<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 4, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CITYSCAPE FINANCIAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6199 11-2994671
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
565 TAXTER ROAD
ELMSFORD, NEW YORK 10523-5200
(914) 592-6677
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JONAH L. GOLDSTEIN, ESQ.
GENERAL COUNSEL
CITYSCAPE FINANCIAL CORP.
565 TAXTER ROAD
ELMSFORD, NEW YORK 10523-5200
(914) 592-6677
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPY TO:
SEAN P. GRIFFITHS, ESQ.
GIBSON, DUNN & CRUTCHER LLP
200 PARK AVENUE
NEW YORK, NEW YORK 10166
(212) 351-4000
(FACSIMILE) (212) 351-4035
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: /X/
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 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. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------
6% Convertible Subordinated
Debentures...................... $75,600,000 100% $75,600,000 $26,069
- ----------------------------------------------------------------------------------------------------------
Common Stock, $0.01 par value..... 2,880,000(2) N/A N/A N/A
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) and (i) of Regulation C under the Securities Act of
1933.
(2) Represents the maximum number of shares of Common Stock presently issuable
upon conversion of the Debentures being registered hereunder at a conversion
price of $26.25 per share. If issued, such shares of Common Stock will be
issued for no additional consideration and, therefore, no registration fee
will be required.
------------------------
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, AS AMENDED, 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> 2
CITYSCAPE FINANCIAL CORP.
CROSS REFERENCE SHEET
(PURSUANT TO RULE 404(A) AND ITEM 501 OF REGULATION S-K)
<TABLE>
<CAPTION>
ITEM LOCATION IN PROSPECTUS
------------------------------------------ ------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................. Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges........ Summary; Risk Factors
4. Use of Proceeds........................... Summary; Use of Proceeds
5. Determination of Offering Price........... *
6. Dilution.................................. *
7. Selling Security Holders.................. Selling Security Holders
8. Plan of Distribution...................... Plan of Distribution
9. Description of Securities to be Outside Front Cover Page; Summary;
Registered................................ Description of Capital Stock; Description
of Debentures
10. Interests of Named Experts and Counsel.... *
11. Information with Respect to the Summary; Risk Factors; The Company;
Registrant................................ Unaudited Pro Forma Consolidated Financial
Statements; Selected Consolidated
Financial and Other Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; Security Ownership
of Certain Beneficial Owners and
Management: Certain Transactions;
Description of Capital Stock; Description
of Debentures; Shares Eligible for Future
Sale; Consolidated Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liability................................. *
</TABLE>
- ---------------
* Answer negative or item inapplicable.
<PAGE> 3
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.
SUBJECT TO COMPLETION
SEPTEMBER 4, 1996
$75,600,000
LOGO
6% CONVERTIBLE SUBORDINATED DEBENTURES
DUE MAY 1, 2006
(INTEREST PAYABLE MAY 1 AND NOVEMBER 1)
AND
2,880,000 SHARES OF COMMON STOCK
------------------------
This Prospectus relates to the public offering from time to time by certain
selling security holders (the "Selling Security Holders") of up to $75,600,000
(the "Offered Debentures") aggregate principal amount of 6% Convertible
Subordinated Debentures due May 1, 2006 in an original aggregate principal
amount of $143,750,000 (the "Debentures") of Cityscape Financial Corp., a
Delaware coporation (the "Company"), and the shares of common stock, par value
$0.01 per share, of the Company (the "Common Stock" and, together with the
Debentures, the "Securities") that are issuable upon conversion of the
Debentures. The Debentures are convertible into a maximum of 2,880,000 shares of
Common Stock at a conversion price of $26.25 per share, subject to adjustment in
certain circumstances, at any time prior to redemption or maturity. See
"Description of Debentures." The Common Stock is traded on the Nasdaq National
Market ("Nasdaq") under the symbol "CTYS." The closing price of the Common Stock
as reported on Nasdaq on September 3, 1996 was $29.50 per share. See
"Description of Capital Stock."
Interest on the Debentures is payable semi-annually in arrears on each May
1 and November 1, commencing November 1, 1996, and the Debentures will mature on
May 1, 2006, unless previously redeemed. See "Description of Debentures."
The Debentures are redeemable at the option of the Company, in whole or in
part, at any time on or after May 15, 1999, at the redemption prices set forth
herein, plus accrued and unpaid interest to the redemption date. In the event of
a Change of Control (as defined herein), each holder of the Debentures will have
the right to cause the Company to repurchase the Debentures, in whole but not in
part, at a price equal to 100% of the principal amount thereof plus accrued and
unpaid interest to the repurchase date. See "Description of
Debentures -- Redemption" and "-- Change of Control."
The Debentures are general unsecured obligations of the Company,
subordinated to all existing and future Senior Indebtedness (as defined herein),
which at July 31, 1996 aggregated $147.2 million. See "Description of
Debentures."
THE DEBENTURES AND THE UNDERLYING SHARES OF COMMON STOCK HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR BY ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION REVIEWED OR PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Company will not receive any proceeds from this offering. The aggregate
proceeds to the Selling Security Holders from the sale of the Securities will be
the offering price of the Securities sold, less applicable agents' commissions
and underwriters' discounts, if any. The Company will pay all expenses incident
to the preparation and filing of this registration statement for the Securities
under federal securities laws. The Selling Security Holders may sell the
Securities from time to time on terms to be determined at the time of sale,
either directly or through agents designated from time to time or dealers or
underwriters designated from time to time. To the extent required, the principal
amount of Offered Debentures or the number of shares of Common Stock to be sold,
the offering price thereof, the name of each Selling Security Holder and each
agent, dealer and underwriter, if any, and any applicable commissions or
discounts with respect to a particular offering will be set forth in an
accompanying Prospectus Supplement. See "Plan of Distribution."
There has been no public market for the Debentures prior to the offering
hereby.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 HEREOF FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
SECURITIES.
------------------------
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE> 4
FOR NEW HAMPSHIRE RESIDENTS: NEITHER THE FACT THAT A REGISTRATION STATEMENT
OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER RSA 421-B WITH THE STATE OF
NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON
IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY
OF STATE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT
MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS
AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE OF
THE STATE OF NEW HAMPSHIRE HAS PASSED IN ANY WAY UPON THE MERITS OR
QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR
TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE
PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE
PROVISIONS OF THIS PARAGRAPH.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------------------
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (referred to herein, together
with all amendments and exhibits, as the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information relating to the Securities and to the Company, reference is
made to the Registration Statement.
The Company is subject to the periodic reporting and other informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith, files reports, proxy statements and other
information with the Commission. For further information with respect to the
Company, reference is hereby made to such reports and other information which
can be inspected and copied (at prescribed rates) at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1025,
Washington, D.C. 20549 and at the Commission's regional offices located at Seven
World Trade Center, 13th Floor, New York, New York 10048 and at 500 West
Madison, Suite 1400, Chicago, Illinois 60661. Copies may also be obtained at
prescribed rates from the Public Reference Section of the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission also
maintains a Web site that contains reports, proxy and information statements and
other information regarding the Company at (http://www.sec.gov).
2
<PAGE> 5
SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. This Prospectus contains
forward-looking statements which involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
Cityscape Financial Corp., a Delaware corporation ("Cityscape" or the
"Company"), is a consumer finance company engaged in the business of
originating, purchasing, selling and servicing mortgage loans secured primarily
by one- to four-family residences. The Company originates and purchases loans in
the US through its subsidiary Cityscape Corp., a New York corporation ("CSC"),
using a network of independent mortgage brokers and loan correspondents, and in
the United Kingdom (excluding Northern Ireland, the "UK") through its indirect
subsidiary City Mortgage Corporation Limited also using a network of independent
mortgage brokers. The majority of the Company's loans are made to owners of
single family residences who use the loan proceeds for such purposes as debt
consolidation, financing of home improvements and educational expenditures. The
Company focuses on lending to individuals who have impaired or unsubstantiated
credit histories and/or unverifiable income and require or seek a high degree of
personalized service and prompt response to their loan applications. As a
result, the Company's customers generally are not averse to paying the higher
interest rates that the Company charges for its loan programs as compared to the
interest rates charged by conventional mortgage sources. Because its customers
generally borrow for reasons other than the purchase of homes, the Company
believes that it is not as dependent as traditional mortgage bankers on general
levels of home sales and refinancing activity.
In the US, the Company originates and purchases loans through three
channels: (i) originations through an extensive network of independent mortgage
brokers utilizing the Company's New York headquarters and four regional
processing offices located in California, Georgia, Illinois and Virginia; (ii)
purchases on a flow basis through its Wholesale Loan Acquisition Program from
selected financial institutions and mortgage bankers known as loan
correspondents; and (iii) purchases of large pools of loans (referred to as
"bulk purchases") from other originators. The Company originates loans through a
network of independent mortgage brokers in 37 states and the District of
Columbia, with its highest producing broker accounting for 2.4% of the total US
origination and purchase volume for the six months ended June 30, 1996. The
Company strives to process each loan application received from mortgage brokers
as quickly as possible in accordance with the Company's loan application
approval procedures. Accordingly, most loan applications receive preliminary
decisions within 24 hours of receipt and most accepted applications are funded
within 15-25 days thereafter. Loans purchased on a flow basis in the Wholesale
Loan Acquisition Program are originated by loan correspondents in accordance
with the Company's underwriting guidelines and the Company purchases such loans
in the form of complete loan packages. The highest producing loan correspondent
in the Wholesale Loan Acquisition Program accounted for 3.5% of the total US
origination and purchase volume for the six months ended June 30, 1996. In
addition, in June 1996, the Company expanded its whole loan purchases to include
the purchase of loans which are offered in the secondary market on a bulk basis
by other originators. The Company believes it has the underwriting, servicing
and management capabilities in place, as well as the necessary access to
capital, to review and purchase bulk loans competitively in this market segment
and to benefit from the efficiencies related to the purchase and securitization
of such loans.
As the Company has expanded the channels through which it originates and
purchases loans, it has also broadened the types of loans it offers. The Company
offers a wide range of loan products in the US, including traditional
residential mortgage loans for refinancing, educational, home improvement and
debt consolidation purposes, mortgage loans on small multi-family and mixed-use
properties, and more recently, adjustable rate mortgage loans and jumbo loans.
The Company also purchases conventional home improvement loans and, to a lesser
extent, originates and purchases Title I home improvement loans partially
insured by the US Department of Housing and Urban Development. For 1995 and the
first six months of 1996, the average
3
<PAGE> 6
principal balances of the Company's loans in the US were $69,551 and $66,940,
respectively, the weighted average initial loan-to-value ratios on such loans
were 66.4% and 69.9%, respectively, and the weighted average interest rate on
such loans were 11.9% and 11.4%, respectively.
In May 1995, the Company commenced its UK operations with the formation of
City Mortgage Corporation Limited ("CSC-UK"), an English corporation that
originates, sells and services loans in England, Scotland and Wales. The UK
market for the type of loans the Company produces is highly fragmented and, for
a variety of reasons, underserved by conventional lenders as compared to the US
market. In the UK, the Company originates loans through a network of independent
mortgage brokers. The Company has entered into contracts with several of its
highest producing brokers which grant the Company a right of first refusal on
all loan applications that meet specified underwriting criteria. To further
increase its loan origination volume and market share in the UK, the Company
also recently acquired J&J Securities Limited ("J&J") and Heritable Group
Limited ("Heritable"), two UK-based mortgage bankers (referred to respectively
as the "J&J Acquisition" and the "Heritable Acquisition"). The J&J Acquisition
provides the Company with greater strength in the second lien loan market,
experienced management personnel and a greater share of the fragmented UK market
through additional broker relationships and the expansion of product offerings.
J&J's loans are generally second lien mortgage loans with lower loan-to-value
ratios, higher interest rates, smaller principal loan balances and higher
delinquency experience than the loans traditionally originated by CSC-UK. The
Heritable Acquisition represents an expansion of new product types offered to a
higher credit quality borrower and that are complementary to the Company's other
UK business. Heritable's loans are generally second lien mortgage loans with
higher loan-to-value ratios, lower interest rates, smaller principal loan
balances and lower delinquency experience than the loans traditionally
originated by CSC-UK. For 1995 and the first six months of 1996, the average
principal balances of the Company's loans in the UK were $43,120 and $14,940,
respectively, the weighted average initial loan-to-value ratios on such loans
were 49.0% and 51.6%, respectively, and the weighted average interest rates on
such loans were 16.4% and 16.9%, respectively.
The Company sells its loans primarily in the secondary market through
securitizations in order to maximize profitability and reduce its exposure to
fluctuations in interest rates. To a lesser extent, the Company sells its loans
through whole loan sales to achieve greater liquidity. Through 1994, the Company
sold virtually all of its loan production on a whole loan sale basis in private
placements to a variety of institutional purchasers. Since 1995, however, the
Company has sold a substantial portion of its loan production in
securitizations. The Company completed its first US securitization in March 1995
and its first UK securitization in March 1996. Each of the Company's US
securitizations has been credit-enhanced by insurance provided by a monoline
insurance company to receive ratings of "Aaa" from Moody's Investor Services,
Inc. and "AAA" from Standard & Poor's Ratings Group. The Company funds its
originations and purchases through warehouse lines of credit and a standby
facility in the US and purchase and sale facilities in the US and the UK into
which it sells the loans it originates and purchases prior to their
securitization. The Company intends to continue to sell loans primarily through
securitizations and, subject to market conditions, through whole loan sales.
The Company retains the servicing rights to substantially all loans it
originates or purchases. Loan servicing involves the collection of payments due
under a loan, the monitoring of the loan, the remitting of payments to the
holder of the loan, the furnishing of reports to such holder and the enforcement
of the lender's rights, including attempting to recover delinquencies and
instituting loan foreclosures. As of June 30, 1996, the Company was servicing an
aggregate of $757.9 million of US loans, including $56.2 million of loans as
master servicer and $20.1 million as contract servicer, and an aggregate of
$332.2 million of UK loans. At December 31, 1995 and June 30, 1996, the
Company's ratios of delinquent loans (one or more payments 30 or more days past
due) to loans serviced by dollar amount were 3.9% and 5.6%, respectively, on its
US loan portfolio and 8.6% and 16.7%, respectively, on its UK loan portfolio.
The Company has not experienced material loan losses in part because its loan
portfolio has been characterized by relatively low initial loan-to-value ratios.
Because the Company only expanded into the business of loan servicing in the US
during the last two years and in the UK in May 1995, the Company's loan
portfolios are relatively unseasoned. The Company believes that over time its
delinquency and loan loss experience will increase as its loan portfolio
matures. The
4
<PAGE> 7
Company has reserved for loan losses in amounts which it believes to be adequate
to cover potential losses for the credit risks it retains on the loans in its
servicing portfolio. Management believes that the business of loan servicing
provides an additional and profitable revenue stream and one that is less
cyclical than the business of originating and purchasing loans.
The Company's business strategy includes (i) geographic expansion
throughout the US, (ii) growth through selected acquisitions, (iii) further
development and expansion of its UK operations, (iv) expansion of its Wholesale
Loan Acquisition Program and bulk purchases, (v) maximization of independent
mortgage broker relationships, (vi) maintenance of underwriting standards and
infrastructure to continue to service its increasing loan portfolio effectively
and (vii) introduction and expansion of new products.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Securities
offered hereby.
NASDAQ SYMBOL
The Common Stock is traded on Nasdaq under the symbol "CTYS."
RISK FACTORS
See "Risk Factors" for a description of certain factors that should be
considered carefully in evaluating an investment in the Securities offered
hereby.
Except as otherwise noted, all information in this Prospectus reflects the
100% stock dividends paid on September 29, 1995 to stockholders of record as of
September 28, 1995 and on July 1, 1996 to stockholders of record as of June 24,
1996. Except as otherwise specified, all information in this Prospectus
regarding outstanding shares excludes 1,991,045 shares of Common Stock reserved
for issuance upon exercise of outstanding options, including 138,000 shares
under the Company's 1995 Non-Employee Directors Stock Option Plan (the
"Directors Plan"), 1,843,200 shares under the Company's 1995 Stock Option Plan
(the "Stock Option Plan") and 9,845 shares under the Company's 1995 Employee
Stock Purchase Plan (the "Stock Purchase Plan") (the Directors Plan, the Stock
Option Plan and the Stock Purchase Plan are collectively referred to as the
"Plans"). See "Description of Capital Stock." Unless otherwise specified, all
references in this Prospectus to "$" are to United States dollars and all
references to "L" are to British Pounds Sterling. Unless otherwise specified,
translation of amounts from British Pounds Sterling to United States dollars for
the convenience of the reader has been made in this Prospectus at the noon
buying rate in New York City for cable transfers in foreign currencies as
certified for customs purposes by the Federal Reserve Bank of New York (the
"Noon Buying Rate") on December 31, 1995 of L1.00 = $1.55. No representation is
made that the British Pound Sterling amounts could have been, or could be,
converted into United States dollars at that rate or at any other rate. In the
event of changes in the official rate, the amounts shown in the convenience
translations would change proportionately. At September 3, 1996, the Noon Buying
Rate was L1.00 = $1.57.
5
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CSC(1) COMPANY
------------------------ ------------------------------------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------ -------------------------------
------------------------ PRO FORMA PRO FORMA
1991 1992 1993 1994(2) 1995 1995(3) 1995 1996 1996(4)
------ ------ ------ ------- ------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Gain on sale of loans......... $ 792 $1,005 $2,088 $ 5,691 $38,198 $66,897 $12,471 $104,237(5) $ 61,182
Mortgage origination
income...................... 1,389 1,251 1,455 2,551 2,963 7,493 1,405 2,192 3,842
Interest income............... 718 612 536 1,900 6,706 16,025 2,134 9,478 11,752
Servicing income.............. -- -- -- 414 777 777 99 1,356 1,356
Earnings from partnership
interest.................... -- -- -- 391 482 482 431 260 260
Other......................... 317 131 378 227 385 664 43 636 770
------ ------ ------ ------- ------- ------ ------ -------- ------
Total revenues.............. 3,216 2,999 4,457 11,174 49,511 92,338 16,583 118,159 79,162
Costs and expenses:
Salaries and employee
benefits.................... 1,276 1,188 1,939 4,280 12,165 18,422 4,084 20,653 22,101
Other costs and expenses...... 1,737 1,718 2,195 5,041 14,581 36,478 5,942 22,091 30,207
------ ------ ------ ------- ------- ------ ------ -------- ------
Total expenses.............. 3,013 2,906 4,134 9,321 26,746 54,900 10,026 42,744 52,308
Earnings before minority
interest, income taxes and
extraordinary item............ 203 93 323 1,853 22,765 37,438 6,557 75,415 26,854
Minority interest............. -- -- -- -- 2,379 -- 845 -- --
------ ------ ------ ------- ------- ------ ------ -------- ------
Earnings before income taxes and
extraordinary item............ 203 93 323 1,853 20,386 37,438 5,712 75,415 26,854
Provision for income taxes...... 5 3 8 1,450(6) 8,515 15,591 2,285 31,297 11,144
------ ------ ------ ------- ------- ------ ------ -------- ------
Earnings before extraordinary
item.......................... 198 90 315 403 11,871 21,847 3,427 44,118 15,710
Extraordinary item.............. -- -- -- -- (296)(7) (296) -- -- --
------ ------ ------ ------- ------- ------ ------ -------- ------
Net earnings.................... $ 198 $ 90 $ 315 $ 403 $11,575 $21,551 $ 3,427 $ 44,118 $ 15,710
====== ====== ====== ======= ======= ====== ====== ======== ======
Earnings per share before
extraordinary item............ $ 0.01 $ 0.01 $ 0.02 $ 0.02 $ 0.50 $ 0.84 $ 0.16 $ 1.46 $ 0.51
Extraordinary item (per
share)........................ -- -- -- -- (0.01)(7) (0.01) -- -- --
------ ------ ------ ------- ------- ------ ------ -------- ------
Earnings per share:
Primary..................... $ 0.01 $ 0.01 $ 0.02 $ 0.02 $ 0.49 $ 0.83 $ 0.16 $ 1.46(8) $ 0.51
====== ====== ====== ======= ======= ====== ====== ======== ======
Fully diluted............... N/A N/A N/A N/A N/A N/A N/A $ 1.41(8) $ 0.51
====== ====== ====== ======= ======= ====== ====== ======== ======
Weighted average shares
outstanding:
Primary................... 20,000 20,000 20,000 20,560 23,838 25,985 22,082 30,152 30,799
====== ====== ====== ======= ======= ====== ====== ======== ======
Fully diluted............. N/A N/A N/A N/A N/A N/A N/A 31,941 32,588
====== ====== ====== ======= ======= ====== ====== ======== ======
Supplemental earnings
per share................. $ 0.80(9)
======
Supplemental weighted
average shares
outstanding............... 27,396(10)
======
</TABLE>
6
<PAGE> 9
<TABLE>
<CAPTION>
COMPANY
----------------------------
AT DECEMBER 31, AT JUNE
1995 30, 1996
--------------- --------
<S> <C> <C>
BALANCE SHEET DATA:
Total assets............................................................... $ 150,388 $462,993
Mortgage servicing receivables............................................. 22,059 117,275
Interest-only and residual certificates.................................... 15,571 45,415
Goodwill and other intangibles............................................. 19,258 78,266
Total debt (11)............................................................ 75,673 262,513
Total liabilities.......................................................... 93,289 343,047
Total stockholders' equity................................................. 57,099 119,946
</TABLE>
<TABLE>
<CAPTION>
COMPANY
CSC (1) ----------------------------------------------
-----------------------------
YEAR ENDED DECEMBER SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 31, 30,
----------------------------- -------------------- ----------------------
1991 1992 1993 1994(2) 1995 1995 1996(12)
------- ------- ------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING STATISTICS:
Loan originations and
purchases:
US...................... $37,820 $43,353 $77,586 $154,410 $417,864 $148,538 $ 456,683
UK...................... -- -- -- -- 41,395 7,595 309,393
------- ------- ------- -------- -------- -------- ----------
Total loan originations
and purchases........... $37,820 $43,353 $77,586 $154,410 $459,259 $156,133 $ 766,076
======= ======= ======= ======== ======== ======== ==========
Average principal balance
per loan originated and
purchased:
US...................... $50 $56 $74 $77 $70 $71 $67
UK...................... -- -- -- -- 43 47 15
Weighted average initial
loan-to-value ratio:
US...................... -- -- -- 59.7% 66.4% 65.3% 69.9%
UK...................... -- -- -- -- 49.0 49.0 51.6
Loan sales:
US...................... $40,305 $40,975 $61,293 $138,041 $358,997 $133,631 $ 446,724
UK...................... -- -- -- -- 41,395 7,595 275,866
------- ------- ------- -------- -------- -------- ----------
Total loan sales.......... $40,305 $40,975 $61,293 $138,041 $400,392 $141,226 $ 722,590
======= ======= ======= ======== ======== ======== ==========
Loans serviced(13):
US...................... -- -- -- $ 56,340 $386,720 $123,842 $ 757,913
UK...................... -- -- -- -- 40,299 7,595 332,192
------- ------- ------- -------- -------- -------- ----------
Total loans serviced...... -- -- -- $ 56,340 $427,019 $131,437 $1,090,105
======= ======= ======= ======== ======== ======== ==========
Loans 30+ days past due as
a percentage of serviced
portfolio:
US(14).................. -- -- -- 3.4% 3.9% 2.7% 5.6%
UK(15).................. -- -- -- -- 8.5 -- 16.7
Charge-offs:
US(14).................. -- -- -- -- $52 $52 $32
UK(15).................. -- -- -- -- -- -- --
</TABLE>
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(1) The historical financial data presented have been derived exclusively from
the financial statements of CSC, which was acquired by the Company on April
27, 1994.
(2) Gives effect to the Company's purchase of the capital stock of CSC as if
such purchase occurred on January 1, 1994. On April 27, 1994, the Company
acquired all of the capital stock of CSC in an acquisition in which the
shareholders of CSC acquired beneficial ownership of approximately 92% of
the Company's Common Stock (the "CSC Acquisition"). The CSC Acquisition was
accounted for as a reverse acquisition for financial reporting purposes
with CSC being deemed to have acquired a 100%
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interest in the Company as of the date of the acquisition. From the date of
its formation in 1988 through the date of the CSC Acquisition, the
Company's activities were limited to (i) the sale of initial shares in
connection with its organization, (ii) a registered public offering of
securities and (iii) the pursuit of a combination, by merger or
acquisition. The Company presently has no business operations other than
those incidental to its ownership of all the capital stock of CSC.
(3) Gives pro forma effect to (i) the Company's purchase of the 50% of the
capital stock of CSC-UK which was not previously owned by the Company (the
"UK Acquisition") as if such transaction had occurred on May 2, 1995, the
date CSC-UK commenced operations, and (ii) the J&J Acquisition and the
Heritable Acquisition as if such transactions had occurred on January 1,
1995. See "Unaudited Pro Forma Consolidated Financial Statements" and Notes
thereto.
(4) Gives pro forma effect to the J&J Acquisition and the Heritable Acquisition
as if such transactions had occurred on January 1, 1995. See "Unaudited Pro
Forma Consolidated Financial Statements" and Notes thereto.
(5) Includes gain on sale of $21.8 million and $29.2 million recognized as a
result of the sale of loan portfolios acquired as a result of the J&J
Acquisition and the Heritable Acquisition, respectively.
(6) Includes a one-time charge of $680,000 related to the change in tax status
in 1994 from an "S" corporation to a "C" corporation.
(7) Represents a loss, net of taxes, related to the early extinguishment of
subordinated debentures in December 1995.
(8) Includes primary earnings per share of $0.33 and $0.44 and fully diluted
earnings per share of $0.31 and $0.41 recorded in connection with the sale
of loans acquired as a result the J&J Acquisition and the Heritable
Acquisition, respectively.
(9) Gives effect to the application of a portion of the net proceeds of the
Company's December 1995 public offering to repay outstanding debt at the
time of such offering as if such application occurred on January 1, 1995,
resulting in a net increase of $464,000 in net earnings due to a reduction
in interest expense.
(10) Gives effect to the inclusion of 1,411,200 shares of Common Stock at $8.37
per share net to the Company to repay the outstanding debt as discussed in
Note 9 above.
(11) Includes short-term borrowings due under a warehouse facility and a US
standby facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
(12) Includes UK loan originations and purchases of $52.0 million and $188.6
million, average principal balance per UK loan originated and purchased of
$9,414 and $14,553, UK loan sales of $52.0 million and $155.1 million, UK
loans serviced of $52.0 million and $188.6 million, and loans 30 or more
days past due as a percentage of UK serviced portfolio of 6.7% and 6.4%,
due to loans acquired as a result of the J&J Acquisition and the Heritable
Acquisition, respectively.
(13) Includes master servicing and contract servicing operations by the Company.
See "Business -- Loans -- Loan Servicing and Collections -- US" and
" -- UK."
(14) Because the Company has expanded into the business of loan servicing in the
US only during the last two years, the Company's US loans serviced
portfolio is relatively unseasoned. The Company believes that over time its
delinquency and loan loss experience will increase as its loan portfolio
matures.
(15) The Company has been servicing loans in the UK only since May 1995.
Accordingly, the UK loans serviced portfolio is unseasoned. Excluding the
loan portfolios acquired as a result of the J&J Acquisition and the
Heritable Acquisition, the UK delinquency ratio would have been 12.1% at
June 30, 1996.
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RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be carefully considered before making an investment in the
Securities offered hereby. This Prospectus contains forward-looking statements
which involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in the following risk
factors and elsewhere in this Prospectus.
SUBORDINATION
The Debentures are subordinated in right of payment to all existing and
future Senior Indebtedness and are effectively subordinated to all existing and
future liabilities (including trade payables) of the Company's subsidiaries.
Neither the Indenture nor the Debentures limit the ability of the Company to
incur additional Senior Indebtedness or other indebtedness by the Company or its
subsidiaries. At July 31, 1996, Senior Indebtedness of the Company and its
subsidiaries aggregated $147.2 million. The Indenture and the Debentures do not
contain any financial covenants or similar restrictions respecting the Company
or its subsidiaries and, therefore, the holders of the Debentures have no
protection (other than rights upon Events of Default as described in
"Description of Debentures") from adverse changes in the Company's financial
condition. By reason of such subordination of the Debentures, in the event of
insolvency, bankruptcy, liquidation, reorganization, dissolution or winding up
of the business of the Company or upon a default in payment with respect to any
indebtedness of the Company or an event of default with respect to such
indebtedness resulting in the acceleration thereof, the assets of the Company
will be available to pay the amounts due on the Debentures only after all Senior
Indebtedness had been paid in full.
The Company conducts substantially all of its operations through its
subsidiaries. Accordingly, the Company's ability to meet its cash obligations is
dependent upon the ability of its subsidiaries to make cash distributions to the
Company. The ability of its subsidiaries to make distributions to the Company is
and will continue to be restricted by, among other limitations, applicable
provisions of the laws of national or state governments and contractual
provisions. Neither the Indenture nor the Debentures limit the ability of the
Company's subsidiaries to incur such restrictions in the future. The right of
the Company to participate in the assets of any subsidiary upon liquidation of
the subsidiary (and thus the ability of holders of the Debentures to benefit
indirectly from such assets) are generally subject to the prior claims of
creditors of that subsidiary except to the extent that the Company is recognized
as a creditor of such subsidiary, in which case the Company's claims would still
be subject to any security interests of other creditors of such subsidiary.
Therefore, the Debentures are effectively subordinated to creditors of
subsidiaries of the Company with respect to the assets of the subsidiaries
against which such creditors have claims.
AVAILABILITY OF FUNDING SOURCES
The Company funds substantially all of the loans which it originates and
purchases through borrowings under a warehouse facility secured by pledges of
its loans, loan purchase facilities under which the Company retains the rights
to repurchase loans sold, lines of credit secured by the residual and
interest-only interests in securitizations, a secured term loan and internally
generated funds. These borrowings are in turn repaid with the proceeds received
by the Company from selling such loans either through securitizations or whole
loan sales. Any failure to renew or obtain adequate funding under these credit
or warehouse facilities, or other borrowings, or any substantial reduction in
the size of or pricing in the markets for the Company's loans, could have a
material adverse effect on the Company's operations. To the extent that the
Company is not successful in maintaining or replacing existing financing, it
would have to curtail its loan production activities or sell loans earlier than
is optimal, which would have a material adverse effect on the Company's results
of operations and financial condition. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
As a result of its increased volume of loan originations and purchases and
its growing use of securitizations, the Company has operated since March 1995,
and expects to continue to operate, on a negative cash flow basis. Prior to
1995, the Company sold loans primarily through whole loan sales which
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generate immediate cash flow on the date of sale. For the year ended December
31, 1995 and the six months ended June 30, 1996, the Company operated on a
negative cash flow basis using $75.5 million and $47.3 million, respectively,
more in operations than was generated, due primarily to the Company's sale of
loans through securitizations.
In connection with the Company's pre-funding commitments in its
securitization transactions, investors deposit in cash a pre-funded amount into
the related trust to purchase loans the Company commits to sell on a forward
basis. This pre-funded amount is invested pending subsequent transfers of loans
to the trusts in short term obligations which pay a lower interest rate than the
interest rate the trust is obligated to pay the certificate investors on the
outstanding balance of the pre-funded amount. The Company is required to deposit
at the closing of the related transaction an amount sufficient to make up the
difference between these rates. If the Company were unable to make such
deposits, it would be unable to access the pre-funding mechanism that allows it
to sell relatively greater volume through each securitization, which could
result in an adverse effect upon the Company's results of operations and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
The type, timing and terms of financing selected by the Company will be
dependent upon the Company's cash needs, the availability of financing sources
and the prevailing conditions in the financial markets. There can be no
assurance that any sources will be available to the Company at any given time or
as to the favorability of the terms on which such sources may be available.
DEPENDENCE ON SECURITIZATIONS
Since March 1995, the Company has pooled and sold through securitizations
an increasing percentage of the loans which it originates or purchases. The
Company derives a significant portion of its income by recognizing gains upon
the sale of loans through securitizations due to the fair value, recorded at the
time of sale, of the interest-only and residual certificates in the US, and the
value, recorded at the time of sale, of mortgage servicing receivables
recognized through UK securitizations and on sales into the US and UK purchase
facilities. In loan sales through US securitizations, the Company sells loans
that it has originated or purchased to a real estate mortgage investment conduit
("REMIC") trust for a cash purchase price and interests in such REMIC trust
consisting of interest-only regular interests and the residual interest which
are represented by the interest-only and residual certificates. The cash
purchase price is raised through an offering by the REMIC trust of pass-through
certificates representing regular interests in the REMIC trust. Following the
securitization, the purchasers of the pass-through certificates receive the
principal collected and the investor pass-through interest rate on the principal
balance, while the Company recognizes as current revenue the fair value of the
interest-only and residual certificates. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Accounting
Considerations."
Adverse changes in the US or UK securitization market for home equity and
home improvement loans could impair the Company's ability to originate, purchase
and sell loans through securitizations on a favorable or timely basis. Any such
impairment could have a material adverse effect upon the Company's results of
operations and financial condition. Furthermore, the Company's quarterly
operating results can fluctuate significantly as a result of the timing and
level of securitizations. If securitizations do not close when expected, the
Company's results of operations may be adversely affected for that period.
In addition, in order to gain access to the securitization market, the
Company has relied on credit enhancements provided by monoline insurance
carriers to guarantee outstanding senior interests in the related REMIC trusts
to enable it to obtain an "AAA/Aaa" rating for such interests. The Company has
not attempted to structure a mortgage loan pool for sale through a
securitization based solely on the internal credit enhancements of the pool or
the Company's credit. Any substantial reductions in the size or availability of
the securitization market for the Company's loans, or the unwillingness of
insurance companies to guarantee the senior interests in the Company's loan
pools, could have a material adverse effect on the Company's results of
operations and financial condition.
The documents governing the Company's securitizations require the Company
to build over-collateralization levels through retention of excess servicing
distributions and application thereof to reduce the principal
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balances of the senior interests issued by the related trust. This application
causes the aggregate principal amount of the loans in the related pool to exceed
the aggregate principal balance of the outstanding investor certificates. Such
excess amounts serve as credit enhancement for the related trust and therefore
fund losses realized on loans held by such trust. The Company continues to be
subject to the risks of default and foreclosure following the sale of loans
through securitizations to the extent excess servicing distributions are
required to be retained or applied to reduce principal from time to time. Such
retained amounts are pre-determined by the entity issuing the guarantee of the
related senior interests and are a condition to obtaining an "AAA/Aaa" rating
thereon. In addition, such retention diverts cash which would otherwise flow to
the Company through its retained interest in the transaction represented by the
interest-only and residual certificates the Company receives upon loan sales
through securitizations, thereby slowing the flow of cash to the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
INTEREST-ONLY AND RESIDUAL CERTIFICATES AND MORTGAGE SERVICING RECEIVABLES
The Company sells over 85% of the loans that it originates or purchases
through securitizations or into loan purchase facilities with servicing
retained. The Company derives a substantial portion of its income by recording a
gain on sale when loans are sold in such a manner. In the case of a US
securitization, the Company records as an investment the interest-only and
residual certificates the Company receives as a result of such securitization.
In the case of a UK securitization, or the sale of loans into a loan purchase
facility, the Company records a mortgage servicing receivable. In addition,
since it adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights" in
October 1995, the Company also recognizes as an asset the capitalized value of
mortgage servicing rights (including normal servicing and other ancillary fees)
as a mortgage servicing receivable. The Company calculates the value of its
interest-only and residual certificates and mortgage servicing receivables in
substantially the same manner. The fair value of these assets is determined
based on various economic factors, including loan types, balances, interest
rates, dates of origination, terms and geographic locations. The Company also
uses other available information such as reports on prepayment rates, interest
rates, collateral value, economic forecasts and historical default and
prepayment rates of the portfolio under review. The Company estimates the
expected cash flows that it will receive over the life of a portfolio of loans.
These expected cash flows constitute the excess of the interest rate payable by
the obligors of loans over the interest rate passed through to the purchasers of
the related securities, less applicable recurring fees and credit losses. The
Company discounts the expected cash flows at a discount rate that it believes is
consistent with the required risk-adjusted rate of return to an independent
third party purchaser of the interest-only and residual certificates or mortgage
servicing receivables. As of June 30, 1996, the Company's balance sheet
reflected the fair value of interest-only and residual certificates and mortgage
servicing receivables of $45.4 million and $117.3 million, respectively.
