UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended
December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of the SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______to_________
1-14074
------------------------
(Commission File Number)
ContiFinancial Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3852588
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
277 Park Avenue
New York, New York 10172
- ----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 207-2800
--------------------
no change
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
The Company had 46,655,538 shares of common stock outstanding as of February 3,
2000.
<PAGE>
ContiFinancial Corporation
Table of Contents
PART I
Page
----
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets . . . . . . . . . . . . . . . . .. 3
Consolidated Statements of Operations . . . . . . . . . . . .. 4
Condensed Consolidated Statements of Cash Flows . . . . . . .. 5
Notes to Unaudited Condensed Consolidated Financial Statement 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . .. 17
Recent Developments, Financial Results and Liquidity . . . .. 17
Selected Financial Data . . . . . . . . . . . . . . . . . . .. 21
Results of Operations . . . . . . . . . . . . . . . . . . . .. 24
Liquidity and Capital Resources . . . . . . . . . . . . . . .. 30
Year 2000 . . . . . . . . . . . . . . . . . . . . . . . . . .. 32
Forward-looking Statements . . . . . . . . . . . . . . . . . 32
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . .. 33
PART II
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 35
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . 36
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
2
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CONTIFINANCIAL CORPORATION
Consolidated Balance Sheets as of December 31, 1999 and March 31, 1999
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
Assets (unaudited)
----------- -----------
<S> <C> <C>
Cash and cash equivalents $ 87,403 $ 112,839
Restricted cash 1,737 4,072
Receivables held for sale:
Receivables held for sale 228,832 1,089,410
Allowance for loan losses (19,402) (7,364)
----------- -----------
Receivables held for sale, net 209,430 1,082,046
Other receivables 79,783 95,984
Due from affiliates -- 53,680
Interest-only and residual certificates (See Note 4) 351,341 722,012
Capitalized servicing rights 55,780 105,273
Premises and equipment, net of accumulated depreciation of $15,434 and
$13,454 as of December 31, 1999 and March 31, 1999, respectively 18,146 23,792
Cost in excess of equity acquired 12,182 85,388
Equity investments in unconsolidated subsidiaries -- 4,978
Taxes receivable -- 13,024
Other assets 22,851 52,076
----------- -----------
Total assets $ 838,653 $ 2,355,164
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable $ 59,336 $ 90,412
Receivables sold under agreements to repurchase 107,190 804,524
Due to affiliates -- 8,918
Short-term debt (See Note 8) 422,220 512,797
Taxes payable 7,622 --
Long-term debt (See Note 8) 699,223 699,225
Other liabilities 16,742 31,316
----------- -----------
Total liabilities 1,312,333 2,147,192
----------- -----------
Commitments and contingencies
Minority interest in subsidiaries 4,102 4,721
----------- -----------
Stockholders' equity (deficit):
Preferred stock (par value $0.01 per share; 25,000,000 shares authorized; none
issued at December 31, 1999 and March 31, 1999) -- --
Common stock (par value $0.01 per share; 250,000,000 shares
authorized; 47,657,539 shares issued at December 31, 1999 477 477
and March 31, 1999)
Paid-in capital 396,280 398,209
Accumulated deficit (849,330) (163,301)
Treasury stock (1,001,273 and 910,169 shares of common stock, at cost, at December 31,
1999 and March 31, 1999, respectively) (25,209) (25,106)
Deferred compensation -- (7,028)
----------- -----------
Total stockholders' equity (deficit) (477,782) 203,251
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 838,653 $ 2,355,164
=========== ===========
The accompanying notes to the unaudited condensed consolidated financial
statements are an integral part of these statements.
</TABLE>
3
<PAGE>
CONTIFINANCIAL CORPORATION
Consolidated Statements of Operations
for the three and nine months ended December 31, 1999 and 1998
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Gross income (loss):
Gain (loss) on sale of receivables $ (12,613) $ 35,720 $ (309,440) $ 89,608
Commercial real estate valuation adjustments
-- -- -- (129,034)
Interest 14,623 72,740 99,255 235,619
Net servicing income 8,689 18,631 23,026 74,317
Gain on sale of subsidiary (Note 5) 453 -- 22,574 --
Other income 6,641 (1,523) 10,738 8,029
------------ ------------ ------------ ------------
Total gross income (loss) 17,793 125,568 (153,847) 278,539
------------ ------------ ------------ ------------
Expenses:
Compensation and benefits 33,267 48,366 129,058 143,532
Interest 26,795 61,285 107,564 182,807
Provision for loan losses 1,143 1,059 5,701 4,110
General and administrative 37,793 41,342 122,758 113,924
Other charges (Note 3) 33,364 44,192 156,758 80,282
------------ ------------ ------------ ------------
Total expenses 132,362 196,244 521,839 524,655
------------ ------------ ------------ ------------
Loss before income taxes and minority interest (114,569) (70,676) (675,686) (246,116)
Provision (benefit) for income taxes (Note 6) 17 (11,907) 10,359 (79,168)
------------ ------------ ------------ ------------
Loss before minority interest (114,586) (58,769) (686,045) (166,948)
Minority interest in earnings (losses) of subsidiaries 19 31 (16) 83
------------ ------------ ------------ ------------
Net loss $ (114,605) $ (58,800) $ (686,029) $ (167,031)
============ ============ ============ ============
Basic loss per common share $ (2.46) $ (1.27) $ (14.76) $ (3.61)
============ ============ ============ ============
Diluted loss per common share $ (2.46) $ (1.27) $ (14.76) $ (3.61)
============ ============ ============ ============
Basic weighted average number of shares outstanding 46,545,136 46,140,707 46,487,173 46,326,692
============ ============ ============ ============
Diluted weighted average number of shares outstanding
46,545,136 46,140,707 46,487,173 46,326,692
============ ============ ============ ============
</TABLE>
The accompanying notes to the unaudited condensed consolidated financial
statements are an integral part of these statements.
4
<PAGE>
CONTIFINANCIAL CORPORATION
Condensed Consolidated Statements of
Cash Flows for the nine months ended
December 31, 1999 and 1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1999 1998
--------- ---------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 23,230 $(342,937)
--------- ---------
Cash flows from investing activities:
Proceeds from sale of majority-owned subsidiary, net (Note 5) 34,649 --
Acquisitions of majority-owned subsidiaries (net of cash acquired) (806) (26,730)
Acquisitions of minority-owned subsidiaries -- (1,544)
Purchase of premises and equipment, net (2,751) (10,983)
Proceeds from sale of unconsolidated subsidiaries and investments 10,580 --
Other, net 452 --
--------- ---------
Net cash provided by (used in) investing activities 42,124 (39,257)
--------- ---------
Cash flows from financing activities:
Increase in due to affiliates -- 7,379
Increase (decrease) in short-term debt (90,790) 145,884
Increase in long-term debt -- 199,778
Debt issuance costs -- (11,692)
Repurchase of common stock -- (22,052)
Other, net
--------- ---------
Net cash provided by (used in) financing activities (90,790) 319,297
--------- ---------
Net increase (decrease) in cash and cash equivalents (25,436) (62,897)
Cash and cash equivalents at beginning of period 112,839 173,588
--------- ---------
Cash and cash equivalents at end of period $ 87,403 $ 110,691
========= =========
</TABLE>
The accompanying notes to the unaudited condensed consolidated financial
statements are an integral part of these statements.
5
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
ContiFinancial Corporation and its majority-owned subsidiaries (collectively,
"ContiFinancial" or the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission and, in the opinion of
management, reflect all normal recurring adjustments which are necessary for a
fair presentation of the financial position, results of operations, and cash
flows for each period shown. The preparation of financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the results of operations. Actual results could
differ from these estimates. In addition, results for interim periods are not
necessarily indicative of results for the full year. These unaudited condensed
consolidated financial statements should be read in conjunction with the audited
Consolidated Financial Statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1999 (the "Annual
Report"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
2. RECENT DEVELOPMENTS, FINANCIAL RESULTS AND LIQUIDITY
In fiscal 1999 and continuing through the first three quarters of fiscal 2000
the Company has incurred significant losses of $426.3 million and $686.0
million, respectively. Over this period the Company has experienced a
significant decline in liquidity. As a result of these factors there is
substantial doubt as to the Company's ability to continue as a going concern.
The 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. At December 31, 1999 stockholders' equity has been reduced to a
deficit balance of $477.8 million. Consequently, the Company does not expect
that it will have sufficient liquidity or assets to repay the Bank Facilities,
which are due on March 31, 2000, or the Senior Notes and expects that it will
have to restructure its outstanding debt by the commencement of a case under
Chapter 11 of the Bankruptcy Code.
During fiscal 1999 and fiscal 2000, the Company recorded fair value adjustments
to interest-only and residual certificates totaling approximately $329 million
and $357 million, respectively, resulting primarily from higher than estimated
credit losses as well as higher than estimated prepayment speeds and an increase
in 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 December 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, resulting in a net loss for such period.
6
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 1999
The Company's operations were also significantly and adversely affected by
difficult capital market conditions that commenced in the second quarter of
fiscal 1999, with the effects of these events, and their repercussions,
continuing to affect the Company's results through the first three quarters of
fiscal 2000. During the second quarter of fiscal 1999, the economic instability
in Asia and Russia precipitated a global debt crisis (the "Debt Crisis") which
caused a "flight to quality" by investors. During this period, fixed income
investors purchased large amounts of U.S. Treasury securities, causing U.S.
Treasury yields to decrease significantly. As investor demand for U.S. Treasury
securities increased, the demand for other fixed income securities declined
dramatically, causing yields on such other securities to rise relative to U.S.
Treasury securities. Since almost all of the Company's loan originations were
ultimately funded by the issuance of securities backed by the loans it
originates (securitization), these unusual interest rate movements affected the
market value of all of the Company's originations, causing significant losses
and leading to a critical loss of liquidity.
While the Debt Crisis abated for other sectors of the economy in fiscal 1999,
its impact and subsequent repercussions continued to affect the "sub-prime"
industry in which the Company operates. The sudden and significant loss of
liquidity experienced throughout the industry, occurring within the context of
increasing market skepticism about the quality of earnings reported under
"gain-on-sale accounting", intensified capital market concerns about the
industry and severely curtailed access to the capital markets as a source of new
liquidity.
In order to attempt to strengthen the Company's ability to operate in this
difficult environment, in the third quarter of fiscal 1999, the Company began to
search for an investor who could contribute additional equity capital to the
Company or a buyer who would be interested in purchasing the Company's business.
On May 14, 1999, the Company signed an indication of interest letter with
Residential Funding Corporation ("RFC") under which RFC indicated its interest
in acquiring all of the outstanding common stock of the Company. On July 2,
1999, a second indication of interest letter was signed with RFC, again for the
acquisition of all of the outstanding common stock of the Company, but on
revised business terms. Definitive documentation for the acquisition was then
negotiated with RFC. On July 14, 1999, just prior to the expected signing of the
definitive documentation, RFC informed the Company that it had determined not to
proceed with the acquisition.
In light of the failure to consummate the transaction with RFC, and the
impending expiration of certain of the Company's credit facilities, the
Company's Board of Directors hired Mr. Alan Fishman as the new Chief Executive
Officer of the Company on July 20, 1999.
Following a review of the Company's situation, Mr. Fishman and other members of
the Company's senior management pursued a plan (the "Restructuring Plan") of
focusing the Company's operations on the most promising of its origination
channels, reducing the size of the Company, negotiating for the restructuring or
extension of the Company's credit facilities, and then recommencing the search
for an equity investor in the Company, or a buyer of the Company's business or
of certain of the Company's assets.
7
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 1999
Pursuant to the Restructuring Plan, in August 1999, the Company entered into a
definitive agreement with Greenwich Capital Financial Products, Inc.
("Greenwich"), an affiliate of Greenwich Capital Markets, Inc., to provide
ContiFinancial with a $500 million revolving servicing-released whole loan
purchase facility with a maximum aggregate purchase commitment of up to $1.5
billion, at ContiFinancial's option, through March 31, 2000. Greenwich also
agreed to provide a warehouse facility of up to $250 million on a revolving
basis. This facility also expires on March 31, 2000. In addition to the two
facilities, Greenwich purchased on a whole loan basis, through an affiliate,
approximately $772 million of home equity loans which were funded under
ContiFinancial's prior warehouse facilities. The Company expects these
arrangements with Greenwich will provide the Company with the necessary
warehouse financing to support the reduced amount of originations contemplated
as the Restructuring Plan is being implemented.
As of December 31, 1999, the Company had utilized $107 million of the capacity
under the Greenwich Warehouse Facilities.
On November 9, 1999, the Company entered into a new arrangement with Greenwich
to provide monthly servicer advances, up to an aggregate outstanding amount of
$125 million, to certain REMICs for which ContiMortgage is the servicer. This
arrangement replaced the ContiGroup arrangement which expired on October 15,
1999. Greenwich has agreed to make these advances, for a fee, through November
9, 2000.
Also in August 1999, the Company began the implementation of a workforce
reduction plan which will result in the reduction of approximately 30% of the
Company's employees by the end of the fiscal year in order to achieve the
strategic goals of focusing the Company's origination in the channels with the
most potential and reducing the overall size of the Company. See Note 3.
On August 19, 1999, the Company agreed with the lenders under its Revolving
Credit Facility and Commercial Paper Program (collectively, the "Bank
Facilities") to extend the maturity date of the Bank Facilities from August 20,
1999 to March 31, 2000 and to convert both facilities into term arrangements.
The Company also agreed to certain modifications of the Bank Facilities
including a $20 million minimum liquidity covenant. The agreement also included
providing collateral to the lenders in the form of a lien on certain Excess
Spread Receivables. The book value of these Excess Spread Receivables as of
December 31, 1999 was approximately $84 million. The interest rate on each
facility remains at LIBOR plus 300 basis points. The Company was in compliance
with the amended covenants of the Bank Facilities as of December 31, 1999.
As a result of the developments described above, the Company determined, during
the first quarter of fiscal 2000, that the carrying value of cost in excess of
equity acquired on the Company's balance sheet had been impaired and should be
written-down (see Note 3 and Management's Discussion and Analysis of Financial
Condition and Results of Operations). During the first three quarters of fiscal
2000, the Company also determined that it may not be able to achieve the results
assumed in its prior loan loss projections; therefore, assumptions as to future
loss frequencies and severities were increased, resulting in fair value
adjustments to interest-only and residual certificates (see Note 4 and
Management's Discussion and Analysis of Financial Condition and Results of
Operations).
8
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 1999
With the objectives of the Restructuring Plan of refocusing the Company's
operations, reducing the size of the Company and restructuring and extending the
Company's credit facilities being substantially accomplished, the Company has
re-launched its efforts to explore strategic alternatives. The Company has
retained financial advisors Lehman Brothers, Inc. and The Blackstone Group L.P.
(the "Advisors") as advisors in the process. With the assistance of the
Advisors, the Company has pursued various strategic alternatives including but
not limited to a sale of the Company, sales of one or more of the business
operations and/or assets of the Company or a recapitalization of the Company
with or without additional equity capital.
During the fiscal quarter ended December 31, 1999, the Company and its Advisors
identified and contacted potential parties to pursue one or more of these
strategic alternatives. The Company has received indications of interest from
several of such parties for the purchase of various groups of assets of the
Company, and the interested parties have been conducting reviews of the Company
and the Company's assets. No assurance can be given that the Company will be
able to sell any or all of the Company's assets. The Company expects that any
sale of assets to an interested party will be consummated under the supervision
of a bankruptcy court. No assurances can be given that the ultimate
recoverability of asset and liability amounts will equal the carrying amounts
indicated in the accompanying Financial Statements.
During the restructuring process, the Company expects that it will be cash flow
negative and will operate at a loss. The Company's continued operations during
the restructuring process are dependent on the continued availability of the
Bank Facilities and the warehouse financing and the supplemental servicer
agreement under the Greenwich arrangements. During this period, the Company's
cash reserves may not be sufficient to meet the Company's cash needs.
