if the aggregate amount of all
judgments and decrees then outstanding against Seller or any of its
subsidiaries or Guarantor exceeds $10,000,000 after deducting (i) the
amount with respect to which Seller or any of its subsidiaries or
Guarantor is insured and with respect to which the insurer has assumed
responsibility in writing, and (ii) the amount for which Seller or said
subsidiary or Guarantor is otherwise indemnified if the terms of such
indemnification are reasonably satisfactory to Purchaser; or
(iv) The occurrence or likelihood of any event which would
allow the obligee under any material loan agreement to which Seller or any
of its subsidiaries or Guarantor is bound to declare an event of default
or accelerate the obligations of Seller or any of its subsidiaries or
Guarantor thereunder.
(h) Replacement or Repurchase. Upon notice or discovery of an
Eligible Asset not conforming in any material respect with the representations
made in this Agreement, Seller shall immediately do one or the following: (i)
replace the non-conforming Eligible Asset with one or more conforming Eligible
Assets of substantially the same type and general risk profile as the
non-conforming Eligible Asset (including, in the case of residential Mortgage
Products, the same generic risk category) and of an aggregate fair market value
at least equal to that of the non-conforming Eligible Asset; or (ii) repurchase
such Eligible Asset at the related Adjusted Tranche Amount plus the related
Adjusted Net Securities Amount. If Seller elects to replace a non-conforming
Eligible Asset with one or more conforming Eligible Assets rather than to
repurchase the
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non-conforming Eligible Asset as described above, Seller hereby agrees to
satisfy the Subsequent Conditions (other than that described in Section 2.2(i)
hereof) with respect to the conforming Eligible Assets and Purchaser hereby
agrees to comply with the provisions of Section 4.6(c) hereof with respect to
the non-conforming Eligible Asset (with the non-conforming Eligible Asset being
treated as if it were a Repurchase Asset being sold to Seller for this purpose).
ARTICLE VIII
FEES AND OTHER COSTS
Section 8.1. Net Securities Amount. In connection with each Tranche
hereunder, Seller agrees to pay to Purchaser during the Term, on the last day of
any Tranche Term, the Net Securities Amount then owed to Purchaser (less the
related Retained Securities Amount, if any), with respect to the applicable
Tranche. In addition, in connection with each Tranche hereunder, if the interest
received by Purchaser at the end of any Tranche Period is less than the Net
Securities Amount (less the related Retained Securities Amount, if any) owed by
Seller to Purchaser in respect of such Tranche Period, Seller shall immediately
reimburse Purchaser for any such deficiency.
Section 8.2. Hold Harmless. Seller hereby agrees to pay, and to
indemnify, protect, save and hold harmless, on an After-Tax Basis, Purchaser
from and against any and all Taxes (as defined in Section 8.3 hereof) other than
(i) income taxes of Purchaser, (ii) Taxes that result from the misconduct or
negligence of Purchaser or from the failure of Purchaser to file tax returns or
certificates of exemption from withholding or other reports, properly and on a
timely basis or to claim a deduction or credit and (iii) Taxes that are based on
or measured by fees or compensation received by Purchaser, which may at any time
be imposed or asserted by reason of, in connection with or in respect of the
Eligible Assets or any transactions contemplated hereby, whether imposed on
Purchaser, Seller or the Eligible Assets or otherwise, and whether arising by
reason of the acts to be performed by Seller hereunder or otherwise.
Section 8.3. Definition of Taxes. For purposes of this Article VIII,
the term "Taxes" shall mean all taxes, charges, fees, levies or other
assessments including, without limitation, withholding, excise, property, sale
and franchise taxes (including, in each such case, any interest, penalties or
additions attributable to or imposed on or with respect to any such assessment)
imposed by the United States, any state or political subdivision thereof, any
foreign government or any other jurisdiction or taxing authority.
Section 8.4. After-Tax Calculation. For purposes of this Section 8,
in determining the additional amount necessary so that any payment hereunder is
paid on an After-Tax Basis, such calculation shall be based on Purchaser's
effective tax rate in effect from time to time under applicable law.
Section 8.5. Contest, Payment, Interest. In the event a taxing
jurisdiction makes a claim with respect to any Tax for which Seller may be
liable under this Article VIII, Purchaser shall promptly notify Seller thereof.
If reasonably requested
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by Seller within 30 days of receipt of such notice, Seller shall, at its own
expense, be entitled to contest the imposition of such Tax. All payments due
pursuant to this Section 8 shall be paid no later than the later of (i) five (5)
Business Days after the date of such demand or (ii) five (5) Business Days
before the date the Tax to which such amount payable hereunder relates is due or
is to be paid (ignoring extension of time) accompanied by a written statement
(which written statement shall, at Seller's request, be verified by a nationally
recognized independent accounting firm mutually acceptable to Seller and
Purchaser, such verification to be at Seller's expense unless such accountants
determine that the amount payable by Seller is less than ninety-five percent
(95%) of the amount shown on such written statement) describing in reasonable
detail the Tax and the computation of the amount payable; provided, however,
that Seller shall not be entitled to any payment in respect of accountants' fees
and expenses incurred in connection with the contest of a taxing authority
assessment. Without in any way limiting Purchaser's remedies, any such amount
not paid when due, shall bear interest at a rate equal to the Default Rate.
Section 8.6. Definition of "After-Tax Basis"; Tax Savings. For
purposes of this Article VIII, the term "After-Tax Basis" shall mean an amount
which after deduction of the net increase in federal, state and foreign income
taxes required to be paid by Purchaser in with respect to the receipt of such
amount is equal to the payment required under the provision of this Article VIII
which requires payment to be made on an After-Tax Basis. If Purchaser
subsequently realizes a tax deduction or credit (including foreign tax credit
and any reduction in Taxes) not previously taken into account in computing such
payment, Purchaser shall promptly pay to Seller an amount equal to the sum of
(i) the actual reduction in Taxes, if any, realized by Purchaser which is
attributable to such deduction or credit and (ii) the actual reduction in Taxes
realized by Purchaser as a result of any payment made by Purchaser pursuant to
this sentence.
ARTICLE IX
TERMINATION
Section 9.1. Events of Termination. Each of the following events
shall constitute an "Event of Termination" hereunder (whatever the reason for
such Event of Termination and whether it shall be voluntary or involuntary or be
effected by operation of law or pursuant to any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body):
(a) Failure to Perform. Failure of Seller to deliver to Purchaser or
its designee the relevant Eligible Assets on the relevant Purchase Date; or
failure of Seller to pay when due any sums or amount equal to or greater than
$20,000 payable hereunder or under any Purchase or to pay within one Business
Day of the due date any sums or amount less than $20,000 payable hereunder or
under any Purchase.
(b) Failure of Representation or Warranty. Any of the
representations and warranties (except for those set forth in subsections (j)
through (p) of Section 6.1 hereof) made by Seller herein, or in any certificate
or other document delivered pursuant
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to or in connection with this Agreement or any transaction contemplated hereby,
or any of the representations and warranties made by Guarantor in the Guarantee,
shall prove to be untrue in any material respect when made or deemed made.
(c) Failure of Covenant. Failure of Seller to observe and perform
any material covenant, condition or other agreement on its part to be observed
or performed hereunder and such default shall continue unremedied for five
Business Days, or failure of Guarantor to observe and perform any covenant,
condition or agreement on its part to be observed or performed under the
Guarantee.
(d) Bankruptcy Event.
(i) Appointment of a receiver, conservator, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official) of
Seller or of Guarantor, or of any substantial part of its or their
property, the ordering of the winding-up or liquidation of its or their
affairs, or the entry of a decree or order for relief by a court having
jurisdiction in the premises in respect of Seller or Guarantor in any
involuntary case under any applicable bankruptcy, insolvency or other
similar law now or hereinafter in effect;
(ii) Commencement by Seller or Guarantor of a voluntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or the consent by Seller or Guarantor to the entry of
an order for relief in an involuntary case under any such law or to the
appointment of or taking possession by a receiver, liquidator, assignee,
trustee, custodian, sequestrator (or other similar official) of Seller or
of Guarantor, or of any substantial part of its property, or the making by
Seller or Guarantor of any general assignment for the benefit of
creditors, or the failure of Seller or of Guarantor generally to pay its
debts as such debts become due, or the taking of corporate action by
Seller or Guarantor in furtherance of any of the foregoing.
(e) Seller Default. Default by Seller or Guarantor, whether as
principal, guarantor or surety, in the payment of any principal or interest on
any indebtedness of Seller or Guarantor in the amount of $10,000,000 or more.
(f) Material Adverse Change. A material adverse change in the
financial condition of Seller or Guarantor shall have occurred which, in the
reasonable opinion of Purchaser, will impair the ability of either to perform
its obligations hereunder or under the Guarantee, as the case may be.
(g) Cross-Default. The occurrence and continuance of an "event of
default" or of an "event of termination" on the part of either Seller or
Guarantor under any other agreement between either Seller or Guarantor, on the
one hand, and Purchaser or any of its affiliates on the other hand, which has
not been waived by Purchaser, or the occurrence and continuance of an "Event of
Default" on the part of the Guarantor under the Indenture with respect to the
senior notes, due 2003; or the occurrence of an event
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which would constitute an "Event of Default" under the Indenture during the term
of this Agreement.