Realization of the value of these interest-only and residual certificates
and mortgage servicing receivables in cash is subject to the prepayment and loss
characteristics of the underlying loans and to the timing and ultimate
realization of the stream of cash flows associated with such loans. If actual
experience differs from the assumptions used in the determination of the asset
value, future cash flows and earnings could be negatively impacted and the
Company could be required to write down the value of its interest-only and
residual certificates and mortgage servicing receivables. In addition, if
prevailing interest rates rose, the required discount rate might also rise,
resulting in impairment of the value of the interest-only and residual
certificates and mortgage servicing receivables. The Company believes that there
is no active market for the sale of its interest-only and residual certificates
or its mortgage servicing receivables. No assurance can be given that these
assets could be sold at their stated value on the balance sheet, if at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ECONOMIC CONDITIONS
General
The Company's business may be adversely affected by periods of economic
slowdown or recession which may be accompanied by decreased demand for consumer
credit and declining real estate values. Any material
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decline in real estate values reduces the ability of borrowers to use home
equity to support borrowings and increases the loan-to-value ratios of loans
previously made by the Company, thereby weakening collateral coverage and
increasing the possibility of a loss in the event of default. Further,
delinquencies, foreclosures and losses generally increase during economic
slowdowns or recessions. Because of the Company's focus on borrowers who are
unable or unwilling to obtain mortgage financing from conventional mortgage
sources, the actual rates of delinquencies, foreclosures and losses on such
loans could be higher under adverse economic conditions than those currently
experienced in the conventional mortgage lending industry. Any sustained period
of such increased delinquencies, foreclosures or losses could adversely affect
the pricing of the Company's loan sales whether through whole loan sales or
securitizations.
Loans made to borrowers who are unable or unwilling to obtain mortgage
financing from conventional mortgage sources may entail a higher risk of
delinquency and higher losses than loans made to borrowers who utilize
conventional mortgage sources. While the Company believes that the underwriting
criteria and collection methods it employs enable it to mitigate the higher
risks inherent in loans made to these borrowers, no assurance can be given that
such criteria or methods will afford adequate protection against such risks. In
the event that pools of loans sold and serviced by the Company experience higher
delinquencies, foreclosures or losses than anticipated, the Company's results of
operations or financial condition could be adversely affected. Because the
Company has only expanded into the business of loan servicing during the last
two years, the Company's US serviced portfolio is relatively unseasoned.
Accordingly, the Company has experienced and expects to continue to experience
an increase in total US delinquencies as a percentage of the US serviced
portfolio. The Company has also experienced an increase in delinquency rates in
connection with its UK serviced portfolio. Further, J&J's historical delinquency
experience has been higher than that of CSC-UK, totaling 45.7% at June 30, 1996.
The Company is exposed to the risk of loan delinquencies and defaults upon
the closing of the loan. After a loan has been originated or purchased by the
Company, the loan is held as part of a portfolio of loans subject to sale either
through a securitization or on a whole loan basis. During the period a loan is
so held, the Company is at risk for loan delinquencies and defaults. Following
the sale of the loan through a securitization, the Company's direct risk with
respect to loan delinquency or default on such loan is limited to those
circumstances in which it is required to repurchase such loan due to a breach of
a representation or warranty in connection with the securitization. This risk
also exists for loans sold on a whole loan basis. On loans sold through
securitizations, the Company is also at risk of loan delinquency or default from
a first payment default and thereafter to the extent that losses are paid out of
a reserve account, or reduce the over-collateralization to the extent that funds
are available, and will result in a reduction in the value of the interest-only
and residual certificates and mortgage servicing receivables held by the
Company. See "-- Contingent Risks" and "Business -- Loans -- Loan Sales."
Interest Rates
Profitability may be directly affected by the level of and fluctuations in
interest rates which affect the Company's ability to earn a spread between
interest received on its loans and the costs of borrowings. The profitability of
the Company is likely to be adversely affected during any period of unexpected
or rapid changes in interest rates. A substantial and sustained increase in
interest rates could adversely affect the ability of the Company to originate
and purchase loans and could reduce the gain on sale recognized by the Company
when loans are sold through securitizations. A significant decline in interest
rates could decrease the size of the Company's loan servicing portfolio by
increasing the level of loan prepayments. Additionally, to the extent servicing
spread has been capitalized on the books of the Company or the Company holds
interest-only and residual certificates received upon loan sales through
securitizations, higher than anticipated rates of loan prepayments or losses
could require the Company to write down the value of such servicing spread or
the fair value of such interest-only and residual certificates, adversely
impacting earnings. Fluctuating interest rates also may affect the net interest
income earned by the Company resulting from the difference between the yield to
the Company on loans held pending sale and the interest paid by the Company for
funds borrowed under the Company's warehouse facility. In addition, inverse or
flattened interest yield curves could have an adverse impact on the
profitability of the Company because the loans pooled and sold by the Company
generally have
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<PAGE> 15
long-term rates, while the senior interests in the related REMIC trusts are
priced on the basis of intermediate rates in the US.
RECENT EXPANSION AND PRODUCT EXTENSION
Since January 1, 1994, the Company has originated and purchased a
significantly greater number of loans than it had in previous years. In light of
this growth, the historical performance of the Company's earnings may be of
limited relevance in predicting future performance. Any credit or other problems
associated with the larger number of loans originated and purchased in the
recent past will not become apparent until sometime in the future.
The Company's significant growth and expansion have placed substantial new
and increased pressures on the Company's personnel and systems. In order to
support the growth of its business, the Company has added a significant number
of new operating procedures, facilities and personnel. Although the Company
believes the addition of new operating procedures and personnel will be
sufficient to enable it to meet its growing operating needs, there can be no
assurance that this will be the case. Failure by the Company to manage its
growth effectively, or to sustain its historical levels of performance in credit
analysis and transaction structuring with respect to the increased loan
origination and purchase volume, could have a material adverse effect on the
Company's results of operations and financial condition.
In addition, the Company has recently expanded its product offerings to
include conventional home improvement loans, jumbo loans, adjustable rate loans
and, to a lesser extent, Title I loans, with which the Company has relatively
little experience. The Company has incurred certain expenses in connection with
the development of these new product offerings. No assurance can be given that
the Company will be able to develop these new product offerings successfully, or
that the Company's extension of its product offerings will not have a material
adverse effect on the Company's results of operations and financial condition.
RISKS RELATED TO ACQUISITIONS
In September 1995, the Company acquired the remaining 50% of CSC-UK not
then owned by the Company in exchange for 3.6 million shares of Common Stock. In
April 1996, CSC-UK acquired all of the outstanding capital stock of J&J in
exchange for L15.0 million ($22.7 million) and 548,000 shares of Common Stock
valued at $9.8 million. J&J's business is substantially similar to that of
CSC-UK but with a primary focus of making loans generally secured by second
liens. In June 1996, CSC-UK acquired all of the outstanding capital stock of
Heritable in exchange for L41.8 million ($66.0 million) and 99,362 shares of
Common Stock valued at $2.5 million. Heritable's business differs from that of
CSC-UK in that its loans are made primarily to borrowers with higher quality
credit characteristics, are generally secured by second liens and generally have
higher loan-to-value ratios and lower interest rates than those made by CSC-UK.
An important part of the Company's growth strategy is the acquisition of
consumer finance companies that complement or supplement the Company's existing
business in the US and in the UK, such as J&J and Heritable. Any acquisition
involves inherent uncertainties, such as the effect on the acquired business of
integration into the Company and the availability of management resources to
oversee the operations of the acquired business. Integrating acquired products
and operations requires a significant amount of the Company's management's time
and skill and may place significant demands on the Company's operations and
financial resources. Although an acquired business may have enjoyed
profitability and growth prior to the acquisition, there can be no assurance
that such profitability or growth would continue thereafter. There can be no
assurance that the Company will be able to locate appropriate acquisition
candidates, that any identified candidates will be acquired or that acquired
operations will be effectively integrated or prove profitable. The consummation
of acquisitions could result in the incurrence or assumption by the Company of
additional indebtedness and the issuance of additional equity. There can be no
assurance that any such financing can be obtained by the Company on favorable
terms, if at all.
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In addition, in connection with its recent acquisitions of CSC-UK, J&J and
Heritable, the Company recognized $19.7 million, $19.2 million and $41.2
million, respectively, of goodwill. The Company may also recognize significant
amounts of goodwill in connection with future acquisitions. The Company
amortizes such goodwill over ten years, and the relatively large amortization
charge in each year may significantly reduce earnings recorded in future
periods. In addition, in the event that the Company determines that the carrying
value of goodwill is impaired, it would write down such carrying value which
would result in a charge to earnings. Any such charge could have a material
adverse effect on the Company's financial results. In connection with its recent
acquisitions, the Company has also made certain provisions for restructuring
charges in the aggregate amount of $4.5 million for items including charges for
terminated leases and severance payments, and may have to make similar
provisions with respect to future acquisitions. In the event that the actual
charges exceed the provisions made by the Company, they will have an adverse
effect on the Company's results of operations.
DEPENDENCE ON FUNDING SOURCE
The Company funds substantially all of its loan origination and purchase
volume and working capital requirements in the US and the UK through loan sales
pursuant to mortgage loan purchase agreements that include working capital
facilities with Greenwich Capital Markets, Inc. (referred to herein, including
its affiliates, as "Greenwich"). The US facility (the "US Greenwich Facility")
is provided through Greenwich's affiliate, Greenwich Capital Financial Products,
Inc., and the UK facility (the "UK Greenwich Facility") is provided through its
affiliate, Greenwich International, Ltd. With certain exceptions, the Company is
required to sell all of its loans to Greenwich. The Company and/or Greenwich
will then resell these loans through whole loan sales or securitizations. These
provisions of the US Greenwich Facility and the UK Greenwich Facility may
prevent the Company from taking advantage of other more favorable financing
sources that may become available to the Company. Additionally, the Company
expects to derive a substantial portion of its working capital through the
mortgage loan purchase agreements. To the extent that the Company is not
successful in maintaining or replacing existing financing, it would have to
curtail its loan production activities or sell loans earlier than is optimal,
thereby adversely affecting the Company's results of operations and financial
condition. CSC-UK has agreed to pay a fee to Greenwich in connection with the UK
Greenwich Facility in the aggregate amount of $38.0 million in the form of two
notes that bear interest at a rate of 6.2% and are payable in the amounts of
$13.0 million on December 15, 1996 and $25.0 million on December 15, 1997. The
Company is amortizing this fee over the 20-year life of the facility. If the
facility were to be terminated prior to its scheduled expiration in 2016, the
Company would have to write-off the fee earlier than anticipated, resulting in a
charge to earnings in the period of such write-off of the unamortized amount of
the fee at that time, which would have an adverse effect on the Company's
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Additionally, the agreement governing the UK Greenwich Facility prohibits
the payment of dividends by CSC-UK to the Company prior to the repayment of all
outstanding balances under the working capital facility of the UK Greenwich
Facility.
EXPANSION IN THE UK
General
The Company's operations in the UK market are subject to most of the same
risks faced by the Company's US operations as well as the additional risks
customarily associated with US corporations conducting foreign activities,
including fluctuations in foreign currency exchange rates. To the extent that
unfavorable fluctuations in foreign currency exchange rates occur, the Company's
results of operations will be adversely affected. Although the Company is
exploring possible programs for hedging this risk, the Company is not aware of
any such program currently available that is suited to the Company's risk. There
can be no assurance that the Company will adopt a program to hedge this risk.
Additional risks in the UK include fluctuations in foreign currency controls,
expropriation, nationalization and other economic, tax and regulatory
14
<PAGE> 17
policies of the UK government as well as the laws and policies of the US
affecting foreign trade and investment.
Business Prospects
The Company believes that the market in the UK for borrowers who are unable
or unwilling to obtain mortgage financing from conventional mortgage sources at
competitive rates, if at all, is underserved as a result of regulatory policies
imposed on banks and building societies in the late 1980s. Currently many of
such borrowers obtain mortgage financing through independent mortgage brokers
predominantly funded by private investors. Since the Company commenced
operations in the UK in May 1995, all of its UK loan originations have been
derived from mortgage brokers (with the exception of the loan portfolios
purchased as a result of the J&J Acquisition and the Heritable Acquisition).
Approximately 60.5% and 48.0% of such loans were originated through three
mortgage brokers in 1995 and in the six months ended June 30, 1996,
respectively. Although the Company believes that its products and services will
attract a consistent flow of loan origination volume from independent mortgage
brokers, there can be no assurance the Company will be able to obtain similar
levels of loan origination volume from brokers in the future. Further, there can
be no assurance that the Company, due to competition or other factors, will be
able to obtain similar terms and pricing for such loan originations. In
particular, the Company has agreed to pay increased commissions to brokers on
loans originated in connection with right of first refusal agreements. As a
result of the Heritable Acquisition, the Company has also begun to participate
in the market for loans to borrowers with higher quality credit characteristics,
which loans generally have higher loan-to-value ratios and lower interest rates
than those originated by CSC-UK and J&J.
Regulation
The Company's mortgage banking business in the UK is subject to regulations
promulgated under the United Kingdom Consumer Credit Act 1974 (the "CCA")
applicable to loans made to individuals or partnerships with principal balances
of L15,000 or less. Loans with principal balances in excess of L15,000 are not
currently regulated within the UK. There is currently a proposal that, if
enacted, would increase this amount to L25,000. The CCA and regulations
promulgated thereunder, among other things, impose licensing obligations on
CSC-UK and its subsidiaries, set down certain requirements relating to the form,
content, legibility, execution and delivery to the borrower of loan documents,
restrict communication with the borrower prior to completion of a transaction,
require information and notice of enforcement to be given to the borrower,
require rebates to the borrower on early settlement and create a cause of action
for "extortionate credit bargain." A license is required to service loans in the
UK irrespective of the size of the loan. Failure to comply with the requirements
of these rules and regulations can result in the revocation or suspension of the
license to do business and render the mortgage unenforceable in the absence of a
court order.
Although the Company believes that CSC-UK has systems and procedures to
facilitate compliance with the requirements under the CCA and is in compliance
in all material respects with applicable laws and regulations, there can be no
assurance that more restrictive laws and regulations will not be adopted in the
future that could make compliance more difficult or expensive. Approximately
45.1% (as a percentage of aggregate principal balances) of the Company's UK
loans were subject to the CCA and the regulations promulgated thereunder at June
30, 1996. Of this 45.1%, 4.8% were loans originated by CSC-UK, 27.6% by J&J and
67.6% by Heritable. If the current proposal to increase the regulated amount to
L25,000 is enacted, an additional 29.5% of the Company's UK loans at June 30,
1996 would have been regulated. The Company cannot predict the likelihood of the
enactment of this proposal or any other change to the CCA. This proposed
regulation or other future regulation, if enacted, could limit the Company's
ability to impose fees and charges and could have a material adverse effect on
the Company's results of operations and financial condition.
Secondary Market
In March 1996, CSC-UK completed its first securitization of L32.0 million
($49.6 million) of loans. Although the Company believes that a UK secondary
market exists for the type of mortgage loans it originates in the UK, the UK
secondary market for such loans is less developed than the US secondary market
for such
15
<PAGE> 18
loans. The Company believes that its March 1996 sale was the first publicly
offered, London Stock Exchange listed securitization of loans of the type
originated by the Company sold in the UK secondary market in several years. No
assurances can be given that CSC-UK will be successful in structuring, marketing
and completing loan securitizations in the UK in the future or that a viable
market for whole loan sales will continue. Failure to securitize or sell
mortgage loans in the UK would have a material adverse effect on CSC-UK's, and
therefore the Company's, results of operations and financial condition.
Mortgage Servicing Receivables
Due to the relatively brief period the Company has operated in the UK, the
Company has limited data on which to base certain of the assumptions necessary
to determine the gain on sale recognized when the Company sells UK loans through
securitizations. A component of such gain on sale, which is capitalized on the
Company's balance sheet as mortgage servicing receivables, results from two
attributes of the Company's UK loans that are not shared by the Company's US
loans. Unlike the Company's US loans, certain UK loans have significant
prepayment penalties and/or provide the borrower with an opportunity to pay a
reduced, or "concessionary" rate to the extent the borrower pays the loan when
due. To the extent that actual prepayments occur at a slower rate than assumed
on UK loans, the Company may realize lower prepayment penalties, or realize the
penalties at a later time, than assumed at the time the gain on sale was
originally determined resulting in impairment to mortgage servicing receivables.
If more borrowers than were initially assumed earned the opportunity to pay the
reduced "concessionary rate," the Company will realize a lower than expected
yield on such borrowers' loans also resulting in impairment to mortgage
servicing receivables. Although the Company believes that its assumptions with
respect to UK prepayments and borrowers who will be eligible to pay the
"concessionary rate" are reasonable, no assurance can be given that actual
results will not differ substantially. In addition, no assurance can be given
that the regulatory environment will not adversely change or competitors
entering the UK market will not offer to borrowers better prepayment and
interest terms than those currently offered by the Company. Either of such
developments could impair the Company's mortgage servicing receivables and would
have a negative impact on the Company's financial condition and results of
operations.
Mortgage servicing receivables may also be impaired as a result of certain
adjustments in interest rates affecting UK loans. The interest rates on the
majority of the Company's UK loans may be adjusted upward by the Company based
upon a UK base borrowing rate. The Company's UK loans have generally been less
sensitive to fluctuations in interest rates than is typically the case for US
adjustable rate loans. The Company's UK securitization completed in March 1996
and loan sales into the UK Greenwich Facility have variable pass-through rates
based on LIBOR, requiring an increase in the rate upon a specified increase in
LIBOR. To the extent that the Company's UK loan interest rates are not adjusted
upward in a timely manner in response to increases in the variable pass-through
rate relating to the securitization, mortgage servicing receivables will be
impaired. In addition, if such interest rates are adjusted upward and borrowers
are unable to make the resulting higher payments, the Company's UK loans may
experience greater delinquencies and losses which could cause the mortgage
servicing receivables to be impaired. See "-- Interest-Only and Residual
Certificates and Mortgage Servicing Receivables," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business -- General -- UK Overview."
CONTINGENT RISKS
Although the Company sells substantially all loans which it originates and
purchases on a nonrecourse basis, the Company retains some degree of credit risk
on substantially all loans sold. During the period of time that loans are held
pending sale, the Company is subject to the various business risks associated
with the lending business including the risk of borrower default, the risk of
foreclosure and the risk that a rapid increase in interest rates would result in
a decline in the value of loans to potential purchasers. In addition, documents
governing the Company's securitizations require the Company to commit to
repurchase or replace loans which do not conform to the representations and
warranties made by the Company at the time of sale. When borrowers are
delinquent in making monthly payments on loans included in a REMIC trust, the
Company is required to advance interest payments with respect to such delinquent
loans to the extent that the Company
16
<PAGE> 19
deems such advances ultimately recoverable. These advances require funding from
the Company's capital resources but have priority of repayment from the
succeeding month's collections.
In the ordinary course of its business, the Company is subject to claims
made against it by borrowers and private investors arising from, among other
things, losses that are claimed to have been incurred as a result of alleged
breaches of fiduciary obligations, misrepresentations, errors and omissions of
employees, officers and agents of the Company (including its appraisers),
incomplete documentation and failures by the Company to comply with various laws
and regulations applicable to its business. The Company believes that liability
with respect to any currently asserted claims or legal actions is not likely to
be material to the Company's consolidated results of operations or financial
condition; however, any claims asserted in the future may result in legal
expenses or liabilities which could have a material adverse effect on the
Company's results of operations and financial condition.
GEOGRAPHIC CONCENTRATION OF US OPERATIONS
Approximately 20% of the Company's US loan origination and purchase volume
for the six months ended June 30, 1996 was derived from the state of New York.
Although the Company is licensed or registered in 37 states and the District of
Columbia and intends to continue to expand into other markets, it is expected
that the state of New York will continue to provide a substantial portion of its
loan origination and purchase activity. Consequently, the Company's results of
operations and financial condition are largely dependent upon general trends in
the New York economy and its residential real estate market.
COMPETITION
As a marketer of mortgage loans, the Company faces intense competition,
primarily from mortgage banking companies, commercial banks, credit unions,
thrift institutions, credit card issuers, finance companies and, additionally in
the UK, building societies. Many of these competitors in the financial services
business are substantially larger and have more capital and other resources than
the Company. Furthermore, certain large national finance companies and
conforming mortgage originators in the US have announced their intention to
adapt their conforming origination programs and allocate resources to the
origination of non-conforming loans. In addition, certain of these larger
mortgage companies and commercial banks have begun to offer products similar to
those offered by the Company, targeting customers similar to those of the
Company. The entrance of these competitors into the Company's market could have
a material adverse effect on the Company's financial condition and results of
operations.
Competition can take many forms, including convenience in obtaining a loan,
customer service, marketing and distribution channels and interest rates.
Competition may be affected by fluctuations in interest rates and general
economic conditions. During periods of rising rates, competitors that have
"locked in" low borrowing costs may have a competitive advantage. During periods
of declining rates, competitors may solicit the Company's customers to refinance
their loans. During economic slowdowns or recessions, the Company's borrowers
may have new financial difficulties and may be receptive to offers by the
Company's competitors. The current level of gains realized by the Company and
its competitors on the sale of the type of loans they originate and purchase is
attracting additional competitors into this market with the possible effect of
lowering gains that may be realized on the Company's future loan sales.
Furthermore, as the Company expands into the market of borrowers with higher
quality credit, loan products that require more significant capital and bulk
purchases, the Company will face additional competition with the possible effect
of lowering gains realized by the Company.
The Company depends largely on independent mortgage brokers and financial
institutions and other mortgage bankers for its originations and purchases of
new loans. The Company's competitors also seek to establish relationships with
the Company's independent mortgage brokers and financial institutions and other
mortgage bankers. In addition, the Company expects the volume of wholesale loans
purchased by the Company to increase and the relative proportion of wholesale
loans to total loans originated and purchased by the Company to expand. The
Company's future results may become more exposed to fluctuations in the
17
<PAGE> 20
volume and cost of its wholesale loans resulting from competition from other
purchasers of such loans, market conditions and other factors.
LEGISLATIVE AND REGULATORY RISKS
Members of Congress and government officials have from time to time
suggested the elimination of the mortgage interest deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. Because many of the Company's loans are made to borrowers
for the purpose of consolidating consumer debt or financing other consumer
needs, the competitive advantages of tax deductible interest, when compared with
alternative sources of financing, could be eliminated or seriously impaired by
such government action. Accordingly, the reduction or elimination of these tax
benefits could have a material adverse effect on the demand for loans of the
kind offered by the Company.
The Company's US business is subject to extensive regulation, supervision
and licensing by federal, state and local governmental authorities and is
subject to various laws and judicial and administrative decisions imposing
requirements and restrictions on part or all of its operations. The Company's
consumer lending activities are subject to the Federal Truth-in-Lending Act and
Regulation Z (including the Home Ownership and Equity Protection Act of 1994),
the Federal Equal Credit Opportunity Act and Regulation B, as amended ("ECOA"),
the Fair Credit Reporting Act of 1970, as amended, the Federal Real Estate
Settlement Procedures Act ("RESPA") and Regulation X, the Home Mortgage
Disclosure Act, the Federal Debt Collection Practices Act and the National
Housing Act of 1934, as well as other federal and state statutes and regulations
affecting the Company's activities. The Company is also subject to the rules and
regulations of, and examinations by, the Department of Housing and Urban
Development ("HUD") and state regulatory authorities with respect to
originating, processing, underwriting, selling, securitizing and servicing
loans. These rules and regulations, among other things, impose licensing
obligations on the Company, establish eligibility criteria for mortgage loans,
prohibit discrimination, provide for inspections and appraisals of properties,
require credit reports on loan applicants, regulate assessment, collection,
foreclosure and claims handling, investment and interest payments on escrow
balances and payment features, mandate certain disclosures and notices to
borrowers and, in some cases, fix maximum interest rates, fees and mortgage loan
amounts. Failure to comply with these requirements can lead to loss of approved
status, termination or suspension of servicing contracts without compensation to
the servicer, demands for indemnifications or mortgage loan repurchases, certain
rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement actions.
Although the Company believes that it has systems and procedures to
facilitate compliance with these requirements and believes that it is in
compliance in all material respects with applicable local, state and federal
laws, rules and regulations, there can be no assurance that more restrictive
laws, rules and regulations will not be adopted in the future that could make
compliance more difficult or expensive. See "-- Expansion in the
UK -- Regulation" and "Business -- Regulation."
POSSIBLE ENVIRONMENTAL LIABILITIES
US
In the course of its business, the Company has acquired, and may acquire in
the future, properties securing loans which are in default. Under various
federal, state and local environmental laws, ordinances and regulations, a
current or previous owner or operator of real estate may be required to
investigate and clean up hazardous or toxic substances or chemical releases at
such property, and may be held liable to a governmental entity or to third
parties for property damage, personal injury and investigation and cleanup costs
incurred by such parties in connection with the contamination. Such laws
typically impose cleanup responsibility and liability which, under such laws,
has been interpreted to be joint and several unless the harm is divisible and
there is a reasonable basis for allocation of responsibility. The costs of
investigation, remediation or removal of such substances may be substantial, and
the presence of such substances, or the failure to properly remediate such
property, may adversely affect the owner's ability to sell or rent such property
or to borrow using such property as collateral. Persons who arrange for the
disposal or treatment of hazardous or toxic substances also may be liable for
the costs of removal or remediation of such substances at the disposal or
treatment facility,
18
<PAGE> 21
whether or not the facility is owned or operated by such person. In addition,
the owner or former owners of a contaminated site may be subject to common law
claims by third parties based on damages and costs resulting from environmental
contamination emanating from such property.
UK
"Owners" or "occupiers" of contaminated land in the UK are potentially
liable under UK environmental laws. Such persons can be required to clean up
affected land, cease polluting activities, obtain licenses in respect of waste
management, reimburse for cleanup costs of land and controlled waters and pay
fines for non-compliance with relevant laws and regulations. A lender may be
deemed to be an "owner" upon enforcement of its interest in the mortgaged
property following default by the borrower and depending on the method of
enforcement employed. The Environment Act 1995 requires local authorities to
inspect and identify contaminated land in their jurisdiction.
No assurance can be given in either the US or the UK that any prior owner
or tenant of a property did not create any material environmental condition not
known to the Company, that future laws, ordinances or regulations will not
impose any material environmental liability, or that a material environmental
condition does not otherwise exist as to any one or more of the properties now
owned or acquired in the future by the Company, any of which could result in a
material adverse effect on the Company's results of operations and financial
condition.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock may experience fluctuations that are
unrelated to the operating performance of the Company. In particular, the price
of the Common Stock may be affected by general market price movements as well as
developments specifically related to the consumer finance industry such as,
among other things, interest rate movements, loss and delinquency rates and the
Company's access to and the overall performance of the securitization market. In
addition, the Company's operating income on a quarterly basis is significantly
dependent upon the successful completion of the Company's loan sales in the
market, and the inability of the Company to complete significant loan sale
transactions in a particular quarter may have a material adverse impact on the
Company's results of operations for that quarter and could, therefore,
negatively impact the price of the Common Stock. It is likely that the market
price of the Debentures, including the Offered Debentures, will be effected by
the market price of the Common Stock.
DEPENDENCE ON KEY PERSONNEL
The Company's growth and development to date have been largely dependent
upon the services of Robert Grosser, Chairman of the Board, Chief Executive
Officer and President of the Company, and Robert C. Patent, Vice Chairman of the
Board and Executive Vice President of the Company. Although the Company has been
able to hire and retain other qualified and experienced management personnel,
the loss of Mr. Grosser's or Mr. Patent's services for any reason could have a
material adverse effect on the Company. The Company has entered into employment
agreements with Messrs. Grosser and Patent. See "Management -- Executive
Compensation -- Employment Agreements."
In the UK, David A. Steene, the Managing Director of CSC-UK, has played an
important role in the development of CSC-UK and the loss of his services could
have a material adverse effect on CSC-UK and therefore on the Company. CSC-UK
has entered into an employment agreement with Mr. Steene. See
"Management -- Executive Compensation -- Employment Agreements" and "Certain
Transactions -- CSC-UK Transactions."
CONTROL BY CERTAIN STOCKHOLDERS
As of July 31, 1996, certain members of the Company's senior management and
Board of Directors beneficially owned an aggregate of 72.2% of the outstanding
shares of Common Stock. Such persons, if they were to act in concert, have
majority control of the Company, with the ability to approve certain fundamental
corporate transactions (including mergers, consolidations and sales of assets)
and to elect all members of the Board of Directors. See "Security Ownership of
Certain Beneficial Owners and Management."
19
<PAGE> 22
ABSENCE OF DIVIDENDS
The Company has not paid any cash dividends on its Common Stock since its
inception and does not currently anticipate paying dividends on its Common Stock
in the foreseeable future. In addition, certain agreements to which the Company
is a party restrict the Company's ability to pay dividends on its Common Stock.
The Company conducts substantially all of its operations through its
subsidiaries. Accordingly, the Company's ability to pay dividends is also
dependent upon the ability of its subsidiaries to make cash distributions to the
Company. The payment of dividends to the Company by its subsidiaries is and will
continue to be restricted by or subject to, among other limitations, applicable
provisions of laws of national or state governments, contractual provisions, the
earnings of such subsidiaries and various business considerations.
ABSENCE OF PUBLIC MARKET FOR DEBENTURES
The Debentures have no established trading market. The Company has not
listed and does not intend to list the Debentures on any national securities
exchange or to seek the admission thereof to trading on Nasdaq. Prior to the
offering of the Offered Debentures, certain of the Debentures were designated
for trading on the Private Offerings, Resales and Trading through Automatic
Linkages ("Portal") System of the National Association of Securities Dealers,
Inc. However, there can be no assurance that an active trading market for the
Debentures has developed or will develop or, if such market develops, that it
will be maintained. Moreover, insofar as the Debentures other than the Offered
Debentures must be transferred pursuant to an exemption under the Securities
Act, any trading market for the Debentures may not be viewed as fungible and if
a trading market for the Debentures does develop, such Debentures could trade at
a substantial discount from the price at which purchasers acquire them, the face
amount or the liquidation preference, as applicable, and liquidity may be
limited. If such a market does not develop, holders may be unable to resell the
Debentures for an extended period of time, if at all. Future trading prices of
the Debentures will depend on many factors, including, among others, prevailing
interest rates, the Company's operating results, and the market for similar
securities which is subject to various pressures.
20
<PAGE> 23
THE COMPANY
The Company is a consumer finance company engaged in the business of
originating, purchasing, selling and servicing mortgage loans secured primarily
by one- to four-family residences. The majority of the Company's loans are made
to owners of single family residences who use the loan proceeds for such
purposes as debt consolidation and financing of home improvements and
educational expenditures, among others.
The Company was incorporated under the laws of the State of Delaware in
December 1988. CSC, the Company's principal operating subsidiary, was
incorporated under the laws of the State of New York in March 1985. In January
1994, CSC acquired Astrum Funding Corp. ("Astrum") which had operated as a
mortgage banker in 11 states. In April 1994, the Company acquired all of the
capital stock of CSC in an acquisition in which the shareholders of CSC acquired
beneficial ownership of approximately 92% of the Company's common stock. In
connection with the CSC Acquisition, the Company changed its name to Cityscape
Financial Corp.
In May 1995, the Company and three principals of a privately held UK-based
mortgage banker formed CSC-UK, a company organized under English law. CSC-UK
operates in the UK, and lends to individuals who are unable or unwilling to
obtain mortgage financing from conventional mortgage sources such as banks and
building societies ("Conventional UK Lenders") primarily because of impaired or
unsubstantiated credit histories and/or unverifiable income. In September 1995,
the Company acquired the 50% interest in CSC-UK not then owned by the Company
through the issuance to the three other shareholders of an aggregate of 3.6
million shares of Common Stock valued at $21.6 million. This acquisition was
completed as of September 30, 1995.
In April 1996, CSC-UK acquired all of the outstanding capital stock of J&J,
a London-based mortgage banker in exchange for L15.0 million ($22.7 million) and
548,000 shares of Common Stock valued at $9.8 million. J&J provides primarily
second lien mortgage loans to UK borrowers who, similar to the Company's UK
borrowers, are unable or unwilling to obtain mortgage financing from
Conventional UK Lenders. The J&J Acquisition resulted in the recognition of
$19.2 million of goodwill. In addition to the goodwill, the Company acquired
assets of $53.8 million, consisting primarily of mortgage loans held for sale,
and assumed $38.8 million of liabilities. The J&J Acquisition has been treated
as a purchase transaction for accounting purposes.
In June 1996, CSC-UK acquired all of the outstanding capital stock of
Heritable, a mortgage banker based in Reading, England in exchange for L41.8
million ($66.0 million) and 99,362 shares of Common Stock valued at $2.5
million. Heritable provides mortgage loans to borrowers that generally have
higher quality credit profiles than the Company's typical UK borrowers. The
Heritable Acquisition resulted in the recognition of $41.2 million of goodwill.
In addition to the goodwill, the Company acquired assets of $221.2 million,
consisting primarily of mortgage loans held for sale, and assumed $193.2 million
of liabilities. The Heritable Acquisition has been treated as a purchase
transaction for accounting purposes.
The Company also owns a 5.82% interest in IMC Mortgage Company, a Delaware
corporation (including its predecessor Industry Mortgage Company, L.P., "IMC").
IMC originates, purchases, sells and services mortgage loans that are secured
primarily by one- to four-family residences. Pursuant to a contractual agreement
with IMC, the Company is obligated to offer to sell an average of $1.0 million
of loans per month to IMC at market prices. The Company entered into an
agreement with IMC whereby, in return for the payment of a fee, such monthly
obligation has been eliminated for the period from November 1, 1995 through
December 31, 1996. For the year ended December 31, 1995 and the six months ended
June 30, 1996, IMC contributed approximately $480,000 and $260,000,
respectively, to the Company's pre-tax income. IMC completed a public offering
of its common stock in June 1996. As a result of this offering, the Company's
interest in IMC is no longer accounted for under the equity method of accounting
whereby the Company recognized its relative portion of the partnership earnings
as revenues, but rather as a marketable security available for sale in
accordance with SFAS No. 115. Marketable securities available for sale are
reported on the statement of financial condition at fair market value with any
corresponding change in value reported as an unrealized gain or loss (if
assessed to be temporary) as an element of stockholders' equity after giving
effect for taxes.
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<PAGE> 24
The Company's principal executive office and mailing address is 565 Taxter
Road, Elmsford, New York 10523-5200 and its telephone number is (914) 592-6677.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Securities
offered by the Selling Security Holders hereunder.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock began to trade on Nasdaq on December 20, 1995
under the symbol "CTYS." From April 29, 1994 until December 19, 1995, the
Company's Common Stock was listed on the National Quotation Bureau, Inc. OTC
Bulletin Board (the "Pink Sheets") under the symbol "CTYS." A public trading
market for the Company's Common Stock began in the fourth quarter of 1994 with
quotes commencing on December 1, 1994. Prior to trading on Nasdaq, there had
been only limited trading in the Common Stock. As a result, prices reported for
the Common Stock prior to December 20, 1995 reflect the relative lack of
liquidity and may not be reliable indicators of market value.
The following table sets forth the range of high and low bid prices per
share for the Common Stock for the periods indicated as reported in the Pink
Sheets through December 19, 1995 (reflecting inter-dealer prices, without retail
mark-up, mark-down or commission which may not represent actual transactions),
and the range of high and low bid prices per share as reported by Nasdaq from
December 20, 1995 and reflects the 100% stock dividends paid by the Company on
September 29, 1995 and July 1, 1996.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Year ended December 31, 1994:
Fourth quarter (from December 1, 1994)........................... $ 0.91 $ 0.81
Year ended December 31, 1995:
First quarter.................................................... 1.38 0.91
Second quarter................................................... 3.00 1.38
Third quarter.................................................... 7.75 2.75
Fourth quarter (through December, 19, 1995)...................... 13.00 7.50
Fourth quarter (from December 20, 1995).......................... 10.75 9.63
Year ended December 31, 1996:
First quarter.................................................... 17.75 9.88
Second quarter................................................... 25.63 18.88
Third quarter (through September 3, 1996)........................ 36.00 25.25
</TABLE>
As of July 31, 1996, there were 271 stockholders of record of the Company's
Common Stock. On September 3, 1996, the closing price per share for the Common
Stock on Nasdaq was $29.50.