The Company's Bank Facilities and the Greenwich warehouse and purchase
facilities expire on March 31, 2000. The Company believes it will have
sufficient liquidity to meet its obligations until March 31, 2000. The Company
does not currently have sufficient financial resources to repay the borrowings
under the Bank Facilities on such date, and no assurance can be given that the
Company will be able to extend, renegotiate or refinance any of the facilities.
The Company does not expect that the proceeds it would receive upon the
consummation of any sale of its assets would be sufficient to allow the Company
to repay the Bank Facilities and the Senior Notes or to replace the Greenwich
facilities. Accordingly, the Company anticipates that it will be necessary to
restructure its outstanding debt, including the Bank Facilities and the Senior
Notes, by the commencement of reorganization proceedings under Chapter 11 of the
Bankruptcy Code. See Note 8.
For the nine months ended December 31, 1999, the Company incurred a net loss of
$686.0 million, primarily due to the fair value adjustment to interest-only and
residual certificates, the write-down of cost in excess of equity acquired, and
restructuring and severance costs as discussed above. As a result of this net
loss, stockholders' equity has been reduced to a deficit balance of $477.8
million.
9
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 1999
3. OTHER CHARGES
Other charges included in the Company's Consolidated Statements of Operations
for the three and nine months ended December 31, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- ----------------------
1999 1998 1999 1998
----- ----- ----- ----
<S> <C> <C> <C> <C>
Other Charges: (in thousands)
Write-down of cost in excess of equity acquired $ -- $ 23,573 $ 62,522 $ 26,355
Restructuring charges (excluding compensation related) 5,941 4,027 24,656 9,367
Severance costs 717 4,838 9,370 4,838
Staff retention costs 5,563 -- 22,706 --
Write-offs and reserves of receivables from affiliates
and others, net 21,143 11,754 35,370 39,722
Other -- -- 2,134 --
-------- -------- -------- --------
Total Other Charges $ 33,364 $ 44,192 $156,758 $ 80,282
======== ======== ======== ========
</TABLE>
Based on the recent developments discussed in Note 2, management made a
determination that the carrying value of cost in excess of equity acquired
related to most of the Company's operations had been significantly impaired and
appropriate write-downs of $62.5 million for the nine months ended December 31,
1999 had to be recorded.
The restructuring charges of $5.9 and $24.7 million, for the three and nine
months ended December 31, 1999, respectively, primarily represent legal and
consulting fees related to restructuring.
In August 1999, the Company began the implementation of a workforce reduction
plan which has resulted in a reduction of the workforce of approximately 26% as
of December 31, 1999, and is expected to result in the reduction of
approximately 30% of the Company's employees by the end of the Company's fiscal
year in order to achieve the strategic goals of the Company's restructuring plan
as discussed in Note 2. A charge of $8.7 million for severance costs was
recorded for approximately 760 employees representing a cross section of
individuals from all operations of the Company. At December 31, 1999,
substantially all of the severance costs originally accrued for have been
disbursed. In the quarter ending December 31, 1999, additional severance costs
of $0.7 million were incurred.
Staff retention costs include monthly discretionary stay bonuses and CFN and CMC
1999 Retention Bonus Plans (the "Plans"). In July 1999 and August 1999, the
Company established the Plans for the purpose of retaining the valuable services
of the Company's key employees through the restructuring period. In order to
guarantee payment to employees of amounts that will become due to them under the
Plans, the Company
10
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 1999
established and funded irrevocable trusts with the amount necessary to satisfy
the Company's maximum liability under the Retention Bonus Plans.
The Write-offs and reserves of receivables from affiliates and others primarily
relates to approximately $21 million and $39.8 million at the three and nine
months ended December 31, 1999, of reserves taken against certain assets
received from a strategic alliance. The continued effect of the market
conditions referred to in Note 2 on this strategic alliance caused the
realization of the assets recorded in other receivables to become doubtful.
4. INTEREST-ONLY AND RESIDUAL CERTIFICATES
Interest only and residual certificates (also referred to as excess spread
receivables or ESR) represents the present value of the estimated stream of
future cash flows that the Company expects to receive over the life of a
securitization, taking into consideration estimated prepayment speeds and credit
losses. At December 31, 1999 and March 31, 1999, the Company's ESR portfolio
consisted of the following:
December 31, March 31,
1999 1999
-------- --------
Home equity:
ContiMortgage/ContiWest $302,528 $611,320
Other servicers 16,326 24,800
-------- --------
Total home equity 318,854 636,120
Home improvement 19,420 4,046
Commercial real estate 5,608 6,263
Auto 5,392 69,804
Other 2,067 5,779
-------- --------
Total ESR portfolio $351,341 $722,012
======== ========
The changes in ESR from March 31, 1999 to December 31, 1999 are presented in the
table below:
Interest-only and residual certificates:
----------------------------------------
Balance as of March 31, 1999 $ 722,012
New securitizations 43,543
ESR received in strategic alliance asset swap 17,964
Net cash distributions from REMICs and trusts (68,202)
Sale of subsidiary (62,446)
Accruals of interest income 33,721
Clean-up call on previously sold ESR 22,076
Sale of residuals (325)
Fair value adjustments (357,002)
---------
Balance as of December 31, 1999 $ 351,341
=========
11
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 1999
In accordance with SFAS No. 134, "Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise", the Company continues to classify ESR as "trading
securities". As such, they are carried at fair value in the Consolidated Balance
Sheets. Unrealized changes in ESR fair value are included in Gain (loss) on sale
of receivables on the accompanying Consolidated Statements of Operations in the
period of the change.
The Company has, from time to time, completed sales of ESR as either sales with
limited recourse or Net Interest Margin Securities ("NIMS") sales. Nevertheless,
there is only a limited market for the sale of ESR. Consequently, the Company
estimates the fair value of ESR through the application of a discounted cash
flow analysis, which requires the use of various assumptions, specifically
regarding prepayments, losses and discount data.
A significant factor affecting the level of estimated future ESR cash flows is
the rate at which the underlying principal of the securitized loans is reduced.
Prepayments represent principal reductions in excess of contractually scheduled
reductions, and prepayment speeds are generally expressed as an annualized
Conditional (or Constant) Prepayment Rate ("CPR"). In determining the fair value
of the ContiMortgage/ContiWest ESR portfolio as of December 31, 1999, the
Company's weighted average estimated future CPR was approximately 29% as
compared to approximately 28% at March 31, 1999.
Another significant factor that is considered in estimating the fair value of
ESR is the estimate of future credit losses. As credit enhancement, the ESR is
subordinate to the rights of the holders of the senior pass-through securities.
Aggregate lifetime credit losses (historical plus future) as a percentage of the
original pool balances for the ContiMortgage/ContiWest ESR portfolio was
estimated to be 4.85% at December 31, 1999 as compared to 2.91% at March 31,
1999. Based on the developments during the first quarter of fiscal 2000, as
discussed in Note 2, the Company made a determination that it most likely would
not be able to achieve the results in its prior loan loss projections;
therefore, assumptions as to future loss severities were increased, resulting in
a fair value adjustment to interest-only and residual certificates of $151.2
million for the three months ended June 30, 1999. For each of the second and
third quarters of fiscal 2000, the Company made a further determination that
assumptions as to future loss frequencies should be increased, resulting in a
fair value adjustment to interest-only and residual certificates of $173.5
million in the second quarter and $32.3 million in the third quarter. The basis
for this increased expectation in loss frequency was driven by the following
factors: For the second quarter of fiscal 2000, (i) the performance of the
Company's more seasoned REMICs resulted in management increasing its assumptions
of loss frequencies across the entire portfolio, and (ii) data from third
parties regarding loss frequency expectations on sub-prime collateral in
general. For the third quarter of fiscal 2000, the performance of certain of the
Company's more seasoned REMICS resulted in management increasing its loss
assumptions across certain segments of the portfolio.
The cumulative impact of the fair value adjustments to interest-only and
residual certificates for the nine months ended December 31, 1999 is $357.0
million.
12
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 1999
The Company determines the discount rate used in estimating fair value by
selecting a rate that it believes is commensurate with the risks involved. The
Company recognizes that the ESR discount rate when interacting with the other
two assumptions, losses and prepayment, is a "risk-adjusted" rate. In
determining this rate the Company considers many factors including a comparison
to the yields on other financial instruments with prepayment or credit risk. The
future cash flows estimated as of December 31, 1999 and March 31, 1999, taking
into consideration estimated prepayment rates and credit losses, were discounted
at 12% to arrive at the fair value amounts presented in the accompanying
Consolidated Balance Sheets.
Assumptions regarding future CPR and credit losses are subject to volatility
that could materially affect operating results. Both the amount and timing of
estimated ESR cash flows are dependent on the performance of the underlying
loans, and actual cash flows may vary significantly from expectations. If actual
prepayment speeds or credit losses in future periods were to be higher than the
assumptions used in the Company's fair value estimate, or if the estimated
market discount rate were to increase, the ESR carrying value would have to be
written down through a charge to earnings, which could cause the Company to
report losses in future periods. Given the size of ContiMortgage/ContiWest's
servicing portfolio, even a modest change in ESR fair value assumptions can have
a relatively large impact on the ESR fair value. The table below illustrates the
impact of a positive or negative change in a single assumption used to determine
fair value for the ContiMortgage/ContiWest related ESR while keeping the
absolute value of the other two assumptions constant. The impact of changes in
these assumptions is not linear. As of December 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 $(20.1 million)
Annual CPR - 100 basis points $ 21.4 million
Lifetime credit losses + 10 basis points $(14.2 million)
Lifetime credit losses - 10 basis points $ 15.3 million
Discount rate +100 basis points $(23.5 million)
Discount rate - 100 basis points $ 26.0 million
5. GAIN ON SALE OF SUBSIDIARY
On June 11, 1999, the Company sold its interest in its wholly-owned subsidiary,
Triad Financial Corporation ("Triad") to Fairlane Credit LLC, a wholly-owned
subsidiary of Ford Motor Credit Company. The sale of Triad resulted in a gain of
approximately $22.6 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.
13
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 1999
6. TAXES
SFAS No. 109 requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion of the deferred tax
assets will not be realized. The Company has provided a valuation allowance for
the entire amount of the net deferred tax asset since it is more likely than not
that the net deferred tax asset will not be realized.
Due to the Company's ownership of REMIC residual certificates, the Federal tax
provision for the three and nine months ended December 31, 1999 is based on
excess inclusion generated by the ownership of these certificates.
7. EARNINGS PER SHARE
For the three and nine months ended December 31, 1999 and 1998, diluted loss per
share equals basic loss per share, as the dilutive calculation would have an
antidilutive impact as a result of the net loss incurred in those periods.
8. DEBT
Short-term and long-term debt at December 31, 1999 and March 31, 1999 consisted
of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
-------- --------
<S> <C> <C>
Short-term debt:
Commercial paper $258,925 $312,477
Revolving Credit Facility 163,000 200,000
Current portion of long-term debt 295 320
-------- --------
Total short-term debt $422,220 $512,797
======== ========
Long-term debt:
8 3/8% Senior Notes, $300 million face amount, due 2003 $299,493 $299,405
7 1/2% Senior Notes, $200 million face amount, due 2002 199,655 199,547
8 1/8% Senior Notes, $200 million face amount, due 2008 199,804 199,792
Capitalized lease 271 481
-------- --------
Total long-term debt $699,223 $699,225
======== ========
</TABLE>
The Company is required to comply with various financial covenants under its
outstanding Senior Notes and Bank Facilities. As of December 31, 1998 and
continuing through December 31, 1999, the Company's leverage ratio exceeded the
leverage ratio test under the covenants of its outstanding Senior Notes. As a
14
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 1999
result, the Company is prevented from issuing additional unsecured debt until
its leverage ratio is below such test.
As of December 31, 1998, amended financial covenants were received changing the
leverage and fixed charge ratios and the minimum net worth test in the Bank
Facilities, and lenders agreed to exclude certain charges from the covenant
ratio calculations. As of March 31, 1999, the Bank Facilities were amended to
eliminate the financial covenants and borrowing base provisions, among other
things. As part of the bank amendment, the Company agreed to reduce commitments
under the Bank Facilities by 75% of the total proceeds received by the Company
for the sale of Triad Financial Corporation ("Triad"). See Note 5. 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.
As part of the December amendments to the Revolving Credit Facility, the Company
had agreed to prepay the Revolving Credit Facility on August 20, 1999, which
made the Revolving Credit Facility coterminous with the Commercial Paper
Program. As part of the March amendments, the interest rate of the Revolving
Credit Facility and the Commercial Paper Program were increased to LIBOR plus
300 basis points.
On August 19, 1999, the Company agreed with the lenders under its Bank
Facilities to extend the maturity date of the Bank Facilities from August 20,
1999 to March 31, 2000 and to convert both facilities into term arrangements
("Term Facility"). The Company also agreed to certain modifications of the Bank
Facilities including a $20 million minimum liquidity covenant. The agreement
also includes providing collateral to the lenders in the form of a lien on
certain Excess Spread Receivables with a June 30, 1999 book value of
approximately $147 million. The book value of these Excess Spread Receivables as
of December 31, 1999 was approximately $84 million. The interest rate on each
facility remains at LIBOR plus 300 basis points. The Company was in compliance
with the amended covenants of the Bank Facilities as of December 31, 1999.
9. SUBSEQUENT EVENTS
Retention Bonus Plan
Effective in February 2000, the Company established the CFN 2000 Retention Bonus
Plans (the "Plans") for the purpose of retaining the valuable services of the
Company's key employees through certain dates. In order to guarantee certain
payments under the Plans, the Company established and funded irrevocable trusts
in the amount of $2.5 million.
New York Stock Exchange Listing
On January 3, 2000, the New York Stock Exchange ("NYSE") announced that trading
in the stock of the Company was to be suspended on January 5, 2000. Following
suspension the NYSE applied to the
15
<PAGE>
Securities and Exchange Commission to delist the Company. The NYSE's action was
taken because the Company did not meet the NYSE's listing standards.
10. LITIGATION
A number of purported class actions have been filed on behalf of the identified
stockholders of the Company, and similarly situated individuals, against the
Company, Continental Grain Corporation (sued in its capacity as a "controlling
person") and former Company officers and/or directors, James E. Moore and Daniel
J. Willett. Four actions have been filed in the United States District Court for
the Eastern District of New York: Dea O'Hopp, et al., v. ContiFinancial, et al.,
No. 99 Civ 6794; Scott Brenner, et al., v. ContiFinancial Corporation, et al.,
No. 99 Civ 8074; Christopher Locallo, et al., v. ContiFinancial Corporation, et
al., No. 99 Civ 8065, and Yisroel Weingarten, et al., v. ContiFinancial
Corporation, et al., No. 99 Civ 8209; three other actions have been filed in the
United States District Court for the Southern District of New York: I & M
Associates, et al., v. ContiFinancial Corporation, et al., No. 99 Civ 10941;
Elfriede Glancy, et al., v. ContiFinancial Corporation, et al., No. 99 Civ
11436; William Black, et al., v. ContiFinancial Corporation, et al., No. 99 Civ.
11941. The complaints are virtually identical and allege, among other things,
violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5 promulgated thereunder, based on alleged materially false or misleading
statements and omissions in Company press releases, SEC filings, and statements
made to analysts during the period from January 19, 1998 through July 21, 1999.
These misstatements and omissions, plaintiffs allege, artificially inflated the
Company's stock price during the relevant time period. Plaintiffs in each of the
cases seek damages in an unspecified amount. The Company, along with the other
defendants, is seeking to have all seven cases consolidated in the Southern
District of New York; plaintiffs are seeking to consolidate the litigation in
the Eastern District of New York. Also pending is a motion under the Private
Securities Litigation Reform Act of l995 for the appointment of lead plaintiffs
and lead plaintiffs' counsel. While the Company intends to defend these actions
vigorously, any filing by the Company under Chapter 11 of the Bankruptcy Code
would operate automatically to stay the prosecution of the litigation against
the Company. Given the preliminary stage of the litigation, and the
uncertainties surrounding the Company's ability to continue as a going concern,
the Company is unable to evaluate the potential materiality of such suits, if
any, on future financial results.
