<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 11, 1997
SECURITIES ACT FILE NO. 333-1787
INVESTMENT COMPANY ACT FILE NO. 811-7565
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/X/
PRE-EFFECTIVE AMENDMENT NO. 2
/X/
POST-EFFECTIVE AMENDMENT NO.
/ /
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
/X/
AMENDMENT NO. 2
/X/
(CHECK APPROPRIATE BOX OR BOXES)
--------------------------
CONTIFINANCIAL STRYPES TRUST
(Exact Name of Registrant as Specified in Charter)
C/O PUGLISI & ASSOCIATES
850 LIBRARY AVENUE
SUITE 204
NEWARK, DELAWARE 19715
(Address of Principal Executive Offices)
------------------------------
Registrant's Telephone Number, including Area Code: (302) 738-6680
DONALD J. PUGLISI
PUGLISI & ASSOCIATES
850 LIBRARY AVENUE
SUITE 204
NEWARK, DELAWARE 19715
(Name and Address of Agent for Service)
------------------------------
COPIES TO:
NORMAN D. SLONAKER, ESQ. MATTHEW NIMETZ, ESQ.
Brown & Wood LLP Paul, Weiss, Rifkind, Wharton &
One World Trade Center Garrison
New York, New York 10048-0557 1285 Avenue of the Americas
New York, New York 10019-6064
--------------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of this Registration Statement.
--------------------------
If any securities being registered on this form will be offered on a delayed
or continuous basis in reliance on Rule 415 under the Securities Act of 1933, as
amended, other than securities offered in connection with a dividend
reinvestment plan, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
CROSS-REFERENCE SHEET*
<TABLE>
<CAPTION>
ITEM NUMBER IN FORM N-2 CAPTION IN PROSPECTUS
- ----------------------------------------------------------------- ------------------------------------------------------
<S> <C> <C>
PART A--INFORMATION REQUIRED IN A PROSPECTUS
1. Outside Front Cover................................... Front Cover Page
2. Inside Front and Outside Back
Cover Page.......................................... Front Cover Page; Inside Front Cover Page;
Underwriting
3. Fee Table and Synopsis................................ Prospectus Summary; Fee Table
4. Financial Highlights.................................. Not Applicable
5. Plan of Distribution.................................. Front Cover Page; Prospectus Summary; Net Asset Value;
Underwriting
6. Selling Shareholders.................................. Not Applicable
7. Use of Proceeds....................................... Use of Proceeds; Investment Objective and Policies
8. General Description of the Registrant................. Front Cover Page; Prospectus Summary; The Trust;
Investment Objective and Policies; Investment
Restrictions; Risk Factors; Dividends and
Distributions; Additional Information
9. Management............................................ Trustees; Management Arrangements
10. Capital Stock, Long-Term Debt and Other Securities.... Description of the STRYPES
11. Defaults and Arrears on Senior Securities............. Not Applicable
12. Legal Proceedings..................................... Not Applicable
13. Table of Contents of the Statement of Additional
Information......................................... Not Applicable
PART B--INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
14. Cover Page............................................ Not Applicable
15. Table of Contents..................................... Not Applicable
16. General Information and History....................... Not Applicable
17. Investment Objective and Policies..................... Prospectus Summary; Investment Objective and Policies;
Investment Restrictions
18. Management............................................ Trustees and Officers; Management Arrangements
19. Control Persons and Principal Holders of Securities... Management Arrangements; Underwriting; Legal Matters;
Experts
20. Investment Advisory and Other Services................ Management Arrangements
</TABLE>
- ------------------------
* PURSUANT TO THE GENERAL INSTRUCTIONS TO FORM N-2, ALL INFORMATION REQUIRED
TO BE SET FORTH IN PART B: STATEMENT OF ADDITIONAL INFORMATION HAS BEEN
INCLUDED IN PART A: THE PROSPECTUS.
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER IN FORM N-2 CAPTION IN PROSPECTUS
- ----------------------------------------------------------------- ------------------------------------------------------
<S> <C> <C>
21. Brokerage Allocation and Other Practices.............. Investment Objective and Policies
22. Tax Status............................................ Certain United States Federal Income Tax
Considerations
23. Financial Statements.................................. Experts; Independent Auditors' Report; Statement of
Assets, Liabilities and Capital
</TABLE>
PART C--OTHER INFORMATION
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS SUBJECT TO COMPLETION
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
PRELIMINARY PROSPECTUS DATED MARCH 11, 1997
2,800,000 STRYPES-SM-
CONTIFINANCIAL STRYPES TRUST
(EXCHANGEABLE FOR SHARES OF COMMON STOCK OF CONTIFINANCIAL CORPORATION)
-------------------
Each of the Structured Yield Product Exchangeable for Stock-SM- (the
"STRYPES") of ContiFinancial STRYPES Trust (the "Trust") offered hereby
represents a proportionate share of beneficial interest in the Trust, which
entitles the holder to receive an annual distribution of $ , and will be
exchanged for between % and 100% of each type of Reference Property (or, in
certain circumstances, cash with an equal value) upon conclusion of the term of
the Trust on , 2000 (the "Exchange Date"). The term "Reference
Property" means initially one share of Common Stock, par value $0.01 per share
(the "ContiFinancial Common Stock"), of ContiFinancial Corporation (the
"Company") and shall be subject to adjustment from time to time prior to the
Business Day (as defined herein) immediately preceding the Exchange Date to
reflect the addition or substitution of any cash, securities and/or other
property resulting from the application of the adjustment provisions described
herein. The annual distribution of $ per STRYPES is payable quarterly on
each , , and , commencing , 1997. The STRYPES
are not subject to redemption.
The Trust is a newly created Delaware business trust established to purchase
and hold (i) a series of zero-coupon U.S. Government securities ("U.S. Treasury
Securities") maturing on a quarterly basis through the Exchange Date and (ii) a
forward purchase contract (the "Contract") with an existing stockholder (the
"Contracting Stockholder") of the Company relating to the Reference Property.
The Trust's investment objective is to distribute to holders of STRYPES on a
quarterly basis $ per STRYPES and, on the Exchange Date, a percentage of
each type of Reference Property (or, in certain circumstances, cash with an
equal value) per STRYPES equal to the Exchange Amount. The Exchange Amount is
equal to: (a) if the Reference Property Value (as defined herein) is greater
than or equal to $ (the "Threshold Appreciation Price"), % of each
type of Reference Property, (b) if the Reference Property Value is less than the
Threshold Appreciation Price but greater than the Initial Price, a percentage of
each type of Reference Property, allocated as proportionately as practicable, so
that the aggregate value thereof equals the Initial Price and (c) if the
Reference Property Value is less than or equal to the Initial Price, 100% of
each type of Reference Property. The "Initial Price" is $ , which amount
is equal to the last reported sale price of the ContiFinancial Common Stock on
the New York Stock Exchange ("NYSE") on , 1997. Holders otherwise
entitled to receive fractional units or interests of any type of Reference
Property in respect of their aggregate holdings of STRYPES will receive cash in
lieu thereof. Pursuant to the terms of the Contract, the Contracting Stockholder
is obligated to deliver to the Trust on the Business Day immediately preceding
the Exchange Date the Reference Property required by the Trust in order to
exchange all of the STRYPES on the Exchange Date in accordance with the Trust's
investment objective. To the extent permitted by applicable law, the obligation
of the Contracting Stockholder to deliver Reference Property under the Contract
may be cash settled, at the option of the Contracting Stockholder, in whole but
not in part, by delivering to the Trust on the Business Day immediately
preceding the Exchange Date, in lieu of the Reference Property otherwise
deliverable, cash in an amount equal to the value of such Reference Property
immediately prior to the Exchange Date (the "Cash Settlement Option"). In the
event that the Contracting Stockholder elects to exercise the Cash Settlement
Option, holders of the STRYPES will receive cash on the Exchange Date. AS
DESCRIBED HEREIN, THE REFERENCE PROPERTY VALUE WILL REPRESENT A DETERMINATION OF
THE VALUE OF THE REFERENCE PROPERTY IMMEDIATELY PRIOR TO THE EXCHANGE DATE.
ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT THE AMOUNT RECEIVABLE BY HOLDERS OF
THE STRYPES ON THE EXCHANGE DATE WILL BE EQUAL TO OR GREATER THAN THE ISSUE
PRICE OF THE STRYPES. IF THE REFERENCE PROPERTY VALUE IS LESS THAN THE INITIAL
PRICE, SUCH AMOUNT RECEIVABLE ON THE EXCHANGE DATE WILL BE LESS THAN THE ISSUE
PRICE PAID FOR THE STRYPES, IN WHICH CASE AN INVESTMENT IN STRYPES WILL RESULT
IN A LOSS. See "Investment Objectives and Policies--General" and "--The
Contract."
(CONTINUED ON FOLLOWING PAGE)
SEE "RISK FACTORS," BEGINNING ON PAGE 23 OF THIS PROSPECTUS, FOR CERTAIN
CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE STRYPES.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
PRICE TO SALES PROCEEDS TO
PUBLIC LOAD(1) TRUST(2)
<S> <C> <C> <C>
Per STRYPES.................................... $ $ $
Total(3)....................................... $ $ $
</TABLE>
(1) Each of the Company and the Contracting Stockholder has agreed to indemnify
the Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriting."
(2) Expenses of the offering, which are payable by the Contracting Stockholder,
are estimated to be approximately $ .
(3) The Trust has granted the Underwriters an option, exercisable for 30 days
from the date hereof, to purchase up to an additional 420,000 STRYPES
(subject to decrease as a result of the issuance and sale of STRYPES in
connection with the formation of the Trust) to cover over-allotments, if
any. If all such STRYPES are purchased, the total Price to Public, Sales
Load and Proceeds to Trust will be $ , $ and $ ,
respectively. See "Underwriting."
---------------------------
The STRYPES are offered by the several Underwriters, subject to prior sale,
when, as and if issued to and accepted by them, and subject to approval of
certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the STRYPES will be made through the facilities of The Depository
Trust Company on or about , 1997.
- ------------
- -SM- Service mark of Merrill Lynch & Co., Inc.
- ------------------------
MERRILL LYNCH & CO. BEAR, STEARNS & CO. INC.
- -------------
The date of this Prospectus is , 1997.
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The Contract provides that, from and after a Tax Event Date (as defined
herein), the Contracting Stockholder's obligations thereunder may be
accelerated, at the option of the Contracting Stockholder, in whole but not in
part, at the Tax Event Acceleration Price (as defined herein). In such event,
the U.S. Treasury Securities will be sold by the Trust, and the proceeds
therefrom will be distributed along with the Tax Event Acceleration Price
received under the Contract after providing for any expenses of the Trust. See
"Investment Objective and Policies--The Contract--Acceleration Upon Tax Event."
In the event of a consolidation or merger of the Company or any successor
thereto into another entity, or the liquidation of the Company or any such
successor, or certain related events, in the event that the Contracting
Stockholder exercises its option to accelerate the Contract upon the occurrence
of a Tax Event or upon the occurrence of certain defaults by the Contracting
Stockholder under the Contract or the collateral arrangements described herein,
the Contract would be accelerated, the Trust's assets (other than assets
received pursuant to the Contract) would be liquidated, the net assets of the
Trust would be distributed PRO RATA to the holders of the STRYPES and the term
of the Trust would expire. See "Investment Objective and Policies--The
Contract--Reorganization Events Causing a Dissolution of the Trust,"
"--Acceleration Upon Tax Event" and "--Collateral Arrangements; Acceleration."
Reference is made to the accompanying prospectus of the Company with respect
to the shares of ContiFinancial Common Stock which may be received by a holder
of STRYPES on the Exchange Date or upon earlier dissolution of the Trust. The
Company is not affiliated with the Trust, will not receive any of the proceeds
from the sale of the STRYPES and will have no obligations with respect to the
STRYPES.
The STRYPES have been approved for listing on the American Stock Exchange
(the "AMEX"), subject to official notice of issuance. Prior to the offering
there has been no public market for the STRYPES. Shares of closed-end investment
companies have in the past frequently traded at a discount from their net asset
values and initial public offering prices. The risks associated with this
characteristic of closed-end investment companies may be greater for investors
expecting to sell shares of a closed-end investment company soon after the
completion of an initial public offering.
The STRYPES are designed to provide investors with a current distribution
yield (the Company has not paid any dividends on the ContiFinancial Common Stock
since its initial public offering), while also providing the opportunity for
investors to share in the appreciation, if any, of the value of the Reference
Property above the Threshold Appreciation Price. However, the opportunity for
equity appreciation afforded by an investment in the STRYPES is less than that
afforded by a direct investment in the Reference Property because the amount
receivable by a holder of a STRYPES upon exchange on the Exchange Date will only
exceed the issue price of such STRYPES if the Reference Property Value exceeds
the Threshold Appreciation Price, which represents an appreciation of % over
the Initial Price. In addition, because each STRYPES will entitle the holder to
receive only % of each type of Reference Property if the Reference Property
Value exceeds the Threshold Appreciation Price, holders of the STRYPES will be
entitled to receive upon exchange only % of any appreciation of the value of
the Reference Property above the Threshold Appreciation Price. Holders of
STRYPES will realize the entire decline in value if the Reference Property Value
is less than the Initial Price. There can be no assurance that the distribution
yield on the STRYPES will be higher than the dividend yield on the
ContiFinancial Common Stock over the term of the Trust.
The STRYPES may be a suitable investment for investors who are able to
understand the unique nature of the Trust and the economic characteristics of
the Contract and the U.S. Treasury Securities held by the Trust.
The Trust has adopted a fundamental policy that the Contract may not be
disposed of during the term of the Trust and that, except under limited
circumstances, the U.S. Treasury Securities may not be disposed of prior to
their respective maturities. As a result, the Trust will continue to hold the
Contract despite any significant decline in the value of the Reference Property,
including the ContiFinancial Common Stock, or adverse changes in the financial
condition of the issuer of any Reference Security (as defined herein), including
the Company. The Trust will not be managed like a typical closed-end investment
company. The Trust will be treated as a grantor trust for United States Federal
income tax purposes and each holder of STRYPES will be treated as the owner of
its PRO RATA portion of the Contract and the U.S. Treasury Securities. The U.S.
Treasury Securities held by the Trust will be treated for United States Federal
income tax purposes as having original issue discount and holders of STRYPES
will be required to recognize currently as income their PRO RATA portion of such
original issue discount as it accrues over the term of the Trust. The quarterly
cash distributions paid to the holders of STRYPES, which distributions are
anticipated to exceed the currently includable original issue discount, will be
treated as a tax-free return of the holders' costs of the U.S. Treasury
Securities and any previously included original issue discount, and therefore
will not be considered current income to holders upon receipt thereof for United
States Federal income tax purposes. Although under current law holders of
STRYPES should not recognize income, gain or loss with respect to the Contract
over its term, holders will recognize taxable gain or loss upon receipt of cash,
if any, upon dissolution of the Trust. For a discussion of certain United States
Federal income tax considerations for holders of the STRYPES, see "Certain
United States Federal Income Tax Considerations."
This Prospectus concisely sets forth information about the Trust that a
prospective investor ought to know before investing and should be read and
retained for future reference.
------------------------
Certain persons participating in this Offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the STRYPES or the
ContiFinancial Common Stock. Such transactions may include stabilizing, the
purchase of STRYPES to cover syndicate short positions and the imposition of
penalty bids. For a description of these activities, see "Underwriting."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH THE MORE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED,
THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS'
OVER-ALLOTMENT OPTION IS NOT EXERCISED. UNLESS THE CONTEXT OTHERWISE REQUIRES,
THE FOLLOWING SUMMARY ASSUMES THAT ON THE EXCHANGE DATE THE REFERENCE PROPERTY
CONSISTS ONLY OF SHARES OF CONTIFINANCIAL COMMON STOCK. AS USED IN THIS
PROSPECTUS, THE "COMPANY" REFERS TO CONTIFINANCIAL CORPORATION.
THE TRUST
ContiFinancial STRYPES Trust (the "Trust") is a newly created Delaware
business trust that will be registered as a non-diversified closed-end
management investment company under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). The term of the Trust will expire on or
shortly after , 2000 (the "Exchange Date"), except that the Trust may
be dissolved prior to such date under certain limited circumstances. The Trust
will be treated as a grantor trust for United States Federal income tax
purposes.
THE OFFERING
The Trust is offering 2,800,000 STRYPES, each representing a proportionate
share of beneficial interest in the Trust, at an initial public offering price
of $ per STRYPES (which is equal to the last reported sale price of the
ContiFinancial Common Stock on the NYSE on , 1997, the date of the
offering (the "Offering")). The Underwriters have been granted an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to an
aggregate of 420,000 additional STRYPES (subject to decrease as a result of the
issuance and sale of STRYPES in connection with the formation of the Trust) to
cover over-allotments, if any. See "Underwriting."
THE COMPANY
The Company engages in the consumer and commercial finance business by
originating and servicing home equity loans and providing financing and asset
securitization structuring and placement services to originators of a broad
range of loans, leases and receivables. Securitization provides significant
benefits, including greater operating leverage and reduced costs of funds, in
the financing of assets such as non-conforming home equity loans, equipment
leases, home improvement loans, franchise loans, commercial/ multi-family loans,
non-prime and sub-prime auto loans and leases and timeshare loans. Through
ContiMortgage Corporation, the Company is a leading originator, purchaser,
seller and servicer of home equity loans made to borrowers whose borrowing needs
may not be met by traditional financial institutions due to credit exceptions or
other factors. Loans are made to borrowers primarily for debt consolidation,
home improvements, education or refinancing and are primarily secured by first
mortgages on one-to-four family residential properties.
Reference is made to the accompanying prospectus of the Company with respect
to the shares of ContiFinancial Common Stock which may be received by a holder
of STRYPES on the Exchange Date or upon earlier dissolution of the Trust. The
Company is not affiliated with the Trust, will not receive any of the proceeds
from the sale of the STRYPES and will have no obligations with respect to the
STRYPES. THE PROSPECTUS OF THE COMPANY IS BEING ATTACHED HERETO AND DELIVERED TO
PROSPECTIVE PURCHASERS OF STRYPES TOGETHER WITH THIS PROSPECTUS FOR CONVENIENCE
OF REFERENCE ONLY. THE PROSPECTUS OF THE COMPANY DOES NOT CONSTITUTE A PART OF
THIS PROSPECTUS, NOR IS IT INCORPORATED BY REFERENCE HEREIN.