The Company has never paid any cash dividends on its Common Stock. The
Company intends to retain all of its future earnings to finance its operations
and does not anticipate paying cash dividends in the foreseeable future. Any
decision made by the Company's Board of Directors to declare dividends in the
future will depend upon the Company's future earnings, capital requirements,
financial condition and other factors deemed relevant by the Company's Board of
Directors. In addition, certain agreements to which the Company is a party
restrict the Company's ability to pay dividends on common equity. The Company
conducts substantially all of its operations through its subsidiaries.
Accordingly, the Company's ability to pay dividends is also dependent upon the
ability of its subsidiaries to make cash distributions to the Company. The
payment of dividends to the Company by its subsidiaries is and will continue to
be restricted by or subject to, among other limitations, applicable provisions
of laws of national or state governments, contractual provisions, the earnings
of such subsidiaries and various business considerations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
22
<PAGE> 25
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at June 30, 1996. This table should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes thereto.
<TABLE>
<CAPTION>
AT
JUNE 30, 1996
--------------
(IN THOUSANDS)
<S> <C>
Short-term debt:
Warehouse financing facilities............................................... $ 72,796
Other short-term debt........................................................ 2,562
--------
Total short-term debt................................................ $ 75,358
========
Long-term debt:
Standby financing facility................................................... $ 7,966
Notes payable................................................................ 38,000
Convertible Subordinated Debentures.......................................... 143,750
--------
Total long-term debt................................................. 189,716
--------
Stockholders' equity:
Preferred Stock, $.01 par value; 5,000,000 shares authorized; no shares
outstanding............................................................... --
Common Stock, $.01 par value; 50,000,000 shares authorized; 29,626,452 shares
issued and outstanding.................................................... 296
Additional paid-in capital................................................... 57,435
Foreign currency translation adjustment...................................... 448
Unrealized gain on marketable securities, net of taxes....................... 5,670
Retained earnings............................................................ 56,097
--------
Total stockholders' equity........................................... 119,946
--------
Total capitalization................................................. $309,662
========
</TABLE>
23
<PAGE> 26
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following tables set forth unaudited pro forma consolidated financial
data for the Company for the year ended December 31, 1995 illustrating the
estimated effects of (i) the UK Acquisition as if it had occurred on May 2,
1995, the date CSC-UK commenced operations, (ii) the J&J Acquisition as if it
had occurred as of January 1, 1995 and (iii) the Heritable Acquisition as if it
had occurred as of January 1, 1995. The unaudited pro forma consolidated
financial data have been prepared using the purchase method of accounting,
whereby the total costs of the UK Acquisition, the J&J Acquisition and the
Heritable Acquisition will be allocated to the tangible and intangible assets
acquired and liabilities assumed based upon their respective fair values at the
effective date of the UK Acquisition, J&J Acquisition and the Heritable
Acquisition, respectively. The unaudited pro forma consolidated financial data
do not purport to represent what the results of operations or financial position
of the Company would have actually been if the UK Acquisition, the J&J
Acquisition and the Heritable Acquisition had in fact occurred on such dates or
to project the results of operations or financial position of the Company for
any future date or period. The unaudited pro forma consolidated financial data
should be read together with the consolidated financial statements of the
Company, J&J and Heritable and related Notes included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------------------
PRO FORMA ADJUSTMENTS
-----------------------------------
HISTORICAL CSC-UK J&J HERITABLE PRO FORMA
---------- ------- ------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
REVENUES
Gain on sale of loans........... $ 38,198 -- $13,045(1) $ 15,654(2) $66,897
Mortgage origination income..... 2,963 -- -- 4,530(3) 7,493
Interest income................. 6,706 -- 1,435(4) 7,884(5) 16,025
Servicing income................ 777 -- -- -- 777
Earnings from partnership
interest..................... 482 -- -- -- 482
Other........................... 385 -- 279(6) -- 664
------- ------- ------- ------- -------
Total revenues.......... 49,511 -- 14,759 28,068 92,338
------- ------- ------- ------- -------
EXPENSES
Salaries and employee
benefits..................... 12,165 39(7) 1,926(8) 4,292(9) 18,422
Interest expense................ 4,610 -- 1,182(10) 2,923(11) 8,715
Selling expenses................ 2,895 -- 1,491(6) 4,456(3) 8,842
Other operating expenses........ 6,582 -- 2,531(6) 2,455(3) 11,568
Amortization of goodwill........ 494 819(12) 1,920(13) 4,120(14) 7,353
------- ------- ------- ------- -------
Total expenses.......... 26,746 858 9,050 18,246 54,900
------- ------- ------- ------- -------
Earnings before minority
interest, income taxes and
extraordinary item........... 22,765 (858) 5,709 9,822 37,438
Minority interest............... 2,379 (2,379)(15) -- -- --
------- ------- ------- ------- -------
Earnings before income taxes and
extraordinary item........... 20,386 1,521 5,709 9,822 37,438
Provision for income taxes...... 8,515 631(16) 2,369(16) 4,076(16) 15,591
------- ------- ------- ------- -------
Earnings before extraordinary
item......................... 11,871 890 3,340 5,746 21,847
Extraordinary item.............. (296) -- -- -- (296)
------- ------- ------- ------- -------
Net earnings...................... $ 11,575 $ 890 $ 3,340 $ 5,746 $21,551
======= ======= ======= ======= =======
Earnings per share before
extraordinary item.............. $ 0.50 N/A N/A N/A $ 0.84
Extraordinary item (per share).... (0.01) N/A N/A N/A (0.01)
------- ------- ------- ------- -------
Primary earnings per share........ $ 0.49 N/A N/A N/A $ 0.83
======= ======= ======= ======= =======
Weighted average shares
outstanding..................... 23,838 1,500(17) 548(18) 99(19) 25,985
======= ======= ======= ======= =======
Supplemental earnings per
share(20)....................... $ 0.80
=======
Supplemental weighted average
shares outstanding(21).......... 27,396
=======
</TABLE>
24
<PAGE> 27
Notes to Unaudited Pro Forma Financial Statements for the year ended December
31, 1995
(1) Reflects gain on sale of approximately $19.6 million from the sale of
approximately $46.7 million of loans acquired as a result of the J&J
Acquisition as if such loans were sold under the mortgage loan repurchase
facility CSC-UK had with Greenwich prior to March 31, 1996 (the "Old
Greenwich Facility") with a participation by Greenwich in such gain of 33%.
Pro forma gain on sale gives effect to the sale of all of J&J's loan
portfolio outstanding as of December 31, 1995 and not J&J's mortgage loan
production for 1995. As a result, the Company's gain on sale for such J&J
loans in 1995 may not be indicative of the gain on sale J&J would have had
for 1995 or for J&J's future loan originations.
(2) Reflects gain on sale of approximately $23.5 million from the sale of
approximately $124.9 million of loans acquired as a result of the Heritable
Acquisition as if such loans were sold under the Old Greenwich Facility
with a participation by Greenwich in such gain of 33%. Pro forma gain on
sale gives effect to the sale of such portion of Heritable's loan portfolio
and not Heritable's mortgage loan production for 1995. As a result, the
Company's gain on sale for such Heritable loans in 1995 may not be
indicative of the gain on sale Heritable would have had for 1995 or for
Heritable's future loan originations.
(3) Reflects the 1995 historical operating results for Heritable.
(4) Reflects the accretion of interest related to the mortgage servicing
receivables associated with the sale of loans acquired as a result of the
J&J Acquisition.
(5) Reflects the accretion of interest of $1.7 million related to the mortgage
servicing receivables associated with the sale of loans acquired as a
result of the Heritable Acquisition, and interest income of $6.2 million on
the remaining loan portfolio.
(6) Reflects the 1995 historical operating results for J&J.
(7) Reflects additional bonus expense resulting from the increased pre-tax
profits related to the pro forma effect of the UK Acquisition on May 2,
1995.
(8) Reflects historical J&J expense and the additional bonus expense resulting
from the increased pre-tax profits related to the pro forma effect of the
J&J Acquisition occurring on January 1, 1995.
(9) Reflects historical Heritable expense and the additional bonus expense
resulting from the increased pre-tax profits related to the pro forma
effect of the Heritable Acquisition occurring on January 1, 1995.
(10) Reflects interest expense on the remaining average debt balance after the
application of the proceeds of the assumed sale of loans on January 1, 1995
to pay down warehouse debt.
(11) Reflects interest expense related to the assumed warehouse debt supporting
Heritable's remaining loan portfolio.
(12) Reflects the amortization of the $19.7 million of goodwill for the period
May 2, 1995 through September 30, 1995 recognized as a result of the UK
Acquisition using the straight-line method over a 10-year period. The
Company acquired the 50% interest in CSC-UK not then owned by the Company
through the issuance to the three other shareholders of an aggregate of 3.6
million shares of the Company's Common Stock valued at $21.6 million. In
addition to the goodwill, the Company acquired assets of $9.0 million,
consisting primarily of mortgage servicing receivables, and assumed
liabilities of $4.1 million.
(13) Reflects the amortization of the $19.2 million of goodwill recognized as a
result of the J&J Acquisition using the straight-line method over a 10-year
period. CSC-UK acquired all the outstanding stock of J&J for L15.0 million
($22.7 million) and 548,000 shares of the Company's Common Stock valued at
$9.8 million. In addition to the goodwill, the Company acquired assets of
$53.8 million, consisting primarily of mortgage loans held for sale, and
assumed liabilities of $38.8 million.
(14) Reflects the amortization of the $41.2 million of goodwill recognized as a
result of the Heritable Acquisition using the straight-line method over a
10-year period. CSC-UK acquired all the outstanding stock of Heritable for
approximately $66.0 million, including 99,362 shares of the Company's
Common
25
<PAGE> 28
Stock valued at $2.5 million. In addition to the goodwill, the Company
acquired assets of $221.2 million, consisting primarily of mortgage loans
held for sale, and assumed liabilities of $193.2 million.
(15) Reflects adjustment related to elimination of the 50% equity earnings for
the period prior to the UK Acquisition.
(16) Reflects tax impact of the pro forma adjustments recorded at a 41.5%
effective rate.
(17) Reflects the adjustment (for the partial year from May 2, 1995 through
September 30, 1995) of the 3.6 million shares of Common Stock issued in the
UK Acquisition as if those shares were issued and outstanding for the
entire period from May 2, 1995 through December 31, 1995.
(18) Reflects the impact of the 548,000 shares of Common Stock issued in the J&J
Acquisition remaining outstanding for the entire year ended December 31,
1995.
(19) Reflects the impact of the 99,362 shares of Common Stock issued in the
Heritable Acquisition remaining outstanding for the entire year ended
December 31, 1995.
(20) Gives effect to the application of a portion of the net proceeds of the
December 1995 public offering to repay outstanding debt at the time of such
offering as if such application occurred on January 1, 1995, resulting in a
net increase of $464,000 in net earnings due to a reduction in interest
expense.
(21) Gives effect to the inclusion of 1,411,200 shares of Common Stock at $8.37
per share net to the Company to repay the outstanding debt as discussed in
Note 20 above.
26
<PAGE> 29
The following tables set forth unaudited pro forma consolidated financial
data for the Company for the six months ended June 30, 1996 illustrating the
estimated effects of (i) the J&J Acquisition as if it had occurred as of January
1, 1995 and (ii) the Heritable Acquisition as if it had occurred as of January
1, 1995. The results of operations of J&J and Heritable are included in the
Company's historical results from April 23, 1996 and June 14, 1996,
respectively, the dates of their respective acquisitions. The unaudited pro
forma consolidated financial data have been prepared using the purchase method
of accounting, whereby the total costs of the J&J Acquisition and the Heritable
Acquisition will be allocated to the tangible and intangible assets acquired and
liabilities assumed based upon their respective fair values at the effective
date of the J&J Acquisition and the Heritable Acquisition, respectively. The
unaudited pro forma consolidated financial data do not purport to represent what
the results of operations or financial position of the Company would have
actually been if the J&J Acquisition and the Heritable Acquisition had in fact
occurred on such date or to project the results of operations or financial
position of the Company for any future date or period. The unaudited pro forma
consolidated financial data should be read together with the consolidated
financial statements of the Company, J&J and Heritable and related Notes
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1996
---------------------------------------------------------
PRO FORMA ADJUSTMENTS
------------------------
HISTORICAL J&J HERITABLE PRO FORMA
---------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES
Gain on sale of loans................... $ 104,237 $(19,567)(1) $ (23,488)(2) $ 61,182
Mortgage origination income............. 2,192 -- 1,650(3) 3,842
Interest income......................... 9,478 (376)(4) 2,650(5) 11,752
Servicing income........................ 1,356 -- -- 1,356
Earnings from partnership interest...... 260 -- -- 260
Other................................... 636 134(6) -- 770
-------- -------- -------- --------
Total revenues.................. 118,159 (19,809) (19,188) 79,162
EXPENSES
Salaries and employee benefits.......... 20,653 (429)(7) 1,877(8) 22,101
Interest expense........................ 6,382 483(9) 1,340(10) 8,205
Selling expenses........................ 4,375 753(6) 1,760(3) 6,888
Other operating expenses................ 9,807 975(6) 317(3) 11,099
Amortization of goodwill................ 1,527 600(11) 1,888(12) 4,015
-------- -------- -------- --------
Total expenses.................. 42,744 2,382 7,182 52,308
-------- -------- -------- --------
Earnings before income taxes............ 75,415 (22,191) (26,370) 26,854
Provision for income taxes.............. 31,297 (9,209)(13) (10,944)(13) 11,144
-------- -------- -------- --------
Net earnings.............................. $ 44,118 $(12,982) $ (15,426) $ 15,710
======== ======== ======== ========
Earnings per share:
Primary................................. $ 1.46 N/A N/A $ 0.51
======== ======== ======== ========
Fully diluted........................... $ 1.41 N/A N/A $ 0.51
======== ======== ======== ========
Weighted average shares outstanding:
Primary................................. 30,152 548(14) 99(15) 30,799
======== ======== ======== ========
Fully diluted........................... 31,941 548(14) 99(15) 32,588
======== ======== ======== ========
</TABLE>
27
<PAGE> 30
Notes to Unaudited Pro Forma Financial Statements for the six months ended June
30, 1996
(1) Reflects an adjustment to the gain on sale on approximately $46.7 million
of J&J loans that, for pro forma purposes, are shown as sold in fiscal
1995.
(2) Reflects an adjustment to the gain on sale on approximately $124.9 million
of Heritable loans, that, for pro forma purposes, are shown as sold in
fiscal 1995.
(3) Reflects historical results for the period January 1, 1996 to June 14, 1996
for Heritable.
(4) Reflects reduced interest accreted as a result of lower mortgage servicing
receivables recorded under the Old Greenwich Facility for J&J loans that,
for pro forma purposes, are shown as sold in fiscal 1995.
(5) Reflects reduced interest accreted as a result of lower mortgage servicing
receivables recorded under the Old Greenwich Facility for Heritable loans
that, for pro forma purposes, are shown as sold in fiscal 1995, offset by
interest income on loans acquired in the Heritable Acquisition but not
sold.
(6) Reflects historical results for the period January 1, 1996 to April 23,
1996 for J&J.
(7) Reflects historical J&J expense for the period January 1, 1996 to April 23,
1996 adjusted for the reduction in bonus expense resulting from lower pro
forma pre-tax earnings for the six month period ended June 30, 1996.
(8) Reflects historical Heritable expense for the period January 1, 1996 to
June 14, 1996 adjusted for the reduction in bonus expense resulting from
lower pro forma pre-tax earnings for the six month period ended June 30,
1996.
(9) Reflects interest expense on the average debt balance on warehouse debt
plus advances under the Old Greenwich Facility related to the J&J loans.
(10) Reflects interest expense on the average debt balance on warehouse debt
plus advances under the Old Greenwich Facility related to the Heritable
loans.
(11) Reflects amortization of the $19.2 million of goodwill recognized as a
result of the J&J Acquisition for the period January 1, 1996 to April 23,
1996 using the straight-line method over a 10-year period. CSC-UK acquired
all the outstanding stock of J&J for L15.0 million ($22.7 million) and
548,000 shares of the Company's Common Stock valued at $9.8 million. In
addition to the goodwill, the Company acquired assets of $53.8 million,
consisting primarily of mortgage loans held for sale, and assumed
liabilities of $38.8 million.
(12) Reflects amortization of the $41.2 million of goodwill recognized as a
result of the Heritable Acquisition for the period January 1, 1996 to June
14, 1996 using the straight-line method over a 10-year period. CSC-UK
acquired all the outstanding stock of Heritable for approximately $66.0
million, including 99,362 shares of the Company's Common Stock valued at
$2.5 million. In addition to the goodwill, the Company acquired assets of
$221.2 million, consisting primarily of mortgage loans held for sale, and
assumed liabilities of $193.2 million.
(13) Reflects tax impact of the pro forma adjustments recorded at a 41.5%
effective rate.
(14) Reflects the impact of the 548,000 shares of Common Stock issued in the J&J
Acquisition remaining outstanding for the six month period ended June 30,
1996.
(15) Reflects the impact of the 99,362 shares of Common Stock issued in the
Heritable Acquisition remaining outstanding for the six month period ended
June 30, 1996.
28
<PAGE> 31
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected consolidated financial data set forth below as of December 31,
1991, 1992 and 1993 and for the years then ended have been derived from the
consolidated financial statements of CSC that have been audited by Shane Yurman
& Company. The selected consolidated financial data set forth below as of
December 31, 1994 and 1995 and for the years then ended have been derived from
the consolidated financial statements of the Company that have been audited by
KPMG Peat Marwick LLP whose report thereon insofar as it relates to the
financial statements of CSC-UK as of and for the year ended December 31, 1995 is
based upon the report of BDO Stoy Hayward. The historical financial data set
forth below as of and for the six months ended June 30, 1995 and 1996 have been
derived from the unaudited consolidated financial statements of the Company that
have been prepared on the same basis as the audited Consolidated Financial
Statements and include all adjustments, consisting of normal recurring accruals,
that the Company considers necessary for a fair presentation of the financial
position and results of operations for such periods. Operating results for the
six months ended June 30, 1996 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1996. The following data
should be read in conjunction with the Consolidated Financial Statements of the
Company and Notes thereto and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
COMPANY
CSC(1) --------------------------------------------
-------------------------------
YEAR ENDED SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31, JUNE 30,
------------------------------- ------------------- --------------------
1991 1992 1993 1994(2) 1995 1995 1996
------- ------- ------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Gain on sale of loans............... $ 792 $ 1,005 $ 2,088 $ 5,691 $38,198 $12,471 $104,237(3)
Net mortgage origination income..... 1,389 1,251 1,455 2,551 2,963 1,405 2,192
Interest income..................... 718 612 536 1,900 6,706 2,134 9,478
Servicing income.................... -- -- -- 414 777 99 1,356
Earnings from partnership
interest.......................... -- -- -- 391 482 431 260
Other............................... 317 131 378 227 385 43 636
------- ------- ------- ------- ------- ------- -------
Total revenues................. 3,216 2,999 4,457 11,174 49,511 16,583 118,159
Costs and expenses:
Salaries and benefits............... 1,276 1,188 1,939 4,280 12,165 4,084 20,653
Other costs and expenses............ 1,737 1,718 2,195 5,041 14,581 5,942 22,091
------- ------- ------- ------- ------- ------- -------
Total costs and expenses....... 3,013 2,906 4,134 9,321 26,746 10,026 42,744
Earnings before minority interest,
income taxes and extraordinary
item................................ 203 93 323 1,853 22,765 6,557 75,415
Minority interest..................... -- -- -- -- 2,379 845 --
------- ------- ------- ------- ------- ------- -------
Earnings before income taxes and
extraordinary item.................. 203 93 323 1,853 20,386 5,712 75,415
Income taxes.......................... 5 3 8 1,450(4) 8,515 2,285 31,297
------- ------- ------- ------- ------- ------- -------
Earnings before extraordinary item.... 198 90 315 403 11,871 3,427 44,118
Extraordinary item.................... -- -- -- -- (296)(5) -- --
------- ------- ------- ------- ------- ------- -------
Net earnings.......................... $ 198 $ 90 $ 315 $ 403 $11,575 $ 3,427 $ 44,118
======= ======= ======= ======= ======= ======= =======
Earnings per share before
extraordinary item.................. $ 0.01 $ 0.01 $ 0.02 $ 0.02 $ 0.50 $ 0.16 $ 1.46
Extraordinary item.................... -- -- -- -- (0.01)(5) -- --
------- ------- ------- ------- ------- ------- -------
Earnings per share:
Primary............................. $ 0.01 $ 0.01 $ 0.02 $ 0.02 $ 0.49 $ 0.16 $ 1.46(6)
======= ======= ======= ======= ======= ======= =======
Fully diluted....................... N/A N/A N/A N/A N/A N/A $ 1.41(6)
======= ======= ======= ======= ======= ======= =======
Weighted average number of shares
outstanding:
Primary............................. 20,000 20,000 20,000 20,560 23,838 22,082 30,152
======= ======= ======= ======= ======= ======= =======
Fully diluted....................... N/A N/A N/A N/A N/A N/A 31,941
======= ======= ======= ======= ======= ======= =======
</TABLE>
29
<PAGE> 32
<TABLE>
<CAPTION>
CSC(1) COMPANY
------------------------------ ----------------------------------
DECEMBER 31, DECEMBER 31,
------------------------------ --------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
------- ------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets...................................... $ 6,904 $ 8,609 $ 13,605 $ 21,816 $ 150,388 $ 462,993
Mortgage servicing receivables.................... -- -- -- -- 22,059 117,275
Interest-only and residual certificates........... -- -- -- -- 15,571 45,415
Goodwill and other intangibles.................... -- -- -- -- 19,258 78,266
Total debt(7)..................................... 4,645 6,310 10,165 16,100 75,673 262,513
Total liabilities................................. 4,948 6,563 11,207 18,030 93,289 343,047
Total stockholders' equity........................ 1,956 2,046 2,398 3,177 57,099 119,946
</TABLE>
<TABLE>
<CAPTION>
COMPANY
CSC(1) -------------------------------------------------
-------------------------------
YEAR ENDED DECEMBER SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, 31, JUNE 30,
------------------------------- --------------------- -----------------------
1991 1992 1993 1994(2) 1995 1995 1996(8)
------- ------- ------- -------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING STATISTICS:
Loan originations and purchases:
US.............................. $37,820 $43,353 $77,586 $154,410 $417,864 $148,538 $ 456,683
UK.............................. -- -- -- -- 41,395 7,595 309,393
------- ------- ------- -------- -------- -------- ----------
Total loan originations and $37,820 $43,353 $77,586 $154,410 $459,259 $156,133 $ 766,076
purchases.....................
======== ======== ======== ========= ========= ========= ==========
Average principal balance per loan
originated and purchased:
US................................ $50 $56 $74 $77 $70 $71 $67
UK................................ -- -- -- -- 43 47 15
Weighted average initial
loan-to-value ratio:
US................................ -- -- -- 59.7% 66.4% 65.3% 69.9%
UK................................ -- -- -- -- 49.0 49.0 51.6
Loan sales:
US................................ $40,305 $40,975 $61,293 $138,041 $358,997 $133,631 $ 446,724
UK................................ -- -- -- -- 41,395 7,595 275,866
------- ------- ------- -------- -------- -------- ----------
Total loan sales................ $40,305 $40,975 $61,293 $138,041 $400,392 $141,226 $ 722,590
======== ======== ======== ========= ========= ========= ==========
Loans serviced:(9)
US................................ -- -- -- $ 56,340 $386,720 $123,842 $ 757,913
UK................................ -- -- -- -- 40,299 7,595 332,192
------- ------- ------- -------- -------- -------- ----------
Total loans serviced............ -- -- -- $ 56,340 $427,019 $131,437 $1,090,105
======== ======== ======== ========= ========= ========= ==========
Loans 30+ days past due as a
percentage of serviced portfolio:
US(10)............................ -- -- -- 3.4% 3.9% 2.7% 5.6%
UK(11)............................ -- -- -- -- 8.5 -- 16.7(8)
Charge-offs:
US(10)............................ -- -- -- -- $52 $52 $32
UK(11)............................ -- -- -- -- -- -- --
</TABLE>
- ---------------
(1) The historical financial data presented have been derived exclusively from
the financial statements of CSC, which was acquired by the Company on April
27, 1994.
(2) Gives effect to the Company's purchase of the capital stock of CSC as if
such purchase occurred on January 1, 1994. On April 27, 1994, the Company
acquired all of the capital stock of CSC in an acquisition in which the
shareholders of CSC acquired beneficial ownership of approximately 92% of
the Company's Common Stock. The CSC Acquisition was accounted for as a
reverse acquisition for financial reporting purposes with CSC being deemed
to have acquired a 100% interest in the Company as of the date of the
acquisition. From the date of its formation in 1988 through the date of the
CSC Acquisition, the Company's activities were limited to (i) the sale of
initial shares in connection with its organization, (ii) a registered
public offering of securities and (iii) the pursuit of a
30
<PAGE> 33
combination, by merger or acquisition. The Company presently has no
business operations other than those incidental to its ownership of all the
capital stock of CSC.
(3) Includes gain on sale of $21.8 million and $29.2 million recognized as a
result of the sale of loan portfolios acquired as a result of the J&J
Acquisition and the Heritable Acquisition, respectively.
(4) Includes a one-time charge of $680,000 related to the change in tax status
in 1994 from an "S" corporation to a "C" corporation.
(5) Represents a loss, net of taxes, related to the early extinguishment of
subordinated debentures in December 1995.
(6) Includes primary earnings per share of $0.33 and $0.44 and fully diluted
earnings per share of $0.31 and $0.41 recorded in connection with the sale
of loans acquired as a result of the J&J Acquisition and the Heritable
Acquisition, respectively.
(7) Includes short-term borrowings due under a warehouse facility and a US
standby facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
(8) Includes UK loan originations and purchases of $52.0 million and $188.6
million, average principal balance per UK loan originated and purchased of
$9,414 and $14,553, UK loan sales of $52.0 million and $155.1 million, UK
loans serviced of $52.0 million and $188.6 million, and loans 30 or more
days past due as a percentage of UK serviced portfolio of 6.7% and 6.4%,
due to the loans acquired as a result of the J&J Acquisition and the
Heritable Acquisition, respectively.
(9) Includes master servicing and contract servicing operations by the Company.
See "Business -- Loans -- Loan Servicing and Collections -- US" and "--
UK."
(10) Because the Company has expanded into the business of loan servicing in the
US only during the last two years, the Company's US loans serviced
portfolio is relatively unseasoned. The Company believes that over time its
delinquency and loan loss experience will increase as its loan portfolio
matures.
(11) The Company has been servicing loans in the UK only since May 1995.
Accordingly, the UK loans serviced portfolio is unseasoned. Excluding the
portfolios acquired as a result of the J&J Acquisition and the Heritable
Acquisition, the UK delinquency ratio would have been 12.1% at June 30,
1996.
31
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company for the six months ended June
30, 1995 and 1996 and the Consolidated Financial Statements of the Company and
accompanying Notes for the years ended December 31, 1993, 1994 and 1995. The
following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements which involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus.
GENERAL
Overview
The Company is a consumer finance company engaged in the business of
originating, purchasing, selling and servicing mortgage loans secured primarily
by one- to four-family residences. The Company primarily generates income from
gain on sale of loans sold through securitizations and into loan purchase
facilities, gains recognized from premiums on loans sold through whole loan
sales to institutional purchasers, interest earned on loans held for sale,
mortgage servicing receivables, origination fees received as part of the loan
application process and fees earned on loans serviced. Gain on sale of loans
includes the fair value of the interest-only and residual certificates that the
Company receives upon the sale of loans through securitizations in the US and
the value of mortgage servicing receivables that it recognizes through UK
securitizations and on sales into the US and UK purchase facilities. Gain
recorded on loans sold with servicing retained represents the excess of the
interest rate payable by an obligor on a loan over the interest rate passed
through to the purchaser acquiring an interest in such loan, less applicable
recurring fees. Gain on sale of loans constituted approximately 50.9% of total
revenues in 1994, 77.2% of total revenues in 1995 and 88.2% of total revenues in
the six months ended June 30, 1996. The Company completed its first US
securitization in the first quarter of 1995 and its first UK securitization in
the first quarter of 1996. The Company anticipates that it will continue to sell
a substantial portion of its loans through securitizations and into loan
purchase facilities, with the balance sold in whole loan sales to institutional
purchasers.
Recent Growth
The Company has experienced significant growth in the past few years,
particularly since January 1, 1994. Management believes that this growth is
primarily attributable to: (i) the Company's geographic expansion program
pursuant to which the Company expanded its operations from five states as of
December 31, 1993 to 37 states as of June 30, 1996; (ii) the development of a
loan servicing capability; (iii) the commencement of the Company's Wholesale
Loan Acquisition Program in 1994; (iv) the Company's increased access to
funding; (v) the formation in May 1995 of CSC-UK and its access to financing
through a loan purchase facility for the origination, sale and servicing of
mortgage loans in the UK; and (vi) the recent acquisitions of J&J and Heritable
in the UK.
Although there can be no assurance that the Company will be able to sustain
its historical growth rate, management believes that the Company will continue
to grow significantly over the next 12 months. Any future growth of the Company
will be limited by, among other things, the Company's need for continued funding
sources, sensitivity to economic slowdown and fluctuation in interest rates,
value of interest-only and residual certificates and mortgage servicing
receivables, dependence on securitizations, the effects of the Company's recent
expansion, contingent risks on loans, concentration of US operations,
competition and legislative and regulatory risks.
32
<PAGE> 35
Loan Originations and Purchases
The Company increased its US loan originations and purchases in 1995 to
$417.9 million from $154.4 million in 1994, representing an annual growth rate
of 170.7% over the 12 month period. The Company's US loan originations and
purchases for the six months ended June 30, 1996 were $456.7 million. The
Company's UK loan originations and purchases for the six months ended June 30,
1996 were $309.4 million, including loan portfolios of $52.0 million and $188.6
million acquired as a result of the J&J Acquisition and the Heritable
Acquisition, respectively.
LOAN ORIGINATION AND PURCHASES
<TABLE>
<CAPTION>
US
CSC(1) ---------------------------------- UK
------------ ---------------------------
FOR THE YEAR FOR THE YEAR ENDED FOR THE SIX FROM FOR THE SIX
ENDED DECEMBER 31, MONTHS ENDED FORMATION TO MONTHS ENDED
DECEMBER 31, ------------------- JUNE 30, DECEMBER 31, JUNE 30,
1993 1994 1995 1996 1995 1996(2)
------------ -------- -------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loan originations and
purchases:
Principal balance...... $ 77,586 $154,410 $417,864 $456,683 $ 41,395 $309,393
Number of loans........ 1,052 2,007 6,008 6,810 960 20,709
Average principal
balance per loan.... $ 73.8 $ 76.9 $ 69.6 $ 67.1 $ 43.1 $ 14.9
Weighted average interest
rate................... 10.7% 11.1% 11.9% 11.4% 16.4% 16.9%
Weighted average initial
loan-to-value
ratio(3)............... 52.5 59.7 66.4 69.9 49.0 51.6
Percentage of loans
secured by:
One- to four-family
residences.......... 100.0 98.3 97.2 96.9 96.2 95.6
First mortgages........ 64.0 87.0 89.0 93.9 92.0 76.1
</TABLE>
- ---------------
(1) Represents historical information of CSC prior to its acquisition by the
Company.
(2) Includes $52.0 million of loans acquired from J&J, 75.0% of which were
secured by second mortgages, with a weighted average interest rate of 27.5%
and a weighted average initial loan-to-value ratio of 45.6%, and includes
$188.6 million of loans acquired from Heritable, 82.0% of which were secured
by second mortgages, with a weighted average interest rate of 14.5% and a
weighted average initial loan-to-value ratio of 52.5%.
(3) The loan-to-value ratio of a loan secured by a first mortgage is determined
by dividing the amount of the loan by the appraised value of the mortgaged
property at origination. The loan-to-value ratio of a loan secured by a
second mortgage is determined by taking the sum of the loans secured by the
first and second mortgages and dividing by the appraised value of the
mortgaged property at origination.
Loan Sales
The Company sells, without recourse, virtually all of the loans it
originates or purchases in loan sales through securitizations, into the US and
UK loan purchase facilities and in whole loan sales. During 1995 and the first
six months of 1996, the Company sold $400.4 million and $722.6 million of loans,
respectively, of which $105.8 million and $59.0 million were sold in whole loan
sales, respectively. Gains on the sale of loans through securitizations and into
loan purchase facilities were $33.2 million and $102.4 million, or 67.1% and
86.6% of the Company's total revenues in 1995 and the six months ended June 30,
1996, respectively. Gains on whole loan sales represented 10.2% and 1.1% of the
Company's total revenues in 1995 and the six months ended June 30, 1996,
respectively.
During 1995 and the first six months of 1996, loan sales included $359.0
million and $446.7 million of US loan sales, respectively, and $41.4 million and
$275.9 million of UK loan sales, respectively. During 1995 and
33
<PAGE> 36
the six months ended June 30, 1996, gains on US loan sales totaled $26.3 million
(7.3% weighted average gain) and $25.8 million (5.8% weighted average gain),
respectively, and gains on UK loan sales totaled $11.9 million (28.7% weighted
average gain) and $78.4 million (28.4% weighted average gain), respectively.
The higher weighted average gain on UK loan sales as compared to US loan
sales was primarily a result of the higher average interest rate on UK loan
originations (16.9% for UK loan originations as compared to 11.4% for US loan
originations for the six months ended June 30, 1996), and greater prepayment
penalties in the UK. Under the terms of some of the Company's loans in the UK,
the amount due in the case of a prepayment is based upon the amount of interest
that has been "earned" and calculated in accordance with the "Rule of 78s"
method with a one- to six-month deferment (i.e., for purposes of calculating the
amount of interest that has been earned, the redemption date is set at one to
six months after the date of actual redemption by the borrower). In a
hypothetical L35,000 loan, the prepayment after the 18th month calculated using
a six-month deferment would require the borrower to pay L45,872, or 31.1% more
than the original principal balance (or L41,080, or 17.4%, if the prepayment
were calculated using a one-month deferment).
The Company has used, and may use in the future, pre-funding mechanisms in
certain of its securitizations both as a relatively inexpensive borrowing
source, as well as to hedge its interest rate exposure. In a typical Company
securitization transaction with a pre-funding account, the investors purchase
certificates with a higher aggregate principal balance than that of the mortgage
loans transferred to the securitization trust on the closing date (such
increment, the "Pre-funded Amount"). During the 90-day "Pre-funding Period"
after the closing date, the Company sells mortgage loans to the trust which in
turn pays for them with the Pre-funded Amount.
The pre-funding mechanism effectively permits the Company during the
Pre-funding Period to borrow from the certificate investors an amount equal to
the Pre-funded Amount and pay the investors an interest rate equal to the
certificate rate which is a rate lower than that at which the Company can borrow
from its other funding sources. Furthermore, the Company fixes at the
certificate rate the pricing at which it can sell an amount (equal to the
Pre-funded Amount) of its mortgage loans, thereby insulating the Company during
the Pre-funding Period from risks associated with interest rate movements (that
would ultimately impact the pass-through rate on securities issued in a
securitization) to which it would be exposed if it were forced to hold the
mortgage loans during such period.
Loan Servicing
Prior to 1994, the Company typically sold loans with servicing rights
released. In 1995 and the first six months of 1996, however, the Company
retained the servicing or master servicing rights for approximately 74.2% and
95.6%, respectively, of the loans it sold. As of June 30, 1996, the Company was
servicing 11,692 US loans with an aggregate principal balance of $757.9 million,
including $56.2 million of loans as master servicer and $20.1 million serviced
by the Company as contract servicer, representing a 96.0% increase over an
aggregate principal balance of $386.7 million serviced as of December 31, 1995.
Revenue generated from loan servicing amounted to 1.6% and 1.1% of total
revenues for 1995 and the first six months of 1996, respectively. Management
believes that the business of loan servicing provides an additional and
profitable revenue stream and one that is less cyclical than the business of
loan origination and purchasing.
The following table provides data on delinquency experience and real estate
owned ("REO") properties for the Company's US serviced portfolio (excluding loan
balances under contract servicing or master servicing agreements). Because the
Company has only expanded into the business of loan servicing during the last
two years, the Company's US serviced portfolio is relatively unseasoned.
Accordingly, the Company has experienced and expects to continue to experience
an increase in total US delinquencies as a percentage of the US serviced
portfolio. No assurances, however, can be given as to the Company's future
delinquency experience.