16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This discussion should be read in conjunction with the accompanying unaudited
Condensed Consolidated Financial Statements and notes thereto included herein,
and the Company's audited Consolidated Financial Statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1999. Certain statements under this caption constitute
"forward-looking statements" under federal securities laws. See "Forward-looking
Statements."
Recent Developments, Financial Results and Liquidity
In fiscal 1999 and continuing through the first three quarters of fiscal 2000
the Company has incurred significant losses of $426.3 million and $686.0
million, respectively. Over this period the Company has experienced a
significant decline in liquidity. As a result of these factors there is
substantial doubt as to the Company's ability to continue as a going concern.
The 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. At December 31, 1999 stockholders' equity has been reduced to a
deficit balance of $477.8 million. Consequently, the Company does not expect
that it will have sufficient liquidity or assets to repay the Bank Facilities,
which are due on March 31, 2000, or the Senior Notes and expects that it will
have to restructure its outstanding debt by the commencement of a case under
Chapter 11 of the Bankruptcy Code.
During fiscal 1999 and fiscal 2000, the Company recorded fair value adjustments
to interest-only and residual certificates totaling approximately $329 million
and $357 million, respectively, resulting primarily from higher than estimated
credit losses as well as higher than estimated prepayment speeds and an increase
in 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 December 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, resulting in a net loss for such period.
The Company's operations were also significantly and adversely affected by
difficult capital market conditions that commenced in the second quarter of
fiscal 1999, with the effects of these events, and their repercussions,
continuing to affect the Company's results through the first three quarters of
fiscal 2000. During the second quarter of fiscal 1999, the economic instability
in Asia and Russia precipitated a global debt crisis (the "Debt Crisis") which
caused a "flight to quality" by investors. During this period, fixed income
investors purchased large amounts of U.S. Treasury securities, causing U.S.
Treasury yields to decrease significantly. As investor demand for U.S. Treasury
securities increased, the demand for other fixed income securities declined
dramatically, causing yields on such other securities to rise relative to U.S.
Treasury securities. Since almost all of the Company's loan originations were
ultimately funded by the issuance of securities backed by the loans it
originates (securitization), these unusual interest rate
17
<PAGE>
movements affected the market value of all of the Company's originations,
causing significant losses and leading to a critical loss of liquidity.
While the Debt Crisis abated for other sectors of the economy in fiscal 1999,
its impact and subsequent repercussions continued to affect the "sub-prime"
industry in which the Company operates. The sudden and significant loss of
liquidity experienced throughout the industry, occurring within the context of
increasing market skepticism about the quality of earnings reported under
"gain-on-sale accounting", intensified capital market concerns about the
industry and severely curtailed access to the capital markets as a source of new
liquidity.
In order to attempt to strengthen the Company's ability to operate in this
difficult environment, in the third quarter of fiscal 1999, the Company began to
search for an investor who could contribute additional equity capital to the
Company or a buyer who would be interested in purchasing the Company's business.
On May 14, 1999, the Company signed an indication of interest letter with
Residential Funding Corporation ("RFC") under which RFC indicated its interest
in acquiring all of the outstanding common stock of the Company. On July 2,
1999, a second indication of interest letter was signed with RFC, again for the
acquisition of all of the outstanding common stock of the Company, but on
revised business terms. Definitive documentation for the acquisition was then
negotiated with RFC. On July 14, 1999, just prior to the expected signing of the
definitive documentation, RFC informed the Company that it had determined not to
proceed with the acquisition.
In light of the failure to consummate the transaction with RFC, and the
impending expiration of certain of the Company's credit facilities, the
Company's Board of Directors hired Mr. Alan Fishman as the new Chief Executive
Officer of the Company on July 20, 1999.
Following a review of the Company's situation, Mr. Fishman and other members of
the Company's senior management pursued a plan (the "Restructuring Plan") of
focusing the Company's operations on the most promising of its origination
channels, reducing the size of the Company, negotiating for the restructuring or
extension of the Company's credit facilities and then recommencing the search
for an equity investor in the Company, or a buyer of the Company's business or
of certain of the Company's assets.
Pursuant to the Restructuring Plan, in August 1999, the Company entered into a
definitive agreement with Greenwich Capital Financial Products, Inc.
("Greenwich"), an affiliate of Greenwich Capital Markets, Inc., to provide
ContiFinancial with a $500 million revolving servicing-released whole loan
purchase facility with a maximum aggregate purchase commitment of up to $1.5
billion, at ContiFinancial's option, through March 31, 2000. Greenwich also
agreed to provide a warehouse facility of up to $250 million on a revolving
basis. This facility also expires on March 31, 2000. In addition to the two
facilities, Greenwich purchased on a whole loan basis, through an affiliate,
approximately $772 million of home equity loans which were funded under
ContiFinancial's prior warehouse facilities. The Company expects these
arrangements with Greenwich will provide the Company with the necessary
warehouse financing to support the reduced amount of originations contemplated
as the Restructuring Plan is being implemented.
As of December 31, 1999, the Company had utilized $107 million of the capacity
under the Greenwich Warehouse Facilities.
18
<PAGE>
On November 9, 1999, the Company entered into a new arrangement with Greenwich
to provide monthly servicer advances, up to an aggregate outstanding amount of
$125 million, to certain REMICs for which ContiMortgage is the servicer. This
arrangement replaced the ContiGroup arrangement which expired on October 15,
1999. Greenwich has agreed to make these advances, for a fee, through November
9, 2000.
Also in August 1999, the Company began the implementation of a workforce
reduction plan which will result in the reduction of approximately 30% of the
Company's employees by the end of the fiscal year in order to achieve the
strategic goals of focusing the Company's origination in the channels with the
greatest potential and reducing the overall size of the Company.
See Note 3 to the Consolidated Financial Statements.
On August 19, 1999, the Company agreed with the lenders under its Revolving
Credit Facility and Commercial Paper Program (collectively, the "Bank
Facilities") to extend the maturity date of the Bank Facilities from August 20,
1999 to March 31, 2000 and to convert both facilities into term arrangements.
The Company also agreed to certain modifications of the Bank Facilities
including a $20 million minimum liquidity covenant. The agreement also included
providing collateral to the lenders in the form of a lien on certain Excess
Spread Receivables. The book value of these Excess Spread Receivables as of
December 31, 1999 was approximately $84 million. The interest rate on each
facility remains at LIBOR plus 300 basis points. The Company was in compliance
with the amended covenants of the Bank Facilities as of December 31, 1999.
As a result of the developments described above, the Company determined, during
the first quarter of fiscal 2000, that the carrying value of cost in excess of
equity acquired on the Company's balance sheet had been impaired and should be
written-down (see Note 3 to the Consolidated Financial Statements). During the
first and second quarters of fiscal 2000, the Company also determined that it
may not be able to achieve the results assumed in its prior loan loss
projections; therefore, assumptions as to future loss frequencies and severities
were increased, resulting in fair value adjustments to interest-only and
residual certificates (see Note 4 to the Consolidated Financial Statements).
With the objectives of the Restructuring Plan of refocusing the Company's
operations, reducing the size of the Company and restructuring and extending the
Company's credit facilities being substantially accomplished, the Company has
re-launched its efforts to explore strategic alternatives. The Company has
retained financial advisors Lehman Brothers, Inc. and The Blackstone Group L.P.
(the "Advisors") as advisors in the process. With the assistance of the
Advisors, the Company has pursued various strategic alternatives including but
not limited to a sale of the Company, sales of one or more of the business
operations and/or assets of the Company or a recapitalization of the Company
with or without additional equity capital.
During the fiscal quarter ended December 31, 1999, the Company and its Advisors
identified and contacted potential parties to pursue one or more of these
strategic alternatives. The Company has received indications of interest from
several of such parties for the purchase of various groups of assets of the
Company, and the interested parties have been conducting reviews of the Company
and the Company's assets. No assurance can be given that the Company will be
able to sell any or all of the Company's assets. The Company contemplates that
any sale of assets to an interested party will be consummated under the
supervision of a bankruptcy court. No assurances can be given that the ultimate
recoverability of asset and liability amounts will equal the carrying amounts
indicated in the accompanying Financial Statements.
19
<PAGE>
During the restructuring process, the Company expects that it will be cash flow
negative and will operate at a loss. The Company's continued operations during
the restructuring process are dependent on the continued availability of the
Bank Facilities and the warehouse financing and the supplemental servicer
agreement under the Greenwich arrangements (see Note 8 to the Consolidated
Financial Statements). During this period, the Company's cash reserves may not
be sufficient to meet the Company's cash needs.
The Company's Bank Facilities and the Greenwich warehouse and purchase
facilities expire on March 31, 2000. The Company believes it will have
sufficient liquidity to meet its obligations until March 31, 2000. The Company
does not currently have sufficient financial resources to repay the borrowings
under the Bank Facilities on such date, and no assurance can be given that the
Company will be able to extend, renegotiate or refinance any of the facilities.
The Company does not expect that the proceeds it would receive upon the
consummation of any sale of its assets would be sufficient to allow the Company
to repay the Bank Facilities and the Senior Notes or to replace the Greenwich
facilities. Accordingly, the Company contemplates that it will be necessary to
restructure its outstanding debt, including the Bank Facilities and the Senior
Notes, by the commencement of reorganization proceedings under Chapter 11 of the
Bankruptcy Code. See Note 8 to the Consolidated Financial Statements.
For the nine months ended December 31, 1999, the Company incurred a net loss of
$686.0 million, primarily due to the fair value adjustment to interest-only and
residual certificates, the write-down of cost in excess of equity acquired, and
restructuring and severance costs as discussed above. As a result of this net
loss, stockholders' equity has been reduced to a deficit balance of $477.8
million.
20
<PAGE>
Selected Financial Data
- -----------------------
ContiFinancial Corporation
Loan Originations, Securitizations and Sales
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the three months For the nine months
ended % ended %
December 31, Incr. December 31, Incr.
1999 1998 (Decr.) 1999 1998 (Decr.)
<S> <C> <C> <C> <C> <C> <C>
Loan Originations
Home equity, home improvement
and other residential mortgage loans:
Brokers $ 55,149 $ 376,791 (85.4%) $ 664,689 $ 1,153,987 (42.4%)
Correspondents 7,424 1,009,731 (99.3%) 707,731 3,945,035 (82.1%)
Direct retail 360,950 457,313 (21.1%) 1,303,524 1,422,144 (8.3%)
----------- ----------- ----------- ----------- -----
Total home equity, home improvement
and other residential mortgage loans 423,523 1,843,835 (77.0%) 2,675,944 6,521,166 (59.0%)
----------- ----------- ----------- ----------- -----
Commercial real estate mortgage loans:
Conduit (ContiMAP(R)and affiliates) -- 80,537 (100.0%) -- 1,455,844 (100.0%)
Keystone 341,737 236,225 44.7% 909,778 723,720 25.7%
----------- ----------- ----------- ----------- -----
Total commercial real estate loans 341,737 316,762 7.9% 909,778 2,179,564 (58.3%)
----------- ----------- ----------- ----------- -----
Triad auto loans -- 98,992 (100.0%) 88,675 271,945 (67.4%)
----------- ----------- ----------- ----------- -----
Total loan originations $ 765,260 $ 2,259,589 (66.1%) $ 3,674,397 $ 8,972,675 (59.1%)
=========== =========== =========== =========== =====
Securitizations and Sales
-------------------------
Whole loan sales to Greenwich affiliate $ -- $ -- n/a $ 771,801 $ -- n/a
ContiMortgage/ContiWest securitizations -- 1,049,318 (100.0%) 800,000 4,899,318 (83.7%)
Other home equity, home improvement and other
residential mortgage sales 351,310 782,583 (55.1%) 1,474,798 1,172,126 25.8%
----------- ----------- ----------- ----------- -----
Total home equity, home improvement and
other residential mortgage sales 351,310 1,831,901 (80.8%) 3,046,599 6,071,444 (49.8%)
----------- ----------- ----------- ----------- -----
Commercial real estate mortgage loans:
Whole loan sales 73,153 368,762 (80.2%) 535,053 368,762 45.1%
Conduit (ContiMAP(R)and affiliates) -- -- n/a -- 581,343 (100.0%)
Keystone 341,737 236,225 44.7% 909,778 723,720 25.7%
----------- ----------- ----------- ----------- -----
Total commercial real estate
mortgage loans 414,890 604,987 (31.4%) 1,444,831 1,673,825 (13.7%)
----------- ----------- ----------- ----------- -----
Triad auto loans -- 100,000 (100.0%) -- 237,674 (100.0%)
Strategic alliances -- 60,000 (100.0%) 12,783 217,188 (94.1.%)
----------- ----------- ----------- ----------- -----
Total securitizations and sales $ 766,200 $ 2,596,888 (70.5%) $ 4,504,213 $ 8,200,131 (45.1%)
=========== =========== =========== =========== =====
</TABLE>
n/a - not applicable
21
<PAGE>
ContiMortgage Corporation
Delinquencies, Defaults and Losses
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
ContiMortgage December 31, March 31, December 31,
Servicing Portfolio 1999 (3) 1999 1998
- -------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Number of loans serviced (at period end) 156,625 194,032 190,033
Serviced loan portfolio (at period end) $ 10,315,023 $ 12,966,131 $ 12,676,546
============ ============ ============
Weighted Average Seasoning (age in months) (1)
25 17 16
Delinquencies:
30 - 59 days 2.30% 1.39% 2.06%
60 - 89 days 0.68% 0.51% 0.74%
90 days and over 0.01% 0.44% 0.63%
------------ ------------ ------------
Total delinquencies (%) 2.99% 2.34% 3.43%
Total delinquencies ($) $ 308,345 $ 303,802 $ 434,841
Defaults:
Foreclosure 3.61% 2.29% 2.14%
Bankruptcy 2.51% 1.65% 1.59%
Real estate owned 1.50% 1.04% 1.05%
Loss mitigation and legal (2) 1.36% 1.24% 1.04%
------------ ------------ ------------
Total defaults (%) 8.98% 6.22% 5.82%
============ ============ ============
Total defaults ($) $ 925,908 $ 806,656 $ 737,189
============ ============ ============
</TABLE>
- ----------
(1) This caption illustrates the significant change in the age of the
portfolio and provides a frame of reference for the location of the
portfolio within the default cycle.
(2) This category includes non-performing accounts specifically identified for
accelerated resolution under the Company's loss mitigation program.
Resolution strategies include refinances, reinstatements, and full
payoffs; forbearance plans; pre-foreclosure sales for less than full
payoff; third party foreclosure sales; deed-in-lieu (or "cash for keys");
and charge-offs.
(3) The Company's servicing portfolio is increasing in age and moving into a
cycle where delinquency and default levels are expected to peak (as a
percentage of current outstanding) and losses will be incurred at
increased levels from prior periods. However, the comparability of the
delinquency and default percentages is distorted, period to period, as no
new servicing is being added to the Company's portfolio, effectively
reducing the denominator.
22
<PAGE>
ContiMortgage Corporation
Delinquencies, Defaults and Losses Continued
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the three For the twelve
ContiMortgage months ended months ended
Loan Loss Experience December 31, December 31,
- -------------------- 1999 1999
<S> <C> <C>
Average serviced loan portfolio $ 10,565,979 $ 12,156,129
============ ============
Net losses:
REMICs and loans held pending securitization 61,115 209,050
Loans and properties purchased out of REMICs 75 4,937
------------ ------------
Total net losses $ 61,190 $ 213,987
============ ============
Realized net losses as a percentage of average amount
outstanding (1) (2):
REMICs and loans held pending securitization 2.32% 1.72%
Loans and properties purchased out of REMICs 0.00% 0.04%
------------ ------------
Total realized net losses as a percentage of average amount
outstanding 2.32% 1.76%
============ ============
</TABLE>
(1) Amounts for the three months ended December 31, 1999 are annualized.