INVESTMENT OBJECTIVE AND POLICIES
The Trust will purchase and hold a series of zero-coupon U.S. Government
securities ("U.S. Treasury Securities") maturing on a quarterly basis through
the Exchange Date and a forward purchase contract (the "Contract") with an
existing stockholder (the "Contracting Stockholder") of the Company relating to
3
<PAGE>
the Reference Property. The Trust's investment objective is to distribute to
holders of the STRYPES ("Holders") on a quarterly basis $ per STRYPES
(which amount equals the PRO RATA portion of the fixed quarterly distributions
from the proceeds of the maturing U.S. Treasury Securities held by the Trust)
and, on the Exchange Date, a percentage of each type of Reference Property (or,
under certain circumstances, cash with an equal value) per STRYPES equal to the
Exchange Amount. The Exchange Amount is equal to: (i) if the Reference Property
Value (as defined herein) is greater than or equal to $ (the "Threshold
Appreciation Price"), % of each type of Reference Property, (ii) if the
Reference Property Value is less than the Threshold Appreciation Price but
greater than $ (the "Initial Price"), a percentage of each type of
Reference Property, allocated as proportionately as practicable, so that the
aggregate value thereof is equal to the Initial Price and (iii) if the Reference
Property Value is less than or equal to the Initial Price, 100% of each type of
Reference Property. The term "Reference Property" means initially one share of
ContiFinancial Common Stock and shall be subject to adjustment from time to time
prior to the Business Day (as defined herein) immediately preceding the Exchange
Date to reflect the addition or substitution of any cash, securities and/or
other property resulting from the application of the adjustment provisions
described herein. As more fully described under "Investment Objective and
Policies--The Contract--Reference Property Adjustments," upon application of
such adjustment provisions, in the future the Reference Property may include, in
addition to or in lieu of ContiFinancial Common Stock, other securities
(including rights or warrants) of the Company, securities of another issuer,
cash or other property. Holders otherwise entitled to receive fractional units
or interests of any type of Reference Property in respect of their aggregate
holdings of STRYPES will receive cash in lieu thereof. See "Investment Objective
and Policies--General" and "--Fractional Interests."
Pursuant to the terms of the Contract, the Contracting Stockholder is
obligated to deliver to the Trust on the Business Day immediately preceding the
Exchange Date the Reference Property required by the Trust in order to exchange
all of the STRYPES (including any STRYPES issued pursuant to the over-allotment
option granted by the Trust to the Underwriters and STRYPES issued in connection
with the formation of the Trust) on the Exchange Date in accordance with the
Trust's investment objective. To the extent permitted by applicable law, the
obligation of the Contracting Stockholder to deliver Reference Property under
the Contract may be cash settled, at the option of the Contracting Stockholder,
in whole but not in part, by delivering to the Trust on the Business Day
immediately preceding the Exchange Date, in lieu of the Reference Property
otherwise deliverable, cash in an amount equal to the value of such Reference
Property immediately prior to the Exchange Date (the "Cash Settlement Option").
Application has been made to the Commodity Futures Trading Commission (the
"CFTC") for confirmation that the Cash Settlement Option does not contravene any
applicable provisions of the Commodity Exchange Act. Under the Contract, the
Cash Settlement Option will not be exercisable by the Contracting Stockholder
unless and until such confirmation or another comparable regulatory response is
received or legislative action from the CFTC. In the event that the Contracting
Stockholder elects to exercise the Cash Settlement Option, Holders will receive
cash on the Exchange Date. See "Investment Objective and Policies--The
Contract."
Holders of the STRYPES will receive distributions at the rate per STRYPES of
$ per annum, or $ per quarter, payable quarterly on each
, , and (or, if any such date is not a
Business Day, on the next succeeding Business Day) to Holders of record as of
each , , and , respectively. The first
distribution (in respect of the period from , 1997 until ,
1997) will be payable on , 1997 to Holders of record as of
, 1997, and will equal $ per STRYPES. See "Investment
Objective and Policies--Trust Assets."
On the Exchange Date, each outstanding STRYPES will be exchanged for between
% and 100% of each type of Reference Property (or, in the event that the
Contracting Stockholder elects to exercise the Cash Settlement Option, cash with
an equal value), depending on the Reference Property Value. AS DESCRIBED HEREIN,
THE REFERENCE PROPERTY VALUE WILL REPRESENT A DETERMINATION OF THE VALUE OF THE
REFERENCE
4
<PAGE>
PROPERTY IMMEDIATELY PRIOR TO THE EXCHANGE DATE. ACCORDINGLY, THERE CAN BE NO
ASSURANCE THAT THE AMOUNT RECEIVABLE BY HOLDERS OF THE STRYPES ON THE EXCHANGE
DATE WILL BE EQUAL TO OR GREATER THAN THE ISSUE PRICE OF THE STRYPES. IF THE
REFERENCE PROPERTY VALUE IS LESS THAN THE INITIAL PRICE, SUCH AMOUNT RECEIVABLE
ON THE EXCHANGE DATE WILL BE LESS THAN THE ISSUE PRICE PAID FOR THE STRYPES, IN
WHICH CASE AN INVESTMENT IN STRYPES WILL RESULT IN A LOSS. In the event of a
consolidation or merger of the Company or any successor thereto into another
entity, or the liquidation of the Company or any such successor, or certain
related events, in the event that the Contracting Stockholder exercises its
option to accelerate the Contract upon the occurrence of a Tax Event or upon the
occurrence of certain defaults by the Contracting Stockholder under the Contract
or the collateral arrangements described herein, the Contract would be
accelerated, the Trust's assets (other than assets received pursuant to the
Contract) would be liquidated, the net assets of the Trust would be distributed
PRO RATA to the Holders of the STRYPES and the term of the Trust would expire.
See "Investment Objective and Policies--The Contract--Reorganization Events
Causing a Dissolution of the Trust," "--Acceleration Upon Tax Event" and
"--Collateral Arrangements; Acceleration."
TRUST ASSETS
The Trust's assets will consist of: (i) a series of zero-coupon U.S.
Treasury Securities with face amounts and maturities corresponding to the
amounts and payment dates of the distributions payable with respect to the
STRYPES, comprising approximately % of the initial assets of the Trust, and
(ii) the Contract with the Contracting Stockholder relating to the Reference
Property, comprising approximately % of the initial assets of the Trust.
Pursuant to the terms of the Contract, the Contracting Stockholder is
obligated to deliver to the Trust on the Business Day immediately preceding the
Exchange Date an aggregate number or amount of each type of Reference Property
equal to the product of the Exchange Amount and the aggregate number of STRYPES
then outstanding, subject to the Contracting Stockholder's Cash Settlement
Option.
The Contract provides that, from and after a Tax Event Date (as defined
herein), the Contracting Stockholder's obligations thereunder may be
accelerated, at the option of the Contracting Stockholder, in whole but not in
part, at the Tax Event Acceleration Price (as defined herein). In such event,
the U.S. Treasury Securities will be sold by the Trust, and the proceeds
therefrom will be distributed along with the Tax Event Acceleration Price
received under the Contract after providing for any expenses of the Trust. See
"Investment Objective and Policies--The Contract--Acceleration Upon Tax Event."
The purchase price under the Contract is equal to $ in the aggregate
(assuming the Underwriters' over-allotment option is not exercised) and is
payable to the Contracting Stockholder by the Trust on or about ,
1997. No other consideration is payable by the Trust to the Contracting
Stockholder in connection with its acquisition of the Contract or the
performance of the Contract by the Contracting Stockholder. See "Investment
Objective and Policies--The Contract."
The obligations of the Contracting Stockholder under the Contract initially
will be secured by a pledge of the maximum number of shares of ContiFinancial
Common Stock deliverable by the Contracting Stockholder pursuant to the
Contract. See "Investment Objective and Policies--The Contract--Collateral
Arrangements; Acceleration."
RELATIONSHIP TO CONTIFINANCIAL COMMON STOCK
Holders of the STRYPES will receive distributions at the rate of % of the
issue price per annum. The Company has not paid any dividends on the
ContiFinancial Common Stock since its initial public offering and has stated
that it has no current intention to pay dividends on the ContiFinancial Common
Stock. As a holding company, the ability of the Company to pay dividends is
dependent upon the receipt of dividends or other payments from its subsidiaries.
Any future determination as to the payment of dividends will be at the
discretion of the Company's Board of Directors and will depend upon the
Company's operating results, financial condition and capital requirements,
contractual restrictions, general business
5
<PAGE>
conditions and such other factors as the Company's Board of Directors deems
relevant. Furthermore, covenants in certain debt agreements of the Company
restrict the payment of dividends by the Company. Holders of STRYPES will not be
entitled to receive any future dividends on the ContiFinancial Common Stock
unless and until such time, if any, as the Trust shall have delivered
ContiFinancial Common Stock in exchange for STRYPES on the Exchange Date or upon
earlier dissolution of the Trust, and unless the applicable record date for
determining stockholders entitled to receive such dividends occurs after such
delivery. See "Risk Factors--No Stockholder Rights."
The opportunity for equity appreciation afforded by an investment in the
STRYPES is less than that afforded by a direct investment in the ContiFinancial
Common Stock because the amount receivable by a Holder of a STRYPES upon
exchange on the Exchange Date will only exceed the issue price of such STRYPES
if the Reference Property Value exceeds the Threshold Appreciation Price (which
represents an appreciation of % over the Initial Price). Moreover, each
STRYPES will entitle the Holder to receive on the Exchange Date only % (the
percentage equal to the Initial Price divided by the Threshold Appreciation
Price) of any appreciation of the value of Reference Property above the
Threshold Appreciation Price. Holders of STRYPES will realize the entire decline
in value if the Reference Property Value is less than the Initial Price. See
"Risk Factors--Limitations on Opportunity for Equity Appreciation; Potential
Losses."
DILUTION; TRADING PRICES
The percentage of each type of Reference Property (or the amount of cash)
that Holders of STRYPES are entitled to receive upon exchange on the Exchange
Date will not be adjusted for certain events, such as offerings of
ContiFinancial Common Stock by the Company for cash or in connection with
acquisitions. The Contracting Stockholder currently owns approximately 81% of
the outstanding ContiFinancial Common Stock. Concurrently with the offering of
the STRYPES, the Company is separately offering 2,800,000 shares of
ContiFinancial Common Stock (3,220,000 shares if the underwriters'
over-allotment options are exercised in full) (the "ContiFinancial Offering").
Upon completion of the ContiFinancial Offering, the Contracting Stockholder will
own approximately 76% of the outstanding ContiFinancial Common Stock
(approximately 75% if the underwriters' over-allotment options are exercised in
full). ContiFinancial is not restricted from issuing additional shares of
ContiFinancial Common Stock during the term of the Trust and, because the
Contracting Stockholder will continue to exercise a controlling influence over
the business and affairs of the Company upon completion of the ContiFinancial
Offering, any such decision to issue additional shares of ContiFinancial Common
Stock will be influenced by the Contracting Stockholder. In addition, the
Contracting Stockholder is not precluded from selling shares of ContiFinancial
Common Stock, either pursuant to Rule 144 under the Securities Act of 1933, as
amended (the "Securities Act"), or by causing the Company to register such
shares. Neither the Company nor the Contracting Stockholder has any obligation
to consider the interests of the Holders of the STRYPES for any reason.
Additional issuances or sales may materially and adversely affect the price of
the ContiFinancial Common Stock and, because of the relationship of the
percentage of the Reference Property (or the amount of cash) to be received on
the Exchange Date to the price of the ContiFinancial Common Stock, such other
events may materially and adversely affect the trading price of the STRYPES.
There can be no assurance that the Company will not take any of the foregoing
actions, or that it will not make offerings of, or that major shareholders
(including the Contracting Stockholder) will not sell any, ContiFinancial Common
Stock in the future, or as to the amount of any such offerings or sales. See
"Risk Factors--Reference Property Adjustments."
TERM OF THE TRUST
The Trust will dissolve on or shortly after the Exchange Date, except if
dissolved earlier under certain limited circumstances. Promptly after the
Exchange Date, the Reference Property or cash to be exchanged for the STRYPES
and any other remaining Trust assets, net of any remaining Trust expenses, if
any, will be
6
<PAGE>
distributed PRO RATA to Holders. In the event that the Company or any successor
thereto is the subject of a Reorganization Event (as defined below), the
Contracting Stockholder exercises its option to accelerate the Contract upon the
occurrence of a Tax Event or certain defaults shall have occurred with respect
to the Contracting Stockholder under the Contract or the collateral arrangements
described herein, the Contract would accelerate, the Trust's assets (other than
assets received pursuant to the Contract) would be liquidated, the net assets of
the Trust would be distributed PRO RATA to the Holders and the term of the Trust
would expire. See "Investment Objective and Policies--The Contract,"
"--Acceleration upon Tax Event" and "--Trust Dissolution," and "Risk
Factors--Limited Term."
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The Trust will be taxable as a grantor trust for United States Federal
income tax purposes. Accordingly, each Holder will be treated for United States
Federal income tax purposes as the owner of its PRO RATA portion of the U.S.
Treasury Securities and the Contract, and income received (including original
issue discount treated as received) by the Trust will generally be treated as
income of the Holders. See "Certain United States Federal Income Tax
Considerations."
The U.S. Treasury Securities held by the Trust will be treated for United
States Federal income tax purposes as having "original issue discount" which
will accrue over the term of the U.S. Treasury Securities. It is currently
anticipated that each quarterly cash distribution to the Holders will be treated
as a tax-free return of the Holders' costs of the U.S. Treasury Securities and
any previously included original issue discount, and therefore will not be
considered current income to Holders upon receipt thereof for United States
Federal income tax purposes. However, a Holder (whether on the cash or accrual
method of tax accounting) must recognize currently as income original issue
discount on the U.S. Treasury Securities as it accrues. See "Certain United
States Federal Income Tax Considerations."
Under existing law, a Holder should not recognize income, gain or loss upon
the Trust's entry into the Contract or over the term of the Contract. In
general, the delivery of Reference Property pursuant to the Contract will not be
taxable to the Holders. A Holder will have taxable gain or loss upon receipt of
cash, if any, upon dissolution of the Trust or to the extent that the
Contracting Stockholder elects to exercise the Cash Settlement Option and
satisfies its obligations under the Contract with cash. Each Holder's initial
tax basis in any Reference Property received from the Trust on the Exchange Date
or upon earlier dissolution of the Trust will be equal to its basis in its PRO
RATA portion of the Contract less the portion of such basis allocable to any
fractional shares of Reference Property for which cash is received. See "Certain
United States Federal Income Tax Considerations."
MANAGEMENT ARRANGEMENTS
The Trust will be internally managed and will not have an investment
adviser. The Trust's portfolio will not be actively managed. The administration
of the Trust will be overseen by the Trustees. The day-to-day administration of
the Trust will be carried out by The Chase Manhattan Bank (or its successor) as
trust administrator (the "Administrator"). The Chase Manhattan Bank (or its
successor) will also act as custodian for the Trust's assets (the "Custodian")
and as paying agent, registrar and transfer agent (the "Paying Agent") with
respect to the STRYPES. Except as aforesaid, and except for its role as
collateral agent under the Trust's Security and Pledge Agreement (see
"Investment Objective and Policies--The Contract--Collateral Arrangements;
Acceleration"), The Chase Manhattan Bank has no other affiliation with, and is
not engaged in any other transaction with, the Trust. For their services, the
Contracting Stockholder will pay each of the Administrator, the Custodian and
the Paying Agent at the closing of the Offering a one-time, up-front amount in
respect of its fee. See "Management Arrangements."
7
<PAGE>
RISK FACTORS
The Trust has adopted a fundamental policy that the Contract may not be
disposed of during the term of the Trust and that, unless the Trust dissolves
prior to the Exchange Date due to the occurrence of a "Reorganization Event"
with respect to the Company or any successor thereto, in the event that the
Contracting Stockholder exercises its option to accelerate the Contract upon the
occurrence of a Tax Event or in the event of a "Default" by the Contracting
Stockholder, the U.S. Treasury Securities may not be disposed of prior to their
respective maturities. The Trust will continue to hold the Contract despite any
significant decline in the value of the Reference Property, including the
ContiFinancial Common Stock, or adverse changes in the financial condition of
the issuer of any Reference Security (as defined herein), including the Company.
Although the STRYPES will provide the Holders with a current distribution
yield (the Company has not paid any dividends on the ContiFinancial Common Stock
since its initial public offering), there is no assurance that the distribution
yield on the STRYPES will be higher than the dividend yield on the
ContiFinancial Common Stock over the term of the Trust. In addition, the
opportunity for equity appreciation afforded by an investment in the STRYPES is
less than that afforded by a direct investment in the ContiFinancial Common
Stock. The value of the Reference Property receivable by a Holder of a STRYPES
upon exchange on the Exchange Date will only exceed the issue price of such
STRYPES if the Reference Property Value exceeds the Threshold Appreciation
Price, which represents an appreciation of % over the Initial Price.
Moreover, because each STRYPES will entitle the Holder to receive only % of
each type of Reference Property if the Reference Property Value exceeds the
Threshold Appreciation Price, Holders of the STRYPES will be entitled to receive
upon exchange only % of any appreciation of the value of the Reference
Property above the Threshold Appreciation Price. AS DESCRIBED HEREIN, THE
REFERENCE PROPERTY VALUE WILL REPRESENT A DETERMINATION OF THE VALUE OF THE
REFERENCE PROPERTY IMMEDIATELY PRIOR TO THE EXCHANGE DATE. ACCORDINGLY, THERE
CAN BE NO ASSURANCE THAT THE AMOUNT RECEIVABLE BY HOLDERS OF THE STRYPES ON THE
EXCHANGE DATE WILL BE EQUAL TO OR GREATER THAN THE ISSUE PRICE OF THE STRYPES.
IF THE REFERENCE PROPERTY VALUE IS LESS THAN THE INITIAL PRICE, SUCH AMOUNT
RECEIVABLE ON THE EXCHANGE DATE WILL BE LESS THAN THE ISSUE PRICE PAID FOR THE
STRYPES, IN WHICH CASE AN INVESTMENT IN STRYPES WILL RESULT IN A LOSS.