34
<PAGE> 37
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
--------------------------------------------- ---------------------
1994 1995 1996
--------------------- --------------------- ---------------------
DOLLARS % OF DOLLARS % OF DOLLARS % OF
IN SERVICED IN SERVICED IN SERVICED
THOUSANDS PORTFOLIO THOUSANDS PORTFOLIO THOUSANDS PORTFOLIO
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
US serviced portfolio.................. $23,904 100.0% $ 311,649 100.0% $ 681,508 100.0%
------- ---- ------- ---- ------- ----
30-59 days delinquent................ -- -- 5,479 1.8 15,715 2.3
60-89 days delinquent................ 142 0.6 1,580 0.5 5,676 0.8
90 days or more delinquent........... 679 2.8 4,968 1.6 16,443 2.4
------- ---- ------- ---- ------- ----
Total US delinquencies................. $ 821 3.4% $ 12,027 3.9% $ 37,834 5.6%
------- ---- ------- ---- ------- ----
US REO property........................ $ 130 0.5% $ 141 -- $ 332 --
</TABLE>
The Company has been servicing loans in the UK since the inception of
CSC-UK in May 1995. As of June 30, 1996, CSC-UK was servicing UK loans with an
aggregate principal balance of $332.2 million.
The following table provides data on delinquency experience for the
Company's UK serviced portfolio. The Company does not have any REO properties in
the UK. Because the Company has only serviced loans in the UK for a short period
of time, the Company's UK serviced portfolio is unseasoned. No assurance can be
given that delinquencies as a percentage of the UK serviced portfolio as of June
30, 1996 will be indicative of delinquency experience in the future.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995 AS OF JUNE 30, 1996(1)
------------------------- -------------------------
DOLLARS DOLLARS
IN % OF SERVICED IN % OF SERVICED
THOUSANDS PORTFOLIO THOUSANDS PORTFOLIO
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
UK serviced portfolio............................. $40,299 100.0% $ 332,192 100.0%
------- ---- ------- ----
30-59 days delinquent........................... 1,087 2.7 16,268 4.9
60-89 days delinquent........................... 423 1.1 8,257 2.5
90 days or more delinquent...................... 1,926 4.8 30,988 9.3
------- ---- ------- ----
Total UK delinquencies....................... $ 3,436 8.6% $ 55,513 16.7%
------- ---- ------- ----
</TABLE>
- ---------------
(1) Includes the J&J serviced portfolio of $45.8 million with total
delinquencies of $21.0 million or 45.7%, of which $3.9 million or 8.4% was
30-59 days delinquent, $3.3 million or 7.3% was 60-89 days delinquent and
$13.8 million or 30.0% was 90 days or more delinquent. Includes the
Heritable serviced portfolio of $184.8 million with total delinquencies of
$21.4 million or 11.6%, of which $8.8 million or 4.8% was 30-59 days
delinquent, $2.8 million or 1.5% was 60-89 days delinquent and $9.8 million
or 5.3% was 90 days or more delinquent. Excluding the portfolios acquired as
a result of the J&J Acquisition and the Heritable Acquisition, the UK
delinquency ratio would have been 12.1% at June 30, 1996.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Total revenues increased $101.6 million or 612.0% to $118.2 million for the
six months ended June 30, 1996 from $16.6 million for the six months ended June,
30, 1995. This increase was primarily the combined result of higher gains on
sale of loans resulting from the combined US and UK increase in loan origination
and purchase volume and volume of loans sold compared to the prior period, the
inclusion of the operating results of CSC-UK, not in existence until May 1995
and 50% owned in the second quarter of 1995, an increase in net mortgage
origination income due to an increased loan origination volume and an increase
in servicing income.
Gain on sale of loans increased $91.7 million or 733.6% to $104.2 million
for the six months ended June 30, 1996 from $12.5 million for the six months
ended June 30, 1995. This increase was a result of the inclusion of CSC-UK's
gain on loan sales of $78.4 million for the 1996 period representing a 28.4%
gain on the $275.9 million of loan sales during this period as compared to gain
on loan sales of $2.7 million representing a 35.5% gain on the $7.5 million of
loan sales during the 1995 period. The lower average gain recognized during the
six months ended June 30, 1996 was a result of the lower average gains
recognized on the sale of the
35
<PAGE> 38
Heritable loan portfolios. In addition, the increase was a result of the
increased volume of US loan sales at lower average gains during the six months
ended June 30, 1996 ($446.7 million of US loan sales at a weighted average gain
of 5.8% ($25.8 million) as compared to a weighted average gain of 7.3% ($9.8
million) on $133.6 million of loan sales during the six months ended June 30,
1995). The lower average gain recognized during the six months ended June 30,
1996 was a result of the lower average margins from bulk purchases begun during
the second quarter of 1996, as well as lower margins from shifts of interest
rates during the second quarter of 1996. Included in the CSC-UK gain on loan
sales were $21.8 million and $29.2 million of gains on the sale of the loan
portfolios acquired as a result of the J&J Acquisition and the Heritable
Acquisition. The higher weighted average gain on sales in the UK, as compared to
the US, is primarily a result of higher average interest rates and greater
prepayment penalties in the UK. The Company anticipates that the weighted
average gain on sale of loans from sales in the UK will continue to exceed such
gain on sale of loans from sales in the US.
Mortgage origination income increased $787,013 or 56.0% to $2.2 million for
the six months ended June 30, 1996 from $1.4 million for the six months ended
June 30, 1995. This increase was primarily a result of (i) the increase in US
loan origination and purchase volume to $456.7 million for the six months ended
June 30, 1996 from $148.5 million for the comparable period in 1995, partially
offset by lower average origination fees earned, and (ii) the increase in
mortgage origination income from CSC-UK. It is anticipated that the Company's
origination fees as a percentage of loans originated will continue to decrease
in the future.
Interest income increased $7.4 million or 352.4% to $9.5 million for the
six months ended June 30, 1996 from $2.1 million for the six months ended June
30, 1995. This increase was due primarily to the increased balance of loans held
for sale during the 1996 period resulting from the increased loan origination
and purchase volume in excess of loans sold during the period as well as income
recognized on mortgage servicing receivables.
Servicing income increased $1.3 million or 1,317.3% to $1.4 million for the
six months ended June 30, 1996 from $98,688 for the six months ended June 30,
1995. This increased income was due primarily to an increase in the average
balances of loans serviced to $500.9 million at June 30, 1996 from $71.6 million
at June 30, 1995 and the increase in the average balance of UK loans serviced to
$128.2 million for the period ending June 30, 1996 from $5.5 million for the
period ending 1995.
Earnings from partnership interest decreased $171,000 or 39.7% to $260,000
for the six months ended June 30, 1996 from $431,000 for the six months ended
June 30, 1995 as a result of lower earnings recognized from the equity interest
in Industry Mortgage Company, L.P., during the six months ended June 30, 1996.
Total expenses increased $32.7 million or 327.0% to $42.7 million for the
six months ended June 30, 1996 from $10.0 million for the six months ended June
30, 1995. This increase was a result of increased salaries, selling expenses and
operating expenses related to increased loan origination and purchase volume
during the 1996 period, as well as the inclusion of the operating results of
CSC-UK, as compared to the 1995 period. Total expenses as a percentage of total
revenues decreased to 36.2% for the 1996 period from 60.2% for the comparable
period in 1995. During the six months ended June 30, 1996, amortization of
goodwill related to the UK Acquisition, the J&J Acquisition and the Heritable
Acquisition totaled $1.5 million.
Salaries and benefits increased $16.6 million or 404.9% to $20.7 million
for the six months ended June 30, 1996 from $4.1 million for the six months
ended June 30, 1995. This increase was primarily due to increased staffing
levels to 367 US employees at June 30, 1996 from 167 US employees for the
comparable period in 1995, the increased staffing levels associated with the UK
operations, severance costs associated with the J&J Acquisition and the
Heritable Acquisition, growth in loan origination and purchase volume and
geographic expansion, as well as the increase in loans serviced.
Interest expenses increased $4.1 million or 178.3% to $6.4 million for the
six months ended June 30, 1996 from $2.3 million for the six months ended June
30, 1995. The increase was attributable to the interest costs associated with
the $143.8 million Convertible Debentures issued during the second quarter of
1996 as well as an increased balance of loans held pending sale during the six
months ended June 30, 1996 resulting from the increased loan origination and
purchase volume during the period.
Other expenses increased $10.6 million or 294.4% to $14.2 million for the
six months ended June 30, 1996 from $3.6 million for the six months ended June
30, 1995. This increase was primarily a result of
36
<PAGE> 39
increased selling costs of $3.5 million or 376.6% to $4.4 million in the 1996
period from $917,903 in the 1995 period, and increased professional fees, travel
and entertainment and occupancy costs incurred to support the increased loan
origination and purchase volume and the inclusion of the operating results of
CSC-UK during the period.
Net earnings increased $40.7 million or 1,197.1% to $44.1 million for the
six months ended June 30, 1996 from $3.4 million for the six months ended June
30, 1995. The growth in net earnings was due primarily to the inclusion of
non-recurring, after-tax earnings of $23.1 million from the sale of the loan
portfolios acquired as a result of the J&J Acquisition and the Heritable
Acquisition, increased revenues resulting from an increase in loan origination
and purchase volume and volume of loans sold during the six months ended June
30, 1996 as the Company expanded its geographic base to 37 states and the
District of Columbia and further penetrated existing markets.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total revenues increased $38.3 million or 342.0% to $49.5 million in 1995
from $11.2 million in 1994. This increase was primarily the combined result of
higher gains on sale of loans resulting from the increased loan origination and
purchase volume and volume of loans sold compared to the prior period, the
inclusion of the operating results of CSC-UK, not in existence during 1994, an
increase in net mortgage origination income due to an increased loan origination
volume and an increase in servicing income.
Gain on sale of loans increased $32.5 million or 570.2% to $38.2 million
for the year ended December 31, 1995 from $5.7 million in 1994. This increase
was a result of (i) the increased volume of US whole loan sales as well as
higher average premiums earned on US whole loan sales during 1995 ($209.0
million of US whole loan sales at a 5.7% ($12.0 million) weighted average
premium as compared to a weighted average premium of 4.1% ($5.7 million) on
$138.0 million of whole loan sales during 1994), (ii) the inclusion of CSC-UK's
gain on loan sales of $11.9 million for the period from its formation to
December 31, 1995 representing a 28.7% premium on the $41.4 million of UK loan
sales during this period and (iii) the initiation of loan sales through
securitizations in 1995. The Company completed loan securitizations in March,
August and December 1995, generating gain on securitization of $14.3 million
(representing the fair value of the interest-only and residual certificates of
$15.6 million, less $1.3 million of costs associated with the transactions), or
a weighted average gain on securitization of 9.5% on the Company's participation
in the $235.0 million of loans sold through securitizations, excluding
prefunding.
Net mortgage origination income increased $411,765 or 15.8% to $3.0 million
in 1995 from $2.6 million in 1994. This increase was a result of the increase in
US loan origination and purchase volume to $417.9 million in 1995 from $154.4
million in 1994, partially offset by lower average origination fees earned.
Interest income increased $4.8 million or 252.6% to $6.7 million in 1995
from $1.9 million in 1994. This increase was due primarily to the increased
balance of loans held for sale during the year resulting from the increased loan
origination and purchase volume in excess of loans sold during the period.
Servicing income increased $362,893 or 87.6% to $777,066 in 1995 from
$414,173 in 1994. This increased income was due primarily to an increase in the
average balances of loans serviced to $140.3 million in 1995 from $23.4 million
in 1994.
Earnings from partnership interest increased $90,789 or 23.2% to $481,789
in 1995 from $391,000 in 1994 as a result of the inclusion of the equity
interest of Industry Mortgage Company, L.P. For the 12 months ended December 31,
1995, Industry Mortgage Company, L.P. recorded revenues of approximately $19.7
million primarily comprised of $15.1 million from gain on sale of loans.
Total expenses increased $17.4 million or 187.1% to $26.7 million in 1995
from $9.3 million in 1994. This increase was a result of increased salaries,
selling expenses and operating expenses related to increased loan origination
and purchase volume during 1995, as well as inclusion of the operating results
of CSC-UK, as compared to 1994. Total expenses as a percentage of total revenues
decreased to 54.0% for 1995 from 83.4% in 1994. During 1995, amortization of
goodwill totaled $493,794, related to the UK Acquisition. In future periods,
total expenses will be impacted by $2.0 million of amortization expense on an
annualized basis related to the goodwill recorded in connection with the UK
Acquisition.
37
<PAGE> 40
Salaries and benefits increased $7.9 million or 183.7% to $12.2 million in
1995 from $4.3 million in 1994. This increase was primarily due to increased US
staffing levels to 264 employees at December 31, 1995 from 114 employees at
December 31, 1994 in connection with the Company's growth in loan origination
and purchase volume and geographic expansion, as well as an increase in loans
serviced.
Interest expenses increased $3.0 million or 187.5% to $4.6 million in 1995
from $1.6 million in 1994. The increase was attributable to the interest costs
associated with a larger balance of loans held pending sale during 1995
resulting from the increased loan origination and purchase volume during the
year.
Other expenses increased $6.0 million or 171.4% to $9.5 million in 1995
from $3.5 million in 1994. This increase was primarily a result of increased
selling costs of $2.3 million or 392.3% to $2.9 million in 1995 from $588,029 in
1994, increased professional fees of $796,343 or 106.9% to $1.5 million in 1995
from $745,105 in 1994 and increased other operating costs of $2.9 million or
131.8% to $5.1 million in 1995 from $2.2 million in 1994 incurred to support the
$304.8 million increase in loan origination and purchase volume.
Minority interest was $2.4 million for 1995. There was no minority interest
for the comparable period in 1994. The minority interest was recognized during
1995 due to the inclusion of the consolidated operating results of CSC-UK,
although CSC-UK was only 50% owned by the Company prior to September 30, 1995.
Earnings before extraordinary item increased $11.5 million or 2,850.3% to
$11.9 million in 1995 from $403,459 in 1994. This growth was due primarily to
increased revenues resulting from an increase in loan origination and purchase
volume and volume of loans sold during 1995 as the Company expanded its
geographic base to 31 states and the District of Columbia and further penetrated
existing markets. Additionally, the inclusion of CSC-UK's earnings, since its
formation in May 1995, contributed $5.2 million, after taxes, to net income
during 1995.
An extraordinary loss of $295,943, net of taxes, was recorded due to early
extinguishment of subordinated debentures in December 1995. The Company
recognized as a loss the unamortized portion of the discount which was initially
recorded as a result of the detachable warrants received by the lender in
connection with the debt. After giving effect to the extraordinary loss, net
earnings increased $11.2 million or 2,800.0% to $11.6 million in 1995 from
$403,459 in 1994.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Total revenues increased $6.7 million or 148.9% to $11.2 million in 1994
from $4.5 million in 1993. This increase was due to a combination of increased
gains on loans sold, increased net mortgage origination income resulting from
the increased loan origination and purchase volume and volume of loans sold
compared to the prior period, as well as the addition of income from servicing
loans from outside portfolios.
Gain on sale of loans, all of which was derived from premium on whole loan
sales, increased $3.6 million or 171.4% to $5.7 million in 1994 from $2.1
million in 1993. This increase was due primarily to the volume of loans sold
during 1994 of approximately $138.0 million as compared to approximately $61.3
million in 1993, an increase of 125.1%. The average premium earned on loan sales
was approximately 4.1% in 1994 as compared to 3.4% in 1993.
Net mortgage origination income increased $1.1 million or 73.3% to $2.6
million in 1994 from $1.5 million in 1993. This increase was a result of the
increase in loan origination and purchase volume to $154.4 million in 1994 from
$77.6 million in 1993, partially offset by lower average origination fees
earned.
Interest income increased $1.4 million or 254.6% to $1.9 million in 1994
from $535,812 in 1993. This increase was due primarily to the increased balance
of loans held for sale during the year resulting from the increased loan
origination and purchase volume in excess of loans sold during the period.
Servicing income increased to $414,173 in 1994 as a result of the January
1994 acquisition of Astrum. At December 31, 1994, the Company serviced $56.3
million of loan balances comprised of 401 loans. Prior to the Astrum
acquisition, the Company did not provide loan servicing.
38
<PAGE> 41
Earnings from partnership interest was $391,000 in 1994 due to the
inclusion of results of the operations of Industry Mortgage Company, L.P. which
commenced operations in 1994. The Company did not have any earnings from
partnership interest in 1993. For the year ended December 31, 1994, Industry
Mortgage Company, L.P. recorded revenues of approximately $11.8 million and net
income of $4.7 million. Partnership revenues were primarily comprised of $8.1
million from gain on sale of loans and $2.0 million from net interest margin.
Total expenses increased $5.2 million or 126.8% to $9.3 million in 1994
from $4.1 million in 1993 as additional selling expenses were incurred and new
employees were added to develop and manage the increased loan origination volume
and loan servicing volume. Total expenses as a percentage of total revenues
decreased to 83.4% during 1994 from 92.7% during 1993.
Salaries and benefits increased $2.4 million or 126.3% to $4.3 million in
1994 from $1.9 million in 1993. This was the result of increased staffing levels
to 114 employees at December 31, 1994 from 35 employees at December 31, 1993 and
related costs in connection with the Company's growth in loan origination and
purchase volume to $154.4 million in 1994 from $77.6 million in 1993 and
expansion into 17 states and the District of Columbia by December 31, 1994 from
five states at December 31, 1993.
Interest expense increased $887,681 or 131.4% to $1.6 million in 1994 from
$675,747 in 1993. This increase was attributable to the interest costs
associated with a larger balance of loans held pending sale during 1994
resulting from the increased loan origination and purchase volume during the
year.
Other expenses increased $2.0 million or 133.3% to $3.5 million in 1994
from $1.5 million in 1993. This increase was primarily a result of increased
selling costs of $242,592 or 70.2% to $588,029 in 1994 from $345,437 in 1993;
increased professional fees of $479,370 or 180.4% to $745,105 in 1994 from
$265,735 in 1993; and increased other operating costs of $1.2 million or 131.1%
to $2.1 million in 1994 from $908,654 in 1993 incurred to support the increased
loan origination and purchase volume. As a percentage of total revenues,
however, other expenses remained relatively constant, decreasing slightly to
31.1% in 1994 from 34.0% in 1993.
Net income increased $88,256 or 28.0% to $403,459 in 1994 from $315,203 in
1993. Excluding a one-time charge of $680,000 related to the change in tax
status in 1994 from an "S" corporation to a "C" corporation, however, 1994 net
income increased 249.0% from 1993 to $1.1 million. Earnings before taxes
increased $1.6 million or 487.9% to $1.9 million in 1994 from $323,203 for 1993.
This growth was due primarily to increased revenues resulting from an increase
in loan origination and purchase volume and the volume of loans sold during 1994
as the Company expanded its geographic base and further penetrated existing
markets.
FINANCIAL CONDITION
June 30, 1996 Compared to December 31, 1995
Cash and cash equivalents increased $3.3 million or 91.7% to $6.9 million
at June 30, 1996 from $3.6 million at December 31, 1995.
Prepaid commitment fees were recorded as an asset at March 31, 1996 as a
result of the UK Greenwich Facility entered into by CSC-UK and Greenwich in
March 1996. The balance at June 30, 1996 was $37.0 million. There was no
corresponding asset at December 31, 1995.
Marketable equity securities in the amount of $9.8 million were recorded as
an asset at June 30, 1996 as a result of the Company's 5.82% equity interest in
IMC. Prior to June 1996, the Company had recorded a 9.09% limited partnership
interest in Industry Mortgage Company, L.P., the predecessor to IMC. At December
31, 1995, the Company's investment in this partnership was $758,315 and was
recorded as other assets. In June 1996, IMC converted into corporate form and
effected a public offering of common stock. As a result of the offering, the
Company's interest in IMC is no longer accounted for under the equity method of
accounting, whereby the Company recognized its relative portion of the
partnership earnings as revenues, but rather as marketable securities available
for sale in accordance with SFAS No. 115. Available for sale securities are
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reported on the statement of financial condition at fair market value with any
corresponding change in value reported as an unrealized gain or loss (if
assessed to be temporary) as an element of stockholders' equity after giving
effect for taxes.
Mortgage servicing receivables increased $95.2 million or 430.8% to $117.3
million at June 30, 1996 from $22.1 million at December 31, 1995 primarily due
to the increase in loan sales with servicing retained partially offset by
amortization expenses.
Interest-only and residual certificates increased $29.8 million or 191.0%
to $45.4 million at June 30, 1996 from $15.6 million at December 31, 1995 as a
result of the $109.7 million and $252.0 million of US securitizations completed
during the first six months of 1996.
Mortgage loans held for sale increased $40.1 million or 54.0% to $114.3
million at June 30, 1996 from $74.2 million at December 31, 1995 due primarily
to the volume of US loans originated exceeding loan sale volume in the first six
months of 1996 and loans acquired as part of the J&J Acquisition and the
Heritable Acquisition which were not yet sold.
Mortgage loans held for investment, net increased $3.5 million or 350.0% to
$4.5 million at June 30, 1996 from $1.0 million at December 31, 1995. This
increase was a result of the Company's increased loan origination and purchase
volume and the inclusion of $2.7 million of mortgages held for investment by
CSC-UK. As a percentage of total assets, mortgage loans held for investment
increased to 1.0% at June 30, 1996 from 0.7% at December 31, 1995.
Goodwill and other intangibles net of amortization increased $59.0 million
or 305.7% to $78.3 million at June 30, 1996 from $19.3 million at December 31,
1995, primarily as a result of the goodwill recorded in connection with the J&J
Acquisition and the Heritable Acquisition of $19.2 million and $41.2 million,
respectively, which is being amortized over ten years, offset by $1.5 million of
amortization during the 1996 period.
Other assets increased $25.9 million or 404.7% to $32.3 million at June 30,
1996 from $6.4 million at December 31, 1995. This was primarily the result of
the inclusion at June 30, 1996 of subwarehouse loan receivables of $5.6 million,
deferred costs of $4.5 million related to the issuance of the 6% Subordinated
Convertible Debentures, CSC-UK receivables related to loan sales to Greenwich of
approximately $9.3 million and other assets of CSC-UK of $6.2 million.
Warehouse financing facilities outstanding decreased $2.1 million or 2.8%
to $72.8 million at June 30, 1996 from $74.9 million at December 31, 1995
primarily as a result of increased volume of loans funded directly by the
Company with proceeds from the Convertible Subordinated Debenture offering.
Accounts payable and other liabilities increased $25.6 million or 156.1% to
$42.0 million at June 30, 1996 from $16.4 million at December 31, 1995. This was
primarily the result of the inclusion of CSC-UK and increased escrow balances
associated with the increased loan servicing portfolio.
Notes payable totaled $38.0 million at June 30, 1996 representing the $38.0
million note payable recorded in connection with the UK Greenwich Facility.
Stockholders' equity increased $62.8 million or 110.0% to $119.9 million at
June 30, 1996 from $57.1 million at December 31, 1995 primarily as a result of
net earnings of $44.1 million for the six months ended June 30, 1996, in
addition to a $5.7 million unrealized gain on marketable securities, net of
taxes and a foreign currency translation adjustment of $448,168.
December 31, 1995 Compared to December 31, 1994
Cash and cash equivalents increased $2.7 million or 293.7% to $3.6 million
at December 31, 1995 from $919,291 at December 31, 1994 primarily as a result of
excess proceeds from the December 1995 common stock offering.
Mortgage servicing receivables of $22.1 million were recorded as an asset
at December 31, 1995 as a result of the initiation of loan sales with servicing
retained partially offset by amortization expenses. There was
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no corresponding asset at December 31, 1994 due to the fact that prior to
January 1995 the Company did not sell loans with servicing retained.
Interest-only and residual certificates of $15.6 million were recorded as
an asset at December 31, 1995 as a result of the initiation of loan sales
through securitizations. There was no corresponding asset at December 31, 1994
due to the fact that prior to March 1995 the Company did not sell loans through
securitizations.
Mortgage loans held for sale increased $57.5 million or 344.3% to $74.2
million at December 31, 1995 from $16.7 million at December 31, 1994 due
primarily to increased loan origination and purchase volume in excess of loan
sale volume during the first nine months of 1995 as the Company expanded
geographically into new states as well as increased its origination and purchase
efforts in states in which the Company has an existing market presence.
Mortgage loans held for investment, net increased $507,621 or 98.3% to $1.0
million at December 31, 1995 from $516,583 at December 31, 1994. This increase
was a result of the Company's increased loan origination and purchase volume. As
a percentage of total assets, mortgage loans held for investment decreased to
0.7% at December 31, 1995 from 2.4% at December 31, 1994.
Goodwill and other intangibles, net of amortization of $19.3 million were
recorded as an asset at December 31, 1995 as a result of the UK Acquisition.
Prior to 1995, the Company did not recognize any goodwill or other intangible
assets.
Warehouse financing facilities outstanding increased $60.2 million or
409.5% to $74.9 million at December 31, 1995 from $14.7 million at December 31,
1994 primarily as a result of increased loan origination and purchase volume in
excess of the volume of loans sold as reflected in the increase in mortgages
held for sale, net.
Accounts payable and other liabilities increased $15.7 million or 2,235.8%
to $16.4 million at December 31, 1995 from $702,214 at December 31, 1994. This
was primarily the result of the UK Acquisition and increased escrow balances
associated with the increased loan servicing portfolio.
Stockholders' equity increased $53.9 million or 1,684.4% to $57.1 million
at December 31, 1995 from $3.2 million at December 31, 1994 primarily as a
result of net income of $11.6 million for the year, the $21.6 million of Common
Stock issued in the UK Acquisition and the $20.7 million from the December 1995
common stock offering.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business requires substantial cash to support its operating
activities. The Company's principal cash requirements include the funding of
loan originations and purchases, payment of interest expenses, funding the
overcollateralization requirements for securitizations, operating expenses,
income taxes and capital expenditures. The Company uses its cash flow from whole
loan sales, loans sold through securitizations, pre-funding mechanisms through
securitizations, loan origination fees, processing fees, net interest income,
borrowings under its warehouse facility, US purchase facilities, standby
facilities and UK purchase facility and capital markets offerings to meet its
working capital needs and to fund acquisitions such as the J&J Acquisition and
the Heritable Acquisition.
Adequate credit facilities and other sources of funding, including the
ability of the Company to sell loans, are essential to the continuation of the
Company's ability to originate and purchase loans. As a result of increased loan
originations and purchases and its growing securitization program, the Company
has operated, and expects to continue to operate, on a negative cash flow basis.
During fiscal 1993, 1994 and 1995 and the six months ended June 30, 1996, the
Company used operating cash of approximately $3.7 million, $5.3 million, $75.5
million and $47.3 million, respectively. The Company's sale of loans through
securitizations has resulted in a gain on sale of loans through securitizations
recognized by the Company. The recognition of this gain on sale has a negative
impact on the cash flow of the Company because significant costs are incurred
upon closing of the transactions giving rise to such gain and the Company is
required to pay state and federal income taxes
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on the gain on sale in the period recognized, although the Company does not
receive the cash representing the gain until later periods as the related loans
are repaid or otherwise collected. During the same periods, the Company received
cash from financing of $4.4 million, $6.7 million, $80.2 million and $136.0
million, respectively.
Credit Facilities
Warehouse Facility. The Company borrows funds on a short term basis to
support the accumulation of loans prior to sale. These short term borrowings are
made under a warehouse line of credit with a group of banks for which CoreStates
serves as agent (the "Warehouse Facility"). Pursuant to the Warehouse Facility,
the Company has available a secured revolving credit line of $72.0 million to
finance the Company's origination or purchase of loans, pending sale to
investors or for holding certain loans in its own portfolio (the "Revolving
Credit Line"). The Revolving Credit Line is settled on a revolving basis in
conjunction with ongoing loan sales and bears interest at a variable rate based
on the prime and LIBOR rates (8.35% at June 30, 1996) based on (i) 25 basis
points over the higher of either the prime rate or the federal funds rate plus
50 basis points, or (ii) LIBOR (A) divided by the result of one minus the stated
maximum rate at which reserves are required to be maintained by Federal Reserve
System member banks, (B) plus 175 basis points, as periodically elected by the
Company. The outstanding balance of this portion of the Warehouse Facility was
$55.9 million at June 30, 1996. The Revolving Credit Line extends through June
1997. In addition, the Warehouse Facility provides for a secured revolving
working capital credit line of up to $3.0 million to be used by the Company for
general corporate purposes (the "Working Capital Credit Line"). The Working
Capital Credit Line operates as a revolving facility until January 1, 1997 at
which time any outstanding balance under the Working Capital Credit Line
converts to a term loan. The Working Capital Credit Line bears interest at a
variable rate (9.25% at June 30, 1996) based on 100 basis points over the higher
of either the prime rate or the federal funds rate plus 50 basis points. There
was no outstanding balance of the Working Capital Credit Line at June 30, 1996.
The Working Capital Credit Line terminates on December 31, 1998.
The Warehouse Facility also permits the Company to use up to $10.0 million
of the Revolving Credit Line to provide subwarehouse lines of credit to certain
loan correspondents from whom the Company purchases loans. In July 1995, the
Company began lending funds on a short term basis to assist in the funding of
loans originated by certain of the Company's loan correspondents. Each borrowing
under these subwarehouse credit lines has a term of not more than 30 days. The
Company requires personal guarantees of the credit line from the principals of
the related loan correspondents. At June 30, 1996, the aggregate balance of
loans outstanding under this program was $4.8 million.
The Company also has a loan and security agreement with CoreStates whereby
CoreStates agrees to lend the Company up to $10.0 million to fund loan
originations and purchases. Borrowings under the agreement bear interest at the
prime rate plus 25 basis points (8.50% at September 3, 1996) and are due upon
demand.
US Purchase Facilities and Standby Facilities. The Company has a $50.0
million loan purchase agreement (the "US Purchase Facility") with ContiTrade
whereby the Company originates and then sells loans to ContiTrade and retains
the right to repurchase loans at a future date for whole loan sales to
institutional investors or for sales through securitizations. This agreement
extends through June 1999. The aggregate principal balance of loans sold to and
retained by ContiTrade at June 30, 1996 under the US Purchase Facility was $11.7
million. The Company also has a standby financing arrangement with ContiTrade
(the "Conti Standby Facility") whereby ContiTrade provides the Company up to
$10.0 million line of credit which is secured by the interest-only and residual
certificates the Company receives upon loan sales through securitizations. As of
June 30, 1996, the Company had $2.0 million available under the Conti Standby
Facility. The Conti Standby Facility bears interest at a variable rate based on
LIBOR plus 200 basis points (7.44% at June 30, 1996) and the agreement extends
through June 1999. The Company also has a term loan from Bank of Boston (the
"BKB Loan") whereby Bank of Boston provides the Company up to $30.0 million to
fund loan originations and purchases and working capital needs, secured by first
and second liens on the interest-only and residual certificates the Company
receives upon loan sales through securitizations. There was no outstanding
balance under the BKB Loan at June 30, 1996. As of September 3, 1996, the
outstanding
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balance under the BKB Loan was $30.0 million. The BKB Loan bears interest at a
rate of 11.0% per annum and the agreement extends through December 31, 1996.
In June 1996, the Company entered into a purchase and sale agreement with
Greenwich, effective as of February 2, 1996, with respect to mortgage loans
originated or purchased by the Company in the US. Pursuant to the US Greenwich
Facility, the Company sells loans to Greenwich for subsequent inclusion in
securitizations. In addition, the Company is advanced amounts based on a
percentage of the principal balance of the loans sold to Greenwich. Advanced
amounts outstanding under this facility bear interest at a rate of LIBOR plus
175 basis points (7.25% at June 30, 1996). The US Greenwich Facility expires on
the earlier to occur of $1.0 billion in loans sold by Greenwich out of the
facility or February 2, 1998. The Company had approximately $604.0 million
available under the US Greenwich Facility at June 30, 1996. The Company retains
servicing on all loans sold into the US Greenwich Facility.
UK Purchase Facility. In March 1996, CSC-UK entered into a mortgage loan
purchase agreement with Greenwich effective as of January 1, 1996 that includes
a working capital facility with respect to the funding of variable rate,
residential mortgage loans originated or purchased by CSC-UK in the UK and
terminated a previous facility with Greenwich. Pursuant to the UK Greenwich
Facility and with certain exceptions, CSC-UK sells all of the loans it
originates to Greenwich which must buy such loans. CSC-UK and/or Greenwich will
subsequently resell these loans through whole loan sales or securitizations. The
UK Greenwich Facility includes a working capital facility pursuant to which
CSC-UK is advanced amounts based on a percentage of the principal balance of
loans originated or purchased by CSC-UK and sold to Greenwich, which advance may
not exceed L10.0 million in the aggregate outstanding at any time. Outstanding
amounts under this working capital facility bear interest at a rate of LIBOR
plus 255 basis points (7.39% at June 30, 1996). This agreement expires as to the
working capital facility on May 1, 2000 and as to the purchase facility on
December 31, 2015. Both CSC-UK and Greenwich are prohibited from entering into
substantially similar transactions with other parties. CSC-UK agreed to pay a
fee to Greenwich in connection with the UK Greenwich Facility in the aggregate
amount of $38.0 million evidenced by two notes bearing interest at a rate of
6.2%, payable, respectively, in amounts of $13.0 million on December 15, 1996
and $25.0 million on December 15, 1997. Such fee is amortized over the life of
the UK Greenwich Facility. The outstanding balance under the working capital
facility portion of the UK Greenwich Facility was L10.0 million ($15.5 million)
at June 30, 1996.
The Company is required to comply with various operating and financial
covenants as defined in the agreements described above. The continued
availability of funds provided to the Company under these agreements is subject
to the Company's continued compliance with these covenants.
The Company's business requires continual access to short- and long-term
sources of debt and equity capital. While management believes that it has
sufficient funds to finance its operations and will be able to refinance or
otherwise repay its debt in the normal course of business, there can be no
assurance that existing lines of credit can be extended or refinanced or that
funds generated from operations will be sufficient to satisfy such obligations.
Future financing may involve the issuance of additional debt or equity
securities.
Loan Sales
Whole Loan Sales. Historically, whole loan sales have been an important
capital resource for the Company. The Company disposes of loans through whole
loan sales when management believes that the Company is able to achieve a
greater return through whole loan sales than through a securitization. In 1994,
1995 and the six months ended June 30, 1996, the Company sold $138.0 million,
$105.8 million and $59.0 million in whole loan sales, respectively, accounting
for 100%, 24.8% and 8.2% of all loan sales in the respective periods. Loans are
generally sold in portfolios. Upon the sale of a loan portfolio, the Company
generally receives a "premium," representing a cash payment in excess of the par
value of the loans (par value representing the unpaid balance of the loan amount
given to the borrower) or in a few instances a "yield differential" whereby the
Company receives a portion of the interest paid by the borrower for the life of
the loan. Premiums on US whole loan sales represented 50.9%, 10.2% and 1.5% of
the Company's total revenues in 1994, 1995 and the six months ended June 30,
1996, respectively.
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Securitization Program. The Company's ability to sell loans in the
secondary market through securitizations has been its most important capital
resource since March 1995. The Company applies net proceeds from securitizations
to repay warehouse indebtedness, thereby making its warehouse facility available
for further loan purchases and originations. Through June 30, 1996, the Company
had securitized approximately $644.7 million of loans.
In these securitizations, the Company purchased credit enhancements to the
senior interest in the related REMIC trusts in the form of insurance policies
provided by insurance companies. The pooling and servicing agreements that
govern the distribution of cash flows from the loans included in the REMIC
trusts require either (i) the establishment of a reserve that may be funded with
an initial cash deposit by the Company or (ii) the overcollateralization of the
REMIC trust intended to result in receipts and collections on the loans that
exceed the amounts required to be distributed to holders of senior interests. To
the extent that borrowers default on the payment of principal or interest on the
loans, losses will be paid out of the reserve account or will reduce the
overcollateralization to the extent that funds are available and may result in a
reduction in the fair value of the interest-only and residual certificates or
the value of the mortgage servicing receivables held by the Company. If payment
defaults exceed the amount in the reserve account or the amount of
overcollateralization, as applicable, the insurance policy maintained by the
Company will pay any further losses experienced by holders of the senior
interests in the related REMIC trust.
In May 1996, the Company filed a registration statement on Form S-3 with
the Commission to offer, on a delayed or continuous basis pursuant to Rule 415
of the Securities Act, pass-through certificates in an aggregate principal
amount of $1.0 billion from time to time in amounts and having such terms as
determined at the time of sale and described in related prospectus supplements
(the "Shelf Registration Statement").