(2) The Company's servicing portfolio is increasing in age and moving into a
cycle where delinquency and default levels are expected to peak (as a
percentage of current outstanding) and losses will be incurred at
increased levels from prior periods. However, the comparability of the
percentage of realized net losses is distorted, period to period, as no
new servicing is being added to the Company's portfolio, effectively
reducing the denominator.
23
<PAGE>
Results of Operations
Three and Nine Months Ended December 31, 1999 Compared with the Three and Nine
Months Ended December 31, 1998
The Company incurred a net loss of $114.6 million and $686.0 million for the
three and nine months ended December 31, 1999 compared to a net loss of $58.8
million and $167.0 million for the three and nine months ended December 31,
1998, an increased loss of $55.8 million and $519.0 million, respectively. The
Company's total gross income (loss) decreased to income of $17.8 million and a
loss of $153.7 million for the three and nine months ended December 31, 1999,
respectively, from income of $125.6 million and $278.5 million for the
comparable periods last year. Total expenses decreased to $132.4 million for the
three months ended December 31, 1999 from $196.2 million for the comparable
period last year, and decreased to $521.8 million for the nine months ended
December 31, 1999 from $524.7 million for the comparable period last year.
Explanation of the significant revenue and expense captions and the drivers of
those changes are described below.
Gain (Loss) on Sale of Receivables:
The following table sets forth the components of gain (loss) on sale of
receivables for the three and nine months ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
---------------------- ----------------------
(dollars in thousands) 1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Home equity/home improvement $ 16,633 $ 52,310 $ 41,112 $ 223,933
Commercial real estate 1,977 1,515 5,339 4,267
Auto and Other 1,111 5,896 1,111 23,264
--------- --------- --------- ---------
Gain (loss) before fair value adjustments 19,721 59,721 47,562 251,464
Fair value adjustments (32,334) (24,001) (357,002) (161,856)
--------- --------- --------- ---------
Gain (loss) after fair value adjustments $ (12,613) $ 35,720 $(309,440) $ 89,608
========= ========= ========= =========
</TABLE>
Gain (loss) before fair value adjustments was unfavorable by $40.0 million for
the three months ended December 31, 1999 as compared to the same three months of
fiscal 1999, whereas total securitizations and sales decreased 70.5%, from $2.6
billion to $0.8 billion for the same respective periods. Gain (loss) before fair
value adjustments was unfavorable by $203.9 million for the nine months ended
December 31, 1999 as compared to the same nine months of fiscal 1999, whereas
total securitizations and sales decreased 45.1%, from $8.2 billion to $4.5
billion for the same respective periods. In the three months ended September 30,
1999 Greenwich purchased on a whole loan basis, through an affiliate,
approximately $772 million of home equity loans which were funded under
ContiFinancial's prior warehouse facilities. For ContiMortgage/ContiWest
transactions, gain (loss) before fair value adjustments expressed as a
percentage of total securitizations and sales resulted in a gain of 4.7%
compared to a gain of 2.9% for the respective three months ended December 31,
1999 and 1998. This change represents the effect of a significantly higher
percentage of the Company's business in the quarter ended December, 1999 being
retail originations, in which points and fees collected from the borrower
increase the margin. The prior year's
24
<PAGE>
gain includes a significantly higher percentage of correspondent originations,
in which the premiums paid to acquire such loans decrease the margin. For the
nine months ended December 31, 1999 and 1998, ContiMortgage/ContiWest
transactions gain before fair value adjustments expressed as a percentage of
total securitizations and sales resulted in a gain of 1.3% compared to a gain of
3.7%, respectively. This decrease in profitability between the two periods
reflects higher loss assumptions (see below) and higher investor spread
requirements.
For the three months ended June 30, 1999, the Company recorded fair value
write-downs of $151.2 million on interest-only and residual certificates,
primarily reflecting increased estimates of credit losses in the
ContiMortgage/ContiWest portfolio. In response to events occurring in the first
fiscal quarter, as more fully described in Note 2 to the Consolidated Financial
Statements, management made a determination that the Company most likely would
not be able to achieve the results assumed in its prior loan loss projections;
therefore, assumptions as to future loss severities were increased. For the
three months ended June 30, 1998, the fair value adjustments of $59.5 million
resulted primarily due to increased estimates of future prepayment speeds and
losses in the ContiMortgage/ContiWest portfolio.
For each of the second and third quarters of fiscal 2000, management made a
further determination that assumptions as to future loss frequencies should be
increased, resulting in a fair value adjustment to interest-only and residual
certificates of $173.5 million in the second quarter and $32.3 million in the
third quarter. The basis for this increased expectation in loss frequency was
driven by the following factors: For the second quarter of fiscal 2000, (i) the
performance of the Company's more seasoned REMICs resulted in management
increasing its assumptions of loss frequencies across the entire portfolio, and
(ii) data from third parties regarding loss frequency expectations on sub-prime
collateral in general. For the third quarter of fiscal 2000, the performance of
certain of the Company's more seasoned REMICS resulted in management increasing
its loss assumptions across certain segments of the portfolio.
The cumulative impact of the fair value adjustments to interest-only and
residual certificates for the nine months ended December 31, 1999 is $357.0
million.
Interest Income and Expense:
In the normal course of its activities, the Company carries inventories of loans
pending sale or securitization and earns a positive spread between the interest
income earned on those loans and the cost of financing such loans. Interest
income also includes accrued imputed interest on Excess Spread Receivables
("ESR"). In addition to the cost of financing loans pending sale or
securitization, interest expense includes the cost of financing the Company's
longer term capital requirements, including the cost of strategic acquisitions.
Interest income during the three and nine months ended December 31, 1999
declined $58.1 million or 79.9%, and $136.4 million or 57.9%, respectively,
compared to the three and nine months ended December 31, 1998. Interest expense
fell $34.5 million or 56.3%, and $75.2 million or 41.2%, respectively, for the
three and nine months ended December 31, 1999 compared to the comparable period
in the prior year. These decreases reflect the decline in loan originations that
began in the second half of fiscal 1999 and continued during the third quarter
of fiscal 2000, the elimination of substantially all financing commitments to
strategic alliance clients, and the reduction in the balance of ESR.
25
<PAGE>
Net Servicing Income:
Net servicing income consists of servicing fees and prepayment penalties
collected from borrowers, and capitalized servicing activity. Net servicing
income declined $9.9 million and $51.3 million or 53.4% and 69.0% in the three
and nine months ended December 31, 1999 compared to the three and nine months
ended December 31, 1998. The following table presents the components of
servicing income for the two periods:
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
------------------------------ -----------------------------
(in thousands) 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Capitalized servicing created $ -- $ 9,832 $ 7,052 $ 62,485
Premiums paid for capitalized prepayment penalties
-- (1,903) (1,736) (20,524)
Amortization of capitalized servicing (14,218) (13,329) (45,579) (31,201)
Fees and prepayment penalty collections 22,907 24,031 76,789 63,557
Impairment of capitalized servicing -- -- (13,500) --
------------ ------------ ------------ ------------
Net servicing income $ 8,689 $ 18,631 $ 23,026 $ 74,317
============ ============ ============ ============
Total ContiMortgage/ContiWest securitization volume $ -- $ 1,049,318 $ 800,000 $ 4,889,318
Average ContiMortgage servicing portfolio (excluding
warehouse) $ 10,404,491 $ 11,402,398 $ 11,161,048 $ 10,259,288
</TABLE>
The absence of capitalized servicing created during the quarter ended December
31, 1999 was attributable to the Company's need to sell production on a
servicing released basis, and for the quarter ended September 30, 1999 to the
appointment of a servicer other than the Company on a loan sale to Greenwich
during that quarter. The appointment of another servicer, because of the
Company's impaired financial condition, was necessary to obtain the monoline
insurance guaranty on the transaction. The increase in amortization of
capitalized servicing of $5.6 million in the quarter ended September 30, 1999
and $0.9 million in the quarter ended December 31, 1999 versus the comparable
fiscal 1999 quarters was due predominantly to the 20% increase in the amount of
capitalized servicing created during fiscal 1999, which affects the level of
subsequent amortization, as compared to the amount of capitalized servicing
created in fiscal 1998 (such capitalized amounts being $76.6 million and $63.6
million, respectively). Further, the prepayment penalty component of capitalized
servicing created was higher in fiscal 1999 than fiscal 1998, and since
prepayment penalties have set expiration dates that may be as short as six
months, capitalized prepayment penalties are, on average, amortized over a much
shorter period than normal servicing fees.
The Company recorded an estimated impairment reserve of $5.5 million during the
first quarter of fiscal 2000 because certain securitized portfolios have reached
delinquency levels that may trigger the loss of the servicing rights related to
those pools. The Company also recorded an estimated impairment reserve of $8.0
million in the second quarter of fiscal 2000 due to the expectation that
servicing costs on a per loan basis will increase in the future. Given its
current financial condition, the Company is unable to increase its
26
<PAGE>
servicing portfolio and as a result the portfolio will increase in age. For the
foreseeable future, as the portfolio ages, the portion of the portfolio that is
delinquent, which is more costly to service, will increase.
Fees and prepayment penalties collected in the three and nine months ended
December 31, 1999 decreased by $1.1 million and increased $13.2 million,
respectively, compared to the three and nine months ended December 31, 1998. The
decrease in the quarter is primarily due to a decrease in the average balance of
the ContiMortgage/ContiWest portfolio of loans. Comparably, the increased
prepayment penalties for the nine months ending December 31, 1999 is due to the
increased penetration of prepayment penalties in the ContiMortage/ContiWest
portfolio of loans (on loans originated during fiscal 1999 and 2000) and the
collection of such penalties as this portion of the portfolio matures and
prepayment levels increase.
The following table presents an analysis of capitalized servicing rights
activity during the nine months ended December 31, 1999:
(in thousands)
Balance as of March 31, 1999 $ 105,273
New securitization 7,052
Capitalized servicing received in strategic
alliance asset swap 2,534
Amortization of capitalized servicing rights (45,579)
Impairment of capitalized servicing (13,500)
---------
Balance as of December 31, 1999 $ 55,780
=========
Compensation and Benefits and General and Administrative Expenses:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------------- ---------------------------
(dollars in thousands) 1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Compensation and benefits $ 33,267 $ 48,366 $ 129,058 $ 143,532
========= ========= ========= =========
General and administrative expenses $ 37,793 $ 41,342 $ 122,758 $ 113,924
========= ========= ========= =========
Quarter-end head count 2,289 3,433
Average head count for the quarter 2,332 3,518
</TABLE>
In the three and nine months ended December 31, 1999 compensation and benefits
decreased by $15.1 million or 31.2% and $14.5 or 10.1% due to a workforce
reduction of approximately 34% compared to the comparable periods ended December
31, 1998.
General and administrative expenses decreased in the three months ended December
31, 1999 by $3.5 million, or 8.6% compared to the prior comparable period, due
to the implementation of the Restructuring Plan (see Note 2 to the Financial
Statements). The increase in G&A expenses for the nine months ended December 31,
1999 of $8.8 million, or 7.8%, primarily reflects the expansion of the Company's
direct-to-consumer retail operations during fiscal 2000 and the expansion of the
Company's servicing operations due to the increase in the size of the servicing
portfolio. Direct-to-consumer retail operations require a higher level of G&A
expense than non-retail operations that are conducted through correspondents and
brokers.
27
<PAGE>
Other Charges:
Other charges for the three and nine months ended December 31, 1999 and 1998
consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Other Charges: (in thousands)
Write-down of cost in excess of equity acquired $ -- $ 23,573 $ 62,522 $ 26,355
Restructuring charges (excluding compensation related) 5,941 4,027 24,656 9,367
Severance costs 717 4,838 9,370 4,838
Staff retention costs 5,563 -- 22,706 --
Write-offs and reserves of receivables from affiliates
and others, net 21,143 11,754 35,370 39,722
Other -- -- 2,134 --
-------- -------- -------- --------
Total Other Charges $ 33,364 $ 44,192 $156,758 $ 80,282
======== ======== ======== ========
</TABLE>
Based on the recent developments discussed in Note 2, management made a
determination that the carrying value of cost in excess of equity acquired
related to most of the Company's operations had been significantly impaired and
appropriate write-downs of $62.5 million for the nine months ended December 31,
1999 had to be recorded.
The restructuring charges of $5.9 and $24.7 million, for the three and nine
months ended December 31, 1999, respectively, primarily represent legal and
consulting fees related to restructuring.
In August 1999, the Company began the implementation of a workforce reduction
plan which has resulted in a reduction of the workforce of approximately 26% as
of December 31, 1999, and is expected to result in the reduction of
approximately 30% of the Company's employees by the end of the Company's fiscal
year in order to achieve the strategic goals of the Company's restructuring plan
as discussed in Note 2. A charge of $8.7 million for severance costs was
recorded for approximately 760 employees representing a cross section of
individuals from all operations of the Company. At December 31, 1999,
substantially all of the severance costs originally accrued for have been
disbursed. In the quarter ending December 31, 1999, additional severance costs
of $0.7 million were incurred.
Staff retention costs include monthly discretionary stay bonuses and CFN and CMC
1999 Retention Bonus Plans (the "Plans"). In July 1999 and August 1999, the
Company established the Plans for the purpose of retaining the valuable services
of the Company's key employees through the restructuring period. In order to
guarantee payment to employees of amounts that will become due to them under the
Plans, the Company established and funded irrevocable trusts with the amount
necessary to satisfy the Company's maximum liability under the Retention Bonus
Plans.
The Write-offs and reserves of receivables from affiliates and others primarily
relates to approximately $21 million and $39.8 million at the three and nine
months ending December 31, 1999, of reserves taken against
28
<PAGE>
certain assets received from a strategic alliance. The continued effect of the
market conditions referred to in Note 2 on this strategic alliance caused the
realization of the assets recorded on other receivables to become doubtful.
29
<PAGE>
Liquidity and Capital Resources
The following discussion of Liquidity and Capital Resources should be read in
conjunction with "Recent Developments, Financial Results and Liquidity" at the
beginning of this Item 2. "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Funding Requirements
The Company requires continued access to short- and long-term sources of funding
for its operations. The Company's primary cash requirements include the funding
of (i) mortgage loan originations and purchases pending their pooling and sale,
(ii) on going administrative and other operating expenses which will include
payments relating to the Restructuring Plan, (iii) payments related to tax
obligations, (iv) interest and principal payments relating to the Company's
long-term debt and short-term borrowed funds, (v) the costs of sales under the
Company's Purchase and Sale Facilities and Repurchase Agreements (collectively,
the "Warehouse Facilities"), and (vi) the cost of any subsequent contingent
purchase price payments on prior acquisitions.
The Company has taken steps to improve the cash flow characteristics of its
business activities by shedding businesses that required significant capital
outlays and focusing its financial resources on its core home equity business.
Within the home equity business, the Company took further steps to reduce the
capital requirements by implementing a whole loan sale strategy to accelerate
recapture of origination costs. The reduction in correspondent origination
volume has significantly reduced the total amount of premiums paid to originate
a loan. As competition has decreased, the cost of originating correspondent
loans has also dropped significantly, benefiting the Company through lower
purchase premiums.
The Company's Bank Facilities and the Greenwich warehouse and purchase
facilities expire on March 31, 2000. The Company does not currently have
sufficient financial resources to repay the borrowings under the Bank Facilities
on such date, and no assurance can be given that the Company will be able to
extend, renegotiate or refinance any of the facilities. The Company does not
expect that the proceeds it would receive upon the consummation of any sale of
its assets would be sufficient to allow the Company to repay the Bank Facilities
and the Senior Notes or to replace the Greenwich facilities. Accordingly, the
Company contemplates that it will be necessary to restructure its outstanding
debt, including the Bank Facilities and the Senior Notes, by the commencement of
reorganization proceedings under Chapter 11 of the Bankruptcy Code.