Section 9.2. Term. This Agreement shall terminate upon the earlier
to occur of an Event of Termination or the expiration of the Term. As used
herein, the "Term" shall mean that period commencing on the date hereof and
continuing until the earlier of (i) the date that the Subservicing Agreement
shall terminate and (ii) the date that a Change of Control with respect to
Seller or Guarantor shall occur. In the event this Agreement expires at the end
of the Term and at that time there exists no Event of Termination, then
immediately prior to the date of such expiration, as to all Eligible Assets then
owned by Purchaser, a Required Sale Event shall be deemed to occur unless this
Agreement is extended.
ARTICLE X
MISCELLANEOUS PROVISIONS
Section 10.1. Payment. Any payment due under this Agreement shall be
made promptly and by wire transfer. Any late payments shall bear interest at a
rate of "Prime" (as then set forth in The Wall Street Journal) plus 2% (the
"Default Rate"), except that payments made one Business Day late shall bear
interest at the then "federal funds" rate plus any customary margin.
Section 10.2. Remedies. If an Event of Termination occurs and is
continuing, Purchaser may, to the extent provided or permitted by applicable law
and this Agreement, pursue any available legal remedy including the sale or
other disposition of some or all of the Eligible Assets and related Collateral
in accordance with the provisions of Section 4.1; provided, however, Purchaser
shall not be obligated to offer the relevant Eligible Asset to Seller for
purchase pursuant to the right of first refusal contained in Section 4.1 if any
of the events described in subsections (d), (e), (f) and (g) of Section 9.1
hereof have occurred and are continuing. Following an Event of Termination, in
addition to the rights granted to Purchaser pursuant to Section 4.4 hereof, no
further Purchase hereunder shall occur, unless such Event of Termination shall
have been waived by Purchaser.
Section 10.3. Exceeding Available Amount. If Purchaser shall accept
a Purchase Request and the Aggregate Adjusted Tranche Amount shall exceed the
Available Amount, then such Purchase shall be governed in all respects by the
terms of this Agreement. Purchaser shall have the option, but not the
obligation, to accept any Purchase Request which causes the Aggregate Adjusted
Tranche Amount to exceed the Available Amount.
Section 10.4. Exclusive Benefit of Parties; Assignment. This
Agreement is for the exclusive benefit of the parties hereto and their
respective successors and assigns and shall not be deemed to give any legal or
equitable right to any other person. This Agreement may not be assigned by
either party hereto without the prior written consent of the other party.
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Section 10.5. Amendment; Waivers. This Agreement may be amended from
time to time only by written agreement of Seller and Purchaser. Any forbearance,
failure, or delay by a party in exercising any right, power, or remedy hereunder
shall not be deemed to be a waiver thereof, and any single or partial exercise
by a party of any right, power or remedy hereunder shall not preclude the
further exercise thereof. Every right, power and remedy of a party shall
continue in full force and effect until specifically waived by it in writing. No
right, power or remedy shall be exclusive, and each such right, power or remedy
shall be cumulative and in addition to any other right, power or remedy, whether
conferred hereby or hereafter available at law or in equity or by statute or
otherwise.
Section 10.6. Effect of Invalidity of Provisions. In case any one or
more of the provisions contained in this Agreement should be or become invalid,
illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein shall in no way be
affected, prejudiced or disturbed thereby.
Section 10.7. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without regard
to its rules regarding conflict of laws.
Section 10.8. Submission to Jurisdiction; Waiver of Trial by Jury.
With respect to any claim arising out of this Agreement each party irrevocably
submits to the nonexclusive jurisdiction of the courts of the State of New York
and the United States District Court located in the Borough of Manhattan, City
of New York, and each party irrevocably waives any objection which it may have
at any time to the laying of venue of any suit, action or proceeding arising out
of or relating hereto brought in any such court, irrevocably waives any claim
that any such suit, action or proceeding brought in any such court has been
brought in any inconvenient forum and further irrevocably waives the right to
object, with respect to such claim, suit, action or proceeding brought in any
such court, that such court does not have jurisdiction over such party. Each
party irrevocably consents to the service of process by registered or certified
mail, postage prepaid, to it at its address given pursuant to Section 10.11
hereof. To the extent permitted by applicable law, Purchaser and Seller each
irrevocably waive all right of trial by jury in any action, proceeding or
counterclaim arising out of or in connection with this Agreement or any matter
arising hereunder.
Section 10.9. Jurisdiction Not Exclusive. Nothing herein will be
deemed to preclude either party hereto from bringing an action or proceeding in
respect of this Agreement in any jurisdiction other than as set forth in Section
10.8 hereof.
Section 10.10. Notices. Any notices, consents, directions, demands
and other communications given under this Agreement (unless otherwise specified
herein) shall be in writing and shall be deemed to have been duly given when
personally delivered at or telefaxed to the respective addresses or facsimile
numbers, as the case may be, set forth on the signature page hereof for Seller
and Purchaser, or to such other address or facsimile number as either party
shall give notice to the other party pursuant to this Section. Notices,
consents, etc. may be also effected by first class mail, postage
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prepaid sent to the foregoing addresses and will be effective upon receipt by
the intended recipient.
Section 10.11. Entire Agreement. This Agreement, including the
Schedules and Exhibits hereto, contains the entire agreement of the parties
hereto with respect to the subject matter hereof, and supersedes all prior and
contemporaneous agreements between them, whether oral or written, of any nature
whatsoever with respect to the subject matter hereof.
Section 10.12. Purchaser's Investment Representation. Each purchase
of Eligible Assets hereunder shall constitute a representation by Purchaser to
Seller that Purchaser understands, and that Purchaser has such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risks of, its investment in the relevant Eligible Assets; that
Purchaser has reviewed such materials and information with respect to the
relevant Eligible Assets as it has deemed necessary and it has been afforded the
opportunity to make inquiry of Seller; that Purchaser is acquiring the relevant
Eligible Assets for the purpose of investment and not with a view to the resale
or distribution thereof; and that it has no present intention of selling,
negotiating, or otherwise disposing of the relevant Eligible Assets; provided,
however, that the disposition of Purchaser's property shall at all times be and
remain within Purchaser's control.
Section 10.13. Indemnification.
(a) Without limiting any other rights which Purchaser or Seller may
have hereunder or under applicable law, and in addition to any other indemnity
provided hereunder, Seller hereby agrees to indemnify Purchaser and its
respective officers, directors, agents and employees (each, an "Indemnified
Party") from and against any and all Losses incurred by any of them directly
arising out of or as a result of this Agreement or any Purchase of Eligible
Assets excluding, however, Losses to the extent arising from gross negligence or
willful misconduct on the part of Purchaser. Without limiting the generality of
the foregoing, Seller shall indemnify Purchaser for Losses relating to or
resulting from:
(i) any representation or warranty made by Seller (or any
officers, employees or agents of Seller) under or in connection with this
Agreement, any periodic report required to be furnished hereunder or any
other information or document delivered by Seller pursuant hereto, which
shall have been false or incorrect in any material respect when made or
deemed made;
(ii) the failure by Seller to comply with any applicable law,
rule or regulation with respect to any Purchase; or
(iii) the failure by Seller (if so requested by Purchaser) to
execute and properly file, or any delay in executing and properly filing,
financing statements or other similar instruments or documents under the
Uniform
28
<PAGE>
Commercial Code of any applicable jurisdiction or other applicable laws
with respect to the Eligible Assets.
(b) The sole indemnification with respect to Taxes, as defined in
Section 8.3 hereof, is that set forth in Article VIII hereof. All indemnities
and undertakings of Seller and Purchaser hereunder shall survive the termination
of this Agreement.
Section 10.14. Headings. The headings in this Agreement are for
convenience only and are not intended to influence its construction.
Section 10.15. Execution in Counterparts. This Agreement may be
executed in any number of counterparts, each of which shall be deemed an
original, and all of which shall constitute one and the same instrument.
29
<PAGE>
IN WITNESS WHEREOF, Purchaser and Seller have duly executed this
Agreement as of the date and year first above written.
CONTINENTAL GRAIN COMPANY
By:
-----------------------------------------
Name:
Title:
Address: 277 Park Avenue
New York, New York 10172
Attention: Senior Vice President
and Chief Legal Officer
Telephone: (212) 207-5100
Facsimile: (212) 207-5799
CONTISECURITIES ASSET FUNDING CORP. III
By:
-----------------------------------------
Name:
Title:
By:
-----------------------------------------
Name:
Title:
Address: 277 Park Avenue
New York, New York 10172
Attention: Chief Counsel
Telephone: (212) 207--2822
Facsimile: (212) 207--2935
[Signature Page to Purchase and Sale Agreement]
30
<PAGE>
SCHEDULE I
RESIDENTIAL MORTGAGE PRODUCT UNDERWRITING
GUIDELINES FOR "C" RISK MORTGAGE PRODUCTS
-----------------------------------------
For purposes of representations of individual mortgage loans and for
purposes of the classification of "C" Risk Mortgage Product, the "C" Risk
Mortgage Product underwriting guidelines are as follows:
(i) The obligor under each Mortgage Product has made no more
than (a) six payments more than 30 days past due, (b) two payments more
than 60 days past due, and (c) two payments more than 90 days past due,
within the last twelve month period.