In connection with its securitizations, the Company continually seeks to
improve its structures to reduce upfront costs and to maximize excess cash flow
available to the Company. The Company may consider alternative securitization
structures, including senior/subordinated tranches, and alternative forms of
credit enhancement, such as letters of credit and surety bonds. The structure of
each securitized sale of loans will depend on market conditions, costs of
securitization and the availability of credit enhancement options to the
Company.
Pre-funding Strategy. The Company has used, and may use in the future,
pre-funding mechanisms in certain of its securitizations both as a relatively
inexpensive borrowing source, as well as to hedge its interest rate exposure. In
a typical Company securitization transaction with a pre-funding account, the
investors purchase certificates with a higher aggregate principal balance than
that of the mortgage loans transferred to the securitization trust on the
closing date. During the 90-day pre-funding period after the closing date, the
Company sells mortgage loans to the trust which in turn pays for them with the
pre-funded amount.
The pre-funding mechanism effectively permits the Company during the
pre-funding period to borrow from the certificate investors an amount equal to
the pre-funded amount and pay the investors an interest rate equal to the
certificate rate which is a rate lower than that at which the Company can borrow
from its other funding sources. Furthermore, the Company fixes at the
certificate rate the pricing at which it can sell an amount (equal to the
pre-funded amount) of its mortgage loans, thereby insulating the Company during
the pre-funding period from risks associated with interest rate movements that
would ultimately impact the pass-through rate on the securities issued in the
securitization and to which it would be exposed if it were forced to hold the
mortgage loans during such period.
Convertible Debentures
In May 1996, the Company issued $143.8 million of 6% Convertible
Subordinated Debentures due 2006 (of which $75.6 million are offered hereby),
convertible at any time into shares of Common Stock, currently at a conversion
price of $26.25 per share, subject to adjustment. The terms of the indenture
governing the Debentures do not limit the incurrence of additional indebtedness
by the Company, nor do they limit the Company's ability to make payments such as
dividends.
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General
The Company's cash requirements may be significantly influenced by possible
acquisitions, although no particular acquisition has been agreed upon or become
the subject of any agreement as of the date of this Prospectus. The Company
anticipates that it will need to arrange for additional cash resources prior to
the end of 1997 through additional debt or equity financing or additional bank
borrowings. The Company has no commitments for additional bank borrowings or
additional debt or equity financing and there can be no assurance that the
Company will be successful in consummating any such financing transaction in the
future on terms the Company would consider to be favorable.
ACCOUNTING CONSIDERATIONS
The Company derives a significant portion of its income by recognizing
gains upon the sale of loans through securitizations based on the fair value,
recorded at the time of sale, of the interest-only and residual certificates
that the Company receives upon the sale of loans through securitizations in the
US, and the value, recorded at the time of sale, of mortgage servicing
receivables recognized through UK securitizations and on sales into loan
purchase facilities. In loan sales through US securitizations, the Company sells
loans that it has originated or purchased to a REMIC trust for a cash purchase
price and interests in such REMIC trust consisting of interest-only regular
interests and the residual interest which are represented by the interest-only
and residual certificates. The cash purchase price is raised through an offering
by the REMIC trust of pass-through certificates representing regular interests
in the REMIC trust. Following the securitization, the purchasers of the
pass-through certificates receive the principal collected and the investor
pass-through interest rate on the principal balance, while the Company
recognizes as current revenue the fair value of the interest-only and residual
certificates.
In the case of a UK securitization, or the sale of loans into a purchase
facility, the Company records a mortgage servicing receivable. In addition,
since it adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights" in
October 1995, the Company also recognizes as an asset the capitalized value of
mortgage servicing rights (including normal servicing and other ancillary fees)
as a mortgage servicing receivable. The Company calculates the value of its
interest-only and residual certificates and mortgage servicing receivables in
substantially the same manner. The fair value of these assets is determined
based on various economic factors, including loan types, sizes, interest rates,
dates of origination, terms and geographic locations. The Company also uses
other available information such as reports on prepayment rates, interest rates,
collateral value, economic forecasts and historical default and prepayment rates
of the portfolio under review. The Company estimates the expected cash flows
that it will receive over the life of a portfolio of loans. These expected cash
flows constitute the excess of the interest rate payable by the obligors of
loans over the interest rate passed through to the purchaser, less applicable
recurring fees and credit losses. The Company discounts the expected cash flows
at a discount rate that it believes is consistent with the required
risk-adjusted rate of return to an independent third party purchaser of the
interest-only and residual certificates or mortgage servicing receivables. As of
June 30, 1996, the Company's balance sheet reflected the fair value of interest-
only and residual certificates and mortgage servicing receivables of $45.4
million and $117.3 million, respectively.
Realization of the value of these interest-only and residual certificates
and mortgage servicing receivables in cash is subject to the prepayment and loss
characteristics of the underlying loans and to the timing and ultimate
realization of the stream of cash flows associated with such loans. If actual
experience differs from the assumptions used in the determination of the asset
value, future cash flows and earnings could be negatively impacted and the
Company could be required to write down the value of its interest-only and
residual certificates and mortgage servicing receivables. In addition, if
prevailing interest rates rose, the required discount rate might also rise,
resulting in impairment of the value of the interest-only and residual
certificates and mortgage servicing receivables.
In the fourth quarter of 1995, the Company adopted SFAS No. 122 which FASB
issued in May 1995. SFAS No. 122 applies prospectively in fiscal years beginning
after December 15, 1995 (with early application encouraged), to transactions in
which a mortgage banking enterprise sells or securitizes mortgage loans with
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servicing rights retained and to impairment evaluations of all amounts
capitalized as servicing rights, including those purchased before the adoption
of such statement. This statement requires that a mortgage banking enterprise
recognize rights to service mortgage loans for others as separate assets,
regardless of how those servicing rights are acquired, and that a mortgage
banking enterprise assess its capitalized servicing rights for impairment based
on the fair value of the underlying servicing rights. The Company recognizes
these rights and classifies them as mortgage servicing receivables. For the
purpose of evaluating and measuring impairment of capitalized mortgage servicing
receivables, the Company must categorize those mortgage servicing receivables
based on one or more of the predominant risk characteristics of the underlying
loans. The Company has determined the predominate risk characteristic to be
prepayment risk. Impairment shall be recognized through a valuation allowance
for an individual category. The amount of impairment recognized shall be the
amount by which the capitalized mortgage servicing receivables for a category
exceed their fair value. Subsequent to the initial measurement of impairment,
the Company shall adjust the valuation allowance to reflect changes in the
measurement of impairment. Fair value in excess of the amount capitalized as
mortgage servicing receivables (net of amortization), however, shall not be
recognized. As a result of its adoption of SFAS No. 122 during the fourth
quarter of 1995, the Company recognized net additional mortgage servicing
receivables of approximately $460,000 during 1995.
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation" which is effective for fiscal years beginning after December 15,
1995. SFAS No. 123 establishes financial accounting and reporting standards for
stock-based employee compensation plans, and allows either expensing the value
of stock-based compensation over the period earned, or disclosing in the notes
to the consolidated financial statements the pro forma impact to net income and
earnings per share as if the fair value of the awards had been charged to
compensation expense. The Company has not completed its analysis of the
statement, nor has it decided upon the expense recognition or disclosure
provisions of the statement.
In June 1996, FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" which provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. SFAS No. 125
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings.
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and is to
be applied prospectively. The Company has not completed its analysis of the
statement.
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BUSINESS
GENERAL
The Company is a consumer finance company engaged in the business of
originating, purchasing, selling and servicing mortgage loans secured primarily
by one- to four-family residences. The majority of the Company's loans are made
to owners of single family residences who use the loan proceeds for such
purposes as debt consolidation and financing of home improvements and
educational expenditures, among others. Through its wholly-owned subsidiary CSC,
the Company is licensed or registered to do business in 37 states and the
District of Columbia. Through its indirect wholly-owned subsidiary CSC-UK, the
Company originates, sells and services mortgage loans in England, Scotland and
Wales.
US Overview
In the US, the Company focuses on lending to individuals who are unable or
unwilling to obtain mortgage financing from conventional mortgage sources such
as thrift institutions and commercial banks. These conventional lending sources,
as compared to the Company, generally impose stringent and inflexible loan
underwriting guidelines and require a longer period of time to approve and fund
loans. The Company's customers are individuals who often have impaired or
unsubstantiated credit histories and/or unverifiable income (for example,
because they are self-employed) and require or seek a high degree of
personalized service and prompt response to their loan applications. As a
result, the Company's customers generally are not averse to paying the higher
interest rates that the Company charges for its loan programs as compared to the
interest rates charged by conventional lending sources. Because its customers
generally borrow for reasons other than the purchase of homes, the Company
believes that it is not as dependent as traditional mortgage bankers on general
levels of home sales and refinancing activity. In addition, the Company has a
Wholesale Loan Acquisition Program whereby it purchases loans on a wholesale
basis, on both a flow and bulk basis, from selected financial institutions and
mortgage bankers.
In the US, the Company originates and purchases loans through three
channels: (i) originations through an extensive network of independent mortgage
brokers utilizing the Company's New York headquarters and four regional
processing offices located in California, Georgia, Illinois and Virginia; (ii)
purchases on a flow basis through its Wholesale Loan Acquisition Program from
selected financial institutions and mortgage bankers known as loan
correspondents; and (iii) purchases of large pools of loans (bulk purchases)
from loan correspondents. The Company originates loans through a network of
independent mortgage brokers, with its highest producing broker accounting for
2.4% of the total US origination and purchase volume for the six months ended
June 30, 1996. The Company strives to process each loan application received
from mortgage brokers as quickly as possible in accordance with the Company's
loan application approval procedures. Accordingly, most loan applications
receive preliminary decisions within 24 hours of receipt and are funded within
15-25 days thereafter. Loans purchased on a flow basis in the Wholesale Loan
Acquisition Program are originated by loan correspondents in accordance with the
Company's underwriting guidelines and the Company purchases such loans in the
form of complete loan packages. In some cases, the Company provides its loan
correspondents with subwarehousing arrangements to facilitate the funding of
mortgage loans. The highest producing loan correspondent in the Wholesale Loan
Acquisition Program accounted for 3.5% of the total US origination and purchase
volume for the six months ended June 30, 1996. In June 1996, the Company
expanded its whole loan purchases to include the purchase of loans which are
offered in the secondary market on a bulk basis by loan correspondents. The
Company believes it has the underwriting, servicing and management capabilities
in place, as well as the necessary access to capital, to review and purchase
bulk loans competitively in this market segment and to benefit from the
efficiencies related to the securitization of such loans.
As the Company expands the channels through which it originates and
purchases loans, it has also broadened the types of loans it offers. The Company
offers a wide range of loan products in the US, including traditional
residential mortgage loans for refinancing, educational, home improvement and
debt consolidation purposes, and mortgage loans on small multi-family and
mixed-use properties. The Company has recently begun offering adjustable rate
mortgage loans, jumbo loans (loans with an initial principal balance in excess
of
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<PAGE> 50
$500,000) and "Sav*-A-Loan" mortgage loans which are loans generally made to
homeowners who may have little or no equity in their property but who possess a
favorable credit profile and debt-to-income ratio and who often use the proceeds
from such loans to repay outstanding indebtedness as well as to make home
improvements. The Company also purchases conventional home improvement loans,
generally secured by second mortgages, and also originates and purchases loans
partially insured by the Federal Housing Administration (the "FHA"), an agency
of the US Department of Housing and Urban Development ("HUD"), pursuant to the
Title I credit insurance program of the National Housing Act of 1934. The
Company's Title I loans must be used by the borrower for property improvements
that protect or improve the basic livability or utility of the property. The
Title I loan program is a coinsurance program. The Company initially is at risk
for 10% of the principal balance of each Title I loan. The FHA will insure the
remaining 90% of the principal balance of each loan, subject to certain limits.
The Company expects that an increasing percentage of its loan origination and
purchase volume in the future will consist of conventional home improvement
loans and Title I loans.
The Company retains the servicing rights to substantially all loans it
originates or purchases. Loan servicing involves the collection of payments due
under a loan, the monitoring of the loan, the remitting of payments to the
holder of the loan, the furnishing of reports to such holder and the enforcement
of the lender's rights, including attempting to recover delinquencies and
instituting loan foreclosures.
The Company sells its US loan production primarily through securitizations
and, to a lesser extent, through whole loan sales. Through 1994, the Company
sold virtually all of its loan production in private placements to a variety of
institutional purchasers. In 1995, however, the Company sold a substantial
portion of its loan production in private placements of mortgage-backed
securities in securitizations. The Company funds its originations and purchases
through warehouse lines of credit in the US and purchase and sale facilities in
the US and the UK. The Company also utilizes its $30.0 million BKB Loan to
facilitate US loan production, as well as for general corporate purposes. The
Company sells the loans it originates and purchases into the purchase and sale
facilities prior to their securitization and recognizes a gain on sale of the
loans at the time of such sale. The Company also sold $209.0 million and $59.0
million of its US loan production in whole loan sales to institutional investors
in 1995 and the first six months of 1996, respectively.
UK Overview
The Company commenced its UK operations in May 1995 with the formation of
CSC-UK. In the UK market, the Company has focused on lending to individuals who
are generally unable to obtain mortgage financing from Conventional UK Lenders
because of impaired or unsubstantiated credit histories and/or unverifiable
income, or who otherwise choose not to seek financing from such conventional
lenders. The UK market is highly fragmented and underserved by conventional
lenders as compared to the US market. The lack of participation of Conventional
UK Lenders in this market is primarily a result of economic difficulties
experienced in the UK in the late 1980s which, in conjunction with poor
underwriting practices, resulted in unacceptable losses for Conventional UK
Lenders who made loans to these borrowers during that period. As a result of
these losses and the negative effect on home prices that resulted from
significant reduction in the deductibility of mortgage interest for UK personal
income tax purposes (enacted in 1988), the regulatory authorities responsible
for overseeing Conventional UK Lenders imposed higher capital adequacy ratios on
Conventional UK Lenders as a condition to making loans to borrowers with
impaired or unsubstantiated credit histories and/or unverifiable income
irrespective of the actual income levels or the home equity of these borrowers.
Given the lack of participation by Conventional UK Lenders, the Company believes
that these borrowers currently obtain mortgage financing through a number of
small mortgage banking institutions, if at all.
The Company originates loans in the UK through a network of independent
mortgage brokers. The Company has entered into contracts with several of its
highest producing brokers which grant the Company a right of first refusal on
all loan applications that meet specified underwriting criteria. To further
increase its loan origination volume and market share in the UK, the Company
also recently acquired J&J and Heritable, two UK-based mortgage bankers. The J&J
Acquisition provides the Company with greater strength in the second lien loan
market, experienced management personnel necessary for the continuance of its
expansion in
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<PAGE> 51
the UK and a greater share of the fragmented UK market through additional broker
relationships and the expansion of offered products. The Heritable Acquisition
represents an expansion to a higher credit quality borrower and new product
types complementary to the Company's other UK business, using more traditional
underwriting guidelines.
Although the Company's operations in the UK are generally similar to its US
operations, there are certain distinctions, primarily related to loan payment
and prepayment terms.
Except for certain loans subject to regulations promulgated under the
United Kingdom Consumer Credit Act 1974 (the "CCA"), the Company's UK loans are
calculated by using a standard rate of interest (the "Standard Rate"), and may
provide the opportunity for a borrower to make a reduced, or "concessionary"
payment (the "Concessionary Rate") to the extent that the borrower pays his loan
when due and is current on previous loan payments. With regard to prepayment
terms, if a UK borrower redeems his loan in full prior to the maturity date
(whether voluntarily or through a default), the equivalent of an early payment
fee is incurred as a result of the borrower's contractual obligation to pay a
stated amount of interest for the credit extended. The total principal and
interest due over the full term of the loan is calculated and then the borrower
is provided a rebate for the unexpired portion of the loan term, resulting in
the equivalent of an early payment fee.
The Company calculates the amount of interest payable on a mortgage loan
over its stated term to maturity by using a "flat" rate of interest on its
original loan balance assuming no amortization of the loan. The cost of credit
is determined by multiplying the Standard Rate times the original principal
amount of the loan times the original stated term of the loan. To determine the
UK borrower's monthly payment, the total cost of credit after, adjusting for
fees and charges, is added to the original principal amount of the loan and
divided by the number of months represented in the loan term. This payment
results in an effective annual percentage rate (the "APR") that is greater than
the APR on a loan originated in the US.
For purposes of allocating loan payments between principal and interest,
the amount of a payment that is deemed to be allocable to the repayment of
principal will be determined on an actuarial basis assuming that the loan has an
interest rate that is equal to the APR on the loan, calculated using the
applicable Concessionary Rate. For example, a hypothetical loan of L35,000
written with a Concessionary Rate of 9.9% and an original term to stated
maturity of 20 years would have a monthly payment of L434.58 and an APR of
13.97% assuming all payments were made when due. In order to determine the
principal portion of each monthly payment under the Concessionary Rate of the
hypothetical L35,000 loan described above, the loan is amortized using its
Concessionary Rate APR.
Under the terms of some of the Company's loans in the UK, the amount due in
the case of a prepayment is based upon the amount of interest, at the Standard
Rate, that has been "earned" and calculated in accordance with the "Rule of 78s"
method with a one- to six-month deferment (i.e., for purposes of calculating the
amount of interest that has been earned, the redemption date is set at one to
six months after the date of actual redemption by the borrower). Prepayments of
the Company's regulated loans are calculated using a one-month deferment, except
where the term of the loan is five years or less, in which case a two-month
deferment is used. This generally results in lower prepayment penalties as
compared to the Company's unregulated UK loans, which typically use a six-month
deferment. In the hypothetical L35,000 loan described above, the prepayment
after the 18th month calculated using a six-month deferment would require the
borrower to pay L45,872, or 31.1% more than the original principal balance (or
L41,080 or 17.4% if the prepayment were calculated using a one-month deferment).
The Company anticipates selling UK loans through securitizations and, to a
lesser extent, through whole loan sales to maximize its revenues and provide
greater flexibility in managing its cash requirements. Prior to each such sale,
the Company sells UK loans upon origination to Greenwich pursuant to the terms
of the UK Greenwich Facility. The Company completed the first UK loan sale
through a securitization of L32.0 million ($49.6 million) of loans in March
1996.
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BUSINESS STRATEGY
The Company's business strategy is to continue its focus on lending to
borrowers who are unable or unwilling to obtain mortgage financing from
conventional mortgage sources. In the US, the Company originates loans through
an extensive network of independent mortgage brokers and purchases loans under
its Wholesale Loan Acquisition Program on a flow basis from selected financial
institutions and mortgage bankers and, more recently, in bulk from loan
correspondents. In the UK, the Company originates loans through a network of
independent mortgage brokers. The Company's goal is to continue to increase its
loan origination and purchase volume by pursuing the strategies discussed below.
Geographic Expansion in the US
The Company intends to expand its independent mortgage broker network and
Wholesale Loan Acquisition Program in the US on a nationwide basis. The Company
currently has an extensive independent broker network covering 37 states and the
District of Columbia utilizing the Company's New York headquarters and four
regional processing centers located in California, Georgia, Illinois and
Virginia and it purchases loans from selected financial institutions and
mortgage bankers. The Company's expansion strategy involves (i) identifying
areas with demographic statistics that are comparable to existing markets where
the Company has been successful in originating and purchasing loans, (ii)
understanding the area's regulatory requirements and tailoring the Company's
loan programs to comply with such requirements, (iii) searching for and
retaining business development representatives for that area who have (or have
the ability to develop) contacts with the independent mortgage brokers
originating loans in that area and (iv) marketing to the independent mortgage
brokers through the business development representatives in order to generate
loan originations.
Growth through Selected Acquisitions
The Company intends to continue to expand its existing operations through
the acquisition of complementary consumer finance businesses in order to enhance
revenue and market share as well as to capitalize on the Company's existing
systems, financial resources and experienced personnel. In furtherance of this
strategy, the Company recently acquired J&J and Heritable. The J&J Acquisition
provides the Company with greater strength in the second lien loan market,
experienced management personnel and a greater share of the fragmented UK market
through additional broker relationships and the expansion of product offerings.
The Heritable Acquisition represents an expansion to a higher credit quality
borrower and new product types complementary to the Company's other UK business.
Further Development and Expansion of UK Operations
In the UK, the Company seeks to target an underserved segment of the home
equity market by lending to borrowers who are unable to obtain mortgage
financing from conventional mortgage sources because of impaired or
unsubstantiated credit histories and/or unverifiable income or who choose not to
seek financing from such conventional lenders. Given the lack of participation
by Conventional UK Lenders in this market segment, the Company believes that
these borrowers currently obtain mortgage financing through a number of small,
privately held mortgage bankers, if at all.
Since the formation of CSC-UK in May 1995, the Company has been actively
marketing its products and services to mortgage brokers in the UK. In order to
increase purchase volume from its UK brokers, the Company has entered into
contracts with several of its highest producing brokers which grant the Company
a right of first refusal on all loan applications that meet specified
underwriting criteria. The Company has proprietary on-line software used by many
of its brokers to expedite the loan application process and has adopted in the
UK its US underwriting procedures in implementing standardized appraisal
guidelines and employing underwriting and processing staff to provide prompt,
efficient and reliable service to the UK broker community. The Company also
intends to broaden the range of loan products it offers in the UK in order to
increase the base of brokers it serves. For example, the Company intends to
begin direct marketing of a new loan product designed for occupants of
government-owned residential properties in the UK.
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Expansion of Wholesale Operations and Bulk Purchases
The Company seeks to increase significantly its wholesale purchases of
loans from selected financial institutions and mortgage bankers under its
Wholesale Loan Acquisition Program. The Company offers a wide range of products
and services, as well as quick response times, to meet the needs of the
participants in its Wholesale Loan Acquisition Program. In addition, the Company
offers subwarehousing arrangements to selected mortgage bankers to facilitate
the funding of mortgage loans. In June 1996, the Company expanded its whole loan
purchases to include the purchase of loans which are offered in the secondary
market on a bulk basis by other originators. The Company intends to expand this
program to capitalize on the use of its expanded infrastructure, underwriting,
processing and servicing capabilities and because the Company believes that it
has the capital resources necessary to compete effectively in this market. The
Company believes that bulk purchases provide an opportunity to benefit from the
efficiencies achieved through the securitization of such loans.
Maximization of Independent Mortgage Broker Relationships
The Company seeks to maximize its loan origination capability from its
network of independent mortgage brokers by offering a variety of innovative
products and providing consistent underwriting and prompt and efficient service
at competitive prices. The Company offers over 20 loan products to its
independent mortgage brokers to meet the needs of the diverse borrower market.
The Company targets brokers with a smaller volume of loans, a segment of the
mortgage market the Company believes has typically been underserved by
traditional sources, and attempts to retain and grow these relationships by
providing quality and reliable products and services as well as consistent
underwriting and substantial funding sources. The Company processes and
underwrites loans for its brokers, generally making preliminary decisions within
24 hours of receipt of an application and funding within 15-25 days thereafter.
The Company believes that it can achieve further penetration of its existing
independent mortgage broker network without incurring significant concentration
risks. In the UK, the Company has entered into contracts with several of its
highest producing brokers which grant the Company a right of first refusal on
all loan applications that meet specified underwriting criteria. In addition,
the Company has proprietary on-line software used by many of its brokers to
expedite the loan application process.
Maintenance of Underwriting Standards and Infrastructure
As the Company expands its product offerings and increases its loan
origination and purchase volume, it intends to continue to apply its
underwriting standards and quality control procedures in connection with the
loans it originates, purchases and services. The Company strives to develop
software and purchase hardware that monitor the Company's loan portfolio in
order to service the portfolio effectively. The Company has recently upgraded
its computer system to provide additional capacity to accommodate the increased
loan origination and purchase volume and to provide greater flexibility in
monitoring the various types of loan products the Company offers. The Company
continues to expand its facilities, retain experienced personnel and monitor
loan payments carefully in order to maintain service levels as it grows its loan
origination and purchase volume.
Introduction and Expansion of New Products
The Company frequently reviews its loan offerings and introduces new loan
products to attempt to meet the needs of its customers. The Company also
evaluates products or programs that it believes enhance revenue by leveraging
the Company's existing systems and personnel. In furtherance of this strategy,
in March 1996 the Company expanded loan production volume to include
conventional home improvement loans and Title I home improvement loans. The
Company also offers adjustable rate mortgage loans, jumbo loans and "Sav*-
A-Loans" (loans to homeowners with little or no equity in their property but who
possess a favorable credit profile and debt-to-income ratios and who often use
the proceeds from such loans to repay outstanding indebtedness as well as make
home improvements). In addition, the Heritable Acquisition has provided the
Company with expanded loan product offerings to UK borrowers with higher quality
credit than the Company's typical UK borrowers.
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LOANS
Overview
The Company's consumer finance activities primarily consist of originating,
purchasing, selling and servicing mortgage loans. The vast majority of these
loans are traditional home equity loans secured by first mortgages on one- to
four-family residences. The balance are loans secured by junior mortgages on
one- to four-family residences, loans secured by first mortgages on small
multi-family residences and mixed-use properties, "Sav*-A-Loans," conventional
home improvement loans and, to a lesser extent, Title I home improvement loans.
Once a loan application has been received, the underwriting process completed
and the loan funded or purchased, the Company typically will package the loans
in a portfolio and sell the portfolio, either through a securitization or
directly on a whole loan basis to institutional purchasers. The Company retains
the right to service substantially all of the loan origination and purchase
volume that it sells. The Company also acts as a contract loan servicer for
other financial institutions.
Loan Originations and Purchases
The Company is licensed or registered to originate or purchase loans in 37
states and the District of Columbia through a network of independent mortgage
brokers and through its eight US branch offices. In addition, the Company
purchases loans on a wholesale basis from selected financial institutions and
mortgage bankers and, more recently, in bulk from other originators. In the UK,
the Company also originates loans through a network of independent mortgage
brokers. The Company believes that its strategy of originating loans through
independent mortgage brokers and purchasing loans in the US through wholesale
acquisitions and in bulk is efficient as it allows the Company, with only nine
offices, to maintain lower overhead expenses than competing companies utilizing
a more extensive branch office system.
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CHANNELS OF LOAN ORIGINATIONS AND PURCHASES
<TABLE>
<CAPTION>
US
-------------------------------- UK
CSC(1) -------------------------
------------ YEAR ENDED SIX MONTHS FORMATION SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED THROUGH ENDED
DECEMBER 31, ------------------- JUNE 30, DECEMBER 31, JUNE 30,
1993 1994 1995 1996 1995 1996
------------ -------- -------- ---------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Independent Mortgage Brokers:
Principal balance........... $ 77,586 $149,724 $291,907 $222,287 $ 41,395 $ 68,006
Number of loans............. 1,052 1,947 4,161 3,254 960 2,182
Average principal balance
per loan................. $ 73.8 $ 76.9 $ 70.2 $ 68.3 $ 43.1 $ 31.2
Wholesale Loan Acquisition
Program:
Principal balance........... -- $ 4,686 $125,957 $166,391 -- --
Number of loans............. -- 60 1,847 2,370 -- --
Average principal balance
per loan................. -- $ 78.1 $ 68.2 $ 70.2 -- --
Bulk Purchases(2):
Principal balance........... -- -- -- $ 68,005 -- $241,387
Number of loans............. -- -- -- 1,186 -- 18,527
Average principal balance
per loan................. -- -- -- $ 57.3 -- $ 13.0
Total Loan Originations and
Purchases:
Principal balance........... $ 77,586 $154,410 $417,864 $456,683 $ 41,395 $309,393
Number of loans............. 1,052 2,007 6,008 6,810 960 20,709
Average principal balance
per loan................. $ 73.8 $ 76.9 $ 69.6 $ 67.1 $ 43.1 $ 14.9
</TABLE>
- ---------------
(1) Represents historical information of CSC prior to its acquisition by the
Company.
(2) For the six months ended June 30, 1996 in the UK, represents the loan
portfolios purchased as a result of the J&J Acquisition and the Heritable
Acquisition.
Independent Mortgage Brokers. A significant portion of the Company's US
loan origination and purchase volume is currently derived from independent
mortgage brokers. During 1995 and the first six months of 1996, $291.9 million
or 69.9% and $222.3 million or 48.7%, respectively, of the Company's loan
originations and purchases were sourced through the independent mortgage broker
network. All independent mortgage brokers submitting loan applications to the
Company must be registered or licensed as required by the jurisdiction in which
they operate. The Company believes that not only are independent mortgage
brokers the most efficient way to reach borrowers, but also that the use of
these brokers minimizes the Company's staffing requirements and marketing
expenses.
The Company receives credit application packages from mortgage brokers. As
independent mortgage brokers may submit loan applications to several prospective
lenders simultaneously, the Company strives to provide a quick response to the
loan application (in most instances a preliminary response is given on the same
day that the application is received). In addition, the Company emphasizes
personal service to both the broker and loan applicant by having consultants and
loan processors follow the loan application through the application and closing
process. Because the Company's independent mortgage brokers collect fees from
the borrower and are not compensated by the Company, the Company believes that
consistent underwriting, quick response times and personal service are critical
to successfully originating loans through independent mortgage brokers. During
1995 and the first six months of 1996, the single highest producing independent
mortgage broker accounted for 6.4% and 2.4%, respectively, of the Company's US
loan originations and purchases, and the ten highest producing independent
mortgage brokers accounted for 21.0% and 9.8%, respectively, of the
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Company's US loan originations and purchases. The Company periodically reviews
the performance of the loans produced by each independent broker and any pattern
of higher than expected delinquency or documentation deficiencies will result in
the elimination of that broker from the Company's approved list.
Wholesale Loan Acquisition Program. In addition to originating loans
through its network of independent mortgage brokers, the Company purchases US
loans on a flow basis through its Wholesale Loan Acquisition Program. These loan
purchases are in the form of complete loan packages originated by loan
correspondents. Commenced in 1994, the Wholesale Loan Acquisition Program
accounted for $4.7 million (3.0%), $126.0 million (30.1%) and $166.4 million
(36.4%) of the Company's total US loan origination and purchase volume for 1994,
1995 and the six months ended June 30, 1996, respectively. The Company
anticipates that this program will account for substantially more of the
Company's total loan origination and purchase volume in the future.
The Company purchases loans on a flow basis under the Wholesale Loan
Acquisition Program. The correspondent follows the Company's underwriting
guidelines and lends to the borrower in accordance with these guidelines. After
the correspondent has made the loan, the Company purchases the loan from the
correspondent. Loan correspondents must be registered or licensed as required by
the jurisdiction in which they operate and must be approved by the Company.
Prior to approving a financial institution or mortgage banker as a loan
correspondent, the Company performs an extensive investigation of, among other
things, the proposed loan correspondent's licensing or registration and the
performance of its previously originated loans. The investigation includes
contacting the agency that licenses or registers such loan correspondent, as
well as other purchasers of loans originated by it, and reviewing such loan
correspondent's financial statements. Following approval, the Company requires
each loan correspondent to enter into a purchase and sale agreement with
customary representations and warranties regarding the loans sold to the
Company. No single financial institution or other mortgage banker in the
Wholesale Loan Acquisition Program accounted for more than 6.4% or 3.5% of the
Company's US loan originations and purchases during 1995 or the six months ended
June 30, 1996, respectively.
In order to facilitate its Wholesale Loan Acquisition Program, the Company
offers a wide range of products and services designed to meet the needs of its
loan correspondents including, in certain cases, a subwarehousing facility to
assist in the funding of mortgage loans. Borrowings under the Company's
subwarehousing lines have terms of not more than 30 days and require personal
guarantees from the principals of the loan correspondents for such credit lines.
Bulk Purchase Program. In June 1996, the Company expanded its whole loan
purchases to include the purchase of loans which are offered in the secondary
market on a bulk basis by other originators. The Company completed its first
bulk purchase of an aggregate of $68.0 million in loans in June 1996, accounting
for 14.9% of the Company's total US loan origination and purchase volume for the
six months ended June 30, 1996. The Company anticipates that bulk purchases will
account for substantially more of the Company's total loan origination and
purchase volume in the future.
Under the bulk purchase program, loan correspondents originate numerous
loans without seeking the Company's preapproval. The loans are packaged in a
large portfolio and presented to the Company for review and possible purchase.
The Company re-underwrites the loans in each package and purchases those loans
that meet its underwriting standards. The Company believes it has the
infrastructure, underwriting, processing and servicing capabilities and capital
resources necessary to compete effectively in the bulk purchase market.
Geographic Distribution of US Loans. Although the Company is licensed or
registered in 37 states and the District of Columbia, it has historically
concentrated its business in the eastern seaboard states and the midwest. While
this concentration has declined, New York and Illinois contributed 37.0% and
17.6%, respectively, of the Company's total US loan origination and purchase
volume for the year ended December 31, 1995, and 20.3% and 10.3%, respectively,
for the six months ended June 30, 1996. The Company intends to expand its loan
origination and purchase activities into new states, as well as within states it
currently serves, through both independent mortgage brokers and its Wholesale
Loan Acquisition Program. Typically, the Company begins to originate and
purchase loans within a six-month period after receiving its license or becoming
registered in a state. This allows the Company time to develop appropriate
documentation
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<PAGE> 57
and procedures for complying with local and state regulatory requirements,
retain a business development representative for the market, implement through
that business development representative a strategy designed to familiarize loan
origination and purchase sources with the Company and its loan programs, as well
as pre-qualify appraisers, title companies and closing attorneys. During 1995
and the six months ended June 30, 1996, the Company received its license or
became registered to conduct mortgage banking activities in 20 additional
states.
GEOGRAPHIC DISTRIBUTION OF US LOAN ORIGINATIONS
AND PURCHASES
<TABLE>
<CAPTION>
CSC(1) COMPANY
------------ ----------------------------------
YEAR ENDED YEAR ENDED SIX MONTHS
DECEMBER 31, DECEMBER 31, ENDED JUNE 30,
------------ --------------- --------------
1993 1994 1995 1996
------------ ----- ----- --------------
<S> <C> <C> <C> <C>
States
New York........................ 89.7% 67.2% 37.0% 20.3%
Illinois........................ 1.3 12.2 17.6 10.3
New Jersey...................... 1.7 2.1 6.4 10.0
Maryland........................ -- 5.3 7.6 7.8
Indiana......................... -- 5.0 4.1 6.3
Florida......................... -- -- 0.6 5.7
Ohio............................ -- -- 2.3 5.6
Pennsylvania.................... -- 0.4 5.8 5.3
Michigan........................ -- -- 1.1 4.7
Georgia......................... -- -- 4.2 4.2
Massachusetts................... -- 0.7 1.9 3.9
South Carolina.................. -- -- 1.7 2.4
Virginia........................ -- 1.7 2.5 2.4
North Carolina.................. -- -- 1.6 2.1
Connecticut..................... 7.3 4.5 1.4 1.8
California...................... -- -- -- 1.5
Tennessee....................... -- -- -- 1.0
All other states................ -- 0.9 4.2 4.7
----- ----- ----- -----
Total................... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
- ---------------
(1) Represents historical information of CSC prior to its acquisition by the
Company.
UK Originations. The Company currently originates all of its UK loans
through independent mortgage brokers using methods similar to those used in the
US to generate loan origination volume. Most loans to borrowers with impaired or
unsubstantiated credit histories and/or unverifiable income, or who otherwise do
not choose to use Conventional UK Lenders, are originated by independent
mortgage brokers throughout the UK. Mortgage brokers fund their originated loans
through private investors, selected financial institutions and, since the
formation of CSC-UK, the Company.
The Company is licensed to originate loans throughout England, Scotland and
Wales. The Company will only originate loans through Company-approved
independent mortgage brokers that are accredited and licensed under the CCA.
Unlike in the US, the Company pays these brokers a commission on loans they
originate through CSC-UK. Many of the Company's mortgage brokers in the UK,
including the Company's three highest producing mortgage brokers, utilize the
Company's proprietary on-line software to expedite the loan process. Although
the Company has a large number of independent brokers who are approved to submit
applications in the UK, 60.5% of CSC-UK's loan originations in 1995 and 48.0% in
the first six months of 1996 came from three mortgage brokers. Although the
Company believes that its products and services will attract a consistent flow
of loan origination volume from mortgage brokers, there can be no assurance the
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<PAGE> 58
Company will be able to obtain similar levels of loan origination volume from
these three, or other, brokers in the future.