The Trust is classified as a "non-diversified" investment company under the
Investment Company Act. Consequently, the Trust is not limited by the Investment
Company Act in the proportion of its assets that may be invested in the
securities of a single issuer. Since the only securities held by the Trust will
be the U.S. Treasury Securities and the Contract, the Trust may be subject to
greater risk than would be the case for an investment company with more
diversified investments.
The trading prices of the STRYPES in the secondary market will be directly
affected by the trading prices of the ContiFinancial Common Stock in the
secondary market. It is impossible to predict whether the price of
ContiFinancial Common Stock will rise or fall. Trading prices of ContiFinancial
Common Stock will be influenced by the Company's operating results and prospects
and by economic, financial and other factors and market conditions.
Holders of STRYPES will not be entitled to any rights with respect to the
ContiFinancial Common Stock (including, without limitation, voting rights and
rights to receive any dividends or other distributions in respect thereof)
unless and until such time, if any, as the Trust shall have delivered shares of
ContiFinancial Common Stock in exchange for STRYPES on the Exchange Date or upon
earlier dissolution of the Trust, and unless the applicable record date, if any,
for the exercise of such rights occurs after such delivery.
The bankruptcy of the Contracting Stockholder could adversely affect the
timing of exchange or, as a result, the amount received by the Holders of the
STRYPES. See "Risk Factors--Risk Relating to Bankruptcy of the Contracting
Stockholder."
8
<PAGE>
Holders will experience a taxable event upon receipt of cash, if any, upon
dissolution of the Trust or to the extent that the Contracting Stockholder
elects to exercise the Cash Settlement Option and satisfy its obligations under
the Contract with cash. Because of an absence of authority as to the proper
character of any gain or loss resulting from such a taxable event, the ultimate
tax consequences to Holders as a result of the Contracting Stockholder electing
to exercise the Cash Settlement Option is uncertain. See "Risk Factors."
LISTING
The STRYPES have been approved for listing on the AMEX, subject to official
notice of issuance.
FEE TABLE
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load (as a percentage of offering price)............% (a)
Automatic Dividend Reinvestment Plan Fees......................... Not Applicable
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS)
Management Fees(b)................................................%
Other Expenses(c).................................................%
---------------
TOTAL ANNUAL EXPENSES(C)..............................................%
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS
- ------------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
An investor would pay the following expenses on a $1,000 investment, including the maximum
sales load of $ and assuming (1) no annual expenses and (2) a 5% annual return
throughout the periods:................................................................. $ $
</TABLE>
- ------------------------
(a) See the cover page of this Prospectus and "Underwriting."
(b) See "Management Arrangements." The Trust will be internally managed;
consequently there is no separate investment advisory fee paid by the Trust.
The Chase Manhattan Bank will act as the administrator of the Trust.
(c) The organization costs of the Trust in the amount of $ , the costs
associated with the initial registration and offering of the STRYPES
estimated to be approximately $ , and approximately $ in
respect of anticipated ongoing expenses over the term of the Trust will be
paid by the Contracting Stockholder. Any unanticipated operating expenses of
the Trust will be paid by Merrill Lynch & Co., Inc., which will be
reimbursed by the Contracting Stockholder. See "Management
Arrangements--Estimated Expenses." Absent such arrangements, the Trust's
"Other Expenses" and "Total Annual Expenses" would be approximately % of
the Trust's net assets.
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Trust will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND
ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED
FOR PURPOSES OF THE EXAMPLE.
9
<PAGE>
THE TRUST
ContiFinancial STRYPES Trust is a newly created Delaware business trust and
will be registered as a closed-end management investment company under the
Investment Company Act. The Trust was formed on March 14, 1996 pursuant to a
Trust Agreement dated as of such date (as amended and restated as of
, 1997, the "Declaration of Trust"). The term of the Trust will
expire on or shortly after , 2000, except that the Trust may be
dissolved prior to such date under certain limited circumstances. The Trust will
be treated as a grantor trust for United States Federal income tax purposes. The
Trust's principal office is located at 850 Library Avenue, Suite 204, Newark,
Delaware 19715 and its telephone number is (302) 738-6680.
USE OF PROCEEDS
The net proceeds of the Offering will be approximately $ (or
approximately $ , if the Underwriters' over-allotment option is
exercised in full), after payment of the sales load. At the time of the closing
of the Offering, or shortly thereafter, the net proceeds of the Offering will be
used to purchase a fixed portfolio comprised of a series of zero-coupon U.S.
Treasury Securities with face amounts and maturities corresponding to the
amounts and payment dates of the distributions payable with respect to the
STRYPES and to pay the purchase price under the Contract to the Contracting
Stockholder.
INVESTMENT OBJECTIVE AND POLICIES
UNLESS THE CONTEXT OTHERWISE REQUIRES, THE FOLLOWING DISCUSSION ASSUMES THAT
ON THE EXCHANGE DATE THE REFERENCE PROPERTY CONSISTS ONLY OF SHARES OF
CONTIFINANCIAL COMMON STOCK.
GENERAL
The Trust will purchase and hold (i) a series of zero-coupon U.S. Treasury
Securities maturing on a quarterly basis through the Exchange Date and (ii) the
Contract with the Contracting Stockholder relating to the Reference Property.
The Trust's investment objective is to distribute to Holders on a quarterly
basis $ per STRYPES (which amount equals the PRO RATA portion of the
fixed quarterly distributions from the proceeds of the maturing U.S. Treasury
Securities held by the Trust) and, on the Exchange Date, a percentage of the
number or amount of each type of Reference Security and other property
constituting part of the Reference Property (or, in certain circumstances, cash
with an equal value) per STRYPES equal to the Exchange Amount. The Exchange
Amount is equal to: (i) if the Reference Property Value is greater than or equal
to the Threshold Appreciation Price, % of the number or amount of each type
of Reference Security and other property constituting part of the Reference
Property, (ii) if the Reference Property Value is less than the Threshold
Appreciation Price but greater than the Initial Price, a percentage of the
number or amount of each type of Reference Security and other property
constituting part of the Reference Property, allocated as proportionately as
practicable, so that the aggregate value thereof is equal to the Initial Price
and (iii) if the Reference Property Value is less than or equal to the Initial
Price, 100% of the number or amount of each type of Reference Security and other
property constituting part of the Reference Property. THERE CAN BE NO ASSURANCE
THAT THE VALUE OF THE REFERENCE PROPERTY RECEIVABLE BY HOLDERS OF THE STRYPES ON
THE EXCHANGE DATE WILL BE EQUAL TO OR GREATER THAN THE ISSUE PRICE OF THE
STRYPES. IF THE REFERENCE PROPERTY VALUE IS LESS THAN THE INITIAL PRICE, THE
VALUE OF THE REFERENCE PROPERTY RECEIVABLE ON THE EXCHANGE DATE WILL BE LESS
THAN THE ISSUE PRICE PAID FOR THE STRYPES, IN WHICH CASE AN INVESTMENT IN
STRYPES WILL RESULT IN A LOSS. Holders otherwise entitled to receive fractional
units or interests of any Reference Security or other property constituting part
of the Reference Property in respect of their aggregate holdings of STRYPES will
receive cash in lieu thereof. See "-- Fractional Interests."
The term "Reference Property" initially means one share of ContiFinancial
Common Stock and shall be subject to adjustment from time to time prior to the
Business Day immediately preceding the Exchange
10
<PAGE>
Date to reflect the addition or substitution of any cash, securities and/or
other property resulting from the application of the adjustment provisions
described below under "--The Contract--Reference Property Adjustments." As more
fully described below, upon application of such adjustment provisions, in the
future the Reference Property may include, in addition to or in lieu of
ContiFinancial Common Stock, other securities (including rights or warrants) of
the Company, securities of another issuer, cash or other property. The term
"Reference Security" means, at any time, any security (as defined in Section
2(1) of the Securities Act) then constituting part of the Reference Property.
The term "Reference Property Value" means, subject to the adjustment provisions
described below, the sum, determined as of 10:00 A.M. (New York City time) on
the second Business Day preceding the Exchange Date, of (a) for any portion of
the Reference Property consisting of cash, the amount of such cash, (b) for any
portion of the Reference Property consisting of property other than cash or
Reference Securities, the fair market value (as determined by a nationally
recognized independent investment banking firm retained for this purpose by the
Administrator) as of 10:00 A.M. (New York City time) on the third Business Day
preceding the Exchange Date of such property, and (c) for any portion of the
Reference Property consisting of a Reference Security, an amount equal to the
average Closing Price per unit of such Reference Security on the 20 Trading Days
immediately prior to, but not including, the second Trading Day preceding the
Exchange Date multiplied by the number of units of such Reference Security
constituting part of the Reference Property. The "Closing Price" of any
Reference Security on any date of determination means the closing sale price
(or, if no closing price is reported, the last reported sale price) of such
Reference Security on the NYSE on such date or, if such Reference Security is
not listed for trading on the NYSE on any such date, as reported in the
composite transactions for the principal United States securities exchange on
which such Reference Security is so listed, or, if such Reference Security is
not listed on a United States national or regional securities exchange, as
reported by the National Association of Securities Dealers, Inc. Automated
Quotation System, or, if such Reference Security is not so reported, the last
quoted bid price for such Reference Security in the over-the-counter market as
reported by the National Quotation Bureau or similar organization, or, if such
bid price is not available, the market value of such Reference Security on such
date as determined by a nationally recognized independent investment banking
firm retained for this purpose by the Administrator. A "Trading Day" is defined
as a day on which the Reference Security the Closing Price of which is being
determined (A) is not suspended from trading on any national or regional
securities exchange or association or over-the-counter market at the close of
business and (B) has traded at least once on the national or regional securities
exchange or association or over-the-counter market that is the primary market
for the trading of such Reference Security. The term "Business Day" means any
day that is not a Saturday, a Sunday or a day on which the New York Stock
Exchange, The NASDAQ National Market, or banking institutions or trust companies
in The City of New York are authorized or obligated by law or executive order to
close.
Pursuant to the terms of the Contract, the Contracting Stockholder is
obligated to deliver to the Trust on the Business Day immediately preceding the
Exchange Date the aggregate number or amount of each type of Reference Security
and other property constituting part of the Reference Property required by the
Trust in order to exchange all of the STRYPES (including any STRYPES issued
pursuant to the over-allotment option granted by the Trust to the Underwriters
and STRYPES issued in connection with the formation of the Trust) on the
Exchange Date in accordance with the Trust's investment objective. To the extent
permitted by applicable law, the obligation of the Contracting Stockholder to
deliver Reference Property under the Contract may be cash settled, at the option
of the Contracting Stockholder, in whole but not in part, by delivering to the
Trust on the Business Day immediately preceding the Exchange Date, in lieu of
the number or amount of each type of Reference Property otherwise deliverable,
cash in an amount equal to the value of such Reference Property immediately
prior to the Exchange Date (the "Cash Settlement Option"). Application has been
made to the CFTC for confirmation that the Cash Settlement Option does not
contravene any applicable provisions of the Commodity Exchange Act. Under the
Contract, the Cash Settlement Option will not be exercisable by the Contracting
Stockholder unless and until the Trust receives such confirmation or another
comparable regulatory response or legislative action
11
<PAGE>
from the CFTC. In the event that the Contracting Stockholder elects to exercise
the Cash Settlement Option, Holders will receive cash on the Exchange Date. On
or prior to the sixth Business Day preceding the Exchange Date, the
Administrator will notify The Depository Trust Company (the "Depositary") and
publish a notice in THE WALL STREET JOURNAL or another daily newspaper of
national circulation stating whether the applicable percentage of the number or
amount of each type of Reference Security and other property constituting part
of the Reference Property or cash will be delivered in exchange for the STRYPES
on the Exchange Date. At the time such notice is published, the Reference
Property Value will not have been determined. If the Contracting Stockholder
elects to deliver Reference Property, Holders will be responsible for the
payment of any and all brokerage costs upon the subsequent sale thereof.
The Trust has adopted a fundamental policy as required by the Declaration of
Trust to invest at least 65% of its portfolio in the Contract. The Contract will
comprise approximately % of the Trust's initial assets. The Trust has also
adopted a fundamental policy that the Contract may not be disposed of during the
term of the Trust and that, unless the Trust dissolves prior to the Exchange
Date due to the occurrence of a "Reorganization Event" with respect to the
Company or any successor thereto, in the event that the Contracting Stockholder
exercises its option to accelerate the Contract upon the occurrence of a Tax
Event or in the event of a "Default" by the Contracting Stockholder, the U.S.
Treasury Securities may not be disposed of prior to their respective maturities.
The foregoing fundamental policies of the Trust may not be changed without the
vote of 100% in interest of the Holders.
TRUST ASSETS
The Trust's assets primarily will consist of: (i) U.S. Treasury Securities,
and (ii) the Contract. The Trust may also make certain temporary investments.
See "--Temporary Investments." For illustrative purposes only, the following
table shows the number of shares of ContiFinancial Common Stock that a Holder
would receive for each STRYPES at various Reference Property Values. The table
assumes that there will be no Reference Property adjustments as described below
under "--The Contract--Reference Property Adjustments" and, accordingly, that on
the Exchange Date the Reference Property will consist of one share of
ContiFinancial Common Stock. There can be no assurance that the Reference
Property Value will be within the range set forth below. Given the Initial Price
of $ and the Threshold Appreciation Price of $ , a Holder would
receive on the Exchange Date the following number of shares of ContiFinancial
Common Stock or amount of cash (in the event that the Contracting Stockholder
elects to exercise the Cash Settlement Option and satisfies its obligations
under the Contract with cash) per STRYPES:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
REFERENCE PROPERTY CONTIFINANCIAL
VALUE COMMON STOCK AMOUNT OF CASH
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
</TABLE>
The following table sets forth information regarding the distributions to be
received on the U.S. Treasury Securities, the portion of each year's
distributions that will constitute a return of capital for United States Federal
income tax purposes and the amount of original issue discount accruing, assuming
a yield-to-maturity accrual election, on the U.S. Treasury Securities with
respect to a Holder who acquires its
12
<PAGE>
STRYPES at the issue price from an Underwriter pursuant to the Offering. See
"Certain United States Federal Income Tax Considerations."
<TABLE>
<CAPTION>
ANNUAL GROSS ANNUAL
DISTRIBUTIONS INCLUSION OF
ANNUAL GROSS FROM U.S. ORIGINAL
DISTRIBUTIONS TREASURY ANNUAL RETURN ISSUE
FROM U.S. SECURITIES OF CAPITAL DISCOUNT IN
TREASURY PER PER INCOME PER
YEAR SECURITIES STRYPES STRYPES STRYPES
- ------------------------------------------------- ------------ ----------------- ------------- -------------
<S> <C> <C> <C> <C>
1997............................................. $ $ $ $
1998.............................................
1999.............................................
2000.............................................
</TABLE>
The annual distribution of $ per STRYPES is payable quarterly on
each , , and , commencing ,
1997. Quarterly distributions on the STRYPES will consist solely of the cash
received from the proceeds of the maturing U.S. Treasury Securities held by the
Trust. The Trust will not be entitled to any future dividends that may be
declared on the ContiFinancial Common Stock. See "Dividends and Distributions."
ENHANCED YIELD; LESS POTENTIAL FOR EQUITY APPRECIATION THAN CONTIFINANCIAL
COMMON STOCK; NO DEPRECIATION PROTECTION
Although the STRYPES will provide the Holders with a current distribution
yield (the Company has not paid any dividends on the ContiFinancial Common Stock
since its initial public offering), there is no assurance that the distribution
yield on the STRYPES will be higher than the dividend yield on the
ContiFinancial Common Stock over the term of the Trust. In addition, the
opportunity for equity appreciation afforded by an investment in the STRYPES is
less than that afforded by a direct investment in the ContiFinancial Common
Stock. The value of the Reference Property receivable by a Holder of a STRYPES
on the Exchange Date will only exceed the issue price of such STRYPES if the
Reference Property Value exceeds the Threshold Appreciation Price, which
represents an appreciation of % of the Initial Price. Moreover, because each
STRYPES will entitle the Holder to receive only % of the number or amount of
each type of Reference Security and other property constituting part of the
Reference Property if the Reference Property Value exceeds the Threshold
Appreciation Price, Holders of the STRYPES will be entitled to receive upon
exchange only % (the percentage equal to the Initial Price divided by the
Threshold Appreciation Price) of any appreciation of the value of the Reference
Property above the Threshold Appreciation Price. Holders of STRYPES will realize
the entire decline in value if the Reference Property Value is less than the
Initial Price.
THE COMPANY
The Company engages in the consumer and commercial finance business by
originating and servicing home equity loans and providing financing and asset
securitization structuring and placement services to originators of a broad
range of loans, leases and receivables. Securitization provides significant
benefits, including greater operating leverage and reduced costs of funds, in
the financing of assets such as non-conforming home equity loans, equipment
leases, home improvement loans, franchise loans, commercial/ multi-family loans,
non-prime and sub-prime auto loans and leases and timeshare loans. Through
ContiMortgage Corporation, the Company is a leading originator, purchaser,
seller and servicer of home equity loans made to borrowers whose borrowing needs
may not be met by traditional financial institutions due to credit exceptions or
other factors. Loans are made to borrowers primarily for debt consolidation,
home improvements, education or refinancing and are primarily secured by first
mortgages on one-to-four family residential properties.
13
<PAGE>
The ContiFinancial Common Stock is traded publicly on the NYSE under the
symbol "CFN". The following table sets forth the quarterly intra-day high and
low sales prices of the ContiFinancial Common Stock as reported by the NYSE
during the periods indicated.
<TABLE>
<CAPTION>
QUARTER HIGH LOW
- ------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
1996
First (from February 9, 1996).......................................... $31 1/2 $ 25 1/8
Second................................................................. 33 28
Third.................................................................. 30 3/8 22 3/4
Fourth................................................................. 39 1/4 28 5/8
1997
First (through March 7, 1997).......................................... $39 3/8 $ 33 3/8
</TABLE>
As of February 28, 1997, there were approximately 88 holders of record of
the ContiFinancial Common Stock including Cede & Co., a nominee of the
Depositary, which holds shares of ContiFinancial Common Stock on behalf of an
indeterminate number of beneficial holders. On March 7, 1997, the last price
reported on the NYSE for the ContiFinancial Common Stock was $36 7/8 per share.