(ii) There are no more than $2,500 in open charge-offs or
collection accounts remaining open on any Purchase Date.
(iii) No bankruptcy or notice of default filings by the
obligor under each Mortgage Product may have occurred during the preceding
eighteen months, but discharged bankruptcies are acceptable if there is a
two-year history of re-established credit with major creditors (i.e.,
installment loans, major credit cards) and a written explanation of
delinquency is provided.
(iv) The Mortgaged Property must be in at least acceptable
condition.
(v) The Mortgage Product must have a maximum Loan-to-Value
Ratio of 75%.
(vi) The Mortgage Product must have a maximum debt-to-income
ratio of 60%.
(vii) The minimum mortgage loan size is $10,000 and the
maximum mortgage loan size is $325,000 (over $325,000 determined on an
exception basis).
(viii) Two automated credit bureau reports are required for
each borrower.
(ix) The foregoing Guidelines are subject to commercially
reasonable variations on a loan-by-loan basis. For example, a borrower
unable to meet Guideline (i) may be approved for a loan with a
Loan-to-Value ratio of less than 75% or for a loan with an above-market
interest rate. Such determinations are made by the originators on a
case-by-case basis.
S-1
<PAGE>
EXHIBIT A
FORM OF GUARANTEE
THIS GUARANTEE is made as of May 26, 1999 by CONTIFINANCIAL
CORPORATION (the "Guarantor"), a corporation organized and existing under the
laws of the State of Delaware and having its principal office at 277 Park
Avenue, New York, New York 10172.
WHEREAS, CONTINENTAL GRAIN COMPANY (the "Purchaser") has entered
into a Purchase and Sale Agreement (the "Agreement," with terms defined therein
being used herein as therein defined) dated as of May 26, 1999 with
CONTISECURITIES ASSET FUNDING CORP. III (the "Seller") providing for the
purchase of certain Eligible Assets by the Purchaser from the Seller, from time
to time; and
WHEREAS, the Guarantor represents that it owns directly or
indirectly a substantial amount of the stock of the Seller and/or is financially
interested in its affairs and expects to derive advantage from each and every
such Purchase;
NOW, THEREFORE, to induce Purchaser to enter into Purchases with the
Seller from time to time, and for other good and valuable consideration receipt
of which is hereby acknowledged, the Guarantor hereby agrees as follows:
(1) The Guarantor hereby unconditionally and irrevocably guarantees
to the Purchaser the full and complete payment when due (whether at stated
maturity, by acceleration or otherwise), and performance, of the Seller's
obligations under the Agreement and every Purchase evidenced by a Purchase
Request entered into pursuant thereto. In addition, the Guarantor agrees that in
the event that the Seller defaults in the performance of or payment when due of
any or all obligations or sums hereby guaranteed, the Guarantor shall forthwith
pay such sums or perform such obligations without need to resort to the Seller
first. All amounts payable by the Guarantor to the Purchaser hereunder shall be
paid in immediately available funds in U.S. Dollars and at the place and
otherwise in the manner and on the terms required by the Agreement. This
Guarantee shall be a continuing Guarantee and shall remain in full force and
effect until all the obligations of the Seller hereby guaranteed are paid in
cash or other immediately available funds or performed in full. The Guarantor's
obligations under this Guarantee shall be reinstated and be continued in full
force and effect if at any time any payment received by the Purchaser under the
Agreement is invalidated, declared to be fraudulent or preferentially set aside
and/or required to be repaid by the Purchaser.
(2) The Guarantor hereby expressly waives all setoffs and
counterclaims and all presentments, demands for performance, notices of
nonperformance, protests, notices of protest, notices of dishonor, notices of
acceptance of this Guarantee, notices of sale, surrender or other handling or
disposition of assets subject
A-1
<PAGE>
to the Agreement, any requirement that the Purchaser exhaust any right, power or
remedy or take any action against the Seller or against any assets subject to
the Agreement, and other formalities of any kind. The obligation of the
Guarantor hereunder is absolute and unconditional irrespective of the
genuineness, legality, validity, regularity or enforceability of the Agreement,
any Purchase Request, or any other agreement, instrument or document
contemplated therein or thereby. The Guarantor hereby waives, to the fullest
extent permitted by applicable law, all defenses of a surety to which it may be
entitled by statute or otherwise. The Purchaser may neglect or forbear to
enforce payment or performance hereunder, under the Agreement, any Purchase
Request, or under any other agreement, instrument or document contemplated
therein or thereby, or waive, amend or otherwise alter the terms of the
Agreement or any Purchase Request in any manner, or release or cause the release
of any assets subject to the Agreement, in each case without in any way
affecting or impairing the liability of the Guarantor hereunder.
(3) The Guarantor hereby waives all rights of subrogation,
exoneration, reimbursement (except reimbursements by third parties) or
contribution, whether arising by contract or operation of law (including,
without limitation, any such right arising under the Federal Bankruptcy Code) or
otherwise by reason of any payment by it hereunder and further agrees with the
Seller for the benefit of its creditors that any such payment by it shall
constitute a contribution of capital by the Guarantor to the Seller.
(4) If an Event of Termination shall have occurred and be
continuing, the Guarantor agrees that, as between the Guarantor and the
Purchaser, the obligations of the Seller guaranteed hereunder may be declared to
be due for purposes of this guarantee notwithstanding any stay, injunction or
other prohibition which may prevent, delay or vitiate any such declaration as
against the Seller and that, in the event of any such declaration (or attempted
declaration), such obligations shall forthwith become due by the Guarantor for
purposes of this Guarantee.
(5) All notices, demands and other communications hereunder shall be
given in writing and delivered or telefaxed (i) to the Guarantor at 277 Park
Avenue, New York, New York 10172, Attention: General Counsel, Facsimile: (212)
207-2937, and (ii) to the Purchaser at 277 Park Avenue, New York, New York
10172, Attention: Senior Vice President and Chief Legal Officer, Facsimile:
(212) 207-5799, and shall be effective upon actual receipt.
(6) THIS GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAWS
RULES THEREOF. This guarantee may not be modified, altered or amended except by
a writing signed by both the Guarantor and the Purchaser.
(7) THE GUARANTOR IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE
COURTS OF THE STATE OF NEW YORK AND THE UNITED STATES DISTRICT COURT LOCATED IN
THE BOROUGH OF
A-2
<PAGE>
MANHATTAN, CITY OF NEW YORK, IN ANY ACTION, SUIT OR PROCEEDING BROUGHT AGAINST
IT WHICH IS RELATED TO ANY MATTER CONTAINED IN THIS GUARANTEE, AND THE GUARANTOR
HEREBY WAIVES AND AGREES NOT TO ASSERT BY WAY OF MOTION, DEFENSE OR OTHERWISE,
IN ANY SUCH ACTION, SUIT OR PROCEEDING, THAT IT IS NOT PERSONALLY SUBJECT TO THE
JURISDICTION OF ANY SUCH COURT, THAT ANY SUCH COURT IS AN INCONVENIENT FORUM OR
THAT VENUE IN ANY SUCH COURT IS IMPROPER. TO THE EXTENT PERMITTED BY APPLICABLE
LAW, THE GUARANTOR IRREVOCABLY WAIVES ALL RIGHT OF TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN CONNECTION WITH THIS GUARANTEE
OR ANY MATTER ARISING HEREUNDER.
IN WITNESS WHEREOF, the Guarantor has executed this Guarantee as of
the day and year first above written.
CONTIFINANCIAL CORPORATION
By:
------------------------------------
Name:
Title:
By:
------------------------------------
Name:
Title:
A-3
<PAGE>
EXHIBIT B
RECEIPT, GRANT AND ASSIGNMENT
Reference is made to the Purchase and Sale Agreement (the "Purchase
Agreement"), dated as of May 26, 1999, between CONTINENTAL GRAIN COMPANY
("Purchaser") and CONTISECURITIES ASSET FUNDING CORP. III ("Seller") and the
Purchase Request dated May 26, 1999 (a copy of which is annexed hereto).
Capitalized terms used herein but not defined herein have the meanings assigned
such terms in the Purchase Agreement.
Seller hereby acknowledges receipt of $____________ in immediately
available funds representing the Purchase Amount for Eligible Assets which are
the subject matter of the annexed Purchase Request. Seller hereby confirms and
restates with respect to each such Assets the representations and warranties
contained in Section 6.1 of the Purchase Agreement.
Seller hereby assigns to Purchaser as security for Seller's
obligations under the Purchase Agreement all of Seller's right, title and
interest in, to and under (a) such Eligible Assets, (b) all distributions of
principal and interest with respect thereto and (c) all proceeds of the
foregoing. The foregoing grant of a security interest is given in furtherance of
Section 5.1 of the Purchase Agreement.