The Company has expanded its broker relationships, and therefore its
originations, in the UK through internal development, as well as through
strategic acquisitions. In order to provide increased purchase volume, the
Company has entered into contracts with several of its highest producing brokers
which grant the Company a right of first refusal on all loan applications by the
broker that meet specified underwriting criteria. The contracts generally have
three-year terms and provide that the Company will pay the broker certain
additional commissions upon the sale to the Company of specified volumes of
qualifying loans. To date, the Company has entered into such right of first
refusal contracts with several UK brokers. These brokers accounted for 60.5% and
48.0% of the Company's total UK loan origination volume in 1995 and the six
months ended June 30, 1996, respectively.
The Company also recently expanded its originations sources in the UK
through the J&J Acquisition and the Heritable Acquisition. J&J originates loans
through a network of approved independent mortgage brokers, the majority of
which specialize in lending to borrowers who generally have credit
characteristics which would allow them to qualify for loans from Conventional UK
Lenders. These mortgage brokers refer applicants with weaker credit
characteristics to J&J. Traditionally, J&J's loans have been secured primarily
by second mortgages. Loans made by J&J tend to have higher interest rates than
the blended interest rates on loans made by CSC-UK. The weighted average
interest rate on J&J's loan portfolio as of December 31, 1995 and June 30, 1996
was 23.2% and 23.5%, respectively , as compared to that of 16.4% and 16.9%,
respectively, on CSC-UK's loan portfolio as of the same dates. J&J's loans are
subject to prepayment penalties. In addition, certain of J&J's loans are also
subject to the calculation of prepayments under the Rule of 78s method. Because
the majority of J&J's loans are regulated, prepayments under the Rule of 78s
method are therefore calculated with a one-month deferment, which generally
results in lower prepayment penalties.
The Company believes that the J&J Acquisition will strengthen the Company's
position in the UK market and expands its product base. J&J specializes in
lending to customers who are very similar to those served by the Company and
offers loan products used by borrowers for similar purposes. Pursuant to the J&J
Acquisition, the Company expanded its mortgage broker network. J&J also
originates several types of loans that the Company did not previously offer. The
Company believes that the expansion of the mortgage broker network and loan
products achieved through the J&J Acquisition will enable the Company to
increase its share of the fragmented UK market. The J&J Acquisition also
provides the Company with additional experienced management personnel for its
continued expansion in the UK. The Company also believes that, with access to
improved loan funding sources such as the UK Greenwich Facility, J&J will be
able to increase its loan origination volume significantly.
Heritable provides secured mortgage loans to individuals in the UK that
generally have higher quality credit profiles than the Company's typical UK
borrowers. Heritable originates, through a network of mortgage brokers, a wide
range of mortgage loan products secured primarily by second mortgages on single
family residences. The majority of Heritable's loans are made to owners of
residences who use the proceeds for such purposes as debt consolidation, the
financing of home improvements and educational purposes. Loans made by Heritable
tend to have a lower interest rate than the blended interest rate on loans made
by CSC-UK. The weighted average interest rate on Heritable's loan portfolio as
of December 31, 1995 and June 30, 1996 was 14.8% and 14.5%, respectively, as
compared to that of 16.4% and 16.9%, respectively, on CSC-UK's loan portfolio as
of the same dates. Heritable's loans are subject to prepayment penalties and to
the calculation of prepayments under the Rule of 78s method. Because the
majority of Heritable's loans are regulated, prepayments under the Rule of 78s
method are generally calculated with a one-month deferment which generally
results in lower prepayment penalties.
The Heritable Acquisition represents an expansion in borrower and product
types complementary to the Company's other UK business. Heritable specializes in
lending to customers with higher quality credit characteristics than those
served by the Company but who use the loan proceeds for similar purposes.
Heritable also originates several types of loans that the Company did not
previously offer. Heritable's business uses more traditional underwriting
guidelines and practices than those of CSC-UK, thereby expanding
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CSC-UK's underwriting capability and, accordingly, the products CSC-UK is able
to offer. The Company believes that the expansion of loan products achieved
through the Heritable Acquisition will enable the Company to increase its share
of the fragmented UK market. The Company also believes that, with access to
improved loan funding sources such as the UK Greenwich Facility, Heritable will
be able to increase significantly its loan origination volume.
The following table highlights certain selected information relating to the
origination and purchase of loans by the Company during the periods shown.
LOAN ORIGINATIONS AND PURCHASES
<TABLE>
<CAPTION>
US
-------------------------- UK
CSC(1) -------------------------
------------ YEAR ENDED SIX MONTHS FORMATION SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED THROUGH ENDED
DECEMBER 31, ------------- JUNE 30, DECEMBER 31, JUNE 30,
1993 1994 1995 1996 1995 1996(2)
------------ ---- ---- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Type of property securing loan:
One- to four-family............... 100.0% 98.3% 97.2% 96.9% 96.3% 95.6%
Multi-family/Mixed-use............ 0.0 1.7 2.8 3.1 3.7 4.4
Type of mortgage securing loan:
First mortgage.................... 64.0 87.0 89.0 93.9 92.0 76.1
Second mortgage................... 36.0 13.0 11.0 6.1 8.0 23.9
Weighted average interest rate...... 10.7 11.1 11.9 11.4 16.4 16.9
Weighted average initial
loan-to-value ratio(3)............ 52.5 59.7 66.4 69.9 49.0 51.6
</TABLE>
- ---------------
(1) Represents historical information of CSC prior to its acquisition by the
Company.
(2) Includes $52.0 million of loans acquired from J&J, 75.0% of which were
secured by second mortgages, with a weighted average interest rate of 27.5%
and a weighted average initial loan-to-value ratio of 46.2%, and includes
$188.6 million of loans acquired from Heritable, 82.0% of which were secured
by second mortgages, with a weighted average interest rate of 14.5% and a
weighted average initial loan-to-value ratio of 52.5%.
(3) The loan-to-value ratio of a loan secured by a first mortgage is determined
by dividing the amount of the loan by the appraised value of the mortgaged
property at origination. The loan-to-value ratio of a loan secured by a
second mortgage is determined by taking the sum of the loans secured by the
first and second mortgages and dividing by the appraised value of the
mortgaged property at origination.
Loan Underwriting -- US
Underwriting Guidelines for Single Family Loans. The following is a
description of the underwriting guidelines customarily and currently employed by
the Company with respect to mortgage loans which it originates or purchases from
others. The Company revises such guidelines from time to time in connection with
changing economic and market conditions. These underwriting guidelines are
applied consistently with respect to all of the Company's US loans, whether
originated through mortgage brokers, purchased on a flow basis under the
Wholesale Loan Acquisition Program or acquired through bulk purchase.
The Company's business consists primarily of originating, purchasing and
servicing mortgage loans. The principal balance of the loans purchased or
originated by the Company generally ranges from a minimum of $8,500 to a maximum
of $450,000. Under the Company's current policy, the majority of the mortgage
loans the Company acquires or originates (other than Sav*-A-Loans) have
loan-to-value ratios which do not exceed 85%, except that in some instances, on
an exception basis, the Company may accept a loan with a loan-to-value ratio up
to 91%.
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The Company specializes in mortgage loans that do not conform to the
underwriting standards of FNMA or FHLMC and typically applied by banks and other
primary lending institutions, particularly with regard to a prospective
borrower's credit history. In analyzing loan applications, the Company analyzes
both the borrower's credit and the value of the underlying property which will
secure the loan, including the characteristics of the underlying first lien, if
any.
The Company considers factors pertaining to the borrower's current
employment, stability of employment and income, financial resources, and
analysis of credit, reflecting not only the ability to pay, but also the
willingness to repay contractual obligations. The property's age, condition,
location, value and continued marketability are additional factors considered in
each risk analysis.
The Company's underwriting standards are designed to provide a program for
all qualified applicants in an amount and for a period of time consistent with
their ability to repay. All of the Company's underwriting determinations are
made without regard to sex, marital status, race, color, religion, age or
national origin. Each application is evaluated on its individual merits,
applying the guidelines set forth below, to ensure that each application is
considered on an equitable basis.
The Company originates mortgage loans with different credit characteristics
depending on the credit profiles of individual borrowers. Except for Balloon
Loans (as defined below), the mortgage loans originated by the Company generally
have amortization schedules ranging from 15 years to 30 years, bear interest at
fixed rates and require equal monthly payments (except for "Balloon Loans"
(i.e., mortgage loans that provide on the date of origination for scheduled
monthly payments in level amounts substantially lower than the amount of the
final scheduled payment), as noted below) which are due as of a scheduled day of
each month which is fixed at the time of origination. The Company also
originates Balloon Loans, which generally provide for scheduled amortization
over 30 years with a due date and a balloon payment at the end of the fifteenth
year. The collateral securing loans acquired or originated by the Company are
generally one- to four-family residences, including condominiums, manufactured
housing and townhomes and such properties may or may not be occupied by the
owner. It is the Company's policy not to accept mobile or commercial properties
(other than mixed-use properties) or unimproved land as collateral. However, the
Company will accept small multi-family properties which consist of more than
four residential units.
The Company's mortgage loan program includes: (i) a full documentation
program and (ii) a non-income verification program. Under the full documentation
program, the borrower's total monthly debt obligations (which include principal
and interest on the new loan and all other mortgages, loans, charge accounts and
scheduled indebtedness) generally cannot exceed 50% of the borrower's monthly
gross income. Loans to borrowers who are salaried employees must be supported by
current employment information in addition to employment history which
information is generally verified based on written confirmation from employers,
one or more pay-stubs, recent W-2 tax forms, recent tax returns or telephone
confirmation from the employer. For the Company's non-income verification
program, proof of employment or self-employment is required.
The Company requires that a full appraisal of the property used as
collateral for any loan that it acquires or originates be performed in
connection with the origination of the loan. All appraisals are performed by
third party, fee-based appraisers and generally conform to current FNMA/FHLMC
secondary market requirements for residential property appraisals. Each such
appraisal generally includes, among other things, an inspection of the exterior
and interior of the subject property and, where available, data from sales
within the preceding 12 months of similar properties within the same general
location as the subject property.
A credit report by an independent, nationally recognized credit reporting
agency reflecting the applicant's complete credit history is also required. The
credit report typically contains information reflecting delinquencies,
repossessions, judgments, foreclosures, bankruptcies and similar instances of
adverse credit that can be discovered by a search of public records. An
applicant's recent credit performance weighs heavily in the evaluation of risk
by the Company. The credit report is used to evaluate the borrower's record and
must be current at the time of application. A lack of credit history will not
necessarily preclude a loan if the borrower has sufficient equity in the
property. Slow payments on the borrower's credit report must be satisfactorily
explained and will normally reduce the amount of the loan for which the
applicant can be approved.
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The Company requires title insurance coverage issued by an approved ALTA
title insurance company on all property securing mortgage loans it originates or
purchases. The Company and its assignees are generally named as the insured.
Title insurance policies indicate the lien position of the mortgage loan and
protect the Company against loss if the title or lien position is not as
indicated. The applicant is also required to secure hazard and, in certain
instances, flood insurance in an amount sufficient to cover the lesser of (i)
the new loan and any senior mortgage and (ii) an amount sufficient to cover
replacement costs of the mortgaged property.
The Company has established classifications with respect to the credit
profiles of loans based on certain of the borrower's characteristics. Each loan
applicant is placed into one of four letter ratings ("A" through "D," with
subratings within those categories), depending upon a number of factors
including the applicant's credit history, based on credit bureau reports and
employment status. Terms of loans made by the Company, as well as the maximum
loan-to-value ratio and debt service to income coverage (calculated by dividing
fixed monthly debt payments by gross monthly income), vary depending upon the
classification of the borrower. Borrowers with lower credit ratings generally
pay higher interest rates and loan origination fees.
Underwriting Guidelines for Small Multi-Family and Mixed-Use
Properties. The Company originates mortgage loans secured by residential
properties consisting of more than four units as well as mortgage loans secured
by small mixed-use properties. A potential mortgagor of such a property must
have established credit and any charge-offs, judgment liens or bankruptcies
generally would disqualify the application. If a potential mortgagor is
attempting to obtain a mortgage on a small mixed-use property with two to four
units, then such small mixed-use property should have net income at least equal
to debt service. The maximum loan-to-value ratio the Company allows for a small
mixed-use property is usually no greater than 65%. The Company may require a
Phase I Environmental Report for mortgage loans secured by properties with seven
or more units depending on the location, the use of the subject property and any
indication in the related appraisal of a potential environmental issue.
Underwriting Guidelines for Conventional Home Improvement Loans and Title I
Loans. Borrowers of home improvement loans partially insured by the FHA under
Title I are evaluated primarily based upon the ratio of their total monthly debt
obligations to monthly gross income, which, by Company policy, generally cannot
exceed 45% (however, monthly debt-to-income ratios up to 50% are accepted by
HUD), rather than the loan-to-value ratio on the underlying property. All Title
I loans require a title search. The borrower must have at least a one-half
interest in the property and furnish the Company with a detailed description of
the improvements to be financed. In accordance with government requirements, the
home improvements financed by Title I loans are inspected within six months of
their funding date.
Specified loan underwriting requirements must be satisfied prior to loan
approval and disbursement of funds. For secured Title I loans, the lender must
verify that the borrower has at least a one-half interest in the mortgaged
property. Additionally, the Company requires that all owners in fee simple have
signed the lien instrument. In addition, the loan file must contain the
promissory note, lien instrument and other documents required by regulation. The
borrower's current paying habits and previous credit history must be ascertained
by obtaining a consumer credit report and by other credit investigation. For
Title I loans, a two-year written verification of income and employment is also
required, whereas conventional home improvement loans require only oral
confirmation of the two-year income and employment history plus the applicant's
latest pay stub. This may include review of any one of the following: (i) recent
payroll stubs (year-to-date plus current); (ii) verification of employment
forms; (iii) signed tax returns (self-employed); (iv) financial statements
(self-employed); or (v) W-2 forms.
Conventional home improvement loans are underwritten in the same manner as
Title I loans except that the loan proceeds may be used for projects that do not
qualify for Title I loans, the amount of the loan may exceed applicable FHA
limits and the loan maturity may be longer than applicable FHA limits (however,
the Company does not currently anticipate underwriting such loans with stated
maturities in excess of the applicable FHA limits). Conventional home
improvement loans and contracts are not insured by the FHA. For conventional
home improvement loans, the borrower must have a 100% interest in the property
and the borrower's loan-to-debt ratio cannot exceed 50% without the approval of
the Company's senior management.
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In addition, for conventional home improvement loans, no appraisal is required
for certain high credit quality borrowers.
The loan proceeds from Title I loans are disbursed directly to the
borrower. The loan proceeds from conventional home improvement loans are
disbursed directly to the borrower or directly to the dealer on behalf of the
borrower. Costs incurred by the mortgagor for loan origination, including
origination points, legal and title fees, are often included in the amount
financed. Under Title I, the discount fee, if any, must be paid outside of
closing.
Underwriting Guidelines for Sav*-A-Loans. The Company's "Sav*-A-Loan"
program is designed for homeowners who may have little or no equity in their
property, but who possess good to excellent credit histories and provable
income, who use the proceeds for home improvements and debt consolidation. Up to
65% of the "Sav*-A-Loan" loan amount (other than proceeds used to repay another
mortgage lien in full) may be used for debt consolidation. Under the
"Sav*-A-Loan" program, the Company obtains credit information from two sources
and generally does not permit the ratio of total monthly debt obligations to
monthly gross income to exceed 45%. The borrower must generally fall within one
of the two highest credit classifications established by the Company. The
principal amount of the "Sav*-A-Loans" purchased or originated by the Company
generally ranges from a minimum of $10,000 to a maximum of $60,000. Under
current policy, the majority of the mortgage loans the Company acquires or
originates have loan-to-value ratios which do not exceed 125%. The loan may be
secured by a first, second or third lien on the related property. The property
must be a completed and owner-occupied one- or two-family property and must have
been occupied for at least six months.
Underwriting Guidelines for Jumbo Loans. The principal amount of the jumbo
loans originated by the Company generally range from a minimum of $500,000 to a
maximum of $3.5 million. Jumbo loans on second homes or investment properties
may not exceed $2.0 million. The Company currently requires that the borrower
have post-closing liquidity of at least 20% of the jumbo loan amount (net of any
cash proceeds from the jumbo loan if it is a refinancing of a prior mortgage
which includes a cash payment to the borrower).
A borrower's total monthly debt obligations (which include principal and
interest on the new loan and all other mortgages, loans, charge accounts and
scheduled indebtedness) generally cannot exceed 60% of the borrower's monthly
gross income. Loans to borrowers who are salaried employees must be supported by
current employment information in addition to employment history. A financial
statement prepared by an accountant must be submitted by a borrower who is
self-employed. Copies of three years signed federal tax returns are required
from all jumbo loan applicants.
The Company requires that two full appraisals of the property used as
collateral for any jumbo loan that it originates be performed in connection with
the origination of the loan. At least one appraisal must be performed by a third
party appraiser selected by the Company. Each such appraisal generally includes,
among other things, an inspection of the exterior and interior of the subject
property and, where available, data from sales within the preceding 12 months of
similar properties within the same general location as the subject property.
A credit report with information from three independent, nationally
recognized credit reporting agencies reflecting the applicant's complete credit
history is required. Each credit report typically contains information
reflecting delinquencies, repossessions, judgments, foreclosures, bankruptcies
and similar instances of adverse credit that can be discovered by a search of
public records. An applicant's recent credit performance weighs heavily in the
evaluation of risk by the Company. The credit report is used to evaluate the
borrower's record and must be current at the time of application. Slow payments
on the borrower's credit report must be satisfactorily explained and will
normally reduce the amount of the loan for which the applicant can be approved.
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The following table sets forth certain information with respect to the
Company's US originations by the Company's internal borrower classification,
along with weighted average coupons, during the year ended December 31, 1995 and
the six months ended June 30, 1996.
US LOAN ORIGINATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
---------------------------------- ----------------------------------
THE COMPANY'S TOTAL WEIGHTED TOTAL WEIGHTED
BORROWER (DOLLARS IN % OF AVERAGE (DOLLARS IN % OF AVERAGE
CLASSIFICATION MILLIONS) TOTAL COUPON MILLIONS) TOTAL COUPON
- -------------------------------- ----------- ----- -------- ----------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
"A" Risk........................ $ 188.8 45.2% 11.3% $ 227.2 49.7% 10.4%
"B" Risk........................ 156.0 37.3 12.1 167.6 36.7 12.0
"C" Risk........................ 46.0 11.0 13.2 45.4 9.9 12.9
"D" Risk........................ 27.1 6.5 14.2 16.6 3.6 14.0
----------- ----- -------- ----------- ----- --------
Total...................... $ 417.9 100.0% 11.9% $ 456.7 100.0% 11.4%
======== ===== ======= ======== ===== =======
</TABLE>
Loan Underwriting -- UK
In the UK, the Company has implemented an underwriting process to assist
mortgage brokers in the loan screening process which is similar to that of the
Company's US operations. Independent mortgage brokers generally submit
applications to the Company at CSC-UK's offices by facsimile transmission or via
the Company's proprietary on-line loan application software. Brokers also submit
applications to Heritable's offices via facsimile transmission, as well as via
mail and hand delivery. The Company's on-line computer software enables brokers
to receive loan pricing information and expedites the loan application and
underwriting process. Upon receipt of either a simple fact sheet or a completed
application form, an initial assessment is made based on the loan applicant's
income, credit history and loan-to-value information. If pre-approved, a loan
offer and mortgage documents are produced the same day and are sent to the
broker and the loan applicant. Through June 30, 1996, the Company's experience
has been that less than 30% of approved loans are ultimately funded by the
Company upon completion of the underwriting process. Loans typically are
rejected by the Company, in part, for objective reasons such as the appraised
value of the underlying property being lower than the value stated in the
application or inadequate borrower income and, in part, for subjective reasons
based on management's past experience. In addition, in some cases the borrower
chooses not to complete the loan.
The Company has implemented policies in the UK that it believes will
minimize losses on its UK loans in the event the Company has to foreclose on the
underlying property including requiring conservative loan-to-value ratios and
full disclosure to borrowers. Specifically, the Company has a range of
loan-to-value levels based on the borrower's credit position and ability to pay.
On its standard mortgage product, the Company does not lend at loan-to-value
levels in excess of 65% (75% in the case of loan for less than L50,000
originated by J&J), in order to provide significant collateral coverage for home
value deflation and/or disposal expenses before any losses are incurred.
Exceptions to this rule are made upon individual evaluation of applications.
As part of the underwriting process, each loan application requires an
appraisal of the collateral property prior to loan approval. Generally, the
Company supplies its mortgage brokers with a pre-approved list of appraisers
that are professionally licensed. In the case of loans originated by Heritable,
the collateral property is evaluated using assessed valuation indices coupled
with a drive-by. If the indices and the drive-by produce valuations which differ
by more than 10%, Heritable engages an appraiser directly to appraise the
property. Appraisers are required to use standardized appraisal forms developed
by the Company which solicit information such as fair market value of the
property, internal and external conditions of the property, comparable property
sales and local demand for such property, among others. All appraisals must be
dated no more than three months prior to closing.
The Company also requires a title search to be conducted on all properties
securing loans prior to loan approval. Registered title deeds are maintained by
a UK governmental agency and are inspected by outside
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counsel, all of whom are required to carry compulsory professional negligence
insurance. Such registered documents verify ownership of the collateral
property, reveal any pending prior third party interests requiring correction
before closing and create priority periods during which no intervening liens may
be filed. The documents registered with the UK governmental agency serve as
conclusive evidence of ownership, therefore eliminating the need for title
insurance.
Although UK law does not require extensive disclosure to borrowers, the
Company has adopted a policy to provide each loan applicant with detailed
information about the prospective loan. The Company generally supplies the loan
applicant at the time of application with a Customer Care Booklet (or, in the
case of regulated loans, a customer care statement contained in the loan
documentation) that highlights, among other things, (i) the loan's relatively
high Standard Rate, (ii) the Concessionary Rate, if applicable, (iii) the fact
that the amount due in the case of a prepayment is calculated under the Rule of
78s method, (iv) the independence of the mortgage broker in the entire loan
review process and (v) the fact that failure to make payments on the loan may
result in the borrower losing his or her home. The borrower's signature on the
Customer Care Booklet (or a written acknowledgment that the customer care
statement has been read and understood) is a requirement of the loan application
process. Additionally, the Company offers all borrowers the opportunity to
rescind the loan for a period of up to one week after funding.
Upon completion of the underwriting process, the closing of the loan is
scheduled with a Company-approved closing attorney or agent. The closing
attorney or agent is responsible for completing the loan closing transaction in
accordance with applicable law and the Company's operating procedures.
Loan Sales
The Company sells its loan origination and purchase volume primarily
through securitizations and sales into loan purchase facilities and, to a lesser
extent, through whole loan sales. By employing this strategy, the Company is
better able to manage its cash flow, diversify its exposure to the potential
volatility of the capital markets and maximize the revenues associated with the
gain on sale of loans given market conditions existing at the time of
disposition. During 1994, 1995 and the first six months of 1996, the Company
sold $138.0 million, $359.0 million and $446.7 million of loans, representing
89.4%, 85.9% and 97.8% of total US originations and purchases during these
periods, respectively. In addition, the Company sold $41.4 million and $275.9
million of UK loans, representing 100% and 89.2%, respectively, of its total UK
loan originations and purchases, including the loan portfolios acquired as a
result of the J&J Acquisition and the Heritable Acquisition during these
periods.
Securitizations. During 1995 and the six months ended June 30, 1996, the
Company sold $235.0 million and $361.7 million, respectively, of its US loan
origination and purchase volume in securitizations. In loan sales through
securitizations, the Company sells loans that it has originated or purchased to
a REMIC trust for a cash purchase price and interests in such REMIC trust
consisting of interest-only regular interests and the residual interest which
are represented by the interest-only and residual certificates. The cash
purchase price is raised through an offering by the REMIC trust of pass-through
certificates representing regular interests in the REMIC trust. Following the
securitization, the purchasers of the pass-through certificates receive the
principal collected and the investor pass-through interest rate on the principal
balance, while the Company recognizes as current revenue the fair value of the
interest-only and residual certificates. An interest-only certificate represents
an interest in a REMIC trust with fixed terms that unconditionally entitles the
holder to receive interest payments that are either fixed or derived from a
formula. A residual certificate represents the interest in the REMIC trust which
has no principal amount and does not unconditionally entitle the holder to
receive payments. A holder of the residual certificate is entitled only to the
remainder, if any, of the interest cash flow from the mortgage loans sold to the
REMIC trust after payment of all other interests in such trust. Securitizations
take the form of pass-through certificates which represent undivided beneficial
ownership interests in a portfolio consisting of Company-originated or purchased
loans that the Company has sold to a trust. The Company, if it remains as
servicer of the loan portfolio, remits the principal and part of the interest
payments on such loans to the trust which in turn passes them to investors in
the pass-through certificates. A portion of the Company's US securitizations
have also included the payment of pre-funded amounts.
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In March 1995, the Company completed in a private placement its first loan
sale through the securitization of a portfolio of $50.0 million of principal
amount of loans secured by one- to four-family residences. In August and
December 1995, the Company completed its second and third securitizations in In
May 1996, the Company filed the Shelf Registration Statement, pursuant to which
the Company anticipates offering for sale from time to time pass-through
certificates representing interests in pools of mortgages sold by the Company to
REMIC trusts established for such purposes.
The Company recognizes as current revenue the fair value of the
interest-only and residual certificates. Fair value is determined based on
various economic factors, including loan type, balance, interest rate, date of
origination, term and geographic location. The Company also uses other available
information such as reports on prepayment rates, collateral value, economic
forecasts and historical default and prepayment rates of the portfolio under
review. The Company estimates the expected cash flows that it will receive over
the life of a portfolio of loans. These expected cash flows constitute the
excess of the interest rate payable by the obligors of loans over the interest
rate paid on the related securities, less applicable fees and credit loans. The
Company discounts the expected cash flows at a discount rate which it believes
to be consistent with the required risk-adjusted rate of return to an
independent third party purchaser of the interest-only and residual
certificates.
Loans originated by the Company in the UK are immediately sold to Greenwich
at which time the Company recognizes a gain on sale of such loans. The loans are
then pooled by CSC-UK and/or Greenwich for future sale either through
securitizations or whole loan sales. The Company completed its first UK loan
sale through a public securitization of L32.0 million ($49.6 million) in March
1996. Prior to acquisition by the Company, J&J and Heritable held all of their
loans for investment. Following the respective acquisitions, the Company sold,
with servicing retained, $52.0 million of J&J's loan portfolio and $155.1
million of Heritable's loan portfolio pursuant to the terms of the UK Greenwich
Facility. In the case of a UK securitization, or the sale of loans into a loan
purchase facility, the Company records a mortgage servicing receivable. The
Company calculates the value of its mortgage servicing receivables in much the
same manner as it does the value of its interest-only and residual certificates.
In a securitization, the Company purchases credit enhancements to the
senior interest in the related REMIC trusts in the form of insurance policies
provided by insurance companies. The pooling and servicing agreements that
govern the distribution of cash flows from the loans included in the REMIC
trusts require either (i) the establishment of a reserve that may be funded with
an initial cash deposit by the Company or (ii) the over-collateralization of the
REMIC trust intended to result in receipts and collections on the loans that
exceed the amounts required to be distributed to holders of senior interests. To
the extent that borrowers default on the payment of principal or interest on the
loans, losses will be paid out of the reserve account or will reduce the
over-collateralization to the extent that funds are available and will result in
a reduction in the value of the interest-only and residual certificates held by
the Company. If payment defaults exceed the amount in the reserve account or the
amount of over-collateralization, as applicable, the insurance policy maintained
by the Company will pay any further losses experienced by holders of the senior
interests in the related REMIC trust.
The Company may be required either to repurchase or to replace loans which
do not conform to the representations and warranties made by the Company in the
pooling and servicing agreements entered into when the portfolios of loans are
sold through a securitization.
Loan sales through securitizations and sales into loan purchase facilities
accounted for 86.9% ($332.0 million) and 98.3% ($102.4 million) of the Company's
total (US and UK) gain on sale of loans for 1995 and the six months ended June
30, 1996, respectively.
Whole Loan Sales. Whole loan sales represented all of the Company's US
loan sales during 1994, and with the initiation of the sale of loans through
securitizations, declined to 24.8% and 5.5%, respectively, of all US loan sales
in the year ended December 31, 1995 and the six months ended June 30, 1996. The
Company disposes of loans through whole loan sales when management believes that
the Company is able to achieve a greater return through whole loan sales than
through a securitization. Loans are generally sold in portfolios. The Company
invites prospective institutional purchasers to review its loan portfolios as
part of the whole loan sale process. During 1994, 1995 and the six months ended
June 30, 1996, the Company sold US loans to 13,
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seven and three institutional purchasers, respectively. Upon the sale of a loan
portfolio, the Company generally receives a "premium," representing a cash
payment in excess of the par value of the loans (par value representing the
unpaid balance of the loan amount given to the borrower) or in a few instances a
"yield differential" whereby the Company receives a portion of the interest paid
by the borrower for the life of the loan. Premiums on US whole loan sales
represented 50.9%, 10.2% and 1.5%, respectively, of the Company's total revenues
in 1994, 1995 and the six months ended June 30, 1996. The Company maximizes its
premium on whole loan sale revenue by closely monitoring institutional
purchasers' requirements and focusing on originating the types of loans that
meet those requirements and for which institutional purchasers tend to pay
higher rates.
During 1994, ContiTrade, Bank of Boston and NationsCredit Commercial Corp.
were the principal institutional purchasers of the Company's whole loan sales,
accounting for 30.1%, 21.6% and 10.5%, respectively, of all loans sold by the
Company. During 1995, these three institutions accounted for 17.3%, 15.6% and
11.4%, respectively, of all US loans sold by the Company. For the six months
ended June 30, 1996, these three institutions accounted for 7.9%, 8.5% and 0%,
respectively, of all US loans sold by the Company, while 78.8% of the Company's
US loans were sold to Greenwich during that period.
The Company has sold substantially all of its US loan origination and
purchase volume to various institutional purchasers on a non-recourse basis with
customary representations and warranties covering loans sold. The Company,
therefore, may be required to repurchase loans pursuant to its representations
and warranties and may have to return a portion of the premium earned if a loan
is prepaid during a limited period of time after sale, usually six months and
not greater than one year. The Company typically repurchases a loan if a default
occurs within the first month following the date the loan was originated or if
the loan documentation is alleged to contain misrepresentations made by the
borrower. During 1994, the Company repurchased one loan for $95,550 and gave
premium rebates totaling $72,393. In 1995, the Company repurchased seven loans
for $623,300 and gave premium rebates totaling $247,651. In the first six months
of 1996, the Company repurchased 14 loans for $1.3 million and gave premium
rebates totaling $89,300.
For 1994, 1995 and the first six months of 1996, premiums from whole loan
sales accounted for 100% ($5.7 million), 19.0% ($5.0 million) and 7.0% ($1.8
million), respectively, of the Company's total US gain on sale of loans.
Loan Servicing and Collections -- US
In conjunction with the purchase of Astrum in January 1994, the Company
expanded into the business of loan servicing. Loan servicing is the collection
of payments due under a loan, the monitoring of the loan, the remitting of
payments to the holder of the loan, furnishing reports to such holder and the
enforcement of such holder's rights, including attempting to recover
delinquencies and instituting loan foreclosures. The Company currently services
its own loans and acts as a master servicer on loans serviced by others as well
as contract servicer on loans that are held by other institutions. Under a
contract servicing arrangement, the Company is responsible for servicing loan
portfolios held by other institutions for a fee. Under a master servicing
arrangement, another servicer is responsible for borrower contact while the
Company is responsible for monitoring that servicer's performance and assisting
in actual loan collection if necessary.
Management believes that the business of loan servicing provides an
additional and profitable revenue stream and one that is less cyclical than the
business of loan origination and purchasing. The Company intends to increase its
loan servicing operations by negotiating for the retention of servicing rights
on a greater percentage of the loan origination and purchase volume it sells in
order to diversify and stabilize its revenue stream. To illustrate this
strategy, the Company retained the rights to 74.2% of the $359.0 million in US
loans it sold during 1995 and 97.3% of the $703.0 million in US loans it sold
during the first six months of 1996.
As of June 30, 1996, the Company was servicing 11,692 US loans representing
an aggregate of $757.9 million, including $56.2 million of loans as master
servicer for other servicers, $20.1 million as contract servicer of loans held
by third parties and the balance as servicer of loans originated or purchased by
the Company. Revenue generated from loan servicing amounted to 1.6% and 1.1% of
total revenues for the year
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ended December 31, 1995 and the six months ended June 30, 1996, respectively.
The Company anticipates that loan servicing will contribute a larger portion of
total revenues in future periods.
On August 1, 1996, the Company converted its loan servicing computer
operations to CPI/Alltel ("CPI"), a service bureau located in Jacksonville,
Florida. CPI's system allows the Company to service adjustable rate loans and to
begin offering escrow services to borrowers, whereby a borrower deposits monthly
payments of certain tax and insurance expenses. The Company then makes full
payment of the applicable expenses from the amounts deposited in escrow by the
borrower. In addition, CPI's system offers a more sophisticated and
comprehensive reporting package. The new computer system is expected to help
facilitate the growth of the Company's servicing operations.
The Company utilizes loan servicing software which enables it to implement
servicing and collection procedures and to provide a series of adaptable custom
designed reports including a trial balance, a remittance report, a paid-off
report and a delinquency report. The collections function is fully automated.
The CPI system provides additional capacity for the Company's increased loan
origination and purchase volume and provides greater flexibility in monitoring
the various types of loan product the Company offers. Delinquent accounts are
automatically placed in the appropriate collector's queue ten days after the due
date of the payment. Company collectors have computer access to telephone
numbers, payment histories, loan information and all past collection notes. The
Company has a specific policy which sets forth actions to be taken at various
stages of delinquency beginning on the tenth and extending to the ninetieth day
after the payment due date. Between 90-105 days of delinquency, the Company
decides whether to foreclose or to take other action. All collection activity,
including the date collection letters were sent and detailed notes on the
substance of each collection telephone call, is entered into a permanent
collection history for each account. Additional guidance with the collection
process is derived through the Loan Performance Monitoring Committee, a group
comprised of members of the Company's senior management.
The CPI system tracks and maintains homeowners' insurance information.
Expiration reports are generated weekly listing all policies scheduled to expire
within 30 days. When policies lapse, a letter is issued advising the borrower of
the lapse and that the Company will obtain force placed insurance at the
borrower's expense. The Company also has an insurance policy in place that
provides coverage automatically for the Company in the event that the Company
fails to obtain force placed insurance.
The Company funds and closes loans throughout the month. Most of the
Company's loans require a first payment 30 days after funding. Accordingly, the
Company's servicing portfolio consists of loans with payments due at varying
times each month. This system alleviates the cyclical highs and lows that some
servicing companies experience as a result of heavily concentrated due dates.
The Company believes that its collections policy identifies payment
problems sufficiently early to permit the Company to address collection problems
quickly and to preserve equity in a pre-foreclosure property. The Company
believes that these policies, combined with the experience level of the
Company's independent appraisers, reduce the incidence of charge-offs of a first
mortgage loan or a second mortgage loan. Notwithstanding the above, there are
occasions when charge-offs may be necessary.
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The following table provides data on delinquency experience and REO
properties for the Company's US serviced portfolio (excluding loan balances
under contract servicing or master servicing agreements).
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------
1994 1995 AS OF JUNE 30, 1996
---------------------- ---------------------- ----------------------
DOLLARS % OF DOLLARS % OF DOLLARS % OF
IN SERVICED IN SERVICED IN SERVICED
THOUSANDS PORTFOLIO THOUSANDS PORTFOLIO THOUSANDS PORTFOLIO
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
US serviced portfolio............. $23,904 100.0% $ 311,649 100.0% $ 681,508 100.0%
--------- --------- --------- --------- --------- ---------
30-59 days delinquent........... -- -- 5,479 1.8 15,715 2.3
60-89 days delinquent........... 142 0.6 1,580 0.5 5,676 0.8
90 days or more delinquent...... 679 2.8 4,968 1.6 16,443 2.4
--------- --------- --------- --------- --------- ---------
Total US delinquencies............ $ 821 3.4% $ 12,027 3.9% $ 37,834 5.6%
======== ====== ======== ====== ======== ======
US REO property................... $ 130 0.5% $ 141 -- $ 322 --
======== ====== ======== ====== ======== ======
</TABLE>
The Company made no provision for loan losses for mortgages held for sale
for the years ended December 31, 1994 and 1995 and the six months ended June 30,
1996, respectively, and, as of June 30, 1996, the Company had no reserve for
losses on mortgages held for sale. The Company establishes a reserve for losses
on loans held for investment based upon delinquency trends, collateral value and
economic conditions and trends. A loan is charged-off against the reserve
account when such loan is deemed uncollectable or to the extent the loan balance
exceeds the fair market value of the collateral acquired through foreclosure.