Sources of Liquidity and Capital
During the quarter ended December 31, 1999, the Company's primary sources of
liquidity were whole loan sales to the Greenwich purchase facilities and to
other third party loan purchasers.
On August 12, 1999, the Company entered into a definitive agreement with
Greenwich to provide the Company with a $500 million revolving
servicing-released whole loan purchase facility of up to $1.5 billion, at
ContiFinancial's option, through March 31, 2000. Greenwich provides a warehouse
facility of up to $250 million on a revolving basis. Both facilities expire on
March 31, 2000. In addition to the two facilities, Greenwich purchased on a
whole loan basis, through an affiliate, approximately $772 million of home
equity loans which were funded under ContiFinancial's prior warehouse
facilities.
30
<PAGE>
As of December 31, 1999, the Company had utilized $107 million of the capacity
under the Greenwich warehouse facilities.
On November 9, 1999, the Company entered into a new arrangement with Greenwich
to provide monthly servicer advances, up to an aggregate outstanding amount of
$125 million, to certain REMICs for which ContiMortgage is the servicer. This
arrangement replaced the ContiGroup arrangement which expired on October 15,
1999. Greenwich has agreed to make these advances, for a fee, through November
9, 2000.
As discussed in the "Recent Developments, Financial Results and Liquidity", the
Company is operating on a negative cash flow basis and is dependent on the
Greenwich facilities for its continued operations. In order to fund new loans
and asset originations and purchases, the Company is dependent on its ability to
fund loans under the Greenwich facilities.
The Company is required to comply with various financial covenants under its
outstanding Senior Notes and Bank Facilities. As of December 31, 1998 and
continuing through December 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, amended financial covenants were received changing the
leverage and fixed charge ratios and the minimum net worth test in the Bank
Facilities, and lenders agreed to exclude certain charges from the covenant
ratio calculations. As of March 31, 1999, the Bank Facilities were amended to
eliminate the financial covenants and borrowing base provisions, among other
things. As part of the bank amendment, the Company agreed to reduce commitments
under the Bank Facilities by 75% of the total proceeds received by the Company
for the sale of Triad Financial Corporation ("Triad"). On June 11, 1999, the
sale of Triad was closed, and the Bank Facilities commitments were reduced by
approximately $95 million. If the above mentioned amendments had not been
obtained, the Company would not have been in compliance with the covenants.
As part of the December amendments to the Revolving Credit Facility, the Company
had agreed to prepay the Revolving Credit Facility on August 20, 1999, which
made the Revolving Credit Facility coterminous with the Commercial Paper
Program. As part of the March amendments, the interest rate of the Revolving
Credit Facility and the Commercial Paper Program were increased to LIBOR plus
300 basis points.
On August 19, 1999, the Company agreed with the lenders under its Bank
Facilities to extend the maturity date of the Bank Facilities from August 20,
1999 to March 31, 2000 and to convert both facilities into term arrangements.
The Company also agreed to certain modifications of the Bank Facilities
including a $20 million minimum liquidity covenant. The agreement also includes
providing collateral to the lenders in the form of a lien on certain Excess
Spread Receivables. The book value of these Excess Spread Receivables as of
December 31, 1999 was approximately $84 million. The interest rate on each
facility remains at LIBOR plus 300 basis points. The Company was in compliance
with the amended covenants of the Bank Facilities as of December 31, 1999.
At December 31, 1999, the Company had outstanding $422 million on its Bank
Facilities.
31
<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 $22.6 million and provided
gross proceeds of approximately $134 million through sale proceeds, repayment of
intercompany debt and net return of intercompany warehouse financing. Of this
amount, approximately $95 million was used to pay down the Company's Bank
Facilities, thereby reducing the commitments under the Bank Facilities by the
pay down amount.
On July 15, 1999, Standard & Poor's lowered its senior unsecured debt and
long-term debt credit ratings to CC, Moody's Investors Service downgraded the
Company's long-term debt ratings to Caa2 and Fitch IBCA reduced the Company's
long-term debt rating to C.
On January 3, 2000, the New York Stock Exchange ("NYSE") announced that trading
in the stock of the Company was to be suspended on January 5, 2000. Following
suspension the NYSE applied to the Securities and Exchange Commission to delist
the Company. The NYSE's action was taken because the Company did not meet the
NYSE's listing standards.
Year 2000
The "Year 2000" issue, the ability of systems to identify dates in the 21st
century, was a critical business and operation issue that was successfully
addressed by the Company's entities. The year 2000 passed with virtually no
disruption to business. The minor system interruptions that occurred were
corrected within hours.
The total cost of Year 2000 remediation, including contingency planning, was
slightly below the expected expenditure of $2 million.
Forward-looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q, including,
but not limited to, statements relating to the Company's future performance or
accomplishing strategic alternatives, including a sale of the Company's assets,
which are not historical fact, may be deemed to be forward-looking statements
under the federal securities laws. There are many important factors that could
cause the Company's actual results to differ materially from those indicated in
the forward-looking statements, including the ability of the Company to
successfully complete a transaction with a buyer of the Company's assets. Such
factors also include, but are not limited to, general economic conditions;
interest rate risk; prepayment speeds; delinquency and default rates including
as to when levels are expected to peak; 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; the Company's needs for financing; the continued availability of the
Company's credit facilities through March 31, 2000; the risk of margin calls on
the Company's warehouse facilities; capital markets conditions, including the
markets for asset-backed securities and commercial mortgage loans; the
performance of the Company's subsidiaries and affiliates; and other risks
identified in the Company's Securities and Exchange Commission filings. In
addition, it should be noted that past financial and
32
<PAGE>
operational performance of the Company is not necessarily indicative of future
financial and operational performance.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary market risk exposure that the Company faces is interest rate risk.
The Company is most vulnerable to changes in U.S. Treasury yields, LIBOR yields,
and the yield spread requirements of the investors who buy the Company's
securities and loans. The Company's material exposures of interest rate
sensitive financial instruments, which are entered into for other than trading
purposes, are its committed pipeline of loans, its loan inventories (including
off-balance-sheet exposures), its interest-only and residual certificates, its
capitalized servicing rights, and the various derivative financial instruments
that the Company uses to manage the interest rate risk related to the
aforementioned other financial instruments. The overall objective of the
Company's interest rate risk management policies is to mitigate the effect of
changing interest rates on the fair value of its other financial instruments.
The Company does not have an ongoing hedging program to manage interest rate
risk associated with its interest-only and residual certificates and its
capitalized servicing rights. The primary risk involved is that a decline in
interest rates could result in an acceleration of prepayment speeds that would
adversely impact the fair value of these assets. However, because of the
relatively short average lives of the Company's home equity loans, prepayment
speeds related to the Company's portfolios are not as interest rate sensitive as
those of traditional mortgage products; therefore, the Company believes it would
require a substantial and sustained decline in interest rates, beyond what the
Company would consider to be a "reasonably possible near-term change," to impact
prepayment speeds to a material extent. The Company is also exposed to basis
risk in its portfolio of interest-only and residual certificates in that a
portion of the Company's securities have interest rates that adjust on a monthly
basis, whereas the interest rates on the loans that collateralize the securities
may be fixed or have adjustment intervals and indices that are different than
those of the underlying securities.
As part of its interest rate risk management process, the Company performs
various sensitivity analyses that attempt to quantify the net change in fair
value of its interest rate sensitive financial instruments. These analyses
assume hypothetical scenarios of instantaneous and permanent shifts in the U.S.
Treasury and/or LIBOR yield curves. The Company employs various discounted cash
flow models to determine the fair value of its interest rate sensitive financial
instruments under these scenarios. The primary assumptions used in the
discounted cash flow models are prepayment rates, credit losses, discount rates
and investor yield spread requirements. See Note 4 to the Consolidated Financial
Statements.
Using the sensitivity analysis described above, as of December 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 $2
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 $20 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
33
<PAGE>
rate sensitive financial instruments (derivative and other) of approximately $32
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 $2 million.
The Company assumed there would be no material change in prepayment speeds under
the interest rate change scenarios presented above. The Company estimates that a
100 basis points (1.0%) increase in prepayment speeds would decrease the fair
value of the interest-only and residual certificates by approximately $20
million and would decrease the fair value of the capitalized servicing rights by
$1 million (net of the estimated benefit from increased prepayment penalty
income). See Note 4 to the Consolidated Financial Statements for the effect of
changes in prepayment speeds and other assumptions on the interest-only and
residual certificates.
These sensitivity analyses are limited by the fact that that they are performed
at a particular point in time and do not incorporate other factors that may
impact the fair value of the Company's interest rate sensitive financial
instruments in each scenario. The above scenarios do not reflect the Company's
expectations regarding future movements in interest rates or prepayment speeds.
Consequently, the preceding estimates should not be viewed as a forecast.
34
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
A number of purported class actions have been filed on behalf of the
identified stockholders of the Company, and similarly situated
individuals, against the Company, Continental Grain Corporation (sued in
its capacity as a "controlling person") and former Company officers
and/or directors, James E. Moore and Daniel J. Willett. Four actions
have been filed in the United States District Court for the Eastern
District of New York: Dea O'Hopp, et al., v. ContiFinancial, et al., No.
99 Civ 6794; Scott Brenner, et al., v. ContiFinancial Corporation, et
al., No. 99 Civ 8074; Christopher Locallo, et al., v. ContiFinancial
Corporation, et al., No. 99 Civ 8065, and Yisroel Weingarten, et al., v.
ContiFinancial Corporation, et al., No. 99 Civ 8209; three other actions
have been filed in the United States District Court for the Southern
District of New York: I & M Associates, et al., v. ContiFinancial
Corporation, et al., No. 99 Civ 10941; Elfriede Glancy, et al., v.
ContiFinancial Corporation, et al., No. 99 Civ 11436; William Black, et
al., v. ContiFinancial Corporation, et al., No. 99 Civ. 11941. The
complaints are virtually identical and allege, among other things,
violations of Section 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5 promulgated thereunder, based on alleged materially false or
misleading statements and omissions in Company press releases, SEC
filings, and statements made to analysts during the period from January
19, 1998 through July 21, 1999. These misstatements and omissions,
plaintiffs allege, artificially inflated the Company's stock price
during the relevant time period. Plaintiffs in each of the cases seek
damages in an unspecified amount. The Company, along with the other
defendants, is seeking to have all seven cases consolidated in the
Southern District of New York; plaintiffs are seeking to consolidate the
litigation in the Eastern District of New York. Also pending is a motion
under the Private Securities Litigation Reform Act of l995 for the
appointment of lead plaintiffs and lead plaintiffs' counsel. While the
Company intends to defend these actions vigorously, any filing by the
Company under Chapter 11 of the Bankruptcy Code would operate
automatically to stay the prosecution of the litigation against the
Company. Given the preliminary stage of the litigation, and the
uncertainties surrounding the Company's ability to continue as a going
concern, the Company is unable to evaluate the potential materiality of
such suits, if any, on future financial results.
35
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
No. Description
---------------------------------------------
10.37 Supplemental Servicing Amendment
11.1 Computations of the Company's Earnings Per Common Share
12.1 Ratio of Earnings to Fixed Charges
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ContiFinancial Corporation
Signature Title Date
- --------- ------ ----
/s/ William P. Higgins Senior Vice President and Controller February 14, 2000
- ----------------------- (Principal Accounting Officer)
William P. Higgins
/s/ Frank W. Baier Senior Vice President and Chief
- ----------------------- Financial Officer (Principal February 14, 2000
Frank W. Baier Financial Officer)
37
SUPPLEMENTAL SERVICING AMENDMENT
SUPPLEMENTAL SERVICING AMENDMENT dated as of November 9, 1999
by and among ContiMortgage Corporation, a Delaware corporation (the "Servicer"),
ContiWest Corporation, a Nevada corporation, ContiSecurities Asset Funding
Corp., a Delaware corporation (the "Depositor"), Greenwich Capital Financial
Products, Inc., a Delaware corporation (the "Supplemental Servicer") and
Manufacturers and Traders Trust Company, a New York banking corporation (the
"Trustee"), in its capacity as Trustee under each of the Pooling and Servicing
Agreements listed on the attached Schedule A-1 and Schedule A-2 (the "Pooling
Agreements") with respect to the 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 the home equity loans (the "Home Equity
Loans") owned by the Trusts in accordance with the Pooling Agreements;
WHEREAS, Servicer and Continental Grain Company, among others,
are party to a Subservicing Agreement dated as of November 1, 1998 (the "Grain
Subservicing Agreement") and desire to terminate that Agreement;
WHEREAS, the Depositor, Servicer and each Trustee desire the
appointment of the Supplemental Servicer to perform the obligations under
Section 2.02(a) of this Amendment;
WHEREAS, the Certificate Insurers for each Trust, as
applicable, have consented to this Amendment and the Rating Agencies rating
securities issued by each Trust have confirmed that this Amendment to each
Pooling Agreement will not cause such Rating Agency to reduce its current rating
assigned to any Class of rated Certificates;
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:
ARTICLE I
AMENDMENT; DEFINITIONS
SECTION 1.01. Amendment. This Supplemental Servicing Amendment
("Amendment") constitutes an amendment and supplement to each Pooling Agreement.
SECTION 1.02. Definitions. The following terms have the
following meanings when used in this Amendment.
"Advance Conditions" has the meaning set forth in Section
2.02(d) hereof.
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"Amendment" means this Supplemental Servicing Amendment, 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.
"Calculated Delinquency Advance" has the meaning set forth in
Section 2.02(a) hereof.
"Clearance Account" has the meaning set forth in Section
2.03(a) hereof.
"Clearing Bank" means Chase Manhattan Bank, N.A. or any other
Designated Depository Institution mutually acceptable to the Supplemental
Servicer, the Servicer and the Certificate Insurer for each Trust.
"Compensating Interest" with respect to any Trust Group, has
the meaning set forth in the related Pooling Agreement.
"Daily Collections" has the meaning, with respect to a
particular Trust Group, set forth in the Pooling Agreement relating to such
Trust Group.
"Depositor" has the meaning set forth in the introductory
paragraph hereof.
"Disbursing Agent" shall mean each of the Servicer and
Supplemental Servicer acting as agents for each Trust.
"Disbursement Notice" has the meaning set forth in Section
2.03(d) herein.
"Funds Available for Servicing Payments" means, with respect
to any Trust, the amounts described in the related Pooling Agreement as the
Servicing Fee and other servicing compensation payable to the Servicer under
such Pooling Agreement, including but not limited to, late payment charges,
prepayment charges, release fees, assumption fees and bad check charges during
any Remittance Period.
"Grain Subservicing Agreement" has the meaning set forth in
the second WHEREAS clause in the Recitals hereof.
"Gross Collections" means, with respect to each Trust Group,
all amounts paid with respect to the Home Equity Loans, including but not
limited to, the total amount of principal, interest, Prepayments, Net
Liquidation Proceeds, Insurance Proceeds, late payment charges, prepayment
charges, release fees, assumption fees and bad check charges, received by the
Servicer or by any other entity on behalf of the Trust, in all circumstances
prior to the payment, netting or deduction of any amount and prior to the
deposit of such funds into the Principal and Interest Account.
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"Home Equity Loans" has the meaning set forth in the first
WHEREAS clause in the Recitals hereof.
"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, such earlier Monthly Remittance Date.
"Mandatory Trust Groups" means the Trusts identified on
Schedule A-1 and the Trust Groups identified on Schedule A-2 as "Mandatory."
"Maximum Aggregate Supplemental Delinquency Advance" means
$125,000,000.
"Maximum Available Supplemental Delinquency Advance" means the
Maximum Aggregate Supplemental Delinquency Advance less the amount of any
outstanding unreimbursed Supplemental Delinquency Advances.
"Net Collections" means Gross Collections minus the Funds
Available for Servicing Payments.
"Optional Trust Groups" means the Trust Groups identified on
Schedule A-2 as "Optional."
"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 hereof.
"Principal and Interest Account" has the meaning, with respect
to a particular Trust, set forth in the Pooling Agreement relating to such
Trust.