CONTISECURITIES ASSET FUNDING CORP. III
By:
------------------------------------
Name:
Title:
By:
------------------------------------
Name:
Title:
B-1
<PAGE>
EXHIBIT C
PURCHASE REQUEST
[Date]
Continental Grain Company
277 Park Avenue
New York, New York 10172
Ladies and Gentlemen:
Pursuant to Section 25 of the Purchase and Sale Agreement (the
"Purchase Agreement") dated as of May 26, 1999 between you ("Purchaser") and us
("Seller"), Seller hereby irrevocably requests that the Purchaser purchase the
following Eligible Assets:
Type of Eligible Assets: _____________
Purchase Date: _____________
Principal: $___________
(multiplied by)
Purchase Price
Percentage: ___%
(equals)
Principal Purchase Amount: $____________
(plus)
Purchased Accrued
Interest: $___________
(equals)
Initial Tranche Amount: $
Tranche Period: _____________
Tranche Rate: _____________.
Market Movement Allowance: _____________%
Gain Amount: $____________
Seller's Account: (#________) $____________
C-1
<PAGE>
Other terms:
CONTISECURITIES ASSET FUNDING CORP. III
By:
------------------------------------
Name:
Title:
By:
------------------------------------
Name:
Title:
SELECT ONE ONLY:
/ / Purchaser hereby acknowledges receipt of the foregoing Purchase Request
and by its signature below agrees to purchase the above-described Assets
subject to the terms and provisions hereof and of the Purchase Agreement.
This document shall operate as a confirmation of the purchase transaction
which is the subject of such request.
/ / Purchaser hereby acknowledges receipt of the foregoing Purchase Request
and declines to purchase the above-described Assets.
CONTINENTAL GRAIN COMPANY
By:
------------------------------------
Name:
Title:
C-2
<PAGE>
EXHIBIT D
FORM OF LEGAL OPINION OF COUNSEL TO SELLER
____________, 1999
Continental Grain Company
277 Park Avenue
New York, New York 10172
Re: Purchase and Sale Agreement and Custodial Agreement
Ladies and Gentlemen:
I have acted as Counsel to ContiSecurities Asset Funding Corp. III
("Seller") in connection with (i) the Purchase and Sale Agreement dated as of
May 26, 1999 (the "Purchase and Sale Agreement") between Continental Grain
Company ("Purchaser") and Seller and (ii) the Custodial Agreement dated as of
March 31, 1999 (the "Custodial Agreement") among Seller, Purchaser and
Manufacturers and Traders Trust Company. The Purchase and Sale Agreement and the
Custodial Agreement are individually referred to herein as an "Agreement" and
collectively referred to herein as the "Agreements." In rendering the opinion
set forth below, I have reviewed the original or a certified or conformed copy
of the Agreements and originals or copies satisfactory to me of all such
corporate records, agreements, certificates, governmental orders, permits and
other documents as I have deemed relevant and necessary. Capitalized terms not
defined herein have the respective meanings assigned to them in the Purchase and
Sale Agreement or, if not defined therein, the Custodial Agreement.
In rendering the opinion expressed below, I have, with your
permission and without any further investigation or verification, assumed (a)
the genuineness of all signatures (other than those executed by officer of
Seller), (b) the authenticity of all documents submitted to me as originals, (c)
the conformity to originals of all documents submitted to me as copies and the
authenticity of the originals of such documents, (d) the legal capacity of
natural persons, (e) that the parties to each Agreement (other than Seller) have
the full power and authority to execute and deliver such Agreement and each
Agreement is the legal, valid and binding obligation of each such party, (f)
that to the extent that certain standards of conduct may be imposed as a matter
of law on either or both of Purchaser and the Custodian as a condition to, or as
a requirement for enforceability of, any of the Agreements (including, without
limitation, any requirement that such parties act reasonably, in good faith, in
a commercially reasonable manner or otherwise in compliance with applicable
law), such parties will comply with such standards of conduct, whether or not
any other conduct is permitted by the Agreements, and (g) the adequacy and
accuracy of the public records reviewed by me.
D-1
<PAGE>
Based upon and subject to the foregoing, I am of the opinion that:
1. Seller is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware.
2. Seller (i) has full power and authority to hold all of its right,
title and interest in and to each Eligible Asset, to assign all of its right,
title and interest in and to each Eligible Asset and to execute, deliver and
perform, and to enter into and consummate, all transactions contemplated by the
Agreements, and (ii) has duly authorized the execution, delivery and performance
of the Agreements.
3. The execution, delivery and performance of the Agreements do not,
and will not, conflict with, or constitute a breach of or default under, any
applicable law, rule, order, decree of any court or regulation, the certificate
of incorporation or the bylaws of Seller, or any material instrument or
agreement to which Seller is a party or by which Seller, or any substantial
portion of its assets, is bound.
4. No consent, approval, authorization or order of, or filing with,
any court or governmental agency, authority or body is required in connection
with the execution and delivery of the Agreements or the consummation of the
transactions contemplated by the Agreements.
5. Seller is not an "investment company" or a company "controlled by
an investment company" within the meaning of the Investment Company Act of 1940,
as amended.
The opinions set forth above are subject to the assumptions,
examinations, qualifications and limitations set forth above and the following
additional qualifications and limitations:
A. This opinion is limited to the matters expressly stated herein
and no opinion is implied or may be inferred beyond the matters
expressly stated herein.
B. This opinion does not cover compliance or noncompliance by Seller
or by any other person or entity with federal or state tax,
intellectual property, employee benefit, antitrust or securities
laws (except for the opinion expressed in paragraph 5 relating to
certain federal securities laws).
C. This opinion is rendered as of the date hereof. I assume no
responsibility to supplement or update the opinions herein expressed
and disclaim any obligation to supplement or update this opinion if,
after the date hereof, something comes to my attention or there are
changes in the law or court decrees which could affect this opinion.
D-2
<PAGE>
D. If any document, instrument, record or paper referred to in the
opinion set forth above is governed by the law of a jurisdiction
other than the State of New York, I have for purposes of this
opinion assumed that the law of such other jurisdiction was
identical to the law of the State of New York.
I am a member of the Bar of the State of New York, and the foregoing
opinions are limited to matters arising under the law of the State of New York,
the federal law of the United States of America and the General Corporation Law
of the State of Delaware.
This letter is furnished by me solely for your benefit in connection
with the transactions referred to in the Agreements, and may not be relied upon
by any other party.
Very truly yours,
D-3
<PAGE>
EXHIBIT E
FORM OF LEGAL OPINION OF COUNSEL TO GUARANTOR
____________, 1999
Continental Grain Company
277 Park Avenue
New York, New York 10172
Re: Purchase and Sale Agreement
Ladies and Gentlemen:
This opinion is being furnished to you in my capacity as Chief
Counsel of ContiFinancial Corporation ("Guarantor") in connection with the
Purchase and Sale Agreement dated as of May 26, 1999 (the "Purchase and Sale
Agreement") between Continental Grain Company ("Purchaser") and ContiSecurities
Asset Funding Corp. III ("Seller") and the Guarantee issued by Guarantor
pursuant thereto (the "Guarantee"). In rendering the opinion set forth below, I
have reviewed the originals or certified or conformed copies of the Purchase and
Sale Agreement and the Guarantee and originals or copies satisfactory to me of
all such corporate records, agreements, certificates, governmental orders,
permits and other documents as I have deemed relevant and necessary. Capitalized
terms used and not otherwise defined herein have the respective meanings
assigned to them in the Purchase and Sale Agreement.
In rendering the opinion expressed below, I have, with your
permission and without any further investigation or verification, assumed (a)
the genuineness of all signatures (other than that of Guarantor), (b) the
authenticity of all documents submitted to me as originals, (c) the conformity
to originals of all documents submitted to me as copies and the authenticity of
the originals of such documents, (d) the legal capacity of natural persons, (e)
that the parties to the Purchase and Sale Agreement have the full power and
authority to execute and deliver the Purchase and Sale Agreement and the
Purchase and Sale Agreement is the legal, valid and binding obligation of each
such party, (f) that to the extent that certain standards of conduct may be
imposed as a matter of law on Purchaser as a condition to, or as a requirement
for enforceability of, the Purchase and Sale Agreement and the Guarantee
(including, without limitation, any requirement that such parties act
reasonably, in good faith, in a commercially reasonable manner or otherwise in
compliance with applicable law), such parties will comply with such standards of
conduct, whether or not any other conduct is permitted by the Purchase and Sale
Agreement or the Guarantee, and (g) the adequacy and accuracy of the public
records reviewed by me.
E-1
<PAGE>
Based upon and subject to the foregoing, I am of the opinion that:
1. Guarantor is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware.
2. Guarantor has duly authorized the execution, delivery and
performance of the Guarantee and has full power and authority, corporate and
other, to enter into and perform its obligations under the Guarantee.
3. The execution, delivery and performance of the Guarantee do not,
and will not, conflict with, or constitute a breach of or default under, any
applicable law, rule, order, decree of any court or any regulation, the
certificate of incorporation or the bylaws of Guarantor, or any material
instrument or agreement to which Guarantor is a party or by which Guarantor, or
any substantial portion of its assets, is bound.
4. No consent, approval, authorization or order of, or filing with,
any court or governmental agency, authority or body is required in connection
with the execution and delivery of the Guarantee.