During 1994, the Company recorded a loan loss provision of $250,210 for
mortgages held for investment. During 1995 and the first six months of 1996, the
Company made no additional provision for losses on mortgages held for investment
and recorded charge-offs of $51,816 and $32,000, respectively, through the
reserve for losses on mortgages held for investment. As of June 30, 1996, the
Company had $198,324 reserved for losses on mortgages held for investment.
Foreclosure -- US. Regulation and practices in the US regarding the
liquidation of properties (e.g., foreclosure) and the rights of the mortgagor in
default vary greatly from state to state. Loans originated or purchased by the
Company are secured by mortgages, deeds of trust, trust deeds, security deeds,
leaseholds or deeds to secure debt, depending upon the prevailing practice in
the state in which the property securing the loan is located. Depending on local
law, foreclosure is effected by judicial action and/or non-judicial sale, and is
subject to various notice and filing requirements. If foreclosure is effected by
judicial action, as in New York and Illinois for example, the foreclosure
proceedings may take several months.
In general, the borrower, or any person having a junior encumbrance on the
real estate, may cure a monetary default by paying the entire amount in arrears
plus other designated costs and expenses incurred in enforcing the obligation
during a statutorily prescribed reinstatement period. Generally, state law
controls the amount of foreclosure expenses and costs, including attorneys'
fees, which may be recovered by a lender.
After the reinstatement period has expired without the default having been
cured, in certain states the borrower or junior lienholder has the right of
redemption of the property by paying the loan in full to prevent the scheduled
foreclosure sale. For example, in Illinois the right of redemption exists for 90
days from the date of foreclosure judgment; New York law does not recognize a
right of redemption.
There are a number of restrictions that may limit the Company's ability to
foreclose on a property. A lender may not foreclose on the property securing a
second mortgage loan unless it forecloses subject to each senior mortgage, in
which case the junior lender or purchaser at such a foreclosure sale will take
title to the property subject to the lien securing the amount due on the senior
mortgage. Moreover, if a borrower has filed for bankruptcy protection, a lender
may be stayed from exercising its foreclosure rights. Also, certain states
provide a homestead exemption which may restrict the ability of a lender to
foreclose on residential property. In such states, the Company requires the
borrower to waive his or her right of homestead. While such waivers are
generally enforceable in Illinois, waivers of homestead rights may not be
enforceable in other states.
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Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien due to several factors,
including the difficulty of determining the exact status of title to the
property, the possible deterioration of the property during the foreclosure
proceedings and a requirement that the purchaser pay for the property in cash or
by cashier's check. Thus, the foreclosing lender often purchases the property
from the trustee or referee for an amount equal to the principal amount
outstanding under the loan, accrued and unpaid interest and the expenses of
foreclosure. Depending upon market conditions, the ultimate proceeds of the sale
may not equal the lender's investment in the property. If, after determining
that purchasing a property securing a loan will minimize the loss associated
with the defaulted loan, the Company may bid at the foreclosure sale for such
property or accept a deed in lieu of foreclosure.
Loan foreclosures are the responsibility of the Company's loan servicing
operations. Prior to a foreclosure, the Company performs a foreclosure analysis
with respect to the mortgaged property to determine the value of the mortgaged
property and the bid that the Company will make at the foreclosure sale. This is
based on (i) a current valuation of the property obtained through a drive-by
appraisal conducted by an independent appraiser, (ii) an estimate of the sale
price of the mortgaged property obtained by sending two local realtors to
inspect the property, (iii) an evaluation of the amount owed, if any, to a
senior mortgagee and for real estate taxes and (iv) an analysis of marketing
time, required repairs and other costs, such as real estate broker fees, that
will be incurred in connection with the foreclosure sale. The Company has
established a committee comprised of members of senior management to perform the
foreclosure analyses.
The Company assigns all foreclosures to outside counsel located in the same
state as the mortgaged property. Bankruptcies filed by borrowers are also
assigned to appropriate local counsel who are required to provide monthly
reports on each loan file.
Loan Servicing and Collections -- UK
In the UK, the Company's loan collection and servicing process used with
respect to loans originated by CSC-UK and J&J is very similar to its US process
except for certain additional procedures. Prior to the first payment date of the
loan, servicing representatives call to remind the borrower of payment and the
benefit of the concessionary flat interest rate.
To the extent that a loan falls into arrears by more than 30 days, the
Company uses the services of independent debt counselors who are instructed to
make personal contact with a borrower at the borrower's home. The purpose of
this visit is (i) to understand the borrower's reasons for arrears, gather
information concerning the borrower's other debts and obligations and suggest
solutions to the arrears problem, (ii) to confidentially assess the condition
and true value of the home (at the point of the visit) and (iii) to make a
recommendation as to whether the loan can be brought current in the near term.
The costs associated with the debt counselors' visit are incurred by the
borrower as an addition to his loan balance.
In the event that the borrower remains in arrears and fails to comply with
the terms of the agreement set out by the debt counselors, proceedings for
physical possession of the property are commenced. Realizing the security
inherent in a mortgaged property requires eviction which is actioned by a court
possession order, typically received within 120 days after filing for
possession. Failure to comply with the terms of the court order enables the
holder of the loan to ask the court for physical possession of the property.
The loan collection and servicing process used with respect to loans
originated by Heritable differs in a few meaningful ways, centering around a
segmented and automated computer system. This computer system automatically
generates a reminder letter when a payment is more than 0.2% in arrears on the
seventh calendar day following the due date; additional letters are generated
every subsequent tenth day thereafter until such arrears are paid. The system
also generates such reminders to the collector to telephone the borrower. If a
borrower falls two payments in arrears, Heritable sends a default notice to the
borrowers and contacts the senior mortgagee, if any, to establish the status of
that loan. If no payment or other arrangement is then made, Heritable sends a
letter instructing the borrower to contact Heritable's collections department
within seven days. If no contact is made, the account is passed to the
pre-litigation department.
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Heritable's pre-litigation department attempts to save legal fees and
prevent write-offs by personally visiting borrowers and setting up payment
arrangements in order to return files to the collection department when arrears
are paid. If the arrears are not paid or other arrangements made, Heritable will
commence proceedings for a possession order in an attempt to encourage payment.
If payment is still not made, Heritable pursues recourse in court. The
repossessions department administers and monitors the marketing and sale of
properties repossessed through court action or voluntarily surrendered by the
borrower. This department also monitors the sale of properties by the senior
lender in circumstances where Heritable should receive a portion of the sale
proceeds. Heritable also has departments which review various accounts and
recommend the most effective method of collection, recovery or indemnification
from the insurer.
The following table provides data on delinquency experience for the
Company's UK serviced portfolio (excluding loan balances under contract
servicing agreements). The Company does not have any REO properties in the UK.
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1995 JUNE 30, 1996(1)
----------------------- -----------------------
DOLLARS % OF DOLLARS % OF
IN SERVICED IN SERVICED
THOUSANDS PORTFOLIO THOUSANDS PORTFOLIO
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
UK serviced portfolio.............................. $40,299 100.0% $ 322,192 100.0%
30-59 days delinquent............................ 1,087 2.7 16,268 4.9
60-89 days delinquent............................ 423 1.1 8,257 2.5
90 days or more delinquent....................... 1,926 4.8 30,988 9.3
--------- --------- --------- ---------
Total UK delinquencies................... $ 3,436 8.6% $ 55,513 16.7%
======== ====== ======== ======
</TABLE>
- ---------------
(1) Includes the J&J serviced portfolio of $45.8 million with total
delinquencies of $21.0 million or 45.7%, of which $3.9 million or 8.4% was
30-59 days delinquent, $3.3 million or 7.3% was 60-89 days delinquent and
$13.8 million or 30.0% was 90 days or more delinquent. Includes the
Heritable serviced portfolio of $184.8 million with total delinquencies of
$21.4 million or 11.6%, of which $8.8 million or 4.8% was 30-59 days
delinquent, $2.8 million or 1.5% was 60-89 days delinquent and $9.8 million
or 5.3% was 90 days or more delinquent. Excluding the portfolios acquired as
a result of the J&J Acquisition and the Heritable Acquisition, the UK
delinquency ratio would have been 12.1% at June 30, 1996.
The Company believes that its UK underwriting policies, specifically its
standard maximum loan-to-value ratio of 65% (75% in the case of loan for less
than L50,000 originated by J&J), help to reduce the likelihood that the Company
will incur losses on property dispositions. There were no loan losses recorded
for the period from May 2, 1995 (inception) through June 30, 1996 on the CSC-UK
loan servicing portfolio. During this period, the average balance of loans
serviced for the period totaled $93.4 million. With the acquisitions of J&J and
Heritable, CSC-UK has expanded its loan servicing business in the UK. As a
result of the J&J Acquisition and the Heritable Acquisition, the Company
acquired additional loan serviced portfolios of an aggregate of $240.6 million.
Foreclosure UK. Regulations and practices regarding the liquidation of
properties (e.g. power of sale) and the rights of the mortgagor in default are
generally uniform throughout England, Scotland and Wales. Unlike the US, lenders
in the UK seldom "foreclose" on the mortgaged property due to the arcane
procedures required to be followed to conduct a foreclosure under applicable UK
laws. The standard remedy for a lender in the case of a defaulted mortgage loan
is to rely on the contractual power of sale contained in the mortgage to sell
the mortgaged property. A lender does not have to take title to the mortgaged
property when exercising a power of sale and therefore can avoid possibly
becoming responsible for certain liabilities of title holders such as local
property taxes.
In order to deliver a mortgaged property sold upon exercise of a power of
sale, a lender must generally evict the mortgagee prior to the sale. The
lender's first eviction step is to obtain a possession order from a court
authorizing vacant possession. Typically, a hearing on an application for a
possession order will be held eight to 12 weeks following the application date.
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<PAGE> 71
At the hearing, generally the only dispute that will arise will be the
terms under which the court will suspend an order for possession. The court will
consider a number of factors in determining if a suspension of a possession
order is warranted such as the reasons for the default, the prospects of the
mortgagor paying off the arrears in installments in addition to the normal
scheduled payments as due and the adequacy of the security. Although it is
difficult to predict how long a court may be willing to suspend a possession
order, if at all, suspensions of possession orders generally last less than six
months.
If a possession order is not suspended or was suspended for a specified
period and such period expired without satisfaction to the lender, or the
borrower fails to honor the possession order, a lender is entitled, in most
instances, to apply to the court for a bailiff's appointment under which the
bailiff will take physical possession of the mortgage property (typically four
to six weeks after the application). Borrowers are entitled to apply for the
suspension of the bailiff's appointment subject to production of evidence of the
borrower's ability to discharge the original possession order.
After the bailiff takes physical possession of the mortgaged property the
lender will exercise its power of sale and will typically either auction the
mortgaged property or market the same. At the time of sale, the lender is
required to realize the best price reasonably obtainable in the open market.
In addition, in the case of mortgage loans regulated under the CCA,
borrowers are able to apply to a court to alter the rate of interest due on the
unpaid installments under the loan. Mortgages securing regulated loans are by
statute only enforceable by court order which order can be suspended at the
discretion of the court.
In the case of a loan secured by a second mortgage, the junior lienholder
may institute proceedings and take possession of the property only after notice
of such proceedings have been given to the senior lienholder. Junior lienholders
are obligated upon a sale of the mortgaged property to repay the debt owed to
the senior lienholder.
An application for bankruptcy by the borrower or any third party does not
stop or adjourn proceedings, nor does the UK have the equivalent of homestead
rights.
Through June 30, 1996, the Company exercised its power of sale with respect
to five mortgaged properties, of which one has been sold. Exercising powers of
sale are the responsibility of the Company's UK loan servicing operations. The
Director of Loan Servicing must approve all decisions to proceed against a
mortgaged property. Prior to proceeding to sale, the Company will perform an
analysis of the mortgaged property to determine its value and the amount, if
any, of the senior mortgage. The Company's in-house valuation personnel will
determine the initial valuation of the mortgaged property. If such valuation
differs significantly from the expected valuation, a more formal appraisal and
inspection will be conducted.
The Company's consultant, an independent third party firm that specializes
in disposals of mortgaged properties, is responsible for conducting an analysis
of the marketing time necessary to sell the mortgaged property, providing advice
on alternative disposal methods and overseeing the sale of the property. The
sale of the property is handled by one of the Company's outside solicitors.
MARKETING
The Company focuses its marketing efforts on sources of loan originations,
as opposed to individual borrowers, through its 50 business development
representatives and 12 regional managers. These business development
representatives and regional managers seek to establish and maintain the
Company's relationships with its principal sources of loan
originations -- independent mortgage brokers, other mortgage bankers and
financial institutions, including commercial banks and thrifts. Through its
focus on sources of originations as opposed to loan applicants, the Company
avoids the high fixed costs associated with a large network of retail offices
and retail advertising.
The business development representatives provide various levels of
information and/or assistance to the Company's sources of loan originations
depending on the sophistication and resources of the particular customer, and
are primarily responsible for maintaining the Company's relationships with its
sources of loan originations. The business development representatives endeavor
to increase the volume of loan originations from independent mortgage brokers,
financial institutions and other mortgage bankers located within the
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geographic territory assigned to such representative through, among other
actions, visits to customer offices and attendance at trade shows, as well as
print advertisements in broker trade magazines. These representatives also
provide the Company with information relating to customers, competitive products
and pricing and new market entrants, all of which assist the Company in refining
its programs and its classifications of borrowers in order to meet competitive
needs. The business development representatives are compensated with a base
salary and commissions based on the volume of loans that are originated or
purchased as a result of their efforts.
When the Company enters a new geographic market and is prepared to begin
loan origination and purchase activities, it typically conducts a seminar for
brokers in that region. This seminar introduces the brokers to the Company's
products, services, underwriting process and funding resources, and has helped
the Company penetrate new markets.
In the UK, the Company also does not currently engage in any form of direct
marketing to potential borrowers. Independent mortgage brokers advertise their
services to borrowers through several means, including advertisements in
national UK newspapers. The Company markets to these independent mortgage
brokers through business development representatives who visit mortgage brokers
to familiarize them with the Company's products and competitive distinctions.
The business development representatives stress the advantages of the Company's
proprietary on-line loan application software and its unique loan programs. The
Company anticipates that future marketing efforts will be directed toward UK
realtors and insurance agents, who the Company believes will prove to be
effective referral sources and who are typically unaware of mortgage financing
available to borrowers with impaired or unsubstantiated credit histories and/or
unverifiable income. Furthermore, the Company intends to begin direct marketing
of a new loan product designed for occupants of government-owned residential
properties in the UK.
COMPETITION
As a consumer finance company, the Company faces intense competition.
Traditional competitors in the financial services business include other
mortgage banking companies, commercial banks, credit unions, thrift
institutions, credit card issuers and finance companies. Many of these
competitors in the consumer finance business are substantially larger and have
considerably greater financial, technical and marketing resources than the
Company. In addition, many financial service organizations have formed national
networks for loan origination substantially similar to the Company's loan
programs. Furthermore, certain large national finance companies and conforming
mortgage originators have announced their intention to adapt their conforming
origination programs and allocate resources to the origination of non-conforming
loans. In addition, certain of these larger mortgage companies and commercial
banks have begun to offer products similar to those offered by the Company,
targeting customers similar to those of the Company. Competition can take many
forms including convenience in obtaining a loan, customer service, marketing and
distribution channels, amount and term of the loan, and interest rates. In
addition, the current level of gains realized by the Company and its existing
competitors on the sale of loans could attract additional competitors into this
market with the possible effect of lowering gains on future loan sales owing to
increased loan origination competition.
The Company believes that it is able to compete on the basis of providing
prompt and responsive service, consistent underwriting and competitive loan
programs to borrowers whose needs are not met by traditional financial
institutions.
In the UK, banks, building societies and other finance companies generally
make mortgage loans to borrowers. The Company believes, however, that these
Conventional UK Lenders are not currently participating in the market for loans
to borrowers with impaired or unsubstantiated credit histories and/or
unverifiable income due to the higher capital adequacy ratios that they must
maintain to participate in this market as required by applicable banking
regulations. Therefore, the Company's most significant present competition is
from private investors who are currently funding the origination volume of
independent mortgage brokers. There can be no assurance that Conventional UK
Lenders or other consumer finance companies will not initiate loan programs in
the UK that are similar to those offered by the Company.
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INVESTMENT IN IMC MORTGAGE COMPANY
In July 1993, the Company acquired a limited partnership interest in
Industry Mortgage Company, L.P., the predecessor to IMC. In June 1996, the
partnership converted into corporate form and effected a public offering of
common stock. The Company's 9.09% limited partnership interest was converted
into a 5.82% equity interest in the corporation as a result of the public
offering. IMC originates, purchases, sells and services mortgage loans that are
primarily secured by one- to four-family residences. Pursuant to a contractual
agreement with IMC, the Company is obligated to offer to sell an average of $1.0
million of loans per month to IMC at market prices. The Company entered into an
agreement with IMC whereby, in return for the payment of a fee, such monthly
obligation has been eliminated for the period from November 1, 1995 through
December 31, 1996. For the year ended December 31, 1995 and the six months ended
June 30, 1996, IMC contributed approximately $480,000 and $260,000,
respectively, to the Company's pre-tax income. IMC completed a public offering
of its common stock in June 1996. As a result of this offering, the Company's
interest in IMC is no longer accounted for under the equity method of accounting
whereby the Company recognized its relative portion of the partnership earnings
as revenues, but rather as a marketable security available for sale in
accordance with SFAS No. 115. Available for sale securities are reported on the
statement of financial condition at fair market value with any corresponding
change in value reported as an unrealized gain or loss (if assessed to be
temporary) as an element of stockholders' equity after giving effect for taxes.
REGULATION
US
The Company's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of its operations. The Company's consumer lending
activities are subject to the Federal Truth-in-Lending Act and Regulation Z
(including the Home Ownership and Equity Protection Act of 1994), ECOA, the Fair
Credit Reporting Act of 1970, as amended, RESPA, and Regulation X, the Home
Mortgage Disclosure Act, the Federal Debt Collection Practices Act and the
National Housing Act of 1934, as well as other federal and state statutes and
regulations affecting the Company's activities. The Company is also subject to
the rules and regulations of, and examinations by, HUD and state regulatory
authorities with respect to originating, processing, underwriting, selling,
securitizing and servicing loans. These rules and regulations, among other
things, impose licensing obligations on the Company, establish eligibility
criteria for mortgage loans, prohibit discrimination, provide for inspections
and appraisals of properties, require credit reports on loan applicants,
regulate assessment, collection, foreclosure and claims handling, investment and
interest payments on escrow balances and payment features, mandate certain
disclosures and notices to borrowers and, in some cases, fix maximum interest
rates, fees and mortgage loan amounts. Failure to comply with these requirements
can lead to loss of approved status, termination or suspension of servicing
contracts without compensation to the servicer, demands for indemnifications or
mortgage loan repurchases, certain rights of rescission for mortgage loans,
class action lawsuits and administrative enforcement actions.
The Company believes that it is in compliance in all material respects with
applicable federal and state laws and regulations.
UK
A portion of the Company's mortgage banking business in the UK is subject
to regulations promulgated under the United Kingdom Consumer Credit Act 1974
(the "CCA") applicable to loans made to individuals or partnerships with
principal balances of Pound Sterling 15,000 or less. Loans with principal
balances in excess of Pound Sterling 15,000 are not currently regulated within
the UK. There is currently a proposal that, if enacted, would increase this
amount to Pound Sterling 25,000. The Company cannot predict the likelihood of
enactment of this proposal. The CCA and regulations promulgated thereunder,
among other things, impose licensing obligations on CSC-UK, set down certain
requirements relating to the form, content, legibility, execution and delivery
of loan documents, restrict communication with the borrower prior to completion
of a transaction, require information and notice of
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<PAGE> 74
enforcement to be given to the borrower, require rebates to the borrower on
early settlement and create a cause of action for "extortionate credit
bargains." A license is required to service loans in the UK irrespective of the
size of the loan. Failure to comply with the requirements of these rules and
regulations can result in the revocation or suspension of the license to do
business and render the mortgage unenforceable in the absence of a court order.
Approximately 2.8% (as a percentage of aggregate principal balances) of the
Company's UK loans were subject to the CCA and the regulations promulgated
thereunder at December 31, 1995. Of the $52.0 million of loans acquired through
the J&J Acquisition and the $188.6 million of loans acquired through the
Heritable acquisition, 77.5% and 53.8%, respectively, were subject to the CCA
and the regulations promulgated thereunder on the date of acquisition by CSC-UK.
The Company believes that CSC-UK is in compliance in all material respects
with applicable laws and regulations in the UK.
ENVIRONMENTAL MATTERS
To date, the Company has not been required to perform any investigation or
clean up activities, nor has it been subject to any environmental claims. There
can be no assurance, however, that this will remain the case in the future.
US
In the course of its business, the Company has acquired and may acquire in
the future properties securing loans which are in default. Although the Company
primarily lends to owners of residential properties, there is a risk that the
Company could be required to investigate and clean up hazardous or toxic
substances or chemical releases at such properties after acquisition by the
Company, and may be held liable to a governmental entity or to third parties for
property damage, personal injury and investigation and cleanup costs incurred by
such parties in connection with the contamination. In addition, the owner or
former owners of a contaminated site may be subject to common law claims by
third parties based on damages and costs resulting from environmental
contamination emanating from such property. On all loan applications for
properties exceeding seven units or on loan applications where the Company
believes there may exist or an appraisal may indicate a possible environmental
problem, the Company requires a Phase I Environmental Report.
UK
"Owners" or "occupiers" of contaminated land in the UK are potentially
liable under UK environmental laws. Such persons can be required to clean up
affected land, cease polluting activities, obtain licenses in respect of waste
management, reimburse for clean up costs of land and controlled waters and pay
fines for non-compliance with relevant laws and regulations. A lender may be
deemed to be an "owner" upon enforcement of its interest in the mortgaged
property following default by the borrower and depending on the method of
enforcement employed. The Environment Act 1995 requires local authorities to
inspect and identify contaminated land in their jurisdiction.
There are no registers which identify contaminated land. In order to
identify such land prior to making a loan, the Company relies on its appraisers
to identify potential environmental problems. There can be no assurance that a
previous or current owner or occupier of a mortgaged property complied with
environmental laws or that in the future lenders will not be subject to
additional environmental liabilities.
EMPLOYEES
As of June 30, 1996, the Company had a total of 367 US employees, ten of
whom were part-time employees and 357 of whom were full-time employees, and 231
UK employees. The Company had 253 employees working at its New York headquarters
as of June 30, 1996. None of the Company's employees is covered by a collective
bargaining agreement. The Company considers its relations with its employees to
be good.
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<PAGE> 75
PROPERTIES
The Company's US executive and administrative offices and the majority of
its US mortgage banking operations are located at 565 Taxter Road in Elmsford,
New York, where the Company leases approximately 40,000 square feet of office
space at an aggregate annual rent of approximately $645,000. The leases provide
for certain scheduled increases and expires on August 31, 2000. The Company's UK
offices are located at Sherbourne House, Croxley Business Park, Watford,
Hertfordshire, where the Company leases approximately 10,500 square feet of
office space at an aggregate annual rent of approximately $236,000. The lease
provides for certain scheduled increases and expires on June 24, 2005. The
Company has entered into an agreement to move its offices within the Croxley
Business Park in September 1996, where the Company will lease approximately
57,000 square feet of office space at an aggregate annual rent of approximately
$1.3 million. The lease provides for certain scheduled increases and expires in
2021, subject to the ability of the Company to terminate the lease on the tenth
anniversary thereof. The Company has leased an additional 17,000 square feet of
office space at 8 Skyline Drive, Hawthorne, New York. The lease provides for an
initial aggregate annual rent of approximately $246,500 and for certain
scheduled increases in square footage and annual rent, and expires in 2001.
LEGAL PROCEEDINGS
The Company is a party to various routine legal proceedings arising out of
the ordinary course of its business. Management believes that none of these
actions, individually or in the aggregate, will have a material adverse affect
on the results of operations or financial condition of the Company.
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<PAGE> 76
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position with the Company
of each person who is an executive officer or director of the Company or its
subsidiaries.
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY
- ------------------------------ --- ------------------------------------------------------
<S> <C> <C>
Robert Grosser................ 39 Chairman of the Board, Chief Executive Officer,
President and Director; President and Director of CSC;
Director of CSC-UK
Robert C. Patent.............. 46 Vice Chairman of the Board, Executive Vice President,
Treasurer and Director; Executive Vice President,
Treasurer, Assistant Secretary and Director of CSC;
Director of CSC-UK
Asher Fensterheim............. 66 Director; Director of CSC
Jonah L. Goldstein............ 60 General Counsel and Director; General Counsel and
Director of CSC; Secretary and Director of CSC-UK
Arthur P. Gould............... 79 Director
Hollis W. Rademacher.......... 61 Director
Robert M. Stata............... 39 Director; Senior Vice President/Originations and
Director of CSC
Cheryl P. Carl................ 43 Secretary; Senior Vice President/Operations, Secretary
and Director of CSC
Steven P. Weiss............... 39 Senior Vice President/Sales and Director of CSC
Eric S. Goldstein............. 34 Senior Vice President/Loan Servicing of CSC
Tim S. Ledwick................ 38 Chief Financial Officer; Vice President, Chief
Financial Officer of CSC
Robert J. Blackwell........... 57 Senior Vice President/Title I Division of CSC
CSC-UK:
David A. Steene............... 36 Director; Managing Director and Director of CSC-UK
Martin H.S. Brand............. 60 Lending Director and Director of CSC-UK
Gerald Epstein................ 47 Financial Director and Director of CSC-UK
</TABLE>
Director and officer positions of CSC and CSC-UK are currently for a term
of one year. Effective with the Company's 1996 annual meeting of stockholders
held on June 12, 1996, the Board of Directors of the Company has been divided
into three classes as nearly equal in size as is practicable and directors of
the Company serve staggered terms of three years. Executive officers of the
Company, CSC and CSC-UK are appointed by their respective Boards of Directors.
The name and business experience during the past five years of each director and
executive officer of the Company are described below:
Robert Grosser has been Chief Executive Officer, President and a Director
of the Company since April 1994 and its Chairman of the Board since September
1995. Mr. Grosser has also served in each of these offices of CSC since he
founded the organization in 1985. Mr. Grosser has served as a Director of CSC-UK
since its formation. Mr. Grosser currently serves on the board of the National
Home Equity Mortgage Association. Mr. Grosser is the son-in-law of Asher
Fensterheim.
Robert C. Patent has been Executive Vice President and a Director of the
Company since April 1994, Treasurer since June 1995 and the Vice Chairman of its
Board since September 1995. Mr. Patent also has served as Executive Vice
President and as Director of CSC since October 1990 and as Treasurer since
January 1994. Mr. Patent has served as a Director of CSC-UK since its formation.
Mr. Patent currently serves as President of Colby Capital Corp. and as a
director of New York Federal Savings Bank, a federally chartered thrift
institution located in New York City.
Asher Fensterheim has been a Director of the Company since June 1995. Mr.
Fensterheim has served as a Director of CSC since January 1995. Mr. Fensterheim
is an attorney in the State of New York who
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<PAGE> 77
specializes in consumer and commercial finance, real estate, mortgage banking
and related areas. From 1988 to 1993, he was a partner with Fink Weinberger P.C.
Since 1994, he is the sole shareholder of Asher Fensterheim P.C. which renders
legal services to the Company. Mr. Fensterheim is the father-in-law of Robert
Grosser.
Jonah L. Goldstein has been General Counsel of the Company since September
1995 and a Director since June 1995. Mr. Goldstein served as a consultant to CSC
from December 1993 through June 1995 and has served as a Director since January
1995 and as General Counsel since January 1996. Effective July 1, 1995, Mr.
Goldstein entered into an employment agreement with the Company. Mr. Goldstein
also has served as Secretary and as a Director of CSC-UK since its formation.
From its formation in 1980 until its acquisition by CSC in 1994, Mr. Goldstein
was President and Chairman of Astrum, a mortgage banker. Mr. Goldstein currently
serves as Chairman and Director of Advance Abstract Corp., a company that sells
title insurance. He is also sole shareholder of Jonah L. Goldstein, P.C. Mr.
Goldstein is the father of Eric S. Goldstein.
Arthur P. Gould has been a Director of the Company since June 1995. Since
1973, Mr. Gould has served as President of Arthur P. Gould & Co., an investment
firm (formerly a division of Inter-Regional Financial Group Inc.). Previously,
Mr. Gould was President of Golden Shield Corporation, a subsdiary of General
Telephone & Electronics Corporation and then President, Corporate Development
Division of Laidlaw & Co. Incorporated and Vice President and Director of
Laidlaw & Co. Incorporated.
Hollis W. Rademacher has been a Director of the Company since June 1995.
Currently, Mr. Rademacher is actively involved in a variety of financial
consulting and corporate director capacities. Mr. Rademacher serves as a
director of four suburban Chicago area banks, Hinsdale Bank and Trust, Hinsdale,
Illinois, North Shore Community Bank and Trust, Wilmette, Illinois, Lake Forest
Bank and Trust, Lake Forest, Illinois and Libertyville Bank and Trust,
Libertyville, Illinois, and several other closely held organizations in the
financial service, distribution and real estate industries. He also serves as
Director of Schawk, Inc., a public company engaged in producing molded plastic
products and pre-press services and products for printed packaging applications.
From 1988 to 1993, Mr. Rademacher served as Chief Financial Officer of
Continental Bank Corp.
Robert M. Stata has been a Director of the Company since June 1995. Mr.
Stata also has served as Vice President of CSC, responsible for lending
originations, since November 1992 and as Director and as Vice
President/Originations of CSC since January 1994. Mr. Stata was promoted to
Senior Vice President/Originations of CSC in June 1996. Mr. Stata was the
President/Founder of Suburban Equity Corp., a mortgage banker specializing in
non-conventional loans, from 1985 to 1992.
Cheryl P. Carl has been Secretary of the Company since June 1994. Ms. Carl
also has served as Vice President/Operations of CSC since January 1994,
Secretary of CSC since June 1994 and as Assistant Treasurer and as Director of
CSC since January 1995. Ms. Carl was promoted to Senior Vice
President/Operations of CSC in June 1996. From its formation in 1980 until its
acquisition by CSC in 1994, Ms. Carl was Executive Vice President and Director
of Astrum, a mortgage banker specializing in non-conventional loans. Ms. Carl
also is a Director and Secretary of Advance Abstract Corp., a company that sells
title insurance.
Steven P. Weiss has been Vice President/Sales of CSC since January 1994 and
a Director of CSC since January 1995. Mr. Weiss was promoted to Senior Vice
President/Sales of CSC in June 1996. From June 1993 to December 1993, Mr. Weiss
held the position of Vice President of Astrum, a mortgage banker specializing in
non-conventional loans. From 1989 to 1993, Mr. Weiss was founder and President
of Record Research, a title search company, and President of County Seat Capital
Corporation, a broker of non-conventional loans.
Eric S. Goldstein has been Vice President/Loan Servicing of CSC since
January 1994. Mr. Goldstein was promoted to Senior Vice President/Loan Servicing
of CSC in June 1996. From 1987 to 1993, Mr. Goldstein was Vice President of
Astrum, a mortgage banker specializing in non-conventional loans. Mr. Goldstein
is the son of Jonah L. Goldstein.
Tim S. Ledwick has been Chief Financial Officer of the Company since March
1995. Mr. Ledwick also has served as Vice President, Chief Financial Officer of
CSC since September 1994. From 1992 until 1994,
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<PAGE> 78
Mr. Ledwick was Vice President/Controller-Subsidiaries and from 1989 until 1992
was Controller-Subsidiaries for River Bank America.
Robert J. Blackwell has been Vice President/Title I Division of CSC since
January 1996. In August 1996, Mr. Blackwell was promoted to Senior Vice
President/Title I Division of CSC. From 1985 to 1995, Mr. Blackwell was the
Executive Vice President, Chief Operating Officer and a Director of Alliance
Funding Company, presently a division of Superior Bank F.S.B.
CSC-UK:
David A. Steene has been a Director of the Company since October 1995. Mr.
Steene also has served as Managing Director and as Director of CSC-UK since its
formation. Mr. Steene was an equity partner of Brand Montague, Solicitors from
September 1985 to September 1994. Mr. Steene was an elected member of Elstree
Ward, Hertsmere Borough Council from May 1991 to May 1995, serving as Vice
Chairman of the Planning Committee in 1992 and Chairman of the Housing Committee
in 1993.
Martin H.S. Brand has been Lending Director and a Director of CSC-UK since
its formation. Mr. Brand served as a director of Metropolitan Mortgage
Corporation Ltd. from 1986 to 1993. Mr. Brand was a partner of Brand Montague,
Solicitors from March 1960 until September 1994.
Gerald Epstein has been Financial Director and a Director of CSC-UK since
its formation. Since 1972, Mr. Epstein has been a senior partner of Downham
Train Epstein, a general accounting practice, where he specializes in tax and
corporate finance. Mr. Epstein is also a director and shareholder of DTE
Insurance Services Limited.
BOARD OF DIRECTORS
In September 1995, the Company created a compensation committee, an audit
committee, a stock option plan committee and a stock purchase plan committee of
the Board of Directors. Messrs. Grosser, Patent, Goldstein and Stata were
appointed to the compensation committee, Messrs. Gould, Rademacher and Patent
were appointed to the audit committee and Messrs. Rademacher and Fensterheim
were appointed to the stock option plan committee and the stock purchase plan
committee.
Directors who are not employees of the Company receive stock options
pursuant to the Company's 1995 Non-Employee Directors Stock Option Plan (the
"Directors Plan"). The Directors Plan provides for automatic grants of an option
to purchase 40,000 shares of Common Stock to the Company's eligible non-employee
directors upon their election to the Board of Directors of the Company. Each
eligible non-employee director is granted an additional option, subject to
certain restrictions, to purchase 6,000 shares of Common Stock on each
anniversary of his or her election so long as he or she remains an eligible non-
employee director of the Company. The exercise price of any options granted
under the Directors Plan is the fair market value of the Common Stock on the
date of grant. No more than 400,000 shares of Common Stock may be issued upon
exercise of options granted under the Directors Plan, subject to adjustment to
reflect stock splits, stock dividends and similar capital stock transactions.
Options may be granted under the Directors Plan until June 1, 2005.
In addition, non-employee directors of the Company receive an annual
retainer of $10,000 (the "Annual Retainer") and are reimbursed for reasonable
expenses incurred in connection with attendance at Board of Directors' meetings
or committee meetings.
On June 1, 1995 and June 12, 1996, Messrs. Gould, Rademacher and
Fensterheim each were granted options to purchase 40,000 shares and 6,000
shares, respectively, of Common Stock under the Directors Plan.
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<PAGE> 79
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning the annual and
long-term compensation earned by the Company's chief executive officer and each
of the four other most highly compensated executive officers whose annual salary
and bonus during the fiscal years presented exceeded $100,000 (the "Named
Executive Officers").
ANNUAL COMPENSATION(1)
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
SECURITIES
FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
- ---------------------------------- ------ ---------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Robert Grosser.................... 1995 $259,155 $207,000 $ 14,628 -- $2,000
President and Chief Executive 1994 238,030 30,000 -- -- 1,100(2)
Officer; President of CSC 1993 213,500 -- -- -- --
Robert C. Patent.................. 1995 $219,550 $138,000 $ 15,900 -- $1,692
Executive Vice President; 1994 208,000 10,000 -- -- 1,100(2)
Executive Vice President and 1993 178,100 -- -- -- --
Treasurer of CSC
Robert M. Stata................... 1995 $207,378 $ 50,000 -- -- --
Senior Vice President/ 1994 220,175 65,000 -- -- 1,100(2)
Originations of CSC 1993 279,531 -- -- -- --
Cheryl P. Carl.................... 1995 $202,868 $ 30,000 $ 11,452 150,000 $1,230
Secretary, Senior 1994 100,000(3) 57,183 -- -- 1,100(2)
Vice-President/Operations 1993(4) 7,070 -- -- -- --
of CSC
Steven P. Weiss................... 1995 $187,798 $ 30,000 $ 10,332 150,000 --
Senior Vice President/ 1994 75,000 82,441 -- -- --
Sales of CSC 1993(4) 6,215 -- -- -- --
</TABLE>
- ---------------
(1) The amounts indicated reflect compensation paid by CSC unless otherwise
specified.