The Company has not paid any dividends on the ContiFinancial Common Stock
since its initial public offering and has stated that it has no current
intention to pay cash dividends on the ContiFinancial Common Stock. As a holding
company, the ability of the Company to pay dividends is dependent upon the
receipt of dividends or other payments from its subsidiaries. Any future
determination as to the payment of dividends will be at the discretion of the
Company's Board of Directors and will depend upon the Company's operating
results, financial condition and capital requirements, contractual restrictions,
general business conditions and such other factors as the Company's Board of
Directors deems relevant. Furthermore, covenants in certain debt agreements of
the Company restrict the payment of dividends by the Company. There can be no
assurance that the Company will have earnings sufficient to pay a dividend on
ContiFinancial Common Stock or that, even if there are sufficient earnings,
dividends will be permitted under applicable law.
Holders of STRYPES will not be entitled to receive any future dividends on
the ContiFinancial Common Stock unless and until such time, if any, as the Trust
shall have delivered ContiFinancial Common Stock in exchange for STRYPES on the
Exchange Date or upon earlier dissolution of the Trust, and unless the
applicable record date for determining stockholders entitled to receive such
dividends occurs after such delivery. See "Risk Factors--No Stockholder Rights."
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Accordingly, the Company
files reports, proxy and information statements and other information with the
Securities and Exchange Commission (the "Commission"). Copies of such material
can be inspected and copied at the public reference facilities maintained by the
Commission at the address specified under "Additional Information."
THE COMPANY IS NOT AFFILIATED WITH THE TRUST, WILL NOT RECEIVE ANY OF THE
PROCEEDS FROM THE SALE OF THE STRYPES AND WILL HAVE NO OBLIGATIONS WITH RESPECT
TO THE STRYPES. THIS PROSPECTUS RELATES ONLY TO THE STRYPES OFFERED HEREBY AND
DOES NOT RELATE TO THE COMPANY OR THE CONTIFINANCIAL COMMON STOCK. THE COMPANY
HAS FILED A REGISTRATION STATEMENT ON FORM S-3 WITH THE COMMISSION WITH RESPECT
TO THE SHARES OF CONTIFINANCIAL COMMON STOCK THAT MAY BE RECEIVED BY A HOLDER OF
STRYPES ON THE EXCHANGE DATE OR UPON EARLIER DISSOLUTION OF THE TRUST. THE
PROSPECTUS OF THE COMPANY (THE "CONTIFINANCIAL PROSPECTUS") CONSTITUTING A PART
OF SUCH REGISTRATION STATEMENT INCLUDES INFORMATION RELATING TO THE COMPANY AND
THE CONTIFINANCIAL COMMON STOCK, INCLUDING CERTAIN RISK FACTORS RELEVANT TO AN
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INVESTMENT IN CONTIFINANCIAL COMMON STOCK. THE CONTIFINANCIAL PROSPECTUS IS
BEING ATTACHED HERETO AND DELIVERED TO PROSPECTIVE PURCHASERS OF STRYPES
TOGETHER WITH THIS PROSPECTUS FOR CONVENIENCE OF REFERENCE ONLY. THE
CONTIFINANCIAL PROSPECTUS DOES NOT CONSTITUTE A PART OF THIS PROSPECTUS, NOR IS
IT INCORPORATED BY REFERENCE HEREIN.
THE CONTRACT
GENERAL. Pursuant to the terms of the Contract, the Contracting Stockholder
is obligated to deliver to the Trust on the Business Day immediately preceding
the Exchange Date an aggregate number or amount of each type of Reference
Security and other property constituting part of the Reference Property equal to
the product of the Exchange Amount and the aggregate number of STRYPES then
outstanding.
To the extent permitted by applicable law, the obligation of the Contracting
Stockholder to deliver Reference Property under the Contract may be cash
settled, at the option of the Contracting Stockholder, in whole but not in part,
by delivering to the Trust on the Business Day immediately preceding the
Exchange Date, in lieu of the aggregate number or amount of each type of
Reference Security and other property otherwise deliverable, cash in an amount
(calculated to the nearest 1/100th of a dollar or, if there is not a nearest
1/100th of a dollar, then to the next higher 1/100th of a dollar) equal to the
sum, determined as of 10:00 A.M. (New York City time) on the Business Day
immediately preceding the Exchange Date, of (a) for any portion of such
Reference Property consisting of cash, the amount of such cash, without interest
thereon, (b) for any portion of such Reference Property consisting of property
other than cash or Reference Securities, the fair market value (as determined by
a nationally recognized independent investment banking firm retained for this
purpose by the Administrator) as of the third Business Day preceding the
Exchange Date of such property, and (c) for any portion of such Reference
Property consisting of a Reference Security (except as described under
"Reference Property Adjustments" below), an amount equal to the average Closing
Price per unit of such Reference Security on the 20 Trading Days immediately
prior to, but not including, the second Trading Day preceding the Exchange Date
multiplied by the number of units of such Reference Security constituting part
of the Reference Property.
REFERENCE PROPERTY ADJUSTMENTS. The Reference Property is subject to
adjustment if an issuer of a Reference Security shall: (i) subdivide or split
the outstanding units of such Reference Security into a greater number of units;
(ii) combine the outstanding units of such Reference Security into a smaller
number of units; (iii) issue by reclassification of units of such Reference
Security any units of another security of such issuer; (iv) issue rights or
warrants to all holders of such Reference Security entitling them, for a period
expiring prior to the fifteenth calendar day following the Exchange Date, to
subscribe for or purchase any of its securities or other property (other than
rights to purchase units of such Reference Security pursuant to a plan for the
reinvestment of dividends or interest); or (v) pay a dividend or make a
distribution to all holders of such Reference Security of cash, securities or
other property (excluding any cash dividend on any Reference Security consisting
of capital stock that does not constitute an Extraordinary Cash Dividend (as
defined below), excluding any payment of interest on any Reference Security
consisting of an evidence of indebtedness and excluding any dividend or
distribution referred to in clause (i), (ii), (iii) or (iv) above) or issue to
all holders of such Reference Security rights or warrants to subscribe for or
purchase any of its securities or other property (other than rights to purchase
units of such Reference Security pursuant to a plan for the reinvestment of
dividends or interest and rights referred to in clause (iv) above) (any of the
foregoing cash, securities or other property or rights or warrants are referred
to as the "Distributed Assets") (any such event described in clause (i), (ii),
(iii), (iv) or (v), a "Dilution Event").
In the case of the Dilution Events referred to in clauses (i), (ii) and
(iii) above, the Reference Property shall be adjusted to include the number of
units of such Reference Security and/or security of such issuer which a holder
of units of such Reference Security would have owned or been entitled to receive
15
<PAGE>
immediately following any such event had such holder held, immediately prior to
such event, the number of units of such Reference Security constituting part of
the Reference Property immediately prior to such event. Each such adjustment
shall become effective immediately after the effective date for such
subdivision, split, combination or reclassification, as the case may be. Each
such adjustment shall be made successively.
In the case of the Dilution Event referred to in clause (iv) above, the
Reference Property shall be adjusted to include an amount in cash equal to the
fair market value (determined as described below), as of the fifth Business Day
(except as provided below) following the date on which such rights or warrants
are received by securityholders entitled thereto (the "Receipt Date"), of each
such right or warrant multiplied by the product of (A) the number of such rights
or warrants issued for each unit of such Reference Security and (B) the number
of units of such Reference Security constituting part of the Reference Property
on the date of issuance of such rights or warrants, immediately prior to such
issuance, without interest thereon. For purposes of the foregoing, the fair
market value of each such right or warrant shall be the quotient of (x) the
highest net bid, as of approximately 10:00 A.M., New York City time, on the
fifth Business Day following the Receipt Date for settlement three Business Days
later, by a recognized securities dealer in The City of New York selected by or
on behalf of the Administrator from three (or such fewer number of dealers as
may be providing such bids) such recognized dealers selected by or on behalf of
the Administrator), for the purchase by such quoting dealer of the number of
rights or warrants (the "Aggregate Number") that a holder of such Reference
Security would receive if such holder held, as of the record date for
determination of stockholders entitled to receive such rights or warrants, a
number of units of such Reference Security equal to the product of (1) the
aggregate number of outstanding STRYPES as of such record date and (2) the
number of units of such Reference Security constituting part of the Reference
Property, divided by (y) the Aggregate Number. Each such adjustment shall become
effective on the fifth Business Day following the Receipt Date of such rights or
warrants. If for any reason the Administrator is unable to obtain the required
bid on the fifth Business Day following the Receipt Date, it shall attempt to
obtain such bid at successive intervals of three months thereafter and on the
third Business Day prior to the Exchange Date until it is able to obtain the
required bid or, if earlier, until the third Business Day prior to the Exchange
Date. From the date of issuance of such rights or warrants until the required
bid is obtained or those efforts end on the third Business Day prior to the
Exchange Date, the Reference Property shall include the number of such rights or
warrants issued for each unit of such Reference Security multiplied by the
number of units of such Reference Security constituting part of the Reference
Property on the date of issuance of such rights or warrants, immediately prior
to such issuance, and such rights or warrants constituting part of the Reference
Property shall be deemed for all purposes hereof to have a fair market value of
zero.
In the case of the Dilution Event referred to in clause (v) above, the
Reference Property shall be adjusted to include, from and after such dividend,
distribution or issuance, (x) in respect of that portion, if any, of the
Distributed Assets consisting of cash, the amount of such Distributed Assets
consisting of cash received for each unit of such Reference Security multiplied
by the number of units of such Reference Security constituting part of the
Reference Property on the date of such dividend, distribution or issuance,
immediately prior to such dividend, distribution or issuance, without interest
thereon, plus (y) in respect of that portion, if any, of the Distributed Assets
which are other than cash, the number or amount of each type of Distributed
Assets other than cash received with respect to each unit of such Reference
Security multiplied by the number of units of such Reference Security
constituting part of the Reference Property on the date of such dividend,
distribution or issuance, immediately prior to such dividend, distribution or
issuance.
An "Extraordinary Cash Dividend" means, with respect to any consecutive
12-month period, the amount, if any, by which the aggregate amount of all cash
dividends on any Reference Security consisting of capital stock occurring in
such 12-month period (or, if such Reference Security was not outstanding at the
commencement of such 12-month period, occurring in such shorter period during
which such
16
<PAGE>
Reference Security was outstanding) exceeds on a per share basis 10% of the
average of the Closing Prices per share of such Reference Security over such
12-month period (or such shorter period during which such Reference Security was
outstanding); provided that, for purposes of the foregoing definition, the
amount of cash dividends paid on a per share basis will be appropriately
adjusted to reflect the occurrence during such period of any stock dividend or
distribution of shares of capital stock of the issuer of such Reference Security
or any subdivision, split, combination or reclassification of shares of such
Reference Security.
In the event of (A) any consolidation or merger of an issuer of a Reference
Security with or into another entity (other than a merger or consolidation in
which such issuer is the continuing corporation and in which the Reference
Security outstanding immediately prior to the consolidation or merger is not
exchanged for cash, securities or other property of such issuer or another
entity), (B) any sale, transfer, lease or conveyance to another corporation of
the property of an issuer of a Reference Security as an entirety or
substantially as an entirety, (C) any statutory exchange of securities of an
issuer of a Reference Security with another entity (other than in connection
with a merger or acquisition) or (D) any liquidation, dissolution, winding up or
bankruptcy of an issuer of a Reference Security (excluding any distribution in
such Dilution Event referred to in clause (v) above) (any such event described
in clause (A), (B), (C) or (D), a "Reorganization Event"), the Reference
Property shall be adjusted to include, from and after the effective date for
such Reorganization Event, in lieu of the number of units of such Reference
Security constituting part of the Reference Property immediately prior to the
effective date for such Reorganization Event, the amount or number of any cash,
securities and/or other property owned or received in such Reorganization Event
with respect to each unit of such Reference Security multiplied by the number of
units of such Reference Security constituting part of the Reference Property
immediately prior to the effective date for such Reorganization Event.
The Administrator is required, within ten Business Days following the
occurrence of an event that requires an adjustment to the Reference Property (or
if the Administrator is not aware of such occurrence, as soon as practicable
after becoming so aware), to provide written notice to the Holders of the
occurrence of such event and a statement in reasonable detail setting forth the
amount or number of each type of Reference Security and other property then
constituting part of the Reference Property.
No adjustments to the Reference Property will be made for certain other
events, such as offerings of ContiFinancial Common Stock by the Company for cash
or in connection with acquisitions. Likewise, no adjustments to the Reference
Property will be made for any sales of ContiFinancial Common Stock by the
Contracting Stockholder.
REORGANIZATION EVENTS CAUSING A DISSOLUTION OF THE TRUST. Notwithstanding
anything to the contrary contained in the Contract, if any Reorganization Event
with respect to the Company, or any surviving entity or subsequent surviving
entity of the Company (a "Company Successor"), occurs, the Contracting
Stockholder's obligations under the Contract shall be automatically accelerated
and the Contracting Stockholder shall be obligated to deliver to the Trust, on
the tenth Business Day after the effective date for such Reorganization Event
(the "Early Settlement Date"), the aggregate number or amount of each type of
Reference Security and other property constituting part of the Reference
Property that would be required to be delivered on such date under the Contract
if the Exchange Date were redefined to be the Early Settlement Date.
IF A REORGANIZATION EVENT WITH RESPECT TO THE COMPANY OR ANY COMPANY
SUCCESSOR OCCURS, THE TRUST'S ASSETS (OTHER THAN ASSETS RECEIVED PURSUANT TO THE
CONTRACT) WILL BE LIQUIDATED, THE NET ASSETS OF THE TRUST WILL BE DISTRIBUTED
PRO RATA TO THE HOLDERS AND THE TERM OF THE TRUST WILL EXPIRE. In such event,
the U.S. Treasury Securities will be sold by the Trust, and the proceeds
therefrom will be distributed along with Reference Property received under the
Contract on the Early Settlement Date after providing for any expenses of the
Trust.
ACCELERATION UPON TAX EVENT. Pursuant to the terms of the Contract, the
Contracting Stockholder's obligations under the Contract may be accelerated, at
the option of the Contracting Stockholder, in whole
17
<PAGE>
but not in part, at any time from and after the date (the "Tax Event Date") on
which a Tax Event (as defined below) shall occur at a price per STRYPES (the
"Tax Event Acceleration Price") equal to (a) an amount of cash equal to the sum
of (i) all accumulated and unpaid distributions on such STRYPES to the date
fixed for acceleration (the "Tax Event Acceleration Date"), (ii) the sum of all
distributions on such STRYPES due after the Tax Event Acceleration Date and on
or prior to the Exchange Date and (iii) $ (equal to the distributions
payable on such STRYPES for one year), minus (b) the Liquidation Value (as
defined below), plus (c) a number or amount of each type of Reference Security
and other property constituting part of the Reference Property that would be
required to be delivered on such date under the Contract if the Exchange Date
were redefined to be the Tax Event Acceleration Date.
A "Tax Event" means that the Contracting Stockholder shall have delivered to
the Trust an opinion (the "Tax Event Opinion") from independent tax counsel
experienced in such matters to the effect that, as a result of (a) any amendment
to, or change in the laws (or any regulations thereunder) of the United States
or any taxing authority thereof or therein or (b) any amendment to, or change
in, an interpretation or application of such laws or regulations by any
legislative body, court, governmental agency or regulatory authority, enacted or
promulgated, or which interpretation is issued or which action is taken, on or
after the date of this Prospectus, there is more than an insubstantial risk
that, by reason of the Contracting Stockholder having entered into the Contract,
the Contracting Stockholder would be required to recognize gain for United
States Federal income tax purposes with respect to shares of ContiFinancial
Common Stock deliverable under the Contract on a date that is prior to the day
immediately preceding the Exchange Date.
The "Liquidation Value" is defined as the proceeds received by the Trust
from the sale of the U.S. Treasury Securities upon the occurrence of a Tax
Event.
On February 6, 1997, the Clinton Administration proposed a series of tax law
changes as part of its Fiscal 1998 Budget proposal. These proposed tax law
changes would, among other things, require taxpayers (including corporations) to
recognize gain (but not loss) upon entering into a "constructive sale" of any
appreciated position in stock. For these purposes, a taxpayer would be treated
as making a "constructive sale" of an appreciated position in stock when the
taxpayer (or, in limited circumstances, a person related to the taxpayer)
substantially eliminates risk of loss and opportunity for gain by entering into
one or more positions with respect to the same or substantially identical
property. The proposal would apply to constructive sales entered into after
January 12, 1996, and before the date of enactment of the proposal if the
transaction resulting in the "constructive sale" remains open 30 days after the
date of enactment of the proposal. Under the proposal, the "constructive sale"
would be deemed to occur with respect to such pre-enactment transactions on the
date that is 30 days after the date of enactment. In addition, on February 26,
1997, Rep. Barbara Kennelly introduced a bill proposing certain tax law changes
that are similar to the Clinton Administration's proposal. However, under Rep.
Kennelly's proposal, a taxpayer would be treated as making a "constructive sale"
of an appreciated position in stock when the taxpayer (or, in limited
circumstances, a person related to the taxpayer) enters into a forward contract
(including a fully or partially prepaid forward contract) to deliver the same or
substantially identical property. The effective dates contained in Rep.
Kennelly's proposal are substantially the same as the effective dates contained
in the Clinton Administration's proposal. Thus, if either of these proposals are
ultimately adopted in their current form on a date that is 32 or more days prior
to the Exchange Date, such enactment could result in a Tax Event. Furthermore,
if there are future legislative developments such that as a result thereof one
of these proposals or a provision with similar effect is adopted and effective
for transactions or positions entered into on or prior to the Exchange Date,
such legislative developments could result in a Tax Event. It cannot be
predicted whether or not these proposed tax law changes (or a provision with
similar effect) will ultimately become law. Moreover, it cannot be predicted
whether or not any other future change in the tax law will occur which could
give rise to a Tax Event, nor can it be predicted whether the Contracting
Stockholder will elect to cause a Tax Event by delivering the Tax Event Opinion
to the Trust in the event that a change in the tax law occurs which could give
rise to a Tax Event.