The opinions set forth above are subject to the assumptions,
examinations, qualifications and limitations set forth above and the following
additional qualifications and limitations:
A. This opinion is limited to the matters expressly stated herein
and no opinion is implied or may be inferred beyond the matters
expressly stated herein.
B. This opinion does not cover compliance or noncompliance by
Guarantor or by any other person or entity with federal or state
tax, intellectual property, employee benefit, antitrust or
securities laws.
C. This opinion is rendered as of the date hereof. I assume no
responsibility to supplement or update the opinions herein expressed
and disclaim any obligation to supplement or update this opinion if,
after the date hereof, something comes to my attention or there are
changes in the law or court decrees which could affect this opinion.
D. If any document, instrument, record or paper referred to in the
opinion set forth above is governed by the law of a jurisdiction
other than the State of New York, I have for purposes of this
opinion assumed that the law of such other jurisdiction was
identical to the law of the State of New York.
I am a member of the Bar of the State of New York and the foregoing
opinions are limited to matters arising under the law of the State of New York,
the federal
E-2
<PAGE>
law of the United States of America and the General Corporation Law of the
State of Delaware.
This letter if furnished by me solely for your benefit in connection
with the transactions referred to in the Purchase and Sale Agreement, and may
not be relied upon by any other party.
Very truly yours,
E-3
<PAGE>
EXHIBIT F
FORM OF REPURCHASE NOTIFICATION
Continental Grain Company
277 Park Avenue
New York, New York 10172
Ladies and Gentlemen:
Pursuant to Section 4.6 of the Purchase and Sale Agreement (the
"Purchase Agreement"), dated as of May 26, 1999, between you ("Purchaser") and
ContiSecurities Asset Funding Corp. III ("Seller"), Seller hereby irrevocably
requests that Purchaser sell to Seller on _________, ____ [insert date]
Repurchase Assets with the following characteristics which Repurchase Assets
correspond to the corresponding Eligible Assets listed on the schedule attached
hereto:
Type of Eligible Assets:
Aggregate Principal Balance:
Average Principal Balance:
Minimum/Maximum Principal Balance:
Number of Loans (range):
Weighted Average Remaining Maturity:
Weighted Average CLTV:
Minimum/Maximum CLTV:
Weighted Average Coupon Rate:
F-1
<PAGE>
Minimum/Maximum Coupon Rate:
Other characteristics (specify)
CONTISECURITIES ASSET FUNDING CORP. III,
as Seller
By:
-------------------------------------
Authorized Signatory
By:
-------------------------------------
Authorized Signatory
F-2
Exhibit 10.29
THIRD AMENDMENT dated as of May 28, 1999
(this "Amendment") to the Credit Agreement dated as
of January 7, 1997 (as heretofore amended, the
"Credit Agreement"), 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 certain provisions of the
Credit Agreement be amended as set forth herein. The undersigned Lenders are
willing to amend such provisions on the terms and subject to the conditions set
forth herein.
Accordingly, in consideration of the mutual agreements
contained herein 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. Each capitalized term used but not
defined herein shall have the meaning assigned to it in the Credit Agreement as
amended hereby. The principles of construction set forth in Section 1.03 of the
Credit Agreement shall apply equally to this Amendment.
SECTION 2. Amendments of Covenants.
(a) Section 2.09(c). The requirement of Section 2.09(c) of the
Credit Agreement that Loans be prepaid to the extent necessary in order
that the Revolving Credit Exposure will not exceed the Borrowing Base
is deleted.
(b) Section 6.09. The requirement that the Borrower comply
with the financial covenants set forth in paragraphs (a), (b) and (c)
of Section 6.09 of the Credit Agreement is deleted.
SECTION 3. Other Amendments.
(a) Amendment of Section 1.01. Section 1.01 of the Credit
Agreement is hereby amended by
(i) inserting in the appropriate alphabetical order
the following definitions:
<PAGE>
2
"'Credit Agreement Amount' means, at any time, the
aggregate outstanding principal amount of the Loans.
'Letter of Credit' means the "Letter of Credit" under
and as defined in the Reimbursement Agreement.
'Reimbursement Agreement Amount' means, at any time,
the aggregate principal amount of the Reimbursement Loans plus
any principal of amounts due under Section 2.03 of the
Reimbursement Agreement plus the undrawn amount of the Letter
of Credit.
'Reimbursement Loans' means the "Loans" under and as
defined in the Reimbursement Agreement.";
(ii) deleting the definition of "Reimbursement
Agreement" in its entirety and substituting therefore the
following new definition:
"'Reimbursement Agreement' means the Amended and
Restated Letter of Credit and Reimbursement Agreement dated as
of September 9, 1997, as amended, among the Borrower, the
Participating Banks party thereto, Credit Suisse First Boston,
New York Branch, as Administrative Agent, and Dresdner Bank
AG, New York Branch, as Issuing Bank.";
(iii) deleting "2.375%" in the definition of
"Applicable Rate" and inserting in its place "(a) prior to
March 31, 1999, 2.375%, (b) on or after March 31, 1999, and
prior to June 1, 1999, 2.750% and (c) on or after June 1,
1999, 3.00%", and deleting the proviso in the definition of
"Applicable Rate"; and
(iv) deleting the words "by its terms, or in order to
obtain a necessary consent to such Asset Disposition, or" in
clause (ii) of the definition of "Net Available Cash", and
inserting the words "and approved by the Administrative Agent"
immediately after the words "provided by the seller" in clause
(iv) of such definition.
(b) Amendment of Section 2.07. Section 2.07 of the Credit
Agreement is hereby amended by the insertion therein of the following new
paragraph (d):
"(d) The Commitments will be automatically and
permanently reduced on the date and in the amount of any
prepayment of Loans and cash collateralization of the Letter
of Credit pursuant to Section 2.09(d) or (e)."
<PAGE>
3
(c) Amendment of Section 2.09. Section 2.09 of the Credit
Agreement is hereby amended by the insertion therein of the following
new paragraphs (d) and (e):
"(d) In the event the Borrower or any Subsidiary
shall receive any Net Available Cash from any Asset
Disposition by the Borrower or any Subsidiary referred to in
subparagraphs (a) through (e) of Section 6.04 involving Triad
Financial Corporation, the Borrower will forthwith apply or
cause the applicable Subsidiary to apply 75% of all such Net
Available Cash to prepay Loans and Reimbursement Loans (and,
after the Reimbursement Loans shall have been repaid in full,
to cash collateralize the Letter of Credit) ratably in
accordance with the aggregate amounts of the Credit Agreement
Amount and the Reimbursement Agreement Amount.
(e) In the event the Borrower or any Subsidiary shall
receive any cash representing the proceeds of any repayment or
prepayment, whether before or after maturity, of loans or
advances made or other credit extended by the Borrower or any
Subsidiary to Triad Financial Corporation, the Borrower will
forthwith apply or cause the applicable Subsidiary to apply
75% of all such cash to prepay Loans and Reimbursement Loans
(and, after the Reimbursement Loans shall have been repaid in
full, to cash collateralize the Letter of Credit) ratably in
accordance with the aggregate amounts of the Credit Agreement
Amount and the Reimbursement Agreement Amount."
(d) Amendment of Section 6.02. Section 6.02 of the Credit
Agreement is hereby amended by the insertion at the end thereof of the
following new paragraph:
"The Borrower will not, and will not permit any
Subsidiary to, enter into any agreement other than as to a
Warehouse Facility (including any amendment of an existing
agreement) that contains any "negative pledge" or similar
provision limiting its ability or the ability of any
Subsidiary to grant, incur or permit to exist Liens on its
properties or assets."
(e) Amendment of Section 6.04. Section 6.04 of the Credit
Agreement is hereby amended by
(i) deleting clause (ii) of the paragraph immediately
following subsection (e) thereof and inserting in its place
"(ii) an amount equal to 100% of the Net Available Cash from
such Asset Disposition is applied by the Borrower to prepay
Loans pursuant to Section 2.06"; and
<PAGE>
4
(ii) deleting the first sentence of the last
paragraph of such Section only as it applies to any amounts
payable under Section 3(c) of this Amendment.
The amendment effected by paragraph (a) (ii) above shall apply
retroactively to March 31, 1999, and shall be taken into account in
computing all interest accrued or accruing under the Credit Agreement
after such date. All such retroactive payments shall be due no later
than June 30, 1999.
SECTION 4. Payment upon Sale of Borrower. The Borrower hereby
irrevocably agrees that the Commitments will be terminated and all outstanding
Loans paid in full (together with all applicable fees, interest and other
amounts due under the Credit Agreement) upon the purchase by any Person or group
of Persons acting in concert, pursuant to any agreement with the Borrower or any
holders of the Borrower's capital stock, of the Borrower or any controlling
equity interest therein (including pursuant to any merger, consolidation or
similar transaction), and that no cash or other proceeds of any such purchase
and no assets of the Borrower, will be received by any holder of the Borrower's
capital stock in respect of such capital stock prior to such termination and
payment; provided that the foregoing provisions shall not apply if the
Borrower's obligations under the Credit Agreement shall have been
unconditionally and irrevocably guaranteed on terms approved by the Required
Lenders by Residential Funding Corporation, a subsidiary of General Motors
Acceptance Corporation, or any other corporation of established reputation,
rated at least investment grade by at least two nationally recognized rating
agencies, that in either case shall have entered into a definitive agreement
with the Borrower to acquire (by purchase, merger or otherwise) 100% of the
equity interests in the Borrower, subject only to the approval of the
purchaser's board of directors and any necessary regulatory approvals.