"Right" has the meaning set forth in Section 6.04 hereof.
"Servicer" has the meaning set forth in the introductory
paragraph hereof.
"Servicer Delinquency Advance" has the meaning set forth in
Section 2.02(a) hereof.
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"Supplemental Delinquency Advance" has the meaning set forth
in Section 2.02(a) hereof.
"Supplemental Delinquency Advance Notice" has the meaning set
forth in Section 2.02(b) hereof.
"Supplemental Servicer" has the meaning set forth in the
introductory paragraph hereof.
"Supplemental Servicing Fee" has the meaning set forth in
Section 2.04(a) hereof.
"Supplemental Servicing Fee Shortfall" means any difference
between the amount of the Supplemental Servicing Fee due to the Supplemental
Servicer pursuant to Section 2.04(a) hereof on any particular day and the amount
of the Supplemental Servicing Fee actually paid to the Supplemental Servicer on
such day.
"Trust Groups" means with respect to the Trusts set forth on
Schedule A-1, such Trusts, and with respect to the Trusts set forth on Schedule
A-2, the Loan Groups for each such Trust identified on such Schedule.
"Trustee" has the meaning set forth in the introductory
paragraph hereof
"Trusts" has the meaning set forth in the introductory
paragraph hereof.
"Turbo Event" has the meaning set forth in Section 4.01(c)
hereof.
"Verification Agent" has the meaning set forth in Section 6.01
hereof.
SECTION 1.03. Other Terms. Capitalized terms used but not
defined herein shall have the meanings ascribed to such terms in the related
Pooling Agreements.
ARTICLE II
THE SERVICER AND THE SUPPLEMENTAL SERVICER
SECTION 2.01. Appointment of the Supplemental Servicer;
Direction to Trustee. Pursuant to the Pooling Agreements, each Trustee, on
behalf of each Trust, hereby appoints the Supplemental Servicer to perform the
services set forth in Section 2.02 hereof, which appointment the Supplemental
Servicer hereby accepts. The Supplemental Servicer agrees to perform the
obligations set forth in Section 2.02 hereof in accordance with the terms set
forth herein and in the Pooling Agreements. The Supplemental Servicer undertakes
no obligations of the Servicer under the Pooling Agreements other than those
expressly set forth in Section 2.02 hereof. Nothing in this Amendment shall
relieve the Servicer of its obligations under the Pooling Agreements or in any
way limit such obligations.
The Depositor hereby directs each Trustee to execute and
deliver this Amendment on behalf of each Trust and to notify each
Certificateholder entitled to notice in accordance with the terms of the related
Pooling Agreement.
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SECTION 2.02. Obligations of the Supplemental Servicer.
(a) The Supplemental Servicer shall, with respect to each
Mandatory Trust Group, and may, with respect to each Optional Trust Group,
advance on each Monthly Remittance Date, until the Supplemental Servicer's
advancing obligation terminates pursuant to Section 4.01 hereof, to each Trustee
on behalf its respective Trust Groups, a "Supplemental Delinquency Advance" in
an amount equal to the lesser of
(i) the "Calculated Delinquency Advance," which shall be
the lesser of:
(a) the Delinquency Advance due on such Monthly
Remittance Date for such Trust Group less
(I) any Compensating Interest with respect
to such Remittance Period not paid by the
Servicer with its own funds and (II) any
portion of a Delinquency Advance to the
extent payable as a result of accounting or
other errors, or the failure to deposit
funds or the misapplication of funds by the
Servicer, and
(b) 5.0% of the unpaid principal balance of the
Home Equity Loans of such Trust Group as of
the last Business Day of the calendar month
immediately preceding the calendar month in
which such Monthly Remittance Date occurs
less any unreimbursed Supplemental
Delinquency Advances for such Trust Group as
of such Monthly Remittance Date; and
(ii) if the aggregate of all Calculated Delinquency
Advances exceeds the Maximum Available Supplemental
Delinquency Advance, the amount of the Calculated
Delinquency Advance shall be allocated on a pro rata
basis among the Trusts, based on the ratio of the
aggregate Calculated Delinquency Advances due to all
Trusts to the Maximum Available Supplemental
Delinquency Advance, first among the Mandatory Trust
Groups and secondly among the Optional Trust Groups
for which the Supplemental Servicer is making a
Supplemental Delinquency Advance.
With respect to any Trust Group, the Supplemental Servicer may agree in its sole
discretion to make a Supplemental Delinquency Advance in an amount greater than
the Calculated Delinquency Advance provided for above. Unless otherwise agreed
by the Supplemental Servicer in its sole discretion, in no event shall the
aggregate of all Supplemental Delinquency Advances exceed the Maximum Available
Supplemental Delinquency Advance. The difference between the Supplemental
Delinquency Advance paid by the Supplemental Servicer on any Monthly Remittance
Date to a particular Trust Group and received by the Trustee and the total
Delinquency Advance due under the Pooling Agreement for such Trust Group on such
Monthly Remittance Date shall be paid by the Servicer as a Delinquency Advance
(a "Servicer Delinquency Advance").
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(b) No later than 1:00 p.m. New York time on the Business Day
preceding each Monthly Remittance Date, the Servicer shall deliver to the
Supplemental Servicer, each Trustee and the Certificate Insurer for each Trust a
notice (the "Supplemental Delinquency Advance Notice"), in the form of Exhibit I
hereto, setting forth, among other things, the amounts due on such Monthly
Remittance Date for the Delinquency Advance, the Supplemental Delinquency
Advance and the Servicer Delinquency Advance to each Trustee for each Trust
Group, and the amounts thereof from prior Remittance Periods that remain
unreimbursed.
(c) As soon as reasonably practicable following receipt of the
Supplemental Delinquency Advance Notice, the Supplemental Servicer shall advise
the Servicer and the Verification Agent of the amount, if any, of the
Supplemental Advance it intends to make in respect of Optional Trust Groups. On
each Monthly Remittance Date, the Supplemental Servicer shall, pursuant to the
terms of this Section 2.02, pay in immediately available funds by wire transfer
to the Certificate Account for each Trust the Supplemental Delinquency Advance
due in respect of each Mandatory Trust Group and, if it elects to make such
advance, the Supplemental Delinquency Advance (or portion thereof) due in
respect of each Optional Trust Group.
(d) The obligation of the Supplemental Servicer to make a
Supplemental Delinquency Advance in respect of a Mandatory Trust Group is
expressly conditioned upon (i) issuance of a Supplemental Delinquency Advance
Notice verified by the Verification Agent at least one Business Day prior to the
Monthly Remittance Date with regard to such Trust Group, (ii) no Turbo Event
with respect to any Trust having occurred and continuing unremedied and no facts
or circumstances described in Section 4.01(c) having occurred and continuing
unremedied, without regard to whether the Supplemental Servicer has issued a
notice with respect to such event(s), (iii) this Amendment not having been
terminated; (iv) the Clearing Bank not having failed to act in accordance with a
Disbursement Notice; (v) the Supplemental Servicer determining in its reasonable
good faith judgment that such Supplemental Delinquency Advance will be
recoverable from Net Collections of such Trust Group within three months of the
date made; and (vi) the Servicer having paid in full all amounts due to the
Verification Agent (collectively, the "Advance Conditions"). Notwithstanding any
provision contained herein to the contrary, the Supplemental Servicer shall have
no obligation to make a Supplemental Delinquency Advance to a particular Trust
unless all the Advance Conditions have been satisfied and the making of a
Supplemental Delinquency Advance if any Advance Conditions are not satisfied
shall not constitute a waiver of such right or be construed as a precedent.
SECTION 2.03. Servicer Acts as Agent; Gross Collections;
Disbursing Notices.
(a) The Servicer shall, during the term of this Amendment,
deposit or cause to be deposited Gross Collections upon receipt for each Trust
without deduction, off-set or netting into an account entitled "ContiMortgage
Payment Clearing A/C FBO Other Investors/Custodial Acct" maintained at the
Clearing Bank for the benefit of the Trusts (the "Clearance Account").
Notwithstanding anything to the contrary in any Pooling Agreement, the Servicer
shall not receive Servicing Fees, other servicing compensation, or reimbursement
of Servicing Advances or Servicer Delinquency Advances except in accordance with
this Amendment and the Servicer shall not be entitled to deduct, off-set or net
any amounts from Gross Collections prior to deposit into the Clearance Account.
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(b) The parties hereto agree that the Servicer shall be acting
in the capacity as agent of the Trusts when it receives Gross Collections,
deposits Gross Collections into the Clearance Account and when it issues
Disbursement Notices, and that the Servicer has no right, title or interest in
any Gross Collections unless and until such amounts are actually paid to the
Servicer pursuant to an authorized Disbursement Notice for its own benefit in
accordance with this Amendment.
(c) The Servicer shall not have or obtain any right, title or
interest in any amounts paid from the Gross Collections to the Supplemental
Servicer as a Supplemental Servicing Fee, as reimbursement for Supplemental
Delinquency Advances, or otherwise. The Servicer acknowledges and agrees that
any Gross Collections received and held by it in the Clearance Account or
otherwise are held as agent and in trust for the applicable Trust. Each Trust is
the owner of its Gross Collections until actually paid pursuant to this
Amendment and the Pooling Agreement.
(d) Subject to Section 2.06, on each Business Day in which
collected funds are on deposit in the Clearance Account, the Disbursing Agent,
as agent for each Trustee, shall issue a notice to the Clearing Bank, the other
Disbursing Agent and the Verification Agent (each a "Disbursement Notice"),
which in each case shall contain (subject to appropriate modification) the items
of information shown on Exhibit II hereto, directing such Clearing Bank to (i)
transfer the appropriate amounts of escrow funds, insurance premiums, and
suspense items to their respective accounts, (ii) to pay by wire transfer from
the Clearance Account to the Supplemental Servicer or the Servicer from Funds
Available for Servicing Payments remaining after transfers pursuant to
subsection (i) in this paragraph, as appropriate and pursuant to the priorities
established in this Amendment, all available funds necessary to pay Supplemental
Servicing Fees, Servicing Fees and other servicing compensation, and (iii) to
pay by wire transfer from the Clearance Account to the Supplemental Servicer or
the Servicer from any funds of each Trust Group remaining after transfers
pursuant to subsections (i) and (ii) in this paragraph, as appropriate and
pursuant to the priorities established in this Amendment, all available funds of
each Trust Group necessary to reimburse Supplemental Delinquency Advances and
Servicer Delinquency Advances, provided, that any disputed amounts shall be
deposited into the Principal and Interest Account for the related Trust as
provided in Section 6.01. To the extent any amounts remain in the Clearance
Account after such amounts have been paid, the Disbursing Agent shall issue a
Disbursement Notice directing the Clearing Bank to deposit the Daily Collections
into the Principal and Interest Account for the related Trust.
(e) In all instances in which the Disbursing Agent is required
to perform an action, the Servicer shall be obligated to take such action and
the Supplemental Servicer may, but is not required to perform, such action. Each
person receiving direction or a notice (including, without limitation, a
Disbursement Notice) from the Servicer and Supplemental Servicer, in each case
as Disbursing Agent, pertaining to the payment of Supplemental Servicing Fees or
reimbursement for Supplemental Delinquency Advances shall disregard the
direction or notice from the Servicer and act in accordance with the direction
or notice from the Supplemental Servicer. The Supplemental Servicer as the other
Disbursing Agent, retains the right to issue alternate Disbursement Notices to
the Clearing Bank concerning Supplemental Servicing Fees and reimbursement for
Supplemental Delinquency Advances which shall supercede any inconsistent
direction or notice issued by the Servicer as Disbursing Agent and
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shall make all such inconsistent notices or directions null and void. Each
Disbursing Agent agrees that it will only disburse funds on deposit in the
Clearance Account in accordance with the terms of the related Pooling
Agreements, as amended by this Amendment. If the Supplemental Servicer is acting
as Disbursing Agent, it shall disburse funds in the Clearance Account only with
respect to the Home Equity Loans owned by the Trusts. At such time as this
Amendment has terminated and the Supplemental Servicer has been paid and
reimbursed all amounts owing to it pursuant to this Amendment, the Supplemental
Servicer shall so notify the Clearing Bank, and shall advise the Clearing Bank
that it is no longer authorized to issue Disbursement Notices pursuant hereto
and that any then effective Disbursement Notices given by it shall thereafter be
void.
SECTION 2.04. Supplemental Servicing Fee.
(a) As compensation for rendering the services specified
herein, the Supplemental Servicer shall be entitled to receive, on a daily
basis, a supplemental servicing fee (the "Supplemental Servicing Fee") from each
Trust. The Supplemental Servicing Fee due on any particular day from a
particular Trust shall equal the product of (i) LIBOR plus 250 basis points,
(ii) 1/360 and (iii) the highest amount of such unreimbursed Supplemental
Delinquency Advances associated with such Trust on such day, provided, however,
that on any day that there are accrued and unpaid Supplemental Servicing Fees
for a prior Monthly Remittance Period, the Supplemental Servicing Fee for that
day shall not exceed 12.0% per annum.
(b) The Supplemental Servicing Fee shall be paid each Business
Day solely from the Funds Available for Servicing Payments, pursuant to a
Disbursement Notice, prior to any payment to the Servicer (or a successor
servicer) with respect to the Servicing Fee or other servicer compensation. The
Servicer (or a successor servicer) shall not be entitled to receive the
Servicing Fee or other servicing compensation and no Trust shall pay the
Servicing Fee or other servicing compensation to the Servicer (or a successor
servicer) if there exists a Supplemental Servicing Fee Shortfall. The amount of
any Supplemental Servicing Fee paid to the Supplemental Servicer from each Trust
shall reduce, dollar-for-dollar, the amount of the Servicing Fee and other
Servicer compensation that would otherwise have been payable to the Servicer (or
a successor servicer) by such Trust but for the execution of this Amendment.
(c) Upon payment in full of all Supplemental Servicing Fees
then due and owing, all remaining Funds Available for Servicing Payments (if
any) shall be paid to the Servicer (or a successor servicer).
(d) Notwithstanding anything to the contrary in this
Amendment, the amount paid to the Supplemental Servicer as a Supplemental
Servicing Fee in a Remittance Period from a particular Trust may not exceed the
total Funds Available for Servicing Payments deposited to the Clearance Account
for such Trust for such Remittance Period.
SECTION 2.05. Reimbursement for Supplemental Delinquency
Advances
(a) The Supplemental Servicer shall be reimbursed for all
Supplemental Delinquency Advances it makes. For the avoidance of doubt, the
reimbursement for Supplemental Delinquency Advances and Servicer Delinquency
Advances made in respect of a
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particular Trust Group shall be from the Net Collections of such Trust Group and
not on a loan-by-loan basis and no funds shall be remitted from the Principal
and Interest Account to the Trustee for deposit into the Certificate Account to
the extent that there are any Supplemental Delinquency Advances that have not
been reimbursed. On each Business Day during each Remittance Period on which
there is an unreimbursed Supplemental Delinquency Advance, the Disbursing Agent
shall, on a Trust Group-by-Trust Group basis, issue a Disbursement Notice to
reimburse the Supplemental Servicer from Net Collections held in the Clearance
Account for all outstanding Supplemental Delinquency Advances prior to payment
of any amount from Net Collections to the Servicer (or a successor servicer) or
to the Principal and Interest Account.
(b) For the avoidance of doubt, notwithstanding anything
contained in the Pooling Agreements to the contrary, the Servicer (or a
successor servicer) is not entitled to, and may not obtain, reimbursement of
Delinquency Advances in respect of any Trust Group (including, without
limitation, from the Clearance Account or Principal and Interest Account) prior
to the Supplemental Servicer receiving reimbursement of all Supplemental
Delinquency Advances outstanding with respect to such Trust Group.