18
<PAGE>
The Administrator will provide notice of the Contracting Stockholder's
election to exercise its acceleration option to Holders of record of the STRYPES
not less than nor more than calendar days prior to the related Tax
Event Acceleration Date. Such notice will state the following and may contain
such other information as the Administrator deems advisable: (a) the Tax Event
Acceleration Date and (b) that distributions will cease to accumulate on the
STRYPES on the Tax Event Acceleration Date. Any such notice will be provided by
mail, sent to each Holder of record at such Holder's address as it appears on
the register for the STRYPES, first class, postage prepaid. At or prior to the
mailing of such notice of acceleration, the Administrator will publish a public
announcement in THE WALL STREET JOURNAL or another daily newspaper of national
circulation. At the time such announcement is published, neither the Reference
Property Value nor the Liquidation Value will have been determined.
COLLATERAL ARRANGEMENTS; ACCELERATION. Pursuant to a Security and Pledge
Agreement among the Contracting Stockholder, the Trust and The Chase Manhattan
Bank, as collateral agent (the "Collateral Agent"), the Contracting
Stockholder's obligations under the Contract will be secured by a security
interest in the maximum number or amount of each type of Reference Security and
other property constituting part of the Reference Property (initially shares of
ContiFinancial Common Stock) deliverable by the Contracting Stockholder under
the Contract. The Collateral Agent will promptly pay over to the Contracting
Stockholder any dividends, interest, principal or other payments received by the
Collateral Agent in respect of any collateral pledged by the Contracting
Stockholder, unless the Contracting Stockholder is in "Default" or unless such
dividends, interest, principal or other payments constitute part of the
Reference Property. The Contracting Stockholder shall have the right to vote any
pledged units of any Reference Security for so long as such units are owned by
it and pledged under the Security and Pledge Agreement.
A "Collateral Event of Default" under the Security and Pledge Agreement
shall mean, at any time, failure of the collateral pledged by the Contracting
Stockholder to consist of at least the maximum number or amount of each type of
Reference Security and other property constituting part of the Reference
Property deliverable by the Contracting Stockholder under the Contract.
The occurrence of a Collateral Event of Default under the Security and
Pledge Agreement or the bankruptcy or insolvency of the Contracting Stockholder
(each such event, a "Default") will cause an automatic acceleration of the
Contracting Stockholder's obligations under the Contract. In any such event, the
Contracting Stockholder will become obligated to deliver a number or amount of
each type of Reference Security and other property constituting part of the
Reference Property, allocated as proportionately as practicable, having an
aggregate value equal to the "Aggregate Acceleration Value" of the Contract. The
Aggregate Acceleration Value will be based on an "Acceleration Value" determined
by the Administrator on the basis of quotations from independent dealers. Each
quotation will be for an amount that would be paid to the relevant dealer in
consideration of an agreement between the Trust and such dealer that would have
the effect of preserving the Trust's rights to receive the number or amount of
each type of Reference Security and other property constituting part of the
Reference Property under a portion of the Contract that corresponds to 1,000 of
the STRYPES offered hereby. The Administrator will request quotations from four
nationally recognized independent dealers on or as soon as reasonably
practicable following the date of acceleration. If four quotations are provided,
the Acceleration Value will be the arithmetic mean of the two quotations
remaining after disregarding the highest and the lowest quotations. If two or
three quotations are provided, the Acceleration Value will be the arithmetic
mean of such quotations. If one quotation is provided, the Acceleration Value
will be such quotation. The Aggregate Acceleration Value will be computed by
dividing the Acceleration Value by 1,000 and multiplying the quotient by the
aggregate number of STRYPES then outstanding, except that, if no quotations are
provided, the Aggregate Acceleration Value will be the value of the aggregate
number or amount of each type of Reference Security and other property
constituting part of the Reference Property that would be required to be
delivered on such date under the Contract if the Exchange Date were redefined to
be the acceleration date. Upon the occurrence of a Default, the number or amount
of each type of Reference
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<PAGE>
Security and other property constituting part of the Reference Property
deliverable for each STRYPES will be based solely on the Aggregate Acceleration
Value described above for the Contract.
For purposes of the Security and Pledge Agreement, unless otherwise
specifically provided, the value of a number or amount of any type of Reference
Property shall be (a) for any Reference Property consisting of cash, the amount
of such cash at the time of valuation, (b) for any Reference Property consisting
of property other than cash or Reference Securities, the fair market value (as
determined by a nationally recognized independent banking firm retained for this
purpose by the Collateral Agent) as of the time of valuation of such property,
and (c) for any Reference Property consisting of a Reference Security, an amount
equal to the market price of a unit of such Reference Security at the time of
valuation multiplied by the number of units of such Reference Security then
being valued.
The Collateral Agent is a "financial institution" for purposes of Sections
555 and 101(22) of Title 11 of the United States Code (the "Bankruptcy Code").
The Trust believes that the Collateral Agent will be the agent and custodian for
the Trust such that the Trust will be a "financial institution" as defined in
Section 101(22) of the Bankruptcy Code. Upon any acceleration, the Collateral
Agent will be required to deliver to the Trust, for distribution PRO RATA to the
Holders, the Aggregate Acceleration Value in the form of Reference Property then
pledged. See "--Trust Dissolution."
FRACTIONAL INTERESTS. No fractional units of any Reference Security will be
delivered to the Trust if the Contracting Stockholder satisfies its obligations
under the Contract by delivering Reference Property. In lieu of any fractional
unit otherwise deliverable to the Trust in respect of the Contracting
Stockholder's obligations under the Contract, the Trust shall be entitled to
receive an amount in cash equal to the value of such fractional unit based on
the average Closing Price per unit of such Reference Security on the 20 Trading
Days immediately prior to, but not including, the second Trading Day preceding
the Exchange Date.
To the extent practicable, the Contracting Stockholder will deliver to the
Trust fractional interests of any Reference Property other than cash or a
Reference Security if the Contracting Stockholder satisfies its obligations
under the Contract by delivering Reference Property. If such delivery is not
practicable, in lieu of delivering any such fractional interest otherwise
deliverable in respect of the Contracting Stockholder's obligations under the
Contract, the Trust shall be entitled to receive an amount in cash equal to the
value of such fractional interest based on the fair market value (as determined
by a nationally recognized independent investment banking firm retained for this
purpose by the Administrator) as of 10:00 A.M. (New York City time) on the third
Business Day preceding the Exchange Date of such Reference Property other than
cash or a Reference Security.
DESCRIPTION OF CONTRACTING STOCKHOLDER. The Contracting Stockholder is
Continental Grain Company. Specific information regarding the holdings of
ContiFinancial Common Stock by the Contracting Stockholder is included in the
accompanying prospectus of the Company with respect to the shares of
ContiFinancial Common Stock which may be received by a Holder of STRYPES on the
Exchange Date or upon earlier dissolution of the Trust.
PURCHASE PRICE. The purchase price under the Contract is equal to
$ in the aggregate and is payable to the Contracting Stockholder by the
Trust on or about , 1997. No other consideration is payable by the
Trust to the Contracting Stockholder in connection with its acquisition of the
Contract or the performance of the Contract by the Contracting Stockholder.
The Contract will be valued by the Trust at fair value as determined in good
faith at the direction of the Trustees (if necessary, through consultation with
accountants, bankers and other specialists). See "Net Asset Value."
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<PAGE>
THE U.S. TREASURY SECURITIES
The Trust will purchase and hold a series of zero-coupon U.S. Treasury
Securities with face amounts and maturities corresponding to the amounts and
payment dates of the distributions payable with respect to the STRYPES. Up to
% of the Trust's total assets may be invested in these U.S. Treasury
Securities. In the event that the Contract is accelerated as described under
"--Reorganization Event Causing a Dissolution of the Trust" or "--Collateral
Arrangements; Acceleration," then any such U.S. Treasury Securities then held in
the Trust shall be liquidated by the Administrator and distributed PRO RATA to
the Holders, together with amounts distributed upon acceleration.
TEMPORARY INVESTMENTS
For cash management purposes, the Trust may invest the proceeds of the U.S.
Treasury Securities and any other cash held by the Trust in short-term
obligations of the U.S. Government maturing no later than the Business Day
preceding the next following distribution date.
TRUST DISSOLUTION
The Trust will dissolve on or shortly after the Exchange Date, except if
dissolved earlier under certain limited circumstances. Although the Trust has
adopted a fundamental policy that it will not dispose of the Contract prior to
the Exchange Date, under certain circumstances the Contract may terminate prior
to the Exchange Date. In the event that the Company or any Company Successor is
the subject of a Reorganization Event, the Contracting Stockholder exercises its
option to accelerate the Contract upon the occurrence of a Tax Event or a
Default shall have occurred with respect to the Contracting Stockholder, the
Trust's assets (other than assets received pursuant to the Contract) would be
liquidated, the net assets of the Trust would be distributed PRO RATA to the
Holders and the term of the Trust would expire. See "--The
Contract--Reorganization Events Causing a Dissolution of the Trust,"
"--Acceleration Upon Tax Event" and "--Collateral Arrangements; Acceleration."
FRACTIONAL INTERESTS
No fractional units of any Reference Security, or fractional interests of
any Reference Property other than cash or a Reference Security, will be
distributed by the Trust to Holders of STRYPES on the Exchange Date or upon
earlier dissolution of the Trust. All fractional units or interests to which
Holders of STRYPES would otherwise be entitled on the Exchange Date or upon
earlier dissolution of the Trust will be aggregated and liquidated by the
Administrator and, in lieu of the fractional unit or interest to which a Holder
would otherwise have been entitled in respect of the total number of STRYPES
held by such Holder, such Holder will receive its PRO RATA portion of the
proceeds from such liquidation (net of any brokerage or related expenses).
INVESTMENT RESTRICTIONS
The Trust has adopted a fundamental policy that the Trust may not purchase
any securities or instruments other than the U.S. Treasury Securities, the
Contract and any Reference Security received pursuant to the Contract and, for
cash management purposes, short-term obligations of the U.S. Government; issue
any securities or instruments except for the STRYPES; make short sales or
purchase securities on margin; write put or call options; borrow money;
underwrite securities; purchase or sell real estate, commodities or commodities
contracts; or make loans. The Trust has adopted a fundamental policy to invest
at least 65% of its portfolio in the Contract. The Trust has also adopted a
fundamental policy that the Contract may not be disposed of during the term of
the Trust and that, unless the Trust dissolves prior to the Exchange Date due to
the occurrence of a Reorganization Event with respect to the Company or any
Company Successor, in the event that the Contracting Stockholder exercises its
option to accelerate
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<PAGE>
the Contract upon the occurrence of a Tax Event or in the event of a Default by
the Contracting Stockholder, the U.S. Treasury Securities may not be disposed of
prior to their respective maturities.
Because of the foregoing limitations, the Trust's investments will be
concentrated initially in the consumer and commercial finance industry, which is
the industry in which the Company currently operates. However, to the extent
that in the future the Company diversifies its operations into one or more other
industries, or the Reference Property includes a Reference Security of an issuer
which operates in another industry, the Trust's investments will be less
concentrated in the consumer and commercial finance industry.
22
<PAGE>
RISK FACTORS
NO ACTIVE PORTFOLIO MANAGEMENT
It is a fundamental policy of the Trust that the Contract may not be
disposed of during the term of the Trust and that, unless the Trust dissolves
prior to the Exchange Date due to the occurrence of a Reorganization Event with
respect to the Company or any Company Successor, in the event that the
Contracting Stockholder exercises its option to accelerate the Contract upon the
occurrence of a Tax Event or in the event of a Default by the Contracting
Stockholder, the U.S. Treasury Securities may not be disposed of prior to their
respective maturities. As a result, the Trust will continue to hold the Contract
despite any significant decline in the value of the Reference Property,
including the ContiFinancial Common Stock, or adverse changes in the financial
condition of the issuer of any Reference Security, including the Company. The
Trust will not be managed like a typical closed-end investment company.
ABSENCE OF TRADING HISTORY; MARKETABILITY; POSSIBILITY OF THE STRYPES TRADING AT
A DISCOUNT FROM NET ASSET VALUE
The STRYPES have no trading history and it is not possible to predict how
they will trade in the secondary market. The trading price of the STRYPES may
vary considerably prior to the Exchange Date due to, among other things,
fluctuations in trading prices of the ContiFinancial Common Stock (which may
occur due to changes in the Company's financial condition, results of operations
or prospects, or because of complex and interrelated political, economic,
financial and other factors that can affect the capital markets generally, the
stock exchanges or quotation systems on which the ContiFinancial Common Stock is
traded and the market segment of which the Company is a part) and fluctuations
in interest rates and other factors that are difficult to predict and beyond the
Trust's control.
The Underwriters currently intend, but are not obligated, to make a market
in the STRYPES. There can be no assurance that a secondary market will develop
or, if a secondary market does develop, that it will provide the Holders of the
STRYPES with liquidity of investment or that it will continue for the life of
the STRYPES. The STRYPES have been approved for listing on the AMEX, subject to
official notice of issuance. There can be no assurance that the STRYPES will not
later be delisted or that trading in the STRYPES on the AMEX will not be
suspended. In the event of a delisting or suspension of trading, the Trust will
apply for listing of the STRYPES on another national securities exchange or for
quotation on another trading market. If the STRYPES are not listed or traded on
any securities exchange or trading market, or if trading of the STRYPES is
suspended, pricing information for the STRYPES may be more difficult to obtain,
and the price and liquidity of the STRYPES may be adversely affected.
The Trust is a newly organized closed-end investment company with no
previous operating history. Shares of closed-end investment companies frequently
trade at a discount from their net asset value, which is a risk separate and
distinct from the risk that the Trust's net asset value will decrease. The Trust
cannot predict whether the STRYPES will trade at, below or above their net asset
value. The risk of purchasing investments that might trade at a discount is more
pronounced for investors who wish to sell their investments in a relatively
short period of time after completion of the Trust's initial public offering
because for those investors realization of a gain or loss on their investments
is likely to be more dependent upon the existence of a premium or discount than
upon portfolio performance. The STRYPES are not subject to redemption.
REFERENCE PROPERTY ADJUSTMENTS
The Reference Property (or, in the event that the Contracting Stockholder
elects to exercise the Cash Settlement Option, the amount of cash) that the
Trust is entitled to receive pursuant to the Contract is subject to adjustment
for certain events arising from, among others, a merger or consolidation in
which the Company is not the surviving or resulting corporation and the
liquidation, dissolution, winding up or bankruptcy of the Company, as well as
stock splits and combinations, stock dividends and certain other
23
<PAGE>
actions of the Company that modify its capital structure. See "Investment
Objective and Policies--The Contract--Reference Property Adjustments." Such
Reference Property (or the amount of cash) to be received by the Trust pursuant
to the Contract immediately prior to the Exchange Date will not be adjusted for
other events, such as offerings of ContiFinancial Common Stock for cash or in
connection with acquisitions.
The Contracting Stockholder currently owns approximately 81% of the
outstanding ContiFinancial Common Stock. Concurrently with the offering of the
STRYPES, the Company is separately offering 2,800,000 shares of ContiFinancial
Common Stock (3,220,000 shares if the underwriters' over-allotment options are
exercised in full) (the "ContiFinancial Offering"). Upon completion of the
ContiFinancial Offering, the Contracting Stockholder will own approximately 76%
of the outstanding ContiFinancial Common Stock (approximately 75% if the
underwriters' over-allotment options are exercised in full). ContiFinancial is
not restricted from issuing additional shares of ContiFinancial Common Stock
during the term of the Trust and, because the Contracting Stockholder will
continue to exercise a controlling influence over the business and affairs of
the Company upon completion of the ContiFinancial Offering, any such decision to
issue additional shares of ContiFinancial Common Stock will be influenced by the
Contracting Stockholder. In addition, the Contracting Stockholder is not
precluded from selling shares of ContiFinancial Common Stock, either pursuant to
Rule 144 under the Securities Act or by causing the Company to register such
shares. Neither the Company nor the Contracting Stockholder has any obligation
to consider the interests of the Holders of the STRYPES for any reason.
Additional issuances or sales may materially and adversely affect the price of
the ContiFinancial Common Stock and, because of the relationship of the
percentage of the Reference Property (or the amount of cash) to be received on
the Exchange Date to the price of the ContiFinancial Common Stock, such other
events may materially and adversely affect the trading price of the STRYPES.
There can be no assurance that the Company will not take any of the foregoing
actions, or that it will not make offerings of, or that major shareholders
(including the Contracting Stockholder) will not sell any, ContiFinancial Common
Stock in the future, or as to the amount of any such offerings or sales.
LIMITED TERM
The term of the Trust will expire on or shortly after the Exchange Date,
unless the Trust is dissolved earlier under certain limited circumstances. On or
shortly after the Exchange Date, the Trust will distribute the Reference
Property or cash received by the Trust pursuant to the Contract and other net
assets held by the Trust PRO RATA to the Holders and dissolve shortly
thereafter. In the event that the Company or any Company Successor thereto is
the subject of a Reorganization Event, the Contracting Stockholder exercises its
option to accelerate the Contract upon the occurrence of a Tax Event or a
Default shall have occurred with respect to the Contracting Stockholder, the
Trust's assets (other than assets received pursuant to the Contract) would be
liquidated, the net assets of the Trust would be distributed PRO RATA to the
Holders and the term of the Trust would expire.
NON-DIVERSIFIED PORTFOLIO
The Trust's assets will consist almost entirely of the Contract and the U.S.
Treasury Securities. As a result, investments in the Trust may be subject to
greater risk than would be the case for a company with a more diversified
portfolio of investments.
COMPARISON TO OTHER EQUITY SECURITIES; RELATIONSHIP TO CONTIFINANCIAL COMMON
STOCK
The terms of the STRYPES are similar to those of ordinary equity securities
in that the value of the Reference Property (or, in the event that the
Contracting Stockholder elects to exercise the Cash Settlement Option, the
amount of cash) that a Holder of a STRYPES will receive on the Exchange Date is
not fixed, but is based on the Reference Property Value (see "Investment
Objective and Policies-- General" and "--The Contract"). THERE CAN BE NO
ASSURANCE THAT SUCH AMOUNT RECEIVABLE BY THE HOLDER
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<PAGE>
ON THE EXCHANGE DATE WILL BE EQUAL TO OR GREATER THAN THE ISSUE PRICE PAID FOR
THE STRYPES. IF THE REFERENCE PROPERTY VALUE IS LESS THAN THE INITIAL PRICE,
SUCH AMOUNT RECEIVABLE ON THE EXCHANGE DATE WILL BE LESS THAN THE ISSUE PRICE
PAID FOR THE STRYPES, IN WHICH CASE AN INVESTMENT IN STRYPES WILL RESULT IN A
LOSS. ACCORDINGLY, A HOLDER OF STRYPES ASSUMES THE RISK THAT THE MARKET VALUE OF
THE CONTIFINANCIAL COMMON STOCK MAY DECLINE AND THAT SUCH DECLINE COULD BE
SUBSTANTIAL. REFERENCE IS MADE TO THE ACCOMPANYING PROSPECTUS OF THE COMPANY,
INCLUDING THE INFORMATION UNDER THE CAPTION "RISK FACTORS" THEREIN.