SECTION 5. Representations and Warranties. The Borrower represents and
warrants to the Administrative Agent and each Lender that:
(a) The representations and warranties set forth in the Credit
Agreement are true and correct in all material respects as of and with
the same effect as if made on the date hereof (except to the extent
such representations and warranties expressly relate to an earlier
date) after giving effect to this Amendment, and with all references in
such representations to (i) the "Transactions" being deemed to include
the execution, delivery and performance by the Borrower of this
Amendment and (ii) "this Agreement" being deemed to include this
Amendment.
(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
by it.
(c) After giving effect to this Amendment, no Default has
occurred and is continuing to the best of the Borrower's knowledge.
<PAGE>
The foregoing representations and warranties shall survive the execution and
delivery of this Amendment.
SECTION 6. Effectiveness. This Amendment shall become effective when
the Administrative Agent has received counterparts hereof that, when taken
together, bear the signatures of the Borrower and the Required Lenders; provided
that the amendments set forth in Section 2 above shall become effective only
when each of the following conditions shall have been satisfied:
(a) the Administrative Agent shall have received the Amendment Fee (as
defined below) and any fees, expenses or other amounts payable by the Borrower
under Section 8 below for which invoices shall have been submitted to the
Borrower;
(b) the Administrative Agent shall have received an opinion of Dewey
Ballantine LLP, in form reasonably satisfactory to the Administrative Agent and
covering such matters relating to this Amendment as the Administrative Agent
shall reasonably request;
(c) the Administrative 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 reasonably satisfactory to the
Administrative Agent and its counsel; and
(d) an amendment under the Reimbursement Agreement, substantially in the
form of this Amendment, shall have been executed and delivered by the Borrower
and the "Required Banks" (as defined in the Reimbursement Agreement), and the
amendments set forth therein shall have become effective (or shall become
effective concurrently with the effectiveness of the amendments set forth in
Section 2).
SECTION 7. Amendment Fee. The Borrower agrees to pay to the
Administrative Agent an amendment fee (the "Amendment Fee") in the amount of
$500,000.00 to be distributed to each Lender that executes and delivers a copy
of this Amendment to the Administrative Agent (or its counsel) on or prior to
May 28, 1999, pro rata based on such Lender's Commitment and the total
Commitments of all Lenders entitled to share in the Amendment Fee pursuant to
this Section 7; provided that the Borrower shall have no liability for the
Amendment Fee if this Amendment does not become effective.
SECTION 8. Fees and Expenses. Without limiting the Borrower's
obligations under Section 9.03 of the Credit Agreement, the Borrower agrees to
pay all reasonable out-of-pocket expenses incurred by the Administrative Agent,
the Swingline Lender, the Co-Arrangers identified on the cover page of the
Credit Agreement and their respective Affiliates, including the reasonable fees
and disbursements of all counsel for such parties, in connection with the
preparation, negotiation, execution and delivery of this Amendment and the
evaluation by such parties of their rights and the rights of the Lenders under
the Credit Agreement or any related documentation.
<PAGE>
6
SECTION 9. 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 Lenders or the
Administrative 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. The Borrower hereby ratifies, affirms,
acknowledges and agrees that the Credit Agreement and the Loans thereunder
represent the valid, enforceable and collectible obligations of the Borrower,
and acknowledges that there are no existing claims, defenses, personal or
otherwise, or rights of setoff whatsoever with respect to the Credit Agreement
or the Loans.
(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.
<PAGE>
7
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 W. Baier
--------------------------------
Name: Frank W. Baier
Title: VP and Treasurer
By: /s/ Daniel J. Willett
--------------------------------
Name: Daniel J. Willett
Title: SVP & CFO
CREDIT SUISSE FIRST BOSTON, NEW
YORK BRANCH, Individually, and as
Administrative 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/ Anthony C. Valencourt
--------------------------------
Name: Anthony C. Valencourt
Title: Senior Vice President
CORESTATES BANK, N.A.,
By: /s/ Helen F. Wessling
--------------------------------
Name: Helen F. Wessling
Title: Vice President
<PAGE>
8
THE BANK OF NEW YORK,
By: /s/ Robert A. Tweed
--------------------------------
Name: Robert A. Tweed
Title: Vice President
DEUTSCHE BANK AG, NEW YORK
AND/OR CAYMAN ISLAND BRANCHES,
By: _________________________________
Name:
Title:
By: _________________________________
Name:
Title:
DG BANK, Deutsche Genossenschaftsbank,
A.G.
By: /s/ Andrew S. Resnick
--------------------------------
Name: Andrew S. Resnick
Title: Vice President
By: /s/ Wolfgang Bollman
--------------------------------
Name: Wolfgang Bollmann
Title: Senior Vice President
<PAGE>
9
THE BANK OF NOVA SCOTIA,
By: /s/ A.T.D. Clarke
--------------------------------
Name: A.T.D. Clarke
Title: Senior Manager
CREDIT LYONNAIS NEW YORK BRANCH,
By: /s/ Vladimir Labun
--------------------------------
Name: Vladimir Labun
Title: First Vice President - Manager
SOCIETE GENERALE,
By: /s/ Jay Sands
--------------------------------
Name: Jay Sands
Title: Managing Director
COMERICA BANK,
By: /s/ Von L. Ringger
--------------------------------
Name: Von L. Ringger
Title: First Vice President
FIRST UNION NATIONAL BANK
OF NORTH CAROLINA,
By: /s/ Helen F. Wessling
--------------------------------
Name: Helen F. Wessling
Title: Vice President
<PAGE>
10
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK,
By: /s/ Anna Marie Fallon
--------------------------------
Name: Anna Marie Fallon
Title: Vice President
PNC BANK NATIONAL ASSOCIATION,
By: /s/ Robert E. Bjorhus Jr.
--------------------------------
Name: Robert E. Bjorhus Jr.
Title: Vice President
THE SUMITOMO BANK, LIMITED,
NEW YORK BRANCH,
By: /s/ John C. Kissinger
--------------------------------
Name: John C. Kissinger
Title: Joint General Manager
THIRD AMENDMENT dated as of May 28, 1999
(this "Amendment") to the Letter of Credit and
Reimbursement Agreement dated as of September 9, 1997
(as heretofore amended, the "Reimbursement
Agreement"), 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 certain provisions of the
Reimbursement Agreement be amended as set forth herein. The undersigned
Participating Banks are willing to amend such provisions on the terms and
subject to the conditions set forth herein.
Accordingly, in consideration of the mutual agreements
contained herein 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. Each capitalized term used but not
defined herein shall have the meaning assigned to it in the Reimbursement
Agreement as amended hereby. The principles of construction set forth in Section
1.03 of the Reimbursement Agreement shall apply equally to this Amendment.
SECTION 2. Amendments of Covenants.
(a) Section 2.06(c). The requirement of Section 2.06(c) of the
Reimbursement Agreement that the Borrower prepay Loans or deposit cash
collateral to the extent necessary in order that the sum of the Loans
outstanding plus any principal of amounts due pursuant to Section 2.03
of the Reimbursement Agreement plus the Stated Amount will not exceed
the Borrowing Base is deleted.
(b) Section 6.09. The requirement that the Borrower comply
with the financial covenants set forth in paragraphs (a), (b) and (c)
of Section 6.09 of the Reimbursement Agreement is deleted.
<PAGE>
2
SECTION 3. Other Amendments.
(a) Amendment of Section 1.01. Section 1.01 of the
Reimbursement Agreement is hereby amended by
(i) inserting in the appropriate alphabetical order
the following definitions:
"'Credit Agreement Loans' means the "Loans" under and
as defined in the Credit Agreement.
'Credit Agreement Amount' means, at any time, the
aggregate outstanding principal amount of the Loans under and
as defined in the Credit Agreement.
'Reimbursement Agreement Amount' means, at any time,
the aggregate principal amount of the Loans plus any principal
of amounts due under Section 2.03 plus the undrawn amount of
the Letter of Credit.";
(ii) deleting the definition of "Credit Agreement" in
its entirety and substituting therefor the following
definition:
"'Credit Agreement' means the Credit Agreement dated
as of January 7, 1997, as amended, among the Company, the
Lenders party thereto and Credit Suisse First Boston, New York
Branch, as Administrative Agent.";
(iii) deleting "2.375%" in the definition of
"Applicable Percentage" and inserting in its place "(a) prior
to March 31, 1999, 2.375%, (b) on or after March 31, 1999, and
prior to June 1, 1999, 2.750% and (c) on or after June 1,
1999, 3.00%", and deleting the proviso in the definition of
"Applicable Percentage"; and
(iv) deleting the words "by its terms, or in order to
obtain a necessary consent to such Asset Disposition, or" in
clause (b) of the definition of "Net Available Cash", and
inserting the words "and approved by the Administrative Agent"
immediately after the words "provided by the seller" in clause
(d) of such definition.