(c) In the event that the Supplemental Servicer has not been
reimbursed in full for Supplemental Delinquency Advances relating to a
particular Trust Group, but funds relating to such Trust Group have nevertheless
been deposited into the related Principal and Interest Account, then the
Supplemental Servicer shall be reimbursed from such funds on deposit in such
Principal and Interest Account prior to the transfer of such amounts to the
Certificate Account. Such reimbursement from the Principal and Interest Account
shall be made by the applicable Trust on receipt of a notice from the Disbursing
Agent.
(d) For the avoidance of doubt, and notwithstanding anything
herein or in the Pooling Agreement to the contrary, the Servicer (or a successor
servicer) shall be entitled to recover Servicer Advances on a loan-by-loan basis
from the Mortgagors to the extent permitted by the Home Equity Loans, or, if not
recovered from the Mortgagor on whose behalf the Servicing Advance was made,
from Liquidation Proceeds realized upon the liquidation of the related Home
Equity Loan prior to the payment of Liquidation Proceeds to any other party to
this Amendment.
SECTION 2.06. Certification of Supplemental Servicer Fee and
Supplemental Delinquency Advance Reimbursement Rights. The right to payment of
the Supplemental Servicing Fee and the right to reimbursement for Supplemental
Delinquency Advances shall be evidenced by a negotiable certificate (a
"Supplemental Servicing Certificate") in the form attached hereto as Exhibit III
if the owner of the Supplemental Delinquency Advances so requests of the Trustee
in writing. Each Supplemental Servicing Certificate shall be executed and
authenticated by the manual or facsimile signature of one of the Trustee's
Authorized Officers. Upon proper authentication by the Trustee, the Supplemental
Servicing Certificates shall bind each Trust and shall evidence each Trust's
obligations to pay and reimburse the Supplemental Servicing Fee and the right to
reimbursement for Supplemental Delinquency Advances in accordance with this
Amendment and the related Pooling Agreement. The holder of any Supplemental
Servicing Certificate may transfer, pledge, encumber, hypothecate or assign all
or any part of its rights in the Supplemental Servicing Certificate. The Trustee
shall cause to be kept a register in which the registration of the Supplemental
Servicing Certificates and any transfer of the Supplemental Servicing
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Certificates shall be recorded if so requested by the transferee or pledgee. If
so directed by the Trustee or the Supplemental Servicer, the Servicer will
include payment instructions for the registered owner of a Supplemental
Servicing Certificate in Disbursement Notices subsequently given. If a
Supplemental Servicing Certificate is destroyed, lost of stolen, upon reasonable
security and indemnity to hold the Trustee and the applicable Trust harmless,
the Trustee shall execute a new Supplemental Servicing Certificate in
replacement for the destroyed, lost or stolen Supplemental Servicing
Certificate. Simultaneously with the payment in full of any Supplemental
Servicing Certificate after the termination of this Amendment, such Certificate
shall be surrendered to the Trustee. The Supplemental Servicer shall pay any
reasonable and customary fees charged by the Trustee in connection with the
issuance of any Supplemental Servicing Certificate or for effecting any transfer
thereof. The Supplemental Servicer hereby agrees to indemnify and hold each
Trust and the Trustee harmless against any loss, liability, claim, damage or
expense incurred in connection with any legal action or proceeding brought by
any third party who has acquired an interest in any Supplemental Servicing
Certificate.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS; CONDITIONS PRECEDENT
SECTION 3.01. Representations, Warranties and Covenants of the
Supplemental Servicer. The Supplemental Servicer hereby represents and warrants
to and covenants with the Trustee as follows:
(a) The Supplemental 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 with the laws of each state necessary to enable it
to perform its obligations under the terms of this Amendment; the Supplemental
Servicer has the full corporate power and authority to execute and deliver this
Amendment and to perform in accordance herewith; the execution, delivery and
performance of this Amendment by the Supplemental Servicer and the consummation
of the transactions contemplated hereby have been duly and validly authorized;
this Amendment evidences the valid, binding and enforceable obligation of the
Supplemental Servicer; and all requisite corporate action has been taken by the
Supplemental Servicer to make this Amendment valid and binding upon the
Supplemental Servicer in accordance with its terms;
(b) Neither the execution and delivery of this Amendment, nor
the fulfillment of or compliance with the terms and conditions of this
Amendment, will conflict with or result in a breach of any of the terms,
conditions or provisions of the Supplemental Servicer's charter or by-laws or
any material agreement or instrument to which the Supplemental 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 Supplemental Servicer
or its property is subject;
(c) There is no action, suit, proceeding, or investigation
pending or, to the knowledge of the Supplemental Servicer, threatened against
the Supplemental 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 Supplemental Servicer, or in
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any material impairment of the right or ability of the
Supplemental Servicer to carry on its business, or of any action taken or to be
taken in connection with the obligations of the Supplemental Servicer
contemplated herein, or which would materially impair the ability of the
Supplemental Servicer to perform under the terms of this Amendment; 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 Supplemental Servicer of or compliance by the Supplemental
Servicer with this Amendment or the consummation of the transactions
contemplated by this Amendment, or if required, such approval has been obtained
prior to the date hereof.
SECTION 3.02. Representations, Warranties and Covenants of the
Servicer. The Servicer hereby represents and warrants to and covenants with the
Supplemental Servicer 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 with the laws of each state necessary to enable it to
perform its obligations under the terms of this Amendment; the Servicer has the
full corporate power and authority to execute and deliver this Amendment and to
perform in accordance herewith; the execution, delivery and performance of this
Amendment by the Servicer and the consummation of the transactions contemplated
hereby have been duly and validly authorized; this Amendment evidences the
valid, binding and enforceable obligation of the Servicer; and all requisite
corporate action has been taken by the Servicer to make this Amendment valid and
binding upon the Servicer in accordance with its terms;
(b) Neither the execution and delivery of this Amendment, nor
the fulfillment of or compliance with the terms and conditions of this
Amendment, 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 Amendment;
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 Amendment
or the consummation of the transactions contemplated by this Amendment, or if
required, such approval has been obtained prior to the date hereof.
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(e) The Servicer has no right, title or interest in or to any
Gross Collections (other than as trustee, or as agent for the related Trustee,
of Gross Collections held by it or by the Clearing Bank) unless and until funds
from such Gross Collections are actually paid to it pursuant to the applicable
Pooling Agreement, as modified by this Amendment.
(f) The Servicer shall continue to collect and deposit into
the Clearance Account, in the ordinary course of its business, the Gross
Collections in the same manner that it has been collecting and depositing such
receipts and deposits, except that the Servicer may not net, off-set or deduct
from such collections or deposits.
(g) The Servicer shall cooperate with the Verification Agent
and shall allow the Verification Agent access to the Servicer's books, records,
computer system and employees during ordinary business hours upon reasonable
notice and shall allow the Verification Agent to review all collections with
respect to Home Equity Loans and to make such copies of books, records and
documents as the Verification Agent determines in its sole discretion, in each
case, on a daily basis.
SECTION 3.03. Conditions Precedent. This Amendment shall not
become effective unless the following conditions are met or waived in writing by
the Supplemental Servicer: (i) receipt by the Supplemental Servicer of an
acknowledgement by the Clearing Bank in form and substance satisfactory to the
Supplemental Servicer agreeing to accept Disbursement Notices from the
Supplemental Servicer on a priority basis and limiting the ability to change the
name of the Clearance Account, and (ii) termination of the Grain Subservicing
Agreement and receipt by the Supplemental Servicer of a duly authorized letter
from Continental Grain Company that no amounts are owing to it, and all
obligations due it, under the Grain Subservicing Agreement have been paid and
satisfied.
ARTICLE IV
REMOVAL; RESIGNATION; MERGER; ASSIGNMENT
SECTION 4.01. Term of Amendment; Termination of Supplemental
Servicing.
(a) The Supplemental Servicer's obligation to make
Supplemental Delinquency Advances hereunder shall terminate on the date on which
this Amendment terminates, which shall be October 15, 2000 except as this
Amendment may be terminated earlier as set forth in Sections 4.01(b) or 4.01(c)
hereof and as this Amendment may be extended if agreed to in writing by the
Depositor, the Trustee, Servicer and Supplemental Servicer, with 30 days prior
written notice given to the other parties hereto and the related Certificate
Insurers.
(b) The Servicer may terminate this Amendment upon 30 days
prior written notice to each of the other parties hereto and the related
Certificate Insurers. Each Certificate Insurer may terminate this Amendment with
respect to the Trusts related to it upon five Business Days prior written notice
to each of the parties hereto. If the Servicer resigns or is terminated pursuant
to the terms of the Pooling Agreements, the Trustee or a successor servicer may
terminate this Amendment upon five Business Days notice to the parties hereto
without payment
12
<PAGE>
of any fee (other than reimbursement for unpaid Supplemental Servicing Fees and
unreimbursed Supplemental Delinquency Advances in accordance with the provisions
hereof).
(c) The Supplemental Servicer may terminate this Amendment and
its obligation to make Supplemental Delinquency Advances immediately upon notice
to each of the other parties hereto and the related Certificate Insurers if any
of the following occur and is continuing on the second Business Day after notice
of the occurrence of any of the following (each, a "Turbo Event"):
(i) The Servicer receives payment for the Servicing Fee
or other servicing compensation with respect to a
Trust at a time when Supplemental Servicing Fees with
respect to such Trust have not been timely paid in
accordance with Section 2.04;
(ii) The Servicer is reimbursed for a Servicer Delinquency
Advance with respect to a Trust Group at a time when
Supplemental Delinquency Advances with respect to
such Trust Group remain unreimbursed;
(iii) The Servicer fails to deposit Gross Collections to
the Clearance Account or fails to deposit the
appropriate amounts to any Principal and Interest
Account as it has been doing in the ordinary course
of business, except for nominal amounts as a result
of inadvertence, error or oversight, which, in each
case is corrected in a prompt manner;
(iv) The Servicer issues a Disbursement Notice to the
Clearing Bank or otherwise withdraws funds from the
Clearance Account or any Principal and Interest
Account except as expressly authorized by the
provisions of any Pooling Agreement, as amended by
this Amendment;
(v) The Servicer breaches any provision of this Amendment
or any of the Servicer's representations, warranties
or covenants are untrue when made or became untrue
thereafter;
(vi) The Clearing Bank fails to act in accordance with a
Disbursement Notice issued by the Supplemental
Servicer or the Clearing Bank informs or otherwise
indicates to the Supplemental Servicer that it will
not honor future Disbursement Notices issued by the
Supplemental Servicer; and
(vii) Any party to this Amendment, or its successor in
interest, except the Supplemental Servicer,
institutes any action or proceeding seeking to avoid
any portion of this Amendment or render any portion
of this Amendment ineffective.
(d) Notwithstanding any termination of this Amendment, the
Supplemental Servicer's right to payment and reimbursement for unpaid
Supplemental Servicing Fees and unreimbursed Supplemental Delinquency Advances
shall survive any such termination until such amounts have been paid and
reimbursed in full. Following any termination of this Amendment, the Disbursing
Agent, on behalf of the related Trust, and each Trustee, shall continue to issue
13
<PAGE>
Disbursement Notices directing payment to the Supplemental Servicer amounts due
to it in respect of unpaid Supplemental Servicing Fees and unreimbursed
Supplemental Delinquency Advances, as calculated in and provided by Article II
hereof, until all such amounts have been paid or reimbursed in full. This
Section 4.01(d), Article V, and Sections 6.05 through 6.15 shall survive any
termination of this Amendment. If the Servicer is not replaced by the Trustee or
a successor servicer, Article II also shall survive any termination of this
Amendment until the Supplemental Servicer has been paid and reimbursed all
amounts owing to it pursuant to this Amendment. Notwithstanding anything to the
contrary contained herein, if this Amendment is terminated and the Servicer is
replaced by the Trustee or a successor servicer, then, until all amounts owing
to the Supplemental Servicer in respect of unpaid Supplemental Servicing Fees
and unreimbursed Supplemental Delinquency Advances have been paid and reimbursed
in full, the Trustee or successor servicer, as appropriate, shall (i) assume the
responsibilities of the Servicer to act as Disbursing Agent, on behalf of the
related Trustee pursuant to this Amendment, including the issuance of
Disbursement Notices and allocations of Gross Collections pursuant to Section
2.03(d), (ii) pay the Supplemental Servicing Fee pursuant to Section 2.04, (iii)
reimburse the Supplemental Servicer for all unreimbursed Supplemental
Delinquency Advances pursuant to Section 2.05, and (iv) perform the obligations
of the Servicer pursuant to Section 2.06.
SECTION 4.02. Merger or Consolidation of the Supplemental
Servicer. The Supplemental Servicer 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
Supplemental Servicer shall be a party, or any Person succeeding to the business
of the Supplemental Servicer, shall be the successor of the Supplemental
Servicer, 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.
SECTION 4.03. Assignment. The Supplemental Servicer may assign
its rights and obligations hereunder to any Person with the prior written
consent of the Servicer and the Certificate Insurer with respect to the related
Trust.
ARTICLE V
LIMITATION ON LIABILITY; INDEMNIFICATION
SECTION 5.01. Limitation on Liability of the Supplemental
Servicer; Indemnification.
(a) The Supplemental Servicer and any director, officer,
employee or agent of the Supplemental Servicer 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. None of the Supplemental
Servicer, nor any of its directors, officers, employees or agents shall have any
liability to the Trustee, the Trust or the Certificateholders for any action
taken or for refraining from the taking of any action by it relating to this
Amendment or for errors in judgment; provided, however, that this provision
shall not protect the Supplemental Servicer or any such person against any
liability that would otherwise be imposed by reason of
14
<PAGE>
willful misfeasance, bad faith or gross negligence in the performance of the
duties of the Supplemental Servicer or by reason of reckless disregard of the
obligations and duties of the Supplemental Servicer hereunder. The Supplemental
Servicer shall not have any liability for any consequential, incidental,
special, exemplary, punitive, or any similar, damages and each party hereto
irrevocably and unconditionally waives any right it may have to claim or recover
any such damages.
(b) The Servicer hereby indemnifies and holds the Supplemental
Servicer and any director, officer, employee or agent of the Supplemental
Servicer harmless against any loss, liability, claim, damage or expense incurred
in connection with any legal action or proceeding relating to this Amendment or
the Supplemental Servicer's action, or failure to take action, under this
Amendment, 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. To the extent that the Supplemental Servicer incurs any loss,
liability or expense arising out of or in connection with this Amendment, the
Supplemental Servicer shall be reimbursed and held harmless by each Trust Estate
to the same extent that the Servicer would be reimbursed or held harmless from
the Trust Estate pursuant to Section 8.05 of the Pooling Agreements; provided,
however, that in the event the Servicer seeks reimbursement or to be held
harmless pursuant to Section 8.05 of the Pooling Agreements for itself from the
Trust Estate, the Supplemental Servicer shall be reimbursed and held harmless
prior to any payment being made to the Servicer with respect to its request to
be reimbursed or held harmless.