The trading prices of the STRYPES in the secondary market will be affected
by the trading prices of the ContiFinancial Common Stock in the secondary
market. It is impossible to predict whether the price of ContiFinancial Common
Stock will rise or fall. Trading prices of ContiFinancial Common Stock will be
influenced by the Company's operating results and prospects and by economic,
financial and other factors and market conditions that can affect the capital
markets generally, including the level of, and fluctuations in, the trading
prices of stocks generally and sales of substantial amounts of ContiFinancial
Common Stock in the market subsequent to the offering of the STRYPES or the
perception that such sales could occur.
LIMITATIONS ON OPPORTUNITY FOR EQUITY APPRECIATION; POTENTIAL LOSSES
The opportunity for equity appreciation afforded by an investment in the
STRYPES is less than the opportunity for equity appreciation afforded by a
direct investment in the ContiFinancial Common Stock because the amount
receivable by a Holder of a STRYPES on the Exchange Date will only exceed the
issue price of such STRYPES if the Reference Property Value exceeds the
Threshold Appreciation Price (which represents an appreciation of % over the
Initial Price). Moreover, each STRYPES will entitle the Holder to receive on the
Exchange Date only % (the percentage equal to the Initial Price divided by
the Threshold Appreciation Price) of any appreciation of the value of the
Reference Property above the Threshold Appreciation Price. See "Investment
Objective and Policies--The Contract." Because the price of the Reference
Property is subject to market fluctuations, the value of the Reference Property
(or, in the event that the Contracting Stockholder elects the Cash Settlement
Option, the amount of cash) received by the Trust on the Business Day
immediately preceding the Exchange Date, determined as described herein, may be
more or less than the issue price paid for the STRYPES.
NO STOCKHOLDER RIGHTS
Holders of the STRYPES will not be entitled to any rights with respect to
the Reference Property (including, without limitation, voting rights and rights
to receive any dividends or other distributions in respect of any Reference
Security) unless and until such time, if any, as the Trust shall have delivered
the Reference Property in exchange for STRYPES on the Exchange Date or upon
earlier dissolution of the Trust, and unless the applicable record date, if any,
for the exercise of such rights occurs after such delivery. For example, in the
event that an amendment is proposed to the Restated Certificate of Incorporation
or By-Laws of the Company and the record date for determining the stockholders
of record entitled to vote on such amendment occurs prior to such delivery,
Holders of the STRYPES will not be entitled to vote on such amendment.
The Contracting Stockholder is not responsible for the determination or
calculation of the amount receivable by Holders of the STRYPES on the Exchange
Date or upon earlier dissolution of the Trust. The Contract between the Trust
and the Contracting Stockholder is a commercial transaction and does not create
any rights in, or for the benefit of, any third party, including any Holder of
STRYPES.
RISK RELATING TO BANKRUPTCY OF CONTRACTING STOCKHOLDER
The Trust believes that the Contract will constitute a "securities contract"
for purposes of the Bankruptcy Code, performance of which would not under
Section 555 of the Bankruptcy Code be subject to the automatic stay provisions
of the Bankruptcy Code in the event of bankruptcy of the Contracting
Stockholder. It is, however, possible that the Contract will be determined not
to qualify as a "securities
25
<PAGE>
contract" or other protected transaction under Sections 556 and 560 of the
Bankruptcy Code for this purpose (or that there will be a delay while the
bankruptcy court considers such issue), in which case the bankruptcy of the
Contracting Stockholder may cause a delay in settlement of the Contract with the
Contracting Stockholder, or otherwise subject the Contract to the bankruptcy
proceedings, which could adversely affect the time of exchange or, as a result,
the amount received by the Holders in respect of the STRYPES.
ACCELERATION UPON TAX EVENT
The Contract provides that, from and after a Tax Event Date, the Contracting
Stockholder's obligations thereunder may be accelerated, at the option of the
Contracting Stockholder, in whole but not in part, at the Tax Event Acceleration
Price. In such event, the U.S. Treasury Securities will be sold by the Trust,
and the proceeds therefrom will be distributed along with the Tax Event
Acceleration Price received under the Contract after providing for any expenses
of the Trust. On February 6, 1997, the Clinton Administration proposed a series
of tax law changes as part of its Fiscal 1998 Budget proposal. These proposed
tax law changes would, among other things, require taxpayers (including
corporations) to recognize gain (but not loss) upon entering into a
"constructive sale" of any appreciated position in stock. For these purposes, a
taxpayer would be treated as making a "constructive sale" of an appreciated
position in stock when the taxpayer (or, in limited circumstances, a person
related to the taxpayer) substantially eliminates risk of loss and opportunity
for gain by entering into one or more positions with respect to the same or
substantially identical property. The proposal would apply to constructive sales
entered into after January 12, 1996, and before the date of enactment of the
proposal if the transaction resulting in the "constructive sale" remains open 30
days after the date of enactment of the proposal. Under the proposal, the
"constructive sale" would be deemed to occur with respect to such pre-enactment
transactions on the date that is 30 days after the date of enactment. In
addition, on February 26, 1997, Rep. Barbara Kennelly introduced a bill
proposing certain tax law changes that are similar to the Clinton
Administation's proposal. However, under Rep. Kennelly's proposal, a taxpayer
would be treated as making a "constructive sale" of an appreciated position in
stock when the taxpayer (or, in limited circumstances, a person related to the
taxpayer) enters into a forward contract (including a fully or partially prepaid
forward contract) to deliver the same or substanially identical property. The
effective dates contained in Rep. Kennelly's proposal are substantially the same
as the effective dates contained in the Clinton Administration's proposal. Thus,
if either of these proposals are ultimately adopted in their current form on a
date that is 32 or more days prior to the Exchange Date, such enactment could
result in a Tax Event. Furthermore, if there are future legislative developments
such that as a result thereof one of these proposals or a provision with similar
effect is adopted and effective for transactions or positions entered into on or
prior to the Exchange Date, such legislative developments could result in a Tax
Event. It cannot be predicted whether or not these proposed tax law changes (or
a provision with similar effect) will ultimately become law. Moreover, it cannot
be predicted whether or not any other future change in the tax law will occur
which could give rise to a Tax Event, nor can it be predicted whether the
Contracting Stockholder will elect to cause a Tax Event by delivering the Tax
Event Opinion to the Trust in the event that a change in the tax law occurs
which could give rise to a Tax Event.
TAX MATTERS
Holders will experience a taxable event upon the exchange of STRYPES to the
extent that the Contracting Stockholder elects to exercise the Cash Settlement
Option. Because of an absence of authority as to the proper character of any
gain or loss resulting from such a taxable event, the ultimate tax consequences
to Holders as a result of an election to exercise the Cash Settlement Option is
uncertain. Accordingly, prospective investors in the STRYPES should consult
their own tax advisers in this regard. Investors should also consult their own
tax advisers concerning the proper treatment of their PRO RATA share of the
Trust's fees and expenses, and the application of the United States Federal
income tax laws to their particular situations as well as any consequences of
the purchase, ownership and disposition of the
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<PAGE>
STRYPES arising under the laws of any other taxing jurisdiction. The tax
consequences of investing in the STRYPES are described in greater detail under
"Certain United States Federal Income Tax Considerations."
DESCRIPTION OF THE STRYPES
Each STRYPES represents a proportionate share of beneficial interest in the
Trust, and a total of 2,800,000 STRYPES will be issued in the Offering, assuming
no exercise of the Underwriters' over-allotment option. Upon liquidation of the
Trust, Holders are entitled to share PRO RATA in the net assets of the Trust
available for distribution. STRYPES have no preemptive, redemption or conversion
rights. The STRYPES, when issued and outstanding, will be fully paid and
nonassessable.
Holders are entitled to one vote for each STRYPES held on all matters to be
voted on by Holders and are not able to cumulate their votes in the election of
Trustees. The Trust intends to hold annual meetings as required by the rules of
the AMEX. The Holders have the right, upon the declaration in writing or vote of
more than two-thirds of the outstanding STRYPES, to remove a Trustee. The
Trustees will call a meeting of Holders to vote on the removal of a Trustee upon
the written request of the record Holders of 10% of the STRYPES or to vote on
other matters upon the written request of the record Holders of 51% of the
STRYPES (unless substantially the same matter was voted on during the preceding
12 months).
BOOK-ENTRY SYSTEM
The STRYPES will be issued in the form of one or more global securities (the
"Global Securities") deposited with the Depositary and registered in the name of
a nominee of the Depositary.
The Depositary has advised the Trust and the Underwriters as follows: The
Depositary is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered pursuant to Section 17A of the Exchange Act. The
Depositary was created to hold securities of persons who have accounts with the
Depositary ("participants") and to facilitate the clearance and settlement of
securities transactions among its participants in such securities through
electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of certificates. Such participants
include securities brokers and dealers, banks, trust companies and clearing
corporations. Indirect access to the Depositary's book-entry system is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly.
Upon the issuance of a Global Security, the Depositary or its nominee will
credit the respective STRYPES represented by such Global Security to the
accounts of participants. The accounts to be credited shall be designated by the
Underwriters. Ownership of beneficial interests in such Global Securities will
be limited to participants or persons that may hold interests through
participants. Ownership of beneficial interests by participants in such Global
Securities will be shown on, and the transfer of those ownership interests will
be effected only through, records maintained by the Depositary or its nominee
for such Global Securities. Ownership of beneficial interests in such Global
Securities by persons that hold through participants will be shown on, and the
transfer of that ownership interest within such participant will be effected
only through, records maintained by such participant. The laws of some
jurisdictions require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such limits and such laws may
impair the ability to transfer beneficial interests in a Global Security.
So long as the Depositary for a Global Security, or its nominee, is the
registered owner of such Global Security, such Depositary or such nominee, as
the case may be, will be considered the sole owner or holder of the STRYPES.
Except as set forth below, owners of beneficial interests in such Global
Securities will not be entitled to have the STRYPES registered in their names
and will not receive or be entitled to receive
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<PAGE>
physical delivery of the STRYPES in definitive form and will not be considered
the owners or Holders thereof.
Payment of Reference Property or amounts payable or other consideration
deliverable on exchange of, and any quarterly distributions on, STRYPES
registered in the name of or held by the Depositary or its nominee will be made
to the Depositary or its nominee, as the case may be, as the registered owner or
the holder of the Global Security. None of the Trust, any Trustee, the
Administrator, the Paying Agent or the Custodian for the STRYPES will have any
responsibility or liability for any aspect of the records relating to, or
payments made on account of, beneficial ownership interests in a Global Security
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Trust expects that the Depositary, upon receipt of any payment in
respect of a Global Security, will credit immediately participants' accounts
with payments in amounts proportionate to their respective beneficial interests
in the principal amount of such Global Security as shown on the records of the
Depositary. The Trust also expects that payments by participants to owners of
beneficial interests in such Global Security held through such participants will
be governed by standing instructions and customary practices, as is now the case
with securities held for the accounts of customers in bearer form or registered
in "street name," and will be the responsibility of such participants.
A Global Security may not be transferred except as a whole by the Depositary
to a nominee or a successor of the Depositary. If the Depositary is at any time
unwilling or unable to continue as depositary and a successor depositary is not
appointed by the Trust within ninety days, the Trust will issue STRYPES in
definitive registered form in exchange for the Global Security representing such
STRYPES. In addition, the Trust may at any time and in its sole discretion
determine not to have any STRYPES represented by one or more Global Securities
and, in such extent, will issue STRYPES in definitive form in exchange for all
of the Global Securities representing the STRYPES. Further, if the Trust so
specifies with respect to the STRYPES, an owner of a beneficial interest in a
Global Security representing STRYPES may, on terms acceptable to the Trust and
the Depositary for such Global Security, receive STRYPES in definitive form. In
any such instance, an owner of a beneficial interest in a Global Security will
be entitled to physical delivery in definitive form of STRYPES represented by
such Global Security equal in number to that represented by such beneficial
interest and to have such STRYPES registered in its name.
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TRUSTEES
The Trustees of the Trust consist of three individuals, none of whom is an
"interested person" of the Trust as defined in the Investment Company Act. The
Trustees of the Trust are responsible for the overall supervision of the
operations of the Trust and perform the various duties imposed on the trustees
of management investment companies by the Investment Company Act.
The Trustees of the Trust are:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS TITLE DURING PAST FIVE YEARS
- ------------------------------------------ ----------------------- ------------------------------
<S> <C> <C>
Donald J. Puglisi, 50 Managing Trustee Professor of Finance
Department of Finance University of Delaware
University of Delaware
Newark, DE 19716
William R. Latham III, 51 Trustee Professor of Economics
Department of Economics University of Delaware
University of Delaware
Newark, DE 19716
James B. O'Neill, 57 Trustee Professor of Economics
Center for Economic University of Delaware
Education & Entrepreneurship
University of Delaware
Newark, DE 19716
</TABLE>
COMPENSATION OF TRUSTEES
Each unaffiliated Trustee will be paid by the Contracting Stockholder, in
respect of its annual fees and anticipated out-of-pocket expenses, a one-time,
up-front fee of $10,800. The Trust's Managing Trustee will also receive an
additional up-front fee of $3,600 for serving in that capacity. The Trustees
will not receive, either directly or indirectly, any compensation, including any
pension or retirement benefits, from the Trust. None of the Trustees receives
any compensation for serving as a trustee or director of any other affiliated
investment company.
MANAGEMENT ARRANGEMENTS
PORTFOLIO MANAGEMENT AND ADMINISTRATION
The Trust will be internally managed and will not have an investment
adviser. The Trust's portfolio will not be actively managed. The Trustees of the
Trust will authorize the purchase of the Contract and the U.S. Treasury
Securities as directed by the Declaration of Trust. It is a fundamental policy
of the Trust that the Contract may not be disposed of during the term of the
Trust and that, unless the Trust dissolves prior to the Exchange Date due to the
occurrence of a Reorganization Event with respect to the Company or any Company
Successor or a Default by the Contracting Stockholder, the U.S. Treasury
Securities may not be disposed of prior to their respective maturities.
The Contracting Stockholder will pay all expenses incurred in the operation
of the Trust, including, among other things, accounting services, expenses for
legal and auditing services, taxes, costs of printing proxies, listing fees, if
any, stock certificates and shareholder reports, charges of the Custodian (as
defined below) and the Paying Agent (as defined below), expenses of registering
the STRYPES under Federal and state securities laws, Commission fees, fees and
expenses of Trustees, accounting and pricing costs, insurance, interest,
brokerage costs, litigation and other extraordinary or non-recurring expenses,
mailing and other expenses properly payable by the Trust. See "--Estimated
Expenses."
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ADMINISTRATOR
The day-to-day affairs of the Trust will be managed by The Chase Manhattan
Bank, as trust administrator pursuant to an Administration Agreement. Under the
Administration Agreement, the Trustees have delegated most of their operational
duties to the Administrator, including without limitation, the duties to: (i)
receive invoices for and pay, or cause to be paid, all expenses incurred by the
Trust; (ii) with the approval of the Trustees, engage legal and other
professional advisors (other than the independent public accountants for the
Trust); (iii) instruct the Paying Agent to pay distributions on STRYPES as
described herein; (iv) prepare and mail, file or publish all notices, proxies,
reports, tax returns and other communications and documents, and keep all books
and records, for the Trust; (v) at the direction of the Trustees, institute and
prosecute legal and other appropriate proceedings to enforce the rights and
remedies of the Trust; and (vi) make all necessary arrangements with respect to
meetings of Trustees and any meetings of Holders of STRYPES. The Administrator
will not, however, select the independent public accountants for the Trust or
sell or otherwise dispose of the Trust assets (except in connection with an
acceleration of the Contract as described under "Investment Objective and
Policies-- The Contract--Reorganization Events Causing a Dissolution of the
Trust" and "--Collateral Arrangements; Acceleration," or the settlement of the
Contract on the Business Day immediately preceding the Exchange Date).
The Administration Agreement may be terminated by either the Trust or the
Administrator upon 60 days prior written notice, except that no termination
shall become effective until a successor Administrator has been chosen and has
accepted the duties of the Administrator.
Except for its roles as Administrator, Custodian, Paying Agent, registrar
and transfer agent of the Trust, and except for its role as Collateral Agent
under the Security and Pledge Agreement, The Chase Manhattan Bank has no other
affiliation with, and is not engaged in any other transactions with, the Trust.
The address of the Administrator is 450 West 33rd Street, 15th Floor, New
York, New York 10001-2697.
CUSTODIAN
The Trust's custodian (the "Custodian") is The Chase Manhattan Bank pursuant
to a custodian agreement (the "Custodian Agreement"). In the event of any
termination of the Custodian Agreement by the Trust or the resignation of the
Custodian, the Trust must engage a new Custodian to carry out the duties of the
Custodian as set forth in the Custodian Agreement. Pursuant to the Custodian
Agreement, all net cash received by the Trust will be invested by the Custodian
in short-term U.S. Government securities maturing on or shortly before the next
quarterly distribution date. The Custodian will also act as Collateral Agent
under the Security and Pledge Agreement and will hold a perfected security
interest in the Reference Property or other assets consistent with the terms of
the Contract pledged thereunder.
PAYING AGENT
The transfer agent, registrar and paying agent (the "Paying Agent") for the
STRYPES is The Chase Manhattan Bank pursuant to a paying agent agreement (the
"Paying Agent Agreement"). In the event of any termination of the Paying Agent
Agreement by the Trust or the resignation of the Paying Agent, the Trust will
use its best efforts to engage a new Paying Agent to carry out the duties of the
Paying Agent.
INDEMNIFICATION
The Trust will indemnify each Trustee, the Administrator, the Paying Agent
and the Custodian with respect to any claim, liability, loss or expense
(including the costs and expenses of the defense against any claim or liability)
which it may incur in acting as Trustee, Administrator, Paying Agent or
Custodian, as the case may be, except in the case of willful misfeasance, bad
faith, gross negligence or reckless disregard of
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<PAGE>
their respective duties or where applicable law prohibits such indemnification.