(b) Amendment of Section 2.06. Section 2.06 of the
Reimbursement Agreement is hereby amended by the insertion therein of
the following new paragraphs (f) and (g):
"(f) In the event the Company or any Subsidiary shall
receive any Net Available Cash from any Asset Disposition by
the Company or any Subsidiary referred to in subparagraphs (a)
through (e) of Section 6.04 involving Triad Financial
Corporation, the Company will forthwith apply or cause the
applicable Subsidiary to apply 75% of all such Net Available
Cash to prepay Loans (and, after the Loans shall have been
repaid in full, to cash collateralize the Letter of Credit by
deposit of cash in the Account) and Credit Agreement Loans
ratably in accordance with the aggregate amounts of the
Reimbursement Agreement Amount and the Credit Agreement
Amount.
<PAGE>
3
(g) In the event the Company or any Subsidiary shall
receive any cash representing the proceeds of any repayment or
prepayment, whether before or after maturity, of loans or
advances made or other credit extended by the Company or any
Subsidiary to Triad Financial Corporation, the Company will
forthwith apply or cause the applicable Subsidiary to apply
75% of all such cash to prepay Loans (and, after the Loans
shall have been repaid in full, to cash collateralize the
Letter of Credit by deposit of cash in the Account) and Credit
Agreement Loans ratably in accordance with the aggregate
amounts of the Reimbursement Agreement Amount and the Credit
Agreement Amount."
(c) Amendment of Section 6.02. Section 6.02 of the
Reimbursement Agreement is hereby amended by the insertion at the end
thereof of the following new paragraph:
"The Company will not, and will not permit any
Subsidiary to, enter into any agreement other than as to a
Warehouse Facility (including any amendment of an existing
agreement) that contains any "negative pledge" or similar
provision limiting its ability or the ability of any
Subsidiary to grant, incur or permit to exist Liens on its
properties or assets."
(d) Amendment of Section 6.04. Section 6.04 of the
Reimbursement Agreement is hereby amended by
(i) deleting subclause (B) of clause (ii) of the
paragraph immediately following subsection (e) thereof and
inserting in its place "(B) an amount equal to 100% of the Net
Available Cash from such Asset Disposition is applied by the
Company to prepay Loans pursuant to Section 2.06"; and
(ii) deleting the first sentence of the last
paragraph of such Section only as it applies to any amounts
payable under Section 3(b) of this Amendment.
<PAGE>
4
The amendment effected by paragraph (a) (ii) above shall apply retroactively to
March 31, 1999, and shall be taken into account in computing all interest
accrued or accruing under the Reimbursement Agreement after such date. All such
retroactive payments shall be due no later than June 30, 1999.
SECTION 4. Payment upon Sale of Borrower. The Borrower hereby
irrevocably agrees that the Letter of Credit will be terminated or cash
collateralized in full and all outstanding Loans and amounts due under Section
2.03 paid in full (together with all applicable fees, interest and other amounts
due under the Reimbursement Agreement) upon the purchase by any Person or group
of Persons acting in concert, pursuant to any agreement with the Borrower or any
holders of the Borrower's capital stock, of the Borrower or any controlling
equity interest therein (including pursuant to any merger, consolidation or
similar transaction), and that no cash or other proceeds of any such purchase,
and no assets of the Borrower, will be received by any holder of the Borrower's
capital stock in respect of such capital stock prior to such termination or cash
collateralization and payment; provided that the foregoing provisions shall not
apply if the Borrower's obligations under the Reimbursement Agreement shall have
been unconditionally and irrevocably guaranteed on terms approved by the
Required Banks by Residential Funding Corporation, a subsidiary of General
Motors Acceptance Corporation, or any other corporation of established
reputation, rated at least investment grade by at least two nationally
recognized rating agencies, that in either case shall have entered into a
definitive agreement with the Borrower to acquire (by purchase, merger or
otherwise) 100% of the equity interests in the Borrower, subject only to the
approval of the purchaser's board of directors and any necessary regulatory
approvals.
SECTION 5. Representations and Warranties. The Borrower
represents and warrants to the Administrative Agent and each Participating Bank
that:
(a) The representations and warranties set forth in the
Reimbursement Agreement are true and correct in all material respects
as of and with the same effect as if made on the date hereof (except to
the extent such representations and warranties expressly relate to an
earlier date) after giving effect to this Amendment, and with all
references in such representations to (i) the "Transactions" being
deemed to include the execution, delivery and performance by the
Borrower of this Amendment and (ii) "this Agreement" being deemed to
include this Amendment.
(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 by it.
(c) After giving effect to this Amendment, no Default has
occurred and is continuing to the best of the Borrower's knowledge.
<PAGE>
5
The foregoing representations and warranties shall survive the execution and
delivery of this Amendment.
SECTION 6. Effectiveness. This Amendment shall become
effective when the Administrative Agent has received counterparts hereof that,
when taken together, bear the signatures of the Borrower and the Required Banks;
provided that the amendments set forth in Section 2 above shall become effective
only when each of the following conditions shall have been satisfied:
(a) the Administrative Agent shall have received the Amendment Fee (as
defined below) and any fees, expenses or other amounts payable by the Borrower
under Section 8 below for which invoices shall have been submitted to the
Borrower;
(b) the Administrative Agent shall have received an opinion of Dewey
Ballantine LLP, in form reasonably satisfactory to the Administrative Agent and
covering such matters relating to this Amendment as the Administrative Agent
shall reasonably request;
(c) the Administrative 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 reasonably satisfactory to the
Administrative Agent and its counsel; and
(d) an amendment under the Credit Agreement, substantially in the form
of this Amendment, shall have been executed and delivered by the Borrower and
the "Required Lenders" (as defined in the Credit Agreement), and the amendments
set forth therein shall have become effective (or shall become effective
concurrently with the effectiveness of the amendments set forth in Section 2).
SECTION 7. Amendment Fee. The Borrower agrees to pay to the
Administrative Agent an amendment fee (the "Amendment Fee") the amount of
$793,750.00 to be distributed to each Participating Bank that executes and
delivers a copy of this Amendment to the Administrative Agent (or its counsel)
on or prior to May 28, 1999, pro rata based on such Participating Bank's
Commitment and the total Commitments of all Participating Banks entitled to
share in the Amendment Fee pursuant to this Section 7; provided that the
Borrower shall have no liability for the Amendment Fee if this Amendment does
not become effective.
SECTION 8. Fees and Expenses. Without limiting the Borrower's
obligations under Section 9.03 of the Credit Agreement, the Borrower agrees to
pay all reasonable out-of-pocket expenses incurred by the Agent, the Issuing
Bank, the Co-Arrangers identified on the cover page of the Reimbursement
Agreement and their respective Affiliates, including the reasonable fees and
disbursements of all counsel for such parties, in connection with the
preparation, negotiation, execution and delivery of this Amendment and the
evaluation by such parties of their rights and the rights of the Participating
Banks under the Reimbursement Agreement or any related documentation.
<PAGE>
6
SECTION 9. 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, the Agent or the Issuing Bank 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 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. The Borrower hereby ratifies, affirms, acknowledges and agrees that
the Reimbursement Agreement and the Loans and reimbursement obligations
thereunder represent the valid, enforceable and collectible obligations of the
Borrower, and acknowledges that there are no existing claims, defenses, personal
or otherwise, or rights of setoff whatsoever with respect to the Reimbursement
Agreement or the Loans or reimbursement obligations thereunder.
(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.
<PAGE>
7
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 W. Baier
-----------------------------------
Name: Frank W. Baier
Title: VP & Treasurer
By: /s/ Daniel J. Willett
-----------------------------------
Name: Daniel J. Willett
Title: SVP & CFO
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/ Anthony C. Valencourt
-----------------------------------
Name: Anthony C. Valencourt
Title: Senior Vice President
<PAGE>
8
THE BANK OF NEW YORK,
By: /s/ Robert A. Tweed
-----------------------------------
Name: Robert A. Tweed
Title: Vice President
CREDIT AGRICOLE INDOSUEZ,
By: /s/ Whakyung Lee
-----------------------------------
Name: Whakyung Lee
Title: Vice President
By: B. Lespinasse
-----------------------------------
Name: B. Lespinasse
Title: SVP
THE BANK OF NOVA SCOTIA,
By: /s/ A.T.D. Clarke
-----------------------------------
Name: A.T.D. Clarke
Title: Senior Manager
THE CHASE MANHATTAN BANK,
By: /s/ Gary L. Spevack
-----------------------------------
Name: Gary L. Spevack
Title: Vice President
NATIONSBANK, N.A.,
By: /s/ Garrett Dolt
-----------------------------------
Name: Garrett Dolt
Title: Vice President
CREDIT LYONNAIS NEW YORK
BRANCH,
By: /s/ Vladimir Labun
-----------------------------------
Name: Vladimir Labun
Title: First Vice President - Manager
<PAGE>
9
SOCIETE GENERALE,
By: /s/ Jay Sands
-----------------------------------
Name: Jay Sands
Title: Managing Director
COMERICA BANK,
By: /s/ Von L. Ringger
-----------------------------------
Name: Von L. Ringger
Title: First Vice President
UBS AG, NEW YORK BRANCH,
By: /s/ Roger Liechti
-----------------------------------
Name: Roger Liechti
Title: AD
By: /s/ Marian McBride
-----------------------------------
Name: Marian McBride
Title: AD
THE SUMITOMO BANK, LIMITED,
NEW YORK BRANCH,
By: /s/ John C. Kissinger
-----------------------------------
Name: John C. Kissinger
Title: Joint General Manager
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
<PAGE>
10
SOUTHTRUST BANK, NATIONAL
ASSOCIATION
By: /s/ Andy Raine
-----------------------------------
Name: Andy Raine
Title: AVP
MANUFACTURERS AND TRADERS
TRUST COMPANY
By: /s/ Kevin B. Quinn
-----------------------------------
Name: Kevin B. Quinn
Title: Assistant Vice President
<PAGE>
Exhibit 11.1
ContiFinancial Corporation
Computation of Earnings Per Common Share
Basic
-----
Net Income (Loss) (426,257,000)
Weighted Average Shares
1st Quarter 46,685,863
2nd Quarter 46,153,506
3rd Quarter 46,142,836
4th Quarter 46,153,556
----------
Average 46,283,940
-----------
Year ended March 31,1999 Basic EPS ($9.21)
===========
Diluted
-------
Diluted earnings per share equals basic earnings per share in fiscal 1999, as
the dilutive calculation would have an antidilutive impact as a result of the
net loss incurred in that fiscal year.