ARTICLE VI
MISCELLANEOUS
SECTION 6.01. Verification Agent. The Supplemental Servicer
shall appoint a nationally-recognized firm of independent accountants reasonably
acceptable to the Certificate Insurers, the Trustee and the Servicer to serve as
the verification agent (the "Verification Agent"). The Supplemental Servicer
hereby appoints KPMG LLP as the initial Verification Agent. The Servicer shall
deliver the proposed Supplemental Delinquency Advance Notice to the Verification
Agent at least one Business Day prior to the issuance of a Supplemental
Delinquency Advance Notice, which notice the Verification Agent shall review and
verify that the calculations of the amounts set forth therein are correct. In
the event the Verification Agent disagrees with any amounts set for in the
Supplemental Delinquency Advance Notice, it shall immediately notify the
Supplemental Servicer and the Servicer of its findings. Any disagreement must be
resolved by the Verification Agent and the Servicer by 11:00 am New York time on
the day on which such Supplemental Delinquency Advance Notice is due. In the
event any such disagreement cannot be resolved by such time on such date, the
findings of the Verification Agent shall be final and binding, and the Servicer
shall submit, as final, such amended Supplemental Delinquency Advance Notice as
the Supplemental Advance Notice. The findings of the Verification Agent in any
Supplemental Delinquency Advance Notice shall be conclusive and shall be binding
on all parties, absent manifest error. To the extent requested by the
Supplemental Servicer, the Verification Agent shall also review Disbursement
Notices given by the Servicer. In the event the Verification Agent disagrees
with any amounts set forth in any Disbursement Notice(s), it shall immediately
notify the Supplemental Servicer and the Servicer of its findings. All amounts
subject to disagreement shall be deposited into the Principal and
15
<PAGE>
Interest Account for the related Trust (and the Servicer acknowledges and agrees
that the Supplemental Servicer may issue a Disbursement Notice to the Clearing
Bank so instructing the Clearing Bank) and shall not be disbursed from such
Principal and Interest Account until the earlier of resolution or the next
Monthly Remittance Date. In the event any such disagreement cannot otherwise be
resolved prior to the next Monthly Remittance Date, the findings of the
Verification Agent shall be final and binding. The fees and expenses of the
Verification Agent will be paid by the Servicer (with such fees to be paid on an
estimated basis, monthly in advance, and such expenses to be paid as incurred)
except that, at the direction of the Supplemental Servicer, any fees or expenses
of the Verification Agent remaining unpaid more than ten Business Days after
submission shall be paid from Funds Available for Servicing Payments after
payment of the Supplemental Servicing Fee pursuant to Section 2.04(b) hereof,
which payment shall reduce the Servicing Fee and other servicing compensation on
a dollar-for-dollar basis. The failure to pay the fees and expenses of the
Verification Agent promptly by the Servicer shall give rise to a breach of the
Advance Conditions.
SECTION 6.02. Inconsistencies with Pooling Agreements;
Amendment to Supplemental Servicing Amendment and the Pooling Agreements.
(a) The Servicer shall not amend any Pooling Agreement in any
way that would affect the rights or obligations of the Supplemental Servicer
hereunder without the prior written consent of the Supplemental Servicer.
(b) Notwithstanding any provision in a Pooling Agreement
requiring ContiMortgage to pay the expenses of the Trust from its own funds, the
Servicer shall not be responsible for and shall not pay from its own funds the
Supplemental Servicing Fee or the reimbursement of Supplemental Advances or any
other fee or expense described in this Amendment (other than any indemnification
of the Supplemental Servicer as provided in the first sentence of Section
5.01(b) and the fee of the Verification Agent as provided in Section 6.01) as
expenses of the Trust.
SECTION 6.03. Servicer Primarily Liable. Notwithstanding
anything to the contrary contained in this Amendment, the Servicer shall
continue to be responsible for making each Delinquency Advance pursuant to
Section 8.09(a) of each Pooling Agreement in the event the Supplemental Servicer
fails to make any required Supplemental Advance on the date required hereunder.
SECTION 6.04. 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 Amendment 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.
16
<PAGE>
SECTION 6.05. Controlling Law; Jurisdiction.
(a) This Amendment 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 applicable to
agreements entered into and to be performed within 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 Amendment 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.
SECTION 6.06. 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 Amendment, any other transaction
document or any instrument or document delivered hereunder or thereunder.
SECTION 6.07. Notices. All demands, notices, and
communications hereunder shall be effective when personally delivered, when sent
by facsimile with confirmation of receipt by the recipient's facsimile machine
or the Business Day after delivery to a nationally recognized overnight delivery
service when the delivery fee is prepaid and delivery by the next Business Day
morning is specified, to the following addresses or facsimile number, or to such
other address or facsimile number as is later specified by notice:
17
<PAGE>
(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
(ii) If to Supplemental Servicer:
Greenwich Capital Financial Products, Inc.
600 Steamboat Road
Greenwich, CT 06830
Attention: John Anderson
Telephone: (203) 625-7941
Fax: (203) 618-2135
with a copy to
General Counsel
Telephone: (203) 625-6065
Fax: (203) 618-4571
(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
(iv) If to the Depositor
ContiSecurities Asset Funding Corp.
3811 West Charleston Blvd., Suite 104
Las Vegas, NV 89102
Telephone: (702) 822-5836
Fax: (702) 822-5839
(v) If to MBIA Insurance Corporation
MBIA Insurance Corporation
113 King Street
Armonk, NY 10504
18
<PAGE>
Attention: Insured Portfolio Management - SF
(ContiMortgage Home Equity Loan Pass-Through
Certificates, Series 1994-3, 1994-4, 1994-5,
1996-2, 1996-3, 1996-4, 1997-4, 1997-5,
1998-1, 1998-2, 1998-3 and 1999-2)
Telephone: (914) 273-4545
Fax: (914) 765-3810
(vi) If to Ambac Assurance Corporation
Ambac Assurance Corporation
One State Street Plaza
New York, NY 10004
Telephone: (212) 668-0340
Fax: (212) 509-9190
(vii) If to Financial Guaranty Insurance Company
Financial Guaranty Insurance Company
115 Broadway
New York, NY 1006
Attention: General Counsel
Telephone: (212) 312-3000
Fax: (212) 312-3220
SECTION 6.08. Binding Nature of Amendment. This Amendment
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 Amendment to be binding only upon the
Servicer or Supplemental Servicer.
SECTION 6.09. Provisions Separable. The provisions of this
Amendment 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.
SECTION 6.10. Counterparts. For the purpose of facilitating
the execution of this Amendment and or other purposes, this Amendment 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.
SECTION 6.11. Entire Agreement; Amendment of this Amendment.
This Amendment 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. This Amendment may not be
modified or amended other than by an agreement in writing.
19
<PAGE>
SECTION 6.12. Paragraph Headings. The paragraph headings in
this Amendment are for convenience only; they form no part of this Amendment and
shall not affect its interpretation.
SECTION 6.13. Advice from Counsel. The parties understand that
this Amendment 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
Amendment and that it is satisfied with its legal counsel and the advice
received from it.
SECTION 6.14. Judicial Interpretation. Should any provision of
this Amendment 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 Amendment.
SECTION 6.15 Third Party Rights. The Trustee, Supplemental
Servicer and the Servicer agree that the Certificate Insurer for each Trust
shall be deemed a third party beneficiary of this Amendment as if it were a
party hereto.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
20
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment 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:
-------------------------------
Name: Margaret M. Curry
Title: Senior Vice President
By:
-------------------------------
Name:
Title:
GREENWICH CAPITAL
FINANCIAL PRODUCTS, INC.,
as Supplemental Servicer
By:
-------------------------------
Name: John C. Anderson
Title: Senior Vice President
CONTISECURITIES ASSET
FUNDING CORP.,
as Depositor
By:
-------------------------------
Name: John Banu
Title: Authorized Signatory
By:
-------------------------------
Name: Jay Remis
Title: Authorized Signatory
CONTIWEST CORPORATION,
as Seller
By:
-------------------------------
Name: Joy Tolbert
Title: Vice President
By:
-------------------------------
Name: Todd Hart
Title: Assistant Secretary
<PAGE>
[Signature Page to Supplemental Servicing Amendment]
MANUFACTURERS AND
TRADERS TRUST COMPANY,
as Trustee and on behalf of the
Trusts
By:
-------------------------------
Name: Neil B. Witoff
Title: Assistant Vice President
For the purpose of this Amendment to each Pooling Agreement:
MBIA INSURANCE CORPORATION,
By:
---------
Name:
Title:
FINANCIAL GUARANTY INSURANCE COMPANY
By
---------
Name:
Title:
AMBAC ASSURANCE CORPORATION
By:
---------
Name:
Title:
[Signature Page to Supplemental Servicing Amendment--con't]
<PAGE>
SCHEDULE A-1
List of Pooling Agreements with Reimbursements Trust-by-Trust
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
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
1997-4 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
A-1
<PAGE>
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
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
1999-1 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
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
1999-3 Pooling and Servicing Agreement, dated as of June 1, 1998,
among ContiSecurities Asset Funding Corp., as Depositor,
Norwest Bank Minnesota, National Association, as Master
Servicer, ContiMortgage Corporation, as Servicer and as
Seller, ContiWest Corporation, as Seller and Manufacturers
and Traders Trust Company, as Trustee
A-2
<PAGE>
SCHEDULE A-2
List of Pooling Agreements with Reimbursements Loan Group-by-Loan Group
<TABLE>
<CAPTION>
SERIES POOLING AGREEMENT LOAN GROUP MANDATORY/
- ------ ----------------- ---------- ----------
OPTIONAL
--------
DESIGNATION
-----------
<S> <C> <C> <C>
1995-2 Pooling and Servicing Agreement, dated as of May 1, 1995, Fixed Rate Group Mandatory*
among ContiSecurities Asset Funding Corp., as Depositor, Adjustable Rate Group Optional
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, Fixed Rate Group Mandatory*
among ContiSecurities Asset Funding Corp., as Depositor, Adjustable Rate Group Optional
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, Group I Mandatory*
1995, among ContiSecurities Asset Funding Corp., as Group III Optional
Depositor, ContiMortgage Corporation, as Servicer and as Group II Optional
Seller and Manufacturers and Traders Trust Company, as Trustee
1996-1 Pooling and Servicing Agreement, dated as of February 1, Fixed Rate Group Mandatory*
1996, among ContiSecurities Asset Funding Corp., as Adjustable Rate Group Optional
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, Fixed Rate Group Mandatory
among ContiSecurities Asset Funding Corp., as Depositor, Adjustable Rate Group Optional
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, Fixed Rate Group Mandatory
among ContiSecurities Asset Funding Corp., as Depositor, Adjustable Rate Group Optional
ContiMortgage Corporation, as Servicer and as Seller and
Manufacturers and Traders Trust Company, as Trustee
</TABLE>
A-1
<PAGE>
<TABLE>
<CAPTION>
SERIES POOLING AGREEMENT TRUST GROUP MANDATORY/
- ------ ----------------- --------------- ----------
OPTIONAL
--------
DESIGNATION
-----------
<S> <C> <C> <C>
1996-4 Pooling and Servicing Agreement, dated as of December 1, Fixed Rate Group Mandatory
1996, among ContiSecurities Asset Funding Corp., as Adjustable Rate Group Optional
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, Group I Mandatory
among ContiSecurities Asset Funding Corp., as Depositor, Group II Optional
ContiMortgage Corporation, as Servicer and as Seller,
ContiWest Corporation, as Seller and Manufacturers and
Traders Trust Company, as Trustee
1997-3 Pooling and Servicing Agreement, dated as of June 1, 1997, Group I Mandatory
among ContiSecurities Asset Funding Corp., as Depositor, Group II Optional
ContiMortgage Corporation, as Servicer and as Seller,
ContiWest Corporation, as Seller and Manufacturers and
Traders Trust Company, as Trustee
</TABLE>
* These Loan Groups will be treated as Optional with respect to the Monthly
Remittance Date occuring in November, 1999.
A-2
<PAGE>
EXHIBIT I
Form of Supplemental Delinquency Advance Notice
-------, -----
Greenwich Capital Financial Products, Inc.
600 Steamboat Road
Greenwich, CT 06830
Attention: John Anderson or General Counsel
Re: Supplemental Servicing Amendment, dated as of November 9, 1999;
Notice of Supplemental Delinquency Advance
Pursuant to Section 2.02(b) of the Supplemental Servicing Amendment,
dated as of November 9, 1999 (the "Supplemental Servicing Amendment"), among
ContiMortgage Corporation (the "Servicer"), ContiWest Corporation, as Seller,
ContiSecurities Asset Funding Corp., as Depositor, Greenwich Capital Financial
Products, Inc. (the "Supplemental Servicer") and Manufacturers and Traders Trust
Company (the "Trustee"), the undersigned hereby notifies you that a Supplemental
Delinquency Advance in the amount of $_________ is due on the Monthly Remittance
Date occurring on ________, ___. The computation of the amount of the
Supplemental Delinquency Advance is set forth below.
The undersigned also hereby certifies that to the best of its
knowledge, each of the Advance Conditions contained in Section 2.02(d) have been
met.
<TABLE>
<CAPTION>
Sum of
Interest Amount on
Remittance deposit in Unreimbursed Unreimbursed Unpaid
Amount and related Amount of Amount of Amount of Amount of Amount of
Principal Principal and Amount of Supplemental Supplemental Servicer Servicer Supplemental
Name of Trust Remittance Interest Delinquency Delinquency Delinquency Delinquency Delinquency Servicing
Group Amount Account Advance Advance Advances Advance Advances Fees
- --------------- ---------- ----------- ----------- ------------ ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
Totals
</TABLE>
I-1
<PAGE>
Please remit the amount of the Supplemental Delinquency Advance
directly to Manufacturers and Traders Trust Company (the "Trustee") at the
account listed below on the Monthly Remittance Date.
To:
Account No:
Reference:
Very truly yours,
CONTIMORTGAGE CORPORATION, as Servicer
By:
------------------------------------
Name:
Title:
Verified by:
KPMG LLC
- ----------------------------
By:
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
I-2
ContiFinancial Corporation
Calculation of Earnings Per Share
For the three months ended December 31, 1999
<TABLE>
<CAPTION>
<S> <C>
Basic and Diluted Computation for the three months ended December 31,1999
Weighted average shares outstanding:
Common stock excluding shares relating to employee incentive plans 46,153,195
Vested Restricted Shares Outstanding during the Quarter 391,941
-------------
Weighted Average Shares Outstanding 46,545,136
-------------
Quarter income (loss) ($114,605)
-------------
Basic and Diluted Earnings Per Share ($2.46)
=============
</TABLE>
ContiFinancial Corporation
Ratio of Earnings to Fixed Charges
Exhibit 12.1 of December 31, 1999 Form 10-Q
<TABLE>
<CAPTION>
Nine months ended
December 31,
1999 1998 Fiscal 99 Fiscal 98 Fiscal 97 Fiscal 96 Fiscal 95
-------- -------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Summary:
Earnings (569,578) (63,392) (255,696) 385,425 297,677 197,996 77,895
Fixed Charges 107,564 182,807 233,598 165,904 120,636 74,770 29,635
-------- -------- -------- -------- -------- -------- --------
Ratio (6.30)(a) (0.35) (1.09)(b) 2.32 2.47 2.65 2.63
======== ======== ======== ======== ======== ======== ========
Earnings:
Income (loss) before income taxes
and minority interest (675,686) (246,116) (493,615) 224,965 177,041 126,536 56,988
Plus: Interest expense 107,564 182,807 233,598 165,904 120,636 74,770 29,635
Less: Equity income/loss in
unconsolidated subsidiaries (1,456) n/a 4,321 (5,444) -- -- --
Less: Minority Interest n/a (83) n/a n/a n/a (3,310) (8,728)
-------- -------- -------- -------- -------- -------- --------
Total "Earnings" (569,578) (63,392) (255,696) 385,425 297,677 197,996 77,895
======== ======== ======== ======== ======== ======== ========
Fixed Charges:
Interest expense 107,564 182,807 233,598 165,904 120,636 74,770 29,635
</TABLE>
(a) The dollar amount of the deficiency at December 31, 1999 was $677,142.
(b) The dollar amount of the deficiency at March 31, 1999 was $489,294.
n/a = Not Applicable
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONTIFINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF
OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> DEC-31-1999
<CASH> 87,403
<SECURITIES> 351,341
<RECEIVABLES> 400,945
<ALLOWANCES> (19,402)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 33,800
<DEPRECIATION> (15,434)
<TOTAL-ASSETS> 838,653
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 477
<OTHER-SE> (478,259)
<TOTAL-LIABILITY-AND-EQUITY> 838,653
<SALES> 0
<TOTAL-REVENUES> 17,793
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 104,424
<LOSS-PROVISION> 1,143
<INTEREST-EXPENSE> 26,795
<INCOME-PRETAX> (114,509)
<INCOME-TAX> 17
<INCOME-CONTINUING> (114,586)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (114,586)
<EPS-BASIC> 2.46
<EPS-DILUTED> 2.46
</TABLE>