Merrill Lynch & Co., Inc. has agreed to reimburse the Trust for any amounts it
may be required to pay as indemnification to any Trustee, the Administrator, the
Paying Agent or the Custodian. Merrill Lynch & Co., Inc. will in turn be
reimbursed by the Contracting Stockholder for all such reimbursements paid by
it.
ESTIMATED EXPENSES
At the closing of the Offering, the Contracting Stockholder will pay to each
of the Administrator, the Custodian and the Paying Agent a one-time, up-front
amount in respect of its fee and, in the case of the Administrator, certain
anticipated ongoing expenses of the Trust over the term of the Trust. The
anticipated Trust expenses to be borne by the Contracting Stockholder include,
among other things, expenses for legal and independent accountants' services,
costs of printing proxies, STRYPES certificates and Holder reports and stock
exchange fees. Organization costs of the Trust in the amount of $ and
estimated costs of the Trust in connection with the initial registration and
public offering of the STRYPES in the amount of approximately $ will be
paid by the Contracting Stockholder.
The amount payable to the Administrator in respect of the anticipated
ongoing expenses of the Trust was determined based on expense estimates made in
good faith on the basis of information currently available to the Trust,
including estimates furnished by the Trust's agents. Merrill Lynch & Co., Inc.
will pay any unanticipated operating expenses of the Trust. Merrill Lynch & Co.,
Inc. will be reimbursed by the Contracting Stockholder for all fees and expenses
of the Trust paid by it.
DIVIDENDS AND DISTRIBUTIONS
The Trust intends to distribute to Holders on a quarterly basis the proceeds
of the U.S. Treasury Securities held by the Trust. The first distribution, in
respect of the period from , 1997 until , 1997, will be made
on , 1997 to Holders of record as of , 1997, and will
equal $ per STRYPES. Thereafter, distributions will be made on
, , and of each year to Holders of record as
of each , , and , respectively. Upon
dissolution of the Trust as described in "Investment Objective and
Policies--Trust Dissolution," each Holder will share PRO RATA in any remaining
net assets of the Trust.
NET ASSET VALUE
The net asset value of the STRYPES will be calculated by the Trust no less
frequently than quarterly by dividing the value of the net assets of the Trust
(the value of its assets less its liabilities) by the total number of STRYPES
outstanding. The Trust's net asset value will be published semi-annually as part
of the Trust's semi-annual report to Holders and at such other times as the
Trustees may determine. The U.S. Treasury Securities held by the Trust will be
valued at the mean between the last current bid and asked prices or, if
quotations are not available, as determined in good faith by the Trust under the
direction of the Trustees. Short-term investments having a maturity of 60 days
or less are valued at cost with accrued interest or discount earned included in
interest receivable. The Contract will be valued at the mean of the bid prices
received by the Trust from at least three independent broker-dealer firms
unaffiliated with the Trust who are in the business of making bids on financial
instruments similar to the Contract and with terms comparable thereto.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
Set forth in full below is the opinion of Brown & Wood LLP, counsel to the
Trust, as to certain United States Federal income tax consequences of the
purchase, ownership and disposition of the STRYPES. Such opinion is based upon
laws, regulations, rulings and decisions now in effect, all of which are subject
to change (including retroactive changes) or possible differing interpretations.
The discussion below deals only with STRYPES held as capital assets and does not
purport to deal with persons in special tax situations, such as financial
institutions, insurance companies, regulated investment companies, dealers in
securities or currencies, tax-exempt entities, or persons holding STRYPES as a
hedge against currency risks or as a position in a "straddle" for tax purposes.
It also does not deal with Holders of STRYPES other than original purchasers
thereof (except where otherwise specifically noted herein). Moreover, the
discussion below does not address the tax consequences of ownership of the
Reference Property. The following discussion also does not address the tax
consequences of investing in the STRYPES arising under the laws of any state,
local or foreign jurisdiction. Persons considering the purchase of the STRYPES
should consult their own tax advisors concerning the application of the United
States Federal income tax laws to their particular situations as well as any
consequences of the purchase, ownership and disposition of the STRYPES arising
under the laws of any other taxing jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of STRYPES
that is for United States Federal income tax purposes (i) a citizen or resident
of the United States, (ii) a corporation, a partnership or other entity created
or organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate that is described in Section 7701(a)(30)(D)
of the Internal Revenue Code of 1986, as amended (the "Code") or (iv) a trust
that is described in Section 7701(a)(30)(E) of the Code. As used herein, the
term "non-U.S. Holder" means a beneficial owner of STRYPES that is not a U.S.
Holder. Unless otherwise specifically provided, the following opinion of Brown &
Wood LLP assumes that on the Exchange Date the Reference Property consists only
of shares of ContiFinancial Common Stock.
CLASSIFICATION OF THE TRUST
The Trust will be classified as a grantor trust under subpart E, Part I of
subchapter J of the Code. As such, Holders of the STRYPES will be treated for
United States Federal income tax purposes as owners of a PRO RATA undivided
interest in the Trust's assets which will consist of the U.S. Treasury
Securities and the Contract. Accordingly, each Holder will be required to report
on its United States Federal income tax return its PRO RATA share of the entire
income on the Trust's assets in accordance with such Holder's regular method of
tax accounting.
U.S. HOLDERS
As previously discussed, each U.S. Holder will be considered the owner of
its PRO RATA portion of the U.S. Treasury Securities and the Contract held by
the Trust. The cost to a U.S. Holder of its STRYPES will be allocated among such
U.S. Holder's PRO RATA portion of the U.S. Treasury Securities and the Contract
(in proportion to the relative fair market values thereof on the date on which
the U.S. Holder acquires its STRYPES) in order to determine the U.S. Holder's
initial tax basis in the U.S. Holder's PRO RATA portion of the U.S. Treasury
Securities and the Contract. It is currently anticipated that approximately %
and approximately % of the net proceeds of the Offering will be used by the
Trust to purchase the U.S. Treasury Securities and as payments under the
Contract, respectively.
The U.S. Treasury Securities held by the Trust will be treated for United
States Federal income tax purposes as having original issue discount which will
accrue over the term of the U.S. Treasury Securities. In general, a U.S. Holder
will be treated as having purchased each U.S. Treasury Security held by the
Trust with original issue discount in an amount equal to the excess of the U.S.
Holder's PRO RATA portion of the amount payable on such U.S. Treasury Security
over the Holder's initial tax basis therefor as discussed
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above. A U.S. Holder (whether on the cash or accrual method of tax accounting)
will be required to include such original issue discount in income for United
States Federal income tax purposes as it accrues in accordance with a constant
yield method. Because it is expected that % or more of the Holders of STRYPES
will be accrual basis taxpayers, original issue discount on any short-term U.S.
Treasury Securities (I.E., any U.S. Treasury Security with a maturity of one
year or less from the date it is purchased by the Trust) held by the Trust will
also be currently includable in income by U.S. Holders as it accrues on a
straight-line basis (unless a U.S. Holder elects to accrue such original issue
discount on a constant yield basis). A U.S. Holder's tax basis in its PRO RATA
portion of a U.S. Treasury Security will be increased by the amount of any
original issue discount included in income by the U.S. Holder with respect to
such U.S. Treasury Security (as described above).
Each U.S. Holder will also be treated as having entered into a PRO RATA
portion of the Contract. Under current law, a U.S. Holder should not be required
to recognize any income, gain or loss with respect to the Contract until the
Exchange Date. On the Exchange Date, if the Contracting Stockholder delivers
Reference Property pursuant to the Contract, a U.S. Holder will generally not
realize any taxable gain or loss upon the receipt of such Reference Property.
However, a U.S. Holder will generally be required to recognize taxable gain or
loss with respect to any cash received in lieu of fractional units of any
Reference Security, fractional interests of any Reference Property other than
cash, and any Reference Property consisting of cash. The amount of such gain or
loss recognized by a U.S. Holder will be equal to the difference, if any,
between the amount of cash received by the U.S. Holder and the portion of the
U.S. Holder's tax basis in the Contract that is allocable to the fractional
units of any Reference Security, fractional interests of any Reference Property
other than cash, and any Reference Property consisting of cash. Any such taxable
gain or loss attributable to cash received in lieu of fractional units of any
Reference Security and fractional interests of any Reference Property other than
cash will be treated as short-term capital gain or loss and, because the matter
is uncertain, any such taxable gain or loss attributable to any Reference
Property consisting of cash could be treated as short-term capital gain or loss,
as long-term capital gain or loss (depending upon the U.S. Holder's holding
period for the STRYPES), or as ordinary income or loss. A U.S. Holder will have
an initial tax basis in any Reference Property (as allocated among the Reference
Property in accordance with the relative fair market values thereof, as
determined on the Exchange Date) received thereby on the Exchange Date (other
than cash received in lieu of fractional units, fractional interests and any
Reference Property consisting of cash) in an amount equal to the U.S. Holder's
tax basis in the Contract less the portion of such tax basis that is allocable
to any fractional units of any Reference Security, fractional interests of any
Reference Property and any Reference Property consisting of cash (as described
above) and will realize taxable gain or loss with respect to any such Reference
Property received thereby on the Exchange Date only upon the subsequent sale or
disposition by the U.S. Holder of such Reference Property. In addition, a U.S.
Holder's holding period for any Reference Property received by such U.S. Holder
on the Exchange Date will begin on the day immediately following the Exchange
Date and will not include the period during which the U.S. Holder held the
related STRYPES.
Alternatively, if the Contracting Stockholder satisfies the Contract in cash
on the Exchange Date, a U.S. Holder will recognize taxable gain or loss on the
Exchange Date with respect to the Contract in an amount equal to the difference,
if any, between the total amount of cash received by such U.S. Holder on the
Exchange Date and an amount equal to the U.S. Holder's tax basis in the
Contract. It is uncertain whether such gain or loss would be treated as capital
or ordinary. If such gain or loss is properly treated as capital, then such gain
or loss will be treated as long-term capital gain or loss if the STRYPES has
been held by the U.S. Holder for more than one year as of the Exchange Date. If
such gain or loss is properly treated as ordinary gain or loss, it is possible
that the deductibility of any loss recognized on the Exchange Date with respect
to the Contract by a U.S. Holder who is an individual could be subject to the
limitations applicable to miscellaneous itemized deductions provided for under
Section 67(a) of the Code. In general, Section 67(a) of the Code provides that
an individual may only deduct miscellaneous itemized deductions for a particular
taxable year to the extent that the aggregate amount of the individuals's
miscellaneous
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itemized deductions for such taxable year exceed two percent of the individual's
adjusted gross income for such taxable year (the miscellaneous itemized
deductions and other itemized deductions allowable to high-income individuals,
however, are generally subject to further limitations under Section 68 of the
Code). Prospective investors in the STRYPES who are individuals should also be
aware that miscellaneous itemized deductions are not allowable in computing the
United States Federal alternative minimum tax imposed by Section 55 of the Code.
Prospective investors in the STRYPES are urged to consult their own tax advisors
concerning the character of any gain or loss realized on the Exchange Date with
respect to the Contract in the event that either (i) the Reference Property
consists of cash, Reference Securities (other than ContiFinancial Common Stock)
or other property or (ii) the Contracting Stockholder elects to satisfy its
obligations under the Contract in cash on the Exchange Date as well as the
deductibility of any such loss.
Upon the sale or other disposition of a STRYPES prior to the Exchange Date,
a U.S. Holder generally will be required to allocate the total amount realized
by such U.S. Holder upon such sale or other disposition between the U.S.
Holder's PRO RATA portion of the U.S. Treasury Securities and the Contract based
upon their relative fair market values (as determined on the date of
disposition). A U.S. Holder will generally be required to recognize taxable gain
or loss with respect to each such component (I.E., the U.S. Holder's PRO RATA
portion of the U.S. Treasury Securities and the Contract) in an amount equal to
the difference, if any, between the amount realized with respect to each such
component upon the sale or disposition of the STRYPES (as determined in the
manner described above) and the U.S. Holder's adjusted tax basis in each such
component. Any such gain or loss will generally be treated as long-term capital
gain or loss if the U.S. Holder has held the STRYPES for more than one year at
the time of disposition.
The proper treatment of the payment by the Contracting Stockholder or
Merrill Lynch & Co., Inc. of various costs and expenses associated with the
organization and operation of the Trust is uncertain. It is possible that there
will be no United States Federal income tax consequences to U.S. Holders as a
result of any such payments. However, it is possible that the Internal Revenue
Service ("IRS") could assert that any such payments consititute income to U.S.
Holders. If the IRS were to prevail in treating such payments as income, then an
individual U.S. Holder who itemizes deductions could possibly amortize and
deduct over the term of the Trust (subject to any applicable limitations such as
Section 67(a) of the Code) its PRO RATA portion of the one-time, up-front fees
paid to the Administrator, the Custodian and the Paying Agent, and could
possibly deduct (subject to any applicable limitations such as those in Section
67(a) of the Code) its PRO RATA portion of the other expenses described under
"Management Arrangements--Estimated Expenses" incurred by the Trust resulting
from its ongoing operations (including the fees payable to the Trustees) as such
expenses are incurred. Brown & Wood LLP, counsel to the Trust, believes that a
U.S. Holder's PRO RATA portion of the expenses directly incurred by a U.S.
Holder in connection with the organization of the Trust, underwriting discounts
and commissions and other offering expenses should be includable in the cost to
the U.S. Holder of the STRYPES. However, there can be no assurance that the
Internal Revenue Service (the "IRS") will not take a contrary view. If the IRS
were to prevail in treating such expenses as excludible from a U.S. Holder's
cost of the STRYPES, such expenses would not be includable in the basis of the
assets of the Trust and should instead, subject to the limitations provided for
under Section 67(a) of the Code, be amortizable and deductible over the term of
the Trust.
POSSIBLE ALTERNATIVE CHARACTERIZATIONS OF THE CONTRACT
Brown & Wood LLP, counsel to the Trust, believes the Contract should be
treated for United States Federal income tax purposes as a prepaid forward
contract for the purchase of a variable number of shares of ContiFinancial
Common Stock. The IRS could conceivably take the view that the Contract should
be treated as a loan to the Contracting Stockholder in exchange for a contingent
payment debt obligation of the Contracting Stockholder. If the IRS were to
prevail in making such an assertion, a U.S. Holder might be required to include
original issue discount in income over the term of the STRYPES based on the
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excess of the anticipated value of the ContiFinancial Common Stock to be
received in respect of the Contract over the amount paid for the Contract. In
addition, a U.S. Holder would be required to include interest (rather than
capital gain) in income on the Exchange Date in an amount equal to the excess,
if any, of the value of the ContiFinancial Common Stock received on the Exchange
Date (or the proceeds from prior disposition of the Contract) over the aggregate
of the basis of the Contract and any interest on the Contract previously
included in income (or might be entitled to an ordinary deduction to the extent
of interest previously included in income and not ultimately received). The IRS
could also conceivably take the view that a U.S. Holder should simply include in
income as interest the amount of cash actually received each year in respect of
the STRYPES.
MISCELLANEOUS TAX MATTERS
Special tax rules may apply to persons holding STRYPES as part of a
"synthetic security" or other integrated investment, or as part of a straddle,
hedging transaction or other combination of offsetting positions. For instance,
Section 1258 of the Code may possibly require certain U.S. Holders of the
STRYPES who enter into hedging transactions or offsetting positions with respect
to the STRYPES to treat all or a portion of any gain realized on the STRYPES as
ordinary income in instances where such gain may have otherwise been treated as
capital gain. U.S. Holders hedging their positions with respect to the STRYPES
or otherwise holding their STRYPES in a manner described above should consult
their own tax advisors regarding the applicability of Section 1258 of the Code,
or any other provision of the Code, to their investment in the STRYPES.
PROPOSED TAX LAW CHANGES
On February 6, 1997, the Clinton Administration proposed a series of tax law
changes as part of its Fiscal 1998 Budget proposal. These proposed tax law
changes would, among other things, require taxpayers (including corporations) to
recognize gain (but not loss) upon entering into a "constructive sale" of any
appreciated position in stock. For these purposes, a taxpayer would be treated
as making a "constructive sale" of an appreciated position in stock when the
taxpayer (or, in limited circumstances, a person related to the taxpayer)
substantially eliminates risk of loss and opportunity for gain by entering into
one or more positions with respect to the same or substantially identical
property. The proposal would apply to constructive sales entered into after
January 12, 1996, and before the date of enactment of the proposal if the
transaction resulting in the "constructive sale" remains open 30 days after the
date of enactment of the proposal. Under the proposal, the "constructive sale"
would be deemed to occur with respect to such pre-enactment transactions on the
date that is 30 days after the date of enactment. In addition, on February 26,
1997, Rep. Barbara Kennelly introduced a bill proposing certain tax law changes
that are similar to the Clinton Administration's proposals. However, under Rep.
Kennelly's proposal, a taxpayer would be treated as making a "constructive sale"
of an appreciated position in stock when the taxpayer (or, in limited
circumstances, a person related to the taxpayer) enters into a forward contract
(including a fully or partially prepaid forward contract) to deliver the same or
substantially identical property. The effective dates contained in Rep.
Kennelly's proposal are substantially the same as the effective dates contained
in the Clinton Administration's proposal. Thus, if either of these proposals are
ultimately adopted in their current form on a date that is 32 or more days prior
to the Exchange Date, such enactment could result in a Tax Event. Furthermore,
if there are future legislative developments such that as a result thereof one
of these proposals or a provision with similar effect is adopted and effective
for transactions or positions entered into on or prior to the Exchange Date,
such legislative developments could result in a Tax Event. It cannot be
predicted whether or not these proposed tax law changes (or a provision with
similar effect) will ultimately become law. Moreover, it cannot be predicted
whether or not any other future change in the tax law will occur which could
give rise to a Tax Event, nor can it be predicted whether the Contracting
Stockholder will elect to cause a Tax Event by delivering the Tax Event Opinion
to the Trust in the event that a change in the tax law occurs which could give
rise to a Tax Event.