<PAGE>
Exhibit 11.1
ContiFinancial Corporation
4th Q EPS calculation
Basic
<TABLE>
<CAPTION>
Weighted
* of shares weighting Avg. Shares
----------- --------- -----------
<S> <C> <C> <C>
Continental Grain shares 35,918,421 100% 35,918,421
Shares Issued in IPO 7,130,000 100% 7,130,000
Shares Acquired through exercise of options 1,996 100% 1,996
Shares Acquired Through Accelerated Vesting -8/15/96 1,996 100% 1,996
Shares Acquired Through Accelerated Vesting -8/15/96 53,220 100% 53,220
Shares Acquired Through Accelerated Vesting -11/19/96 3,990 100% 3,990
Shares Acquired through exercise of options -1/23/97 5,991 100% 5,991
Shares Acquired through exercise of options -2/19/97 3,395 100% 3,395
Shares Acquired through exercise of options -4/11/97 5,328 100% 5,328
Shares Acquired through exercise of options -4/30/97 5,326 100% 5,326
Shares Acquired through exercise of options -5/9/97 2,995 100% 2,995
Shares Acquired through exercise of options -8/19/97 11,185 100% 11,185
Vested Restricted Stock of former Employees -4/2/97 5,328 100% 5,328
Vested Restricted Stock of former Employees -4/11/97 5,321 100% 5,321
Secondary Equity Offering 3,220,000 100% 3,220,000
Shares Acquired through exercise of options -11/17/97 22,370 100% 22,370
Shares Acquired Through Accelerated Vesting -11/30/98 970 100% 970
Vested Restricted Stock of former Employees -12/1/98 15,965 100% 15,965
Shares Acquired Through Accelerated Vesting -12/1/98 10,645 100% 10,645
Shares Acquired Through Accelerated Vesting -12/01/98 710 100% 710
Less: Shares repurchased for treasury (1,000,000) various (1,000,000)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>
Effect of Restricted Shares: <C> <C> <C> <C>
Restricted Shares Outstanding during the Quarter
Restricted Shares Granted - IPO 1,330,532
Vested Shares of Departed Employees:
During the quarter (146,374)
-----------
Outstanding Restricted Shares 1,184,158
Percentage Vested for whole quarter 60.00%
-----------
Shares Outstanding during whole quarter 710,495 710,495 100% 710,495
-----------
Percentage Vested as of March 31 20.00%
-----------
Shares Outstanding for 1 day 236,832 236,832 1.11% 2,631
-----------
Restricted Shares Outstanding for part of the
Quarter (forfeited Feb 5)
Outstanding Restricted Shares 775
Percentage Vested for part of quarter 0.00%
-----------
Shares Outstanding during part of quarter 0 0 38.89% 0
-----------
Restricted Shares Outstanding for part of the
Quarter (forfeited Feb 26)
Outstanding Restricted Shares 1,290
Percentage Vested for part of quarter 0.00%
-----------
Shares Outstanding during part of quarter 0 0 62.22% 0
-----------
New Awards of Restricted Shares
Restricted Shares Granted - 1/15/97 6,000
Percentage Vested for whole quarter 40.00%
-----------
Shares Outstanding during whole quarter 2,400 2,400 100% 2,400
-----------
Percentage Vested as of March 31 20.00%
-----------
Shares Outstanding for 1 day 1,200 1,200 1.11% 13
-----------
New Awards of Restricted Shares
Restricted Shares Granted - 4/10/97 20,000
Percentage Vested 34.00%
-----------
Shares Outstanding 6,800 6,800 100% 6,800
-----------
New Awards of Restricted Shares
Restricted Shares Granted - 5/1/97 6,400
Percentage Vested 33.33%
-----------
Shares Outstanding 2,133 2,133 100% 2,133
-----------
New Awards of Restricted Shares
Restricted Shares Granted - 9/17/97 10,000
Percentage Vested 34.00%
-----------
Shares Outstanding 3,400 3,400 100% 3,400
-----------
New Awards of Restricted Shares
Restricted Shares Granted - 4/28/98 99,405
Vested Shares of Departed Employees:
During the whole quarter (3, 745)
-----------
Outstanding Restricted Shares 95,660
Percentage Vested for whole quarter 0.00%
-----------
Shares Outstanding 0 0 100% 0
Percentage Vested as of March 31 50.00%
-----------
Shares Outstanding for 1 day 47,830 47,830 1.11% 531
-----------
Weighted Average Shares Outstanding 46,153,556
------------
Quarter income (loss) (259,226,000)
------------
Basic Earnings (Loss) Per Share ($5.62)
</TABLE>
<PAGE>
ContiFinancial Corporation Exhibit 12.1
Ratio of Earnings to Fixed Charges
Exhibit 12.1 of March 31, 1999 Form 10-K
<TABLE>
<CAPTION>
Fiscal 99 Fiscal 98 Fiscal 97 Fiscal 96 Fiscal 95
<S> <C> <C> <C> <C> <C>
Summary:
Earnings (255,696) 385,425 297,677 197,996 77,895
Fixed Charges 233,598 165,904 120,636 74,770 29,635
-------- ------- ------- ------- ------
Ratio (l.09)(a) 2.32 2.47 2.65 2.63
======== ======= ======= ======= ======
Earnings:
Income/loss before income taxes
and minority interest (493,615) 224,965 177,041 126,536 56,988
Plus: Interest expense 233,598 165,904 120,636 74,770 29,635
Less: Equity income/loss in
unconsolidated subsidiaries 4,321 (5,444) -- -- --
Less: Minority interest n/a n/a n/a (3,310) (8,728)
-------- ------- ------- ------- ------
Total "Earnings" (255,696) 385,425 297,677 197,996 77,895
======== ======= ======= ======= ======
Fixed Charges:
Interest expense 233,598 165,904 120,636 74,770 29,635
(a) The dollar amount of the deficiency at March 31, 1999 was $489,294.
</TABLE>
<PAGE>
CONTIFINANCIAL CORPORATION
Subsidiary Companies
March 31, 1999
ContiFinancial Services Corporation
ContiMortgage Corporation
California Lending Group, Inc.
ContiWest Corporation
ContiTrade Services L.L.C. (99%)
Triad Financial Corporation
ContiAsset Receivables Management, LLC (90%)
Warminster National Abstract, Inc.
Keystone Mortgage Partners L.L.C. (75%)
American Commercial Capital LLC (50%)
ZTS Corp. [Royal MortgageBanc] (99%)*
Resource One Consumer Discount Company, Inc.*
ContiInsurance Agency, Inc.*
Fidelity Mortgage Decisions Corporation*
Crystal Mortgage Company, Inc.*
Lenders M.D., Inc.*
*Subsidiary of ContiMortgage Corporation
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this form 10-K, into ContiFinancial Corporation's previously
filed Registration Statement, File No. 333-33783.
/s/ ARTHUR ANDERSEN LLP
New York, NY
July 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONTIFINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME
FOR THE YEAR ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 112,839
<SECURITIES> 722,012
<RECEIVABLES> 1,344,347
<ALLOWANCES> (7,364)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 37,246
<DEPRECIATION> (13,454)
<TOTAL-ASSETS> 2,355,164
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 477
<OTHER-SE> 202,774
<TOTAL-LIABILITY-AND-EQUITY> 2,355,164
<SALES> 0
<TOTAL-REVENUES> 253,191
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 506,993
<LOSS-PROVISION> 6,215
<INTEREST-EXPENSE> 233,598
<INCOME-PRETAX> (493,615)
<INCOME-TAX> (67,510)
<INCOME-CONTINUING> (426,257)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (426,257)
<EPS-BASIC> (9.21)
<EPS-DILUTED> (9.21)
</TABLE>