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NON-U.S. HOLDERS
Subject to the discussion below concerning income that is effectively
connected with a trade or business conducted by a non-U.S. Holder in the United
States, payments of interest (including original issue discount) made with
respect to the U.S. Treasury Securities will not be subject to United States
withholding tax, provided that such non-U.S. Holder complies with applicable
certification requirements. In general, for a non-U.S. Holder to qualify for
this exemption from taxation, the last United States payor in the chain of
payment prior to payment to a non-U.S. Holder (the "Withholding Agent") must
have received in the year in which a payment of interest or principal occurs, or
in either of the two preceding calendar years, a statement that (i) is signed by
the beneficial owner of the U.S. Treasury Securities under penalties of perjury,
(ii) certifies that such owner is not a U.S. Holder and (iii) provides the name
and address of the beneficial owner. The statement may be made on an IRS Form
W-8 or a substantially similar form, and the beneficial owner must inform the
Withholding Agent of any change in the information on the statement within 30
days of such change. If STRYPES are held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide a signed statement to the Withholding Agent. However, in
such case, the signed statement must be accompanied by a copy of the IRS Form
W-8 or the substitute form provided by the beneficial owner to the organization
or institution.
Any capital gain realized in respect of STRYPES by a non-U.S. Holder will
generally not be subject to United States Federal income tax if (i) such gain is
not effectively connected with a United States trade or business of such
non-U.S. Holder and (ii) in the case of an individual non-U.S. Holder, such
individual is not present in the United States for 183 days or more in the
taxable year of the sale or other disposition, or the gain is not attributable
to a fixed place of business maintained by such individual in the United States
and such individual does not have a "tax home" (as defined for United States
Federal income tax purposes) in the United States.
If any interest or gain realized by a non-U.S. Holder is effectively
connected with the non-U.S. Holder's conduct of a trade or business in the
United States, such interest or gain will be subject to regular United States
Federal income tax in the same manner as if the non-U.S. Holder were a U.S.
Holder. In addition, in such event, if such non-U.S. Holder is a foreign
corporation, such interest or gain may be included in the earnings and profits
of such non-U.S. Holder in determining such non-U.S. Holder's United States
branch profits tax liability.
BACKUP WITHHOLDING AND INFORMATION REPORTING
A beneficial owner of STRYPES may be subject to information reporting and to
backup withholding at a rate of 31 percent of certain amounts paid to the
beneficial owner unless such beneficial owner provides proof of an applicable
exemption or a correct taxpayer identification number, and otherwise complies
with applicable requirements of the backup withholding rules.
Any amounts withheld under the backup withholding rules from a payment to a
beneficial owner would be allowed as a refund or a credit against such
beneficial owner's United States Federal income tax provided the required
information is furnished to the IRS.
PROSPECTIVE INVESTORS IN THE STRYPES SHOULD BE AWARE THAT THERE IS NO
AUTHORITY DIRECTLY ADDRESSING THE PROPER UNITED STATES FEDERAL INCOME TAX
TREATMENT OF THE STRYPES OR SECURITIES WITH TERMS SUBSTANTIALLY THE SAME AS THE
STRYPES, AND THAT NO RULING HAS BEEN REQUESTED FROM THE IRS WITH RESPECT TO THE
STRYPES. ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT THE IRS WILL AGREE WITH THE
FOREGOING DISCUSSION AND THAT THE IRS WILL NOT ASSERT A CONTRARY POSITION AS TO
THE PROPER UNITED STATES FEDERAL INCOME TAX TREATMENT OF THE STRYPES WHICH MIGHT
CAUSE THE CHARACTER AND TIMING OF INCOME, GAIN OR LOSS
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RECOGNIZED WITH RESPECT TO A STRYPES TO DIFFER SIGNIFICANTLY FROM SUCH CHARACTER
AND TIMING DISCUSSED ABOVE. PROSPECTIVE INVESTORS IN THE STRYPES ARE THEREFORE
URGED TO CONSULT WITH THEIR OWN TAX ADVISERS PRIOR TO MAKING AN INVESTMENT IN
THE STRYPES.
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UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement"), the Trust has agreed to sell to each of the underwriters
named below (the "Underwriters"), and each of the Underwriters, for whom Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Bear, Stearns & Co. Inc. are
acting as representatives (the "Representatives"), has severally agreed to
purchase, the aggregate number of STRYPES set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER STRYPES
- ---------------------------------------------------------------------------------------- ------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..................................................................
Bear, Stearns & Co. Inc. ...............................................................
------------
Total......................................................................... 2,800,000
------------
------------
</TABLE>
In the Purchase Agreement, the several Underwriters have agreed,
respectively, subject to the terms and conditions set forth in the Purchase
Agreement, to purchase all of the STRYPES being sold pursuant to the Purchase
Agreement if any of the STRYPES are purchased. In the event of a failure to
close, any funds debited from any investor's account maintained with an
Underwriter will be credited to such account and any funds received by such
Underwriter by check or money order from any investor will be returned to such
investor by check.
The Underwriters have each advised the Trust that they propose initially to
offer the STRYPES to the public at the public offering price set forth on the
cover page of this Prospectus. The Underwriters have also advised the Trust that
they propose to offer STRYPES to certain dealers at the initial public offering
price less a concession not in excess of $ per STRYPES. Such
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $ per STRYPES to certain other dealers. After the initial public
offering, the public offering price, concession and discount may be changed. The
sales load of $ per STRYPES is equal to % of the initial public
offering price. Investors must pay for any STRYPES purchased in the initial
public offering on or before , 1997.
The Trust has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus to purchase up to an aggregate of 420,000
additional STRYPES (subject to decrease by the number of STRYPES resulting from
the split of the initial STRYPES described below) to cover over-allotments, if
any, at the initial public offering price less the sales load. To the extent the
Underwriters exercise such option, the Underwriters will have a firm commitment,
subject to certain conditions, to purchase a number of additional STRYPES.
Prior to the Offering, there has been no public market for the STRYPES. The
STRYPES have been approved for listing on the AMEX, subject to official notice
of issuance.
The Company, certain members of management of the Company and the
Contracting Stockholder have agreed not to offer, sell, contract to sell or
otherwise dispose of, directly or indirectly, or cause to be filed a
registration statement under the Securities Act with respect to, any shares of
ContiFinancial Common Stock, securities convertible into, exchangeable for or
repayable with such shares or rights or warrants to acquire such shares, for a
period of 90 days after the date of this Prospectus without the prior written
consent of Merrill Lynch, subject to certain exceptions.
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Each of the Company and the Contracting Stockholder has agreed to indemnify
the Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the Underwriters may be required to
make in respect thereof.
In connection with the formation of the Trust, each of ML IBK Positions,
Inc., an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, and
Bear, Stearns & Co. Inc. or an affiliate thereof has subscribed for and
purchased one STRYPES for an aggregate purchase price of $100,000. Prior to the
Offering, the initial STRYPES will be split into the smallest whole number of
STRYPES that would result in the per STRYPES amount recorded as shareholders'
equity, after effecting the split, not exceeding the public offering price per
STRYPES. Under the Contract, the Contracting Stockholder will be obligated to
deliver to the Trust on the Business Day immediately preceding the Exchange Date
a number or amount of each type of Reference Property (or, in certain
circumstances, cash with an equal value) in respect of such STRYPES on the same
terms as the STRYPES offered hereby.
Until the distribution of the STRYPES is completed, rules of the Commission
may limit the ability of the Underwriters and any selling group members to bid
for and purchase the STRYPES. As an exception to these rules, the
Representatives are permitted to engage in certain transactions that stabilize
the price of the STRYPES or the ContiFinancial Common Stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the STRYPES or the ContiFinancial Common Stock.
If the Underwriters create a short position in the STRYPES in connection
with the Offering, I.E., if they sell more STRYPES than are set forth on the
cover page of this Prospectus, the Representatives may reduce that short
position by purchasing STRYPES in the open market. The Representatives may also
elect to reduce any short position by exercising all or part of the
over-allotment option described above.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
STRYPES in the open market to reduce the Underwriters' short position or to
stabilize the price of the STRYPES, they may reclaim the amount of the selling
concession from the Underwriters and any selling group members who sold those
STRYPES as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Trust nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the STRYPES or the ContiFinancial
Common Stock. In addition, neither the Trust nor any of the Underwriters makes
any representation that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without notice.
Certain of the Underwriters render investment banking and other financial
services to the Company from time to time.
LEGAL MATTERS
Certain legal matters will be passed upon for the Trust and for the
Underwriters by their counsel, Brown & Wood LLP, New York, New York. Certain
matters of Delaware law will be passed upon for the Trust by Richards, Layton &
Finger, Wilmington, Delaware.
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EXPERTS
The statement of assets, liabilities and capital included in this Prospectus
has been audited by , independent auditors, as stated in their opinion
appearing herein, and has been included in reliance upon such opinion given on
the authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Trust has filed with the Commission, Washington D.C. 20549, a
Registration Statement under the Securities Act with respect to the STRYPES
offered hereby. Further information concerning the STRYPES and the Trust may be
found in the Registration Statement, of which this Prospectus constitutes a
part. The Registration Statement may be inspected without charge at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and copies of all or any part thereof may
be obtained from such office after payment of the fees prescribed by the
Commission. The Commission maintains a Web site at http://www.sec.gov containing
reports, proxy and information statements and other information regarding
registrants, such as the Trust, that file electronically with the Commission.
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INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholder of ContiFinancial STRYPES Trust:
We have audited the accompanying statement of assets, liabilities and
capital of ContiFinancial STRYPES Trust as of , 1997. This financial
statement is the responsibility of the Trust's management. Our responsibility is
to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of assets, liabilities and
capital is free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statement. An audit also includes assessing the accounting principles used and
significant estimates made by the Trust's management, as well as evaluating the
overall financial statement presentation. We believe that our audit of the
financial statement provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of ContiFinancial STRYPES
Trust, as of , 1997 in conformity with generally accepted accounting
principles.
New York, New York
, 1997
41
<PAGE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash.............................................................................. $ 100,000
---------
Total Assets................................................................ $ 100,000
---------
---------
<CAPTION>
LIABILITIES
<S> <C>
Total Liabilities................................................................. $ 0
---------
---------
NET ASSETS........................................................................ $ 100,000
---------
---------
CAPITAL
STRYPES, par value $.10 per STRYPES; 2 STRYPES issued and outstanding (Note
3)............................................................................ $ 100,000
---------
---------
</TABLE>
- ------------------------
(1) The Trust was created as a Delaware business trust on March 14, 1996 and has
had no operations other than matters relating to its organization and
registration as a non-diversified, closed-end management investment company
under the Investment Company Act of 1940, as amended. Costs incurred in
connection with the organization of the Trust and ongoing administrative
expenses will be paid by the Contracting Stockholder.
(2) Offering expenses will be payable upon completion of the Offering and also
will be paid by the Contracting Stockholder.
(3) On , 1997, the Trust issued one STRYPES to ML IBK Positions, Inc.,
an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, and one
STRYPES to Bear, Stearns & Co. Inc. or an affiliate thereof, in
consideration for the purchase price of $50,000 per STRYPES.
The Declaration of Trust provides that prior to the Offering, the Trust will
split each of the outstanding STRYPES to be effected on the date that the
price and underwriting discount of the STRYPES being offered to the public
is determined, but prior to the sale of the STRYPES to Underwriters. The two
outstanding STRYPES will be split into the smallest whole number of STRYPES
that would result in the per STRYPES amount recorded as shareholders'
equity, after effecting the split, not exceeding the public offering price
per STRYPES.
42
<PAGE>
THE FOLLOWING PROSPECTUS OF CONTIFINANCIAL CORPORATION IS ATTACHED AND DELIVERED
FOR CONVENIENCE OF REFERENCE ONLY. THE PROSPECTUS OF CONTIFINANCIAL CORPORATION
DOES NOT CONSTITUTE A PART OF THE FOREGOING PROSPECTUS OF CONTIFINANCIAL STRYPES
TRUST, NOR IS IT INCORPORATED BY REFERENCE THEREIN.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE TRUST OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFERING OF ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES OR AN OFFER TO ANY PERSON IN ANY STATE OR JURISDICTION OF THE UNITED
STATES OR ANY COUNTRY WHERE SUCH OFFER WOULD BE UNLAWFUL. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS SET FORTH IN
THIS PROSPECTUS OR IN THE AFFAIRS OF THE TRUST SINCE THE DATE HEREOF OR SINCE
THE DATES AS OF WHICH INFORMATION IS SET FORTH HEREIN. IN THE EVENT THAT ANY
SUCH CHANGE SHALL OCCUR DURING THE PERIOD IN WHICH APPLICABLE LAW REQUIRES
DELIVERY OF THIS PROSPECTUS, THIS PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED
ACCORDINGLY.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................. 3
Fee Table....................................... 9
The Trust....................................... 10
Use of Proceeds................................. 10
Investment Objective and Policies............... 10
Investment Restrictions......................... 21
Risk Factors.................................... 23
Description of the STRYPES...................... 27
Trustees........................................ 29
Management Arrangements......................... 29
Dividends and Distributions..................... 31
Net Asset Value................................. 31
Certain United States Federal Income Tax
Considerations................................ 32
Underwriting.................................... 38
Legal Matters................................... 39
Experts......................................... 40
Additional Information.......................... 40
Independent Auditors' Report.................... 41
Statement of Assets, Liabilities and Capital.... 42
Prospectus relating to Common Stock
of ContiFinancial Corporation
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE STRYPES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2,800,000 STRYPES-SM-
CONTIFINANCIAL STRYPES TRUST
EXCHANGEABLE FOR SHARES OF
COMMON STOCK OF
CONTIFINANCIAL CORPORATION
---------------------
PROSPECTUS
---------------------
MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
, 1997
-SM- SERVICE MARK OF MERRILL LYNCH & CO., INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
<TABLE>
<C> <C> <S> <C>
1. FINANCIAL STATEMENTS
Independent Auditors' Report
Statement of Assets, Liabilities and Capital as of , 1997
2. EXHIBITS
(a) (1) Trust Agreement*
(2) Form of Amended and Restated Trust Agreement**
(3) Certificate of Trust*
(4) Restated Certificate of Trust**
(b) Not applicable
(c) Not applicable
(d) (1) Form of Specimen certificate for STRYPES (included in Exhibit 2(a)(2))**
(2) Portions of the Declaration of Trust of the Registrant defining the rights
of Holders of STRYPES (included in Exhibit 2(a)(2))**
(e) Not applicable
(f) Not applicable
(g) Not applicable
(h) (1) Form of Purchase Agreement**
(2) Form of Registration Agreement**
(3) Merrill Lynch Standard Dealer Agreement**
(i) Not applicable
(j) Form of Custodian Agreement**
(k) (1) Form of Administration Agreement**
(2) Form of Paying Agent Agreement**
(3) Form of Forward Purchase Contract**
(4) Form of Security and Pledge Agreement**
(5) Form of Fund Expense Agreement**
(6) Form of Fund Indemnity Agreement**
(l) Opinion and Consent of Brown & Wood LLP, counsel to the Trust**
(m) Not applicable
(n) (1) Tax Opinion and Consent of Brown & Wood LLP, counsel to the Trust**
(2) Consent of , independent auditors for the Trust**
(o) Not applicable
(p) Form of Subscription Agreement**
(q) Not applicable
(r) Financial Data Schedule**
</TABLE>
- ------------------------
* Previously filed.
** To be filed by amendment.
ITEM 25. MARKETING ARRANGEMENTS
See Exhibits (h)(1), (h)(2) and (h)(3) to this Registration Statement.
C-1
<PAGE>
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be incurred in connection with the offering described in
this Registration Statement will be paid by the Contracting Stockholder.
ITEM 27. PERSON CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
The Trust will be internally managed and will not have an investment
adviser. The information in the Prospectus under the caption "Management
Arrangements" is incorporated herein by reference.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
There will be one record holder of the STRYPES as of the effective date of
this Registration Statement.
ITEM 29. INDEMNIFICATION
Section 7.6 of the Amended and Restated Trust Agreement, Section 6 of the
Purchase Agreement and Section 4 of the Registration Agreement provide for
indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "1933 Act"), may be permitted to trustees, officers and
controlling persons of the Registrant, pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission (the "Commission") such indemnification is against
public policy as expressed in the 1933 Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a trustee, officer
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such trustee, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933 Act
and will be governed by the final adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The Trust is internally managed and does not have an investment adviser.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the rules
promulgated thereunder are maintained at the offices of the Registrant (850
Library Avenue, Suite 204, Newark, Delaware 19715), its custodian (450 West 33rd
Street, 15th Floor, New York, New York 10001-2697) and its paying agent (450
West 33rd Street, 15th Floor, New York, New York 10001-2697).
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
(a) The Registrant hereby undertakes to suspend the offering of the shares
covered hereby until it amends its prospectuses contained herein if (1)
subsequent to the effective date of this Registration Statement, its net asset
value per share declines more than 10 percent from its net asset value per share
as of the effective date of the Registration Statement or (2) the net asset
value per share increases to an amount greater than its net proceeds as stated
in the prospectuses contained herein.
C-2
<PAGE>
(b) The Registrant hereby undertakes that (i) for purpose of determining any
liability under the 1933 Act, the information omitted from the form of
prospectuses filed as part of this Registration Statement in reliance upon Rule
430A and contained in a form of prospectus filed by the registrant under Rule
497(h) under the 1933 Act shall be deemed to be part of this registration
statement as of the time it was declared effective; (ii) for the purpose of
determining any liability under the 1933 Act, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of the securities
at that time shall be deemed to be the initial bona fide offering thereof.
C-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Pre-Effective Amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Newark, State of
Delaware, on the 11th day of March, 1997.
CONTIFINANCIAL STRYPES TRUST
(REGISTRANT)
By: /s/ DONALD J. PUGLISI
-----------------------------------------
Donald J. Puglisi
MANAGING TRUSTEE
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment to the Registrant's Registration Statement has been
signed below by the following persons, in the capacities and on the date
indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ DONALD J. PUGLISI
- ------------------------------ Managing Trustee March 11, 1997
(Donald J. Puglisi)
WILLIAM R. LATHAM III*
- ------------------------------ Trustee
(William R. Latham III)
JAMES B. O'NEILL*
- ------------------------------ Trustee
(James B. O'Neill)
<TABLE>
<S> <C> <C> <C>
/s/ DONALD J. PUGLISI
------------------------------------------ March 11, 1997
*By: (Donald J. Puglisi, Attorney-in-fact)
</TABLE>