(2) Reflects amounts paid as qualified matching contributions under the
Company's employee benefit plan. See "-- 401(k) Plan."
(3) Includes $60,000 paid in December 1993 for services rendered in 1994.
(4) Reflects annual compensation as an employee of Astrum.
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<PAGE> 80
Option Grants in 1995
Shown below is information concerning grants of options issued by the
Company to the Named Executive Officers during 1995:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -------------------
NAME GRANTED(#)(1) FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
- ---------------------------- ------------- ------------ --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Robert Grosser.............. -- -- -- -- -- --
Robert C. Patent............ -- -- -- -- -- --
Robert M. Stata............. -- -- -- -- -- --
Cheryl P. Carl.............. 150,000 16.3% $2.50 07/01/05 $235,835 $597,653
Steven P. Weiss............. 150,000 16.3 2.50 07/01/05 235,835 597,653
</TABLE>
- ---------------
(1) All options were granted in July 1995, with an exercise price equal to the
closing sale price of the Common Stock as reported on The OTC Bulletin
Board on such date. Grants vest to the extent of (a) 40,000 shares on each
of the date of grant, the first anniversary of the date of grant and the
second anniversary of the date of grant and (b) 30,000 shares on the third
anniversary of the date of grant.
(2) The 5% and 10% assumed rates of appreciation are specified under the rules
of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of the future price of its Common Stock.
The actual value, if any, which a Named Executive Officer may realize upon
the exercise of stock options will be based upon the difference between the
market price of the Company's Common Stock on the date of exercise and the
exercise price.
Aggregated Option Exercises in 1995 and 1995 Year-End Option Values
The following table sets forth for the Chief Executive Officer and the
other Named Executive Officers, information with respect to unexercised options
and year-end option values, in each case with respect to options to purchase
shares of the Company's Common Stock. None of such Named Executive Officers
exercised any options during the year ended December 31, 1995.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AS OF IN-THE-MONEY OPTIONS
DECEMBER 31, 1995 AT DECEMBER 31, 1995(1)
---------------------------- ----------------------------
NAME EXERCISABLE NONEXERCISABLE EXERCISABLE NONEXERCISABLE
- ----------------------------------------------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Robert Grosser................................. -- -- -- --
Robert C. Patent............................... -- -- -- --
Robert M. Stata................................ -- -- -- --
Cheryl P. Carl................................. 40,000 110,000 $ 315,000 $866,250
Steven P. Weiss................................ 40,000 110,000 315,000 866,250
</TABLE>
- ---------------
(1) Based on the closing sale price of the Common Stock on Nasdaq on December
29, 1995 of $10.38 per share.
Employment Agreements
The Company has employment agreements with each of the Named Executive
Officers, as well as with certain other officers of the Company and CSC, and
CSC-UK has employment agreements with each of the three executive officers of
CSC-UK. Each agreement, other than those with Mr. Epstein and Mr. Jonah L.
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<PAGE> 81
Goldstein, requires the executive officer to devote his or her full time and
best efforts to the Company during the term of the agreement.
The employment agreements with Messrs. Grosser and Patent are for a term
commencing January 1, 1995 and ending December 31, 1998. The agreements provide
for annual salary of $260,000 and $220,000, respectively, plus increases based
on the percentage increase, if any, in the Consumer Price Index, or by a greater
amount, at the discretion of the Board of Directors. In addition, the agreements
provide for payment to Mr. Grosser and Mr. Patent of an amount equal to 1.5% and
1.0%, respectively, of the pre-tax profits of the Company, as determined by the
Company's outside auditors in accordance with generally accepted accounting
principles, in excess of certain scheduled thresholds.
The employment agreement with Mr. Stata extends through December 31, 1997.
The agreement provides for annual salary of $225,000 plus increases based on the
percentage increase, if any, in the Consumer Price Index. In addition, the
agreement provides for payment to Mr. Stata of an annual bonus if the aggregate
of loans originated or purchased by the Company exceeds certain specified levels
for each year during the term of the agreement. Upon a change in control, Mr.
Stata may terminate the agreement if the current senior management of the
Company ceases to exercise oversight over the operations of the Company. The
Company would then be obligated to pay a monthly payment over the balance of the
remaining term of the agreement equal to 33% of Mr. Stata's monthly compensation
in effect prior to his giving notice of termination.
The employment agreements with Ms. Carl and Messrs. Weiss, Jonah L.
Goldstein and Eric S. Goldstein extend through December 31, 1998. Each agreement
provides for an annual salary of $160,000, plus increases based on the
percentage increase, if any, in the Consumer Price Index, or by a greater
amount, in the discretion of the Board of Directors. In addition, each agreement
provides for payment of an annual bonus, if the Company's gross volume of loans
originated by the Company in the case of Ms. Carl and Messrs. Weiss and Jonah L.
Goldstein, or the outstanding servicing portfolio of the Company in the case of
Mr. Eric S. Goldstein, exceeds certain specified levels for each year during the
term of the agreement. In addition, each agreement provided for a one-time grant
of 150,000 incentive stock options at an exercise price of $2.50 per share in
accordance with the Stock Option Plan. Of the options granted, 40,000 options
were exercisable upon grant, 40,000 options as of July 1996, 40,000 options as
of July 1997 and 30,000 options as of July 1998.
The employment agreement with Tim S. Ledwick is for a term commencing on
January 1, 1996 and continuing until December 31, 1999. The agreement provides
for annual salary of $150,000 plus increases based on the percentage increase,
if any, in the Consumer Price Index, or by a greater amount, in the discretion
of the Board of Directors. In addition, the agreement provides for payment of an
annual bonus of $15,000, and an additional bonus may be granted at the option of
the Board of Directors. The agreement also provided for a one-time grant of
100,000 incentive stock options at an exercise price of $10.00 per share in
accordance with the Stock Option Plan. Of the options granted, 40,000 options
were exercisable upon grant, 30,000 options are exercisable as of January 1,
1997, and 30,000 options are exercisable as of January 1, 1998.
The employment agreement with Robert J. Blackwell is for a term commencing
on February 1, 1996 and continuing until January 31, 1999. The agreement
provides for an annual salary of $200,000 plus increases based on the percentage
increase, if any, in the Consumer Price Index, or by a greater amount, in the
discretion of the Board of Directors. In addition, the agreement provides for
the payment of a bonus at the option of the Board of Directors. The agreement
also provided for a one-time grant of 300,000 incentive stock options at an
exercise of $10.00 per share in accordance with the Stock Option Plan. Of the
options granted, 100,000 options are exercisable as of January 15, 1997, 100,000
options are exercisable as of January 15, 1998 and 100,000 options are
exercisable as of January 15, 1999.
CSC-UK entered into employment agreements dated as of April 5, 1995 with
Messrs. Steene, Brand and Epstein which extend through April 5, 1999. Each
agreement provides for an annual salary of L150,000, plus increases based on the
percentage increase, if any, in the Retail Price Index. In addition, each
agreement provides for the payment of an annual bonus related to the pre-tax
profits of CSC-UK not to exceed L1.0 million in the aggregate for the term of
the agreement.
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401(K) PLAN
The Company sponsors a 401(k) plan, a savings and investment plan intended
to be qualified under Section 401 of the Internal Revenue Code of 1986, as
amended (the "Code"). Participating employees may make pre-tax contributions,
subject to limitations under the Code, of a percentage of their total
compensation. The Company, in its sole discretion, may make matching
contributions for the benefit of all participants with at least one year of
service who make pre-tax contributions. The Board of Directors has not yet
determined the matching contribution that will be made for the 1995 plan year.
EMPLOYEE STOCK PLANS
Effective June 1, 1995, the Board of Directors adopted, and the
stockholders of the Company approved, the Stock Option Plan. No more than
3,600,000 shares of Common Stock may be issued upon exercise of options granted
under the Stock Option Plan, and no eligible person may receive options to
purchase more than 600,000 shares of Common Stock during any calendar year,
subject to adjustment to reflect stock splits, stock dividends, and similar
capital stock transactions. The Stock Option Plan is administered by a committee
of disinterested non-employee directors which has the authority to determine the
terms and conditions of options granted under the Stock Option Plan and to make
all other determinations deemed necessary or advisable for administering the
Stock Option Plan, provided that the exercise price of the options granted under
the Stock Option Plan cannot be less than the fair market value of the Common
Stock on the date of grant. As of July 31, 1996, there were 1,843,200 options
outstanding under the Stock Option Plan.
Effective December 1994, the Board of Directors adopted, and the
stockholders of the Company approved, the Company's Stock Purchase Plan. The
Stock Purchase Plan, and the right of participants to make purchases of the
Common Stock thereunder, is intended to qualify under the provisions of Sections
421 and 423 of the Code and, for persons subject to Section 16 of the Exchange
Act, under the provisions of Rule 16b-3 of the Exchange Act. The Stock Purchase
Plan is generally administered by a committee appointed by the Board of
Directors of the Company which has the authority to make all determinations,
interpretations and rules deemed necessary or advisable for administering the
Stock Purchase Plan. The Stock Purchase Plan permits eligible employees of the
Company to purchase Common Stock through payroll deductions of up to ten percent
of their compensation (including base salary or hourly compensation and cash
bonuses), up to a maximum of $25,000 for all purchase periods ending within any
calendar year. The price of Common Stock purchased under the Stock Purchase Plan
will be 85% of the lower of the fair market value of a share of Common Stock on
the commencement date or the termination date of the relevant offering period.
No more than 1,600,000 shares of Common Stock may be issued upon exercise of
options granted under the Stock Purchase Plan and no more than 400,000 shares
plus unissued shares from prior offerings may be issued in each calendar year
under the Stock Purchase Plan. To date, 80,310 shares of Common Stock have been
issued pursuant to the Stock Purchase Plan.
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CERTAIN TRANSACTIONS
GENERAL
In May 1994, the Company loaned Mr. Stata $100,000. The terms of the loan
provide that it will accrue interest on the unpaid principal balance at a rate
equal to 6%. Interest payments to the Company for 1994 and 1995 amounted to
$2,768 and $1,500, respectively. This loan became due on May 18, 1996, at which
time the remaining amounts outstanding were paid in full.
The Company paid $110,000 in legal fees during 1995 to Mr. Fensterheim who
acted as counsel to the Company through his professional corporation, Asher
Fensterheim, P.C. The Company anticipates that it will pay approximately
$180,000 in legal fees to Mr. Fensterheim during 1996.
The Company entered into an agreement with Jonah L. Goldstein whereby Mr.
Goldstein was paid as a part-time consultant to the Company. The agreement
provided that Mr. Goldstein was paid a fee at an annualized rate of $40,000,
amended to increase such rate to $85,000 on March 30, 1994 and to $125,000 on
June 1, 1995, plus certain bonuses for periods through June 30, 1995. For
services performed in 1995 through the termination of the agreement on June 30,
1995, Mr. Goldstein was paid $99,144. Effective July 1, 1995, Mr. Goldstein
entered into an employment agreement with the Company.
Robin Fensterheim, the daughter of Mr. Fensterheim and wife of Mr. Grosser,
performs legal services in connection with the closing of loans made by the
Company for which services she receives compensation from the borrower. For
1995, Ms. Fensterheim received $45,823 for such services.
The Company entered into an agreement, dated as of January 2, 1995, with
Mr. Jay L. Botchman for consulting services on a non-exclusive basis rendered to
the Company through December 31, 1995 whereby the Company issued to Mr. Botchman
40,000 shares of Common Stock and is obligated to pay to Mr. Botchman a monthly
fee of $5,000 per month. The agreement was amended, effective as of July 1,
1995, to increase the monthly fee to $12,500 per month for the remainder of the
term of the agreement. Since the expiration of this agreement on December 31,
1995, the Company has engaged Mr. Botchman to render consulting services on a
monthly basis and has paid him $12,500 per month for such services. In addition,
CSC-UK entered into an agreement with a company owned by Mr. Botchman pursuant
to which such company is paid a fee of one-eighth of 1.0% of the principal
balance of loans originated by CSC-UK upon the sale of such loans. This
agreement terminates upon the later of May 1, 2000 or the sale by CSC-UK of
loans having an aggregate principal balance of L1 billion. Each of Messrs.
Grosser, Patent and Fensterheim entered into option agreements dated March 10,
1995 with Mr. Botchman pursuant to which Mr. Botchman was granted an option to
acquire up to 1,380,000 shares of Common Stock from each of Messrs. Grosser,
Patent and Fensterheim at a price of $1.25 per share which represented a premium
of approximately 25.0% over the bid price of $1.00 per share on the date the
option agreements were executed. The options became exercisable on July 1, 1996
and expire on March 10, 2000. Mr. Botchman has provided strategic advisory and
consulting services to Messrs. Grosser, Patent and Fensterheim and the Company
in connection with the Company's growth, expansion and acquisition policies.
In January 1996, Samboy Financial Corp., a Minnesota corporation
("Samboy"), began selling Title I and similar loans to the Company. To date,
Samboy has sold $930,300 of loans to the Company. Jonah L. Goldstein owns 20% of
the outstanding capital stock of Samboy.
CSC-UK TRANSACTIONS
On September 29, 1995, the Company entered into a Stock Purchase Agreement
with Messrs. Steene, Brand and Epstein to acquire their 50% interest in CSC-UK
in exchange for 3,600,000 shares of Common Stock. The UK Acquisition was
completed as of September 30, 1995. Pursuant to the Stock Purchase Agreement,
the Company must offer piggyback registration rights to Messrs. Steene, Brand
and Epstein when the Company proposes to register any shares of its Common Stock
for the benefit of Mr. Grosser, Mr. Patent
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or Mr. Fensterheim under the Securities Act (other than under a registration
statement on Form S-8). The Company also agreed to appoint Mr. Steene as a
member of the Board of Directors of the Company and agreed to indemnify Messrs.
Steene, Brand and Epstein against any amounts paid pursuant to their guarantee
of a Pound Sterling 200,000 obligation of CSC-UK. In addition, due to the fact
that CSC-UK reached a certain loan origination target in the six months
following the consummation of the UK Acquisition, CSC-UK amended Messrs. Steene,
Brand and Epstein's employment agreements effective March 30, 1996 to provide
that the annual bonus payments due to Messrs. Steene, Brand and Epstein are no
longer subject to any cash flow requirement (see "Management -- Employment
Agreements").
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth security ownership information regarding the
Company's Common Stock as of July 31, 1996 (except as otherwise noted) by (i)
each person who is known by the Company to own beneficially more than 5% of the
Company's Common Stock, (ii) each director, (iii) each of the executive officers
and (iv) all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
----------------------
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENT
- ------------------------------------------------------------------------ ---------- -------
<S> <C> <C>
Robert Grosser(2)....................................................... 5,286,044 17.8%
Robert C. Patent(2)..................................................... 5,287,192 17.8
Asher Fensterheim(2)(4)................................................. 5,114,520 17.3
Jonah L. Goldstein(3)................................................... 461,352 1.6
Arthur Gould(4)......................................................... 20,000 *
Hollis W. Rademacher(4)................................................. 26,600 *
Robert M. Stata......................................................... 802,000 2.7
Cheryl P. Carl(5)....................................................... 488,200 1.6
Steven P. Weiss(3)...................................................... 250,676 *
Eric S. Goldstein(3).................................................... 288,980 *
Tim S. Ledwick(6)....................................................... 53,406 *
Robert J. Blackwell..................................................... -- --
David A. Steene......................................................... 1,200,000 4.1
Martin H.S. Brand....................................................... 1,200,000 4.1
Gerald Epstein.......................................................... 1,202,200 4.1
All directors and executive officers as a group (15 persons)(7)......... 21,681,170 72.2%
Jay L. Botchman(8)...................................................... 4,580,000 15.5%
</TABLE>
- ---------------
* Less than one percent.
(1) Unless otherwise indicated and subject to community property laws where
applicable, each of the stockholders named in this table has sole voting and
investment power with respect to the shares shown as beneficially owned by
it. A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this Prospectus upon
the exercise of options and warrants. Each beneficial owner's percentage
ownership is determined by assuming that options that are held by such
person (but not those held by any other person) and that are exercisable
within 60 days from the date of this Prospectus have been exercised.
(2) Messrs. Grosser, Patent and Fensterheim have each granted an option to Jay
L. Botchman, a consultant to the Company, to purchase up to 1,380,000
shares. Each such option became exercisable on July 1, 1996. See "Certain
Transactions."
(3) Includes an immediately exercisable option to purchase 80,000 shares granted
pursuant to the Stock Option Plan.
(4) Includes an immediately exercisable option to purchase 20,000 shares granted
pursuant to the Directors Plan.
(5) Includes 3,400 shares for which Ms. Carl shares voting and investment power
with her husband and an immediately exercisable option to purchase 80,000
shares granted pursuant to the Stock Option Plan.
(6) Includes an immediately exercisable option to purchase 40,000 shares granted
pursuant to the Stock Option Plan.
(7) See Notes (1)-(6).
(8) Includes options to purchase up to an aggregate of 4,140,000 shares granted
by Messrs. Grosser, Patent and Fensterheim, which options became exercisable
on July 1, 1996.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized by its Certificate of Incorporation to issue
50,000,000 shares of Common Stock, par value $0.01 per share, of which
29,627,452 were outstanding on July 31, 1996; and 5,000,000 shares of Preferred
Stock, par value $0.01 per share ("Preferred Stock"), of which no shares are
outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
to be voted on by stockholders and are entitled to receive such dividends as may
be declared by the Board of Directors out of funds legally available therefor.
The Company's Certificate of Incorporation prohibits holders of Common Stock
from acting by written consent. Actions required or permitted to be taken by the
stockholders of the Company may be taken only at a duly called annual or special
meeting of the stockholders. The Company intends to hold annual meetings of its
stockholders in the second quarter of each year at a location near its Elmsford,
New York headquarters. The Company mails notices of such meetings, as well as
proxy statements, annual reports and quarterly reports to all of its
stockholders of record. From time to time, information with respect to the
Company may also be published in various periodicals. Subject to the rights of
holders of Preferred Stock, if any, in the event of a liquidation, dissolution,
or winding-up of the Company, holders of Common Stock will be entitled to share
pro rata in the distribution of all remaining assets of the Company. The Common
Stock does not entitle holders to any preemptive rights upon the issuance of
other securities of the Company. Of the authorized but unissued shares of Common
Stock, an aggregate of 5,600,000 shares of Common Stock have been reserved for
issuance pursuant to the Stock Option Plan, the Directors Plan and the Stock
Purchase Plan.
PREFERRED STOCK
Pursuant to the Company's Certificate of Incorporation, the Board of
Directors has the authority to issue up to 5,000,000 shares of Preferred Stock
in one or more series with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without stockholder approval, to issue Preferred
Stock with dividend, liquidation, conversion, voting or other rights which
adversely affect the voting power or other rights of the holders of the Common
Stock. In the event of issuance, the Preferred Stock could be utilized, under
certain circumstances, as a way of discouraging, delaying or preventing an
acquisition or change in control of the Company. The Company does not currently
intend to issue any shares of its Preferred Stock.
OPTIONS
As of July 31, 1996, the Company had granted options to purchase up to
2,024,000 shares of Common Stock, of which 1,981,200 options are currently
outstanding, at exercise prices ranging from $2.50 to $23.25, pursuant to the
provisions of the Stock Option Plan and Directors Plan. As of July 31, 1996,
options to purchase 9,845 shares of Common Stock were outstanding pursuant to
the Stock Purchase Plan. See "Management -- Non-Employee Directors
Compensation," "-- Employee Option Plans."
RESTRICTIONS ON PAYMENT OF DIVIDENDS
The Company has never paid any cash dividends on its capital stock. The
Company intends to retain all of its future earnings to finance its operations
and does not anticipate paying cash dividends in the foreseeable future. In
addition, certain agreements to which the Company is a party prohibit the
Company, CSC and CSC-UK from paying dividends on their respective capital stock.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of
the Company's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with the Company for three years
following the date that person became an interested stockholder unless: (i)
before that person became an interested stockholder, the Board approved the
transaction in which the interested stockholder became an interested stockholder
or approved the business combination; (ii) upon completion of the transaction
that resulted in the interested stockholders becoming an
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interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the Company outstanding at the time the transaction commenced
(excluding stock held by directors who are also officers of the Company and by
employee stock plans that do not provide employees with the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer); or (iii) on or following the date on which that
person became an interested stockholder, the business combination is approved by
the Company's Board and authorized at a meeting of stockholders by the
affirmative vote of the holders of at least 66 2/3% of the outstanding voting
stock of the Company not owned by the interested stockholder.
Under Section 203, these restrictions also do not apply to certain business
combinations proposed by an interested stockholder following the announcement or
notification of one of certain extraordinary transactions involving the Company
and a person who was not an interested stockholder during the previous three
years or who became an interested stockholder with the approval of a majority of
the Company's directors, if that extraordinary transaction is approved or not
opposed by a majority of the directors (but not less than one) who were
directors before any person became an interested stockholder in the previous
three years or who were recommended for election or elected to succeed such
directors by a majority of such directors then in office.
Pursuant to Section 162 of the Delaware General Corporation Law, the Board
of Directors of the Company can, without stockholder approval, issue shares of
capital stock, which may have the effect of delaying, deferring or preventing a
change of control of the Company. Other than pursuant to the Offering, the
Company has no plan or arrangement for the issuance of any shares of capital
stock other than in the ordinary course pursuant to the Plans.
CERTAIN CHARTER AND BYLAW PROVISIONS
The Company's Certificate of Incorporation contains certain provisions that
could discourage potential takeover attempts and make more difficult attempts by
stockholders to change management. The Company's Certificate of Incorporation
provides for a classified Board of Directors consisting of three classes as
nearly equal in size as practicable. Each class will hold office until the third
annual meeting for election of directors following the election of such class;
provided, however, that the initial terms of the directors in the first, second
and third classes of the Board of Directors will expire in 1997, 1998 and 1999,
respectively. The Company's Certificate of Incorporation provides that no
director may be removed except for cause and by the vote of not less than 67% of
the total outstanding voting power of the securities of the corporation which
are then entitled to vote in the election of directors. The Certificate of
Incorporation permits the Board of Directors to create new directorships and the
Company's Bylaws permit the Board of Directors to elect new directors to serve
the full term of the class of directors in which the new directorship was
created. The Bylaws also provide that the Board of Directors (or its remaining
members, even though less than a quorum) is empowered to fill vacancies on the
Board of Directors occurring for any reason for the remainder of the term of the
class of directors in which the vacancy occurred. A vote of not less than 67% of
the total outstanding voting power of the securities of the Company which are
then entitled to vote in the election of directors is required to amend the
foregoing provisions of the Certificate of Incorporation.
The Certificate of Incorporation prohibits any action required to be taken
or which may be taken at any annual or special meeting of stockholders of the
Company to be taken without a meeting, denying the power of stockholders to
consent in writing, without a meeting, to the taking of any action. This
provision may discourage another person or entity from making a tender offer for
the Company's Common Stock because such person or entity, even if it acquired a
majority of the outstanding voting securities of the Company, would be able to
take action as a stockholder (such as electing new directors or approving a
merger) only at a duly called stockholders meeting, and not by written consent.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is the Bank of
Boston.
LISTING
The shares of Common Stock are traded on Nasdaq under the symbol "CTYS."
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SHARES ELIGIBLE FOR FUTURE SALE
As of July 31, 1996, 29,627,452 shares of Common Stock were outstanding. Of
these shares, 7,818,282 shares of Common Stock are available for resale in the
public market without restriction or further registration under the Securities
Act, except for shares held by affiliates of the Company (in general, any person
who has a control relationship with the Company), which shares are subject to
the resale limitations of Rule 144 promulgated under the Securities Act ("Rule
144"). 22,229,170 of the shares of Common Stock outstanding are deemed to be
"restricted securities" as the term is defined in Rule 144, all of which are
eligible for sale in the public market in compliance with Rule 144.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years is entitled to sell, within any three-month period, a number of shares
which does not exceed the greater of 1% of the then-outstanding shares of the
Company's Common Stock (296,275 shares as of July 31, 1996) or the average
weekly trading volume of the Company's Common Stock during the four calendar
weeks preceding the date on which notice of the sale is filed with the
Commission. Sales under Rule 144 may also be subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. Any person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the three months preceding a sale, and who has beneficially owned
shares within the definition of "restricted securities" under Rule 144 for at
least three years, is entitled to sell such shares under Rule 144(k) without
regard to the volume limitation, manner of sale provisions, public information
requirements or notice requirements.
In addition, up to 1,991,045 shares of Common Stock may be issued upon
exercise of certain options that the Company has granted, of which options to
purchase 543,200 shares of Common Stock are currently exercisable. The Company
has filed a registration statement on Form S-8 under the Securities Act to
register the 5,600,000 shares of Common Stock reserved for issuance under the
Plans. As a result, any shares issued upon exercise of stock options granted
under the Plan are available, subject to special rules for affiliates, for
resale in the public market. See "Management -- Board of Directors" and
"-- Employee Stock Plans."
The Company has also issued $143.8 million of Debentures (of which $75.6
million are offered hereby), convertible at any time into shares of Common
Stock, currently at a conversion price of $26.25 per share, subject to
adjustment. Any shares issued upon conversion of the Debentures are available
for resale in the public market. See "Description of Debentures."
DESCRIPTION OF DEBENTURES
Set forth below is a summary of certain provisions of the Debentures. The
Debentures were issued pursuant to an Indenture (the "Indenture") dated as of
May 7, 1996, by and between the Company and The Chase Manhattan Bank N.A., as
trustee (the "Trustee"). The following summary of the Debentures, the Indenture
and the related Registration Rights Agreement (the "Registration Rights
Agreement") does not purport to be complete and is subject to, and is qualified
in its entirety by, reference to all of the provisions of the Indenture, the
Debentures and the Registration Rights Agreement, including the definitions
therein contained. Copies of the Indenture and the Registration Rights Agreement
can be obtained from the Company upon request.
Capitalized terms used herein without definition have the meaning ascribed
to them in the Indenture and the Registration Rights Agreement, as appropriate.
References under this heading to the "Company" are to Cityscape Financial Corp.,
and do not include its subsidiaries unless expressly stated. The Debentures
offered hereby were part of a series of 6% Convertible Subordinated Debentures
issued by the Company in May 1996. All references to the term "Debentures" in
this section refer to the entire issue of 6% Convertible Subordinated Debentures
($143.8 million) and not just to the Debentures offered hereby ($75.6 million).
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GENERAL
The Debentures are unsecured general obligations of the Company, limited in
aggregate principal amount to $143.8 million. The Debentures are subordinated in
right of payment to all existing and future Senior Indebtedness of the Company,
as described under "Subordination" below. At July 31, 1996, Senior Indebtedness
of the Company and indebtedness of its subsidiaries aggregated $147.2 million.
Neither the Indenture nor the Debentures limit the amount of Senior Indebtedness
or other indebtedness that the Company or its subsidiaries may incur.
The Debentures will mature on May 1, 2006. The Debentures bear interest at
the 6% per annum from May 7, 1996 or from the most recent Interest Payment Date
to which interest has been paid or provided for, payable semi-annually in
arrears on May 1 and November 1 of each year, commencing on November 1, 1996.
Interest will be calculated on the basis of a 360-day year consisting of twelve
30-day months. The interest payable on November 1, 1996, will amount to $29 per
$1,000 principal amount of the Debentures, and on each May 1 and November 1
thereafter will amount to $30 per $1,000 principal amount of the Debentures.
SUBORDINATION
The Debentures are obligations exclusively of the Company and not of its
subsidiaries. The Company conducts substantially all of its operations through
its subsidiaries. Accordingly, the Company's ability to meet its cash
obligations is dependent upon the ability of its subsidiaries to make cash
distributions to the Company. The Company's subsidiaries are separate and
distinct legal entities and have no obligation, contingent or otherwise, to pay
any amounts due pursuant to the Debentures or to make funds available therefor,
whether by dividends, loans or other payments. In addition, the payment of
dividends and the making of loans and advances to the Company by its
subsidiaries are and will continue to be restricted by or subject to, among
other limitations, applicable provisions of laws of national or state
governments, contractual provisions, the earnings of such subsidiaries and
various business considerations. Neither the Indenture nor the Debentures will
restrict the Company's subsidiaries' ability to incur such restrictions in the
future.
The Debentures are subordinated in right of payment to all existing and
future Senior Indebtedness of the Company and rank pari passu with other
unsecured subordinated indebtedness of the Company that pursuant to its terms
provides for such ranking. The rights of holders of Debentures are effectively
subordinated by operation of law to all existing and future liabilities
(including trade payables and commitments under leases) of the Company's
subsidiaries. Neither the Indenture nor the Debentures restrict the incurrence
of Senior Indebtedness or other indebtedness by the Company or its subsidiaries.
Any right of the Company to receive assets of any of its subsidiaries upon
liquidation or reorganization of the subsidiary (and the consequent right of the
holders of the Debentures to participate in those assets) will be effectively
subordinated to the claims of that subsidiary's creditors, except to the extent
that the Company is itself recognized as a creditor of such subsidiary, in which
case the claims of the Company would still be subject to any security interests
in the assets of such subsidiary and subordinated to any indebtedness of such
subsidiary senior to that held by the Company.
The Indenture provides that no payment may be made by the Company on
account of the principal of, premium, if any, interest on, or Additional Amounts
(as defined herein) with respect to, the Debentures, or to acquire any of the
Debentures (including repurchases of Debentures at the option of the holder
thereof) for cash or property (other than Junior Securities as defined herein),
or on account of the redemption provisions of the Debentures, (i) upon the
maturity of any Senior Indebtedness of the Company by lapse of time,
acceleration (unless waived) or otherwise, unless and until all principal of,
premium, if any, and interest on such Senior Indebtedness and all other
Obligations in respect thereof are first paid in full (or such payment is duly
provided for), or (ii) in the event of default in the payment of any principal
of, premium, if any, interest on or any other Obligation in respect of any
Senior Indebtedness of the Company when it becomes due and payable, whether at
maturity or at a date fixed for prepayment or by declaration or otherwise (a
"Payment Default"), unless and until such Payment Default has been cured or
waived or otherwise has ceased to exist.
Upon (i) the happening of an event of default (other than a Payment
Default) that permits the holders of Senior Indebtedness or their representative
immediately to accelerate its maturity and (ii) written notice of
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such event of default given to the Company and the Trustee, by the holders of
such Senior Indebtedness or their representative (a "Payment Notice"), then,
unless and until such event of default has been cured or waived or otherwise has
ceased to exist, no payment (by setoff or otherwise) may be made by or on behalf
of the Company on account of the principal of, premium, if any, interest on, or
Additional Amounts with respect to, the Debentures, or to acquire or repurchase
any of the Debentures for cash or property, or on account of the redemption
provisions of the Debentures, in any such case other than payments made with
Junior Securities of the Company. Notwithstanding the foregoing, unless (i) the
Senior Indebtedness in respect of which such event of default exists has been
declared due and payable in its entirety within 179 days after the Payment
Notice is delivered as set forth above (the "Payment Blockage Period"), and (ii)
such declaration has not been rescinded or waived, at the end of the Payment
Blockage Period the Company shall be required to pay all sums not paid to the
holders of the Debentures during the Payment Blockage Period due to the
foregoing prohibitions and to resume all other payments as and when due on the
Debentures. Any number of Payment Notices may be given; provided, however, that
(i) not more than one Payment Notice shall be given within any period of 360
consecutive days, and (ii) no default that existed upon the date of such Payment
Notice or the commencement of such Payment Blockage Period shall be made the
basis for the commencement of any other Payment Blockage Period unless such
default has been cured or waived for a period of not less than 180 consecutive
days.
In the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company (other than Junior Securities) shall be
received by the Trustee or the holders of Debentures at a time when such payment
or distribution is prohibited by the foregoing provisions, such payment or
distribution shall be held in trust for the benefit of the holders of Senior
Indebtedness of the Company, and shall be paid or delivered by the Trustee or
such holders of Debentures, as the case may be, to the holders of the Senior
Indebtedness of the Company remaining unpaid or unprovided for or to their
representative or representatives, or to the trustee or trustees under any
indenture pursuant to which any instruments evidencing any of such Senior
Indebtedness of the Company may have been issued, ratably according to the
aggregate amounts remaining unpaid on account of the Senior Indebtedness of the
Company held or represented by each, for application to the payment of all
Senior Indebtedness of the Company remaining unpaid, to the extent necessary to
pay or to provide for the payment of all such Senior Indebtedness in full after
giving effect to any concurrent payment or distribution to the holders of such
Senior Indebtedness.
Upon any distribution of assets of the Company upon any dissolution,
winding up, total or partial liquidation or reorganization of the Company,
whether voluntary or involuntary, in bankruptcy, insolvency, receivership or a
similar proceeding or upon assignment for the benefit of creditors or any
marshaling of assets or liabilities, (i) the holders of all Senior Indebtedness
of the Company will first be entitled to receive payment in full (or have such
payment duly provided for) before the holders of Debentures are entitled to
receive any payment on account of the principal of, premium, if any, interest
on, or Additional Amounts with respect to, the Debentures (other than Junior
Securities) and (ii) any payment or distribution of assets of the Company of any
kind or character, whether in cash, property or securities (other than Junior
Securities) to which the holders of Debentures or the Trustee on their behalf
would be entitled (by setoff or otherwise), except for the subordination
provisions contained in the Indenture, will be paid by the liquidating trustee
or agent or other person making such a payment or distribution directly to the
holders of Senior Indebtedness of the Company or their representative to the
extent necessary to make payment in full of all such Senior Indebtedness
remaining unpaid, after giving effect to any concurrent payment or distribution
to the holders of such Senior Indebtedness.
No provision contained in the Indenture or the Debentures affects the
obligation of the Company, which is absolute and unconditional, to pay, when
due, principal of, premium, if any, interest on, and Additional Amounts with
respect to, the Debentures. The subordination provisions of the Indenture and
the Debentures will not prevent the occurrence of any default or Event of
Default (as hereafter defined) or limit the rights of any holder of Debentures,
subject to the six immediately preceding paragraphs, to pursue any other rights
or remedies with respect to the Debentures.
As a result of these subordination provisions, in the event of the
liquidation, bankruptcy, reorganization, insolvency, receivership or similar
proceeding or an assignment for the benefit of the creditors of the Company
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or any of its subsidiaries or a marshaling of assets or liabilities of the
Company and its subsidiaries, holders of the Debentures may receive ratably less
than other creditors.
DELIVERY AND FORM OF RESTRICTED DEBENTURES
The managers of the Debenture offering (the "Managers") arranged for the
sale of a portion of the Debentures to certain institutions in the US in
reliance on exemptions from the registration requirements of the Securities Act.
Debentures that were sold to qualified institutional buyers (as defined in Rule
144A under the Securities Act) ("QIBs") are represented by a single global
Debenture (the "Rule 144A Global Security"), which was deposited on May 7, 1996
with, or on behalf of, the Depository Trust Company (the "Depository") and
registered in the name of Cede & Co., as nominee of the Depository (such nominee
being referred to herein as the "Rule 144A Global Security Holder"). Debentures
represented by the Rule 144A Global Security are eligible for trading on Portal.
Debentures that were sold to institutional accredited investors (the "Accredited
Investor Debentures") are in fully registered form. The Rule 144A Global
Security and the Accredited Investor Debentures were delivered for the accounts
of the purchasers thereof on May 7, 1996.
The Depository is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depository's Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depository's
Participants include securities brokers and dealers, banks and trust companies,
clearing corporations and certain other organizations. Access to the
Depository's system is also available to other entities such as banks, brokers,
dealers and trust companies (collectively, the "Indirect Participants" or the
"Depository's Indirect Participants") that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly. Persons who are
not Participants may beneficially own securities held by or on behalf of the
Depository only through the Depository's Participants or the Depository's
Indirect Participants.
So long as the Rule 144A Global Security Holder is the registered owner of
any Debentures, the Rule 144A Global Security Holder will be considered the sole
holder under the Indenture of any Debentures evidenced by the Rule 144A Global
Security. Beneficial owners of Debentures evidenced by the Rule 144A Global
Security will not be considered the owners or holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee. Neither the Company nor
the Trustee will have any responsibility or liability for any aspect of the
records of the Depository or for maintaining, supervising or reviewing any
records of the Depository relating to the Debentures.
Payments in respect of the principal of, premium, if any, interest on, and
Additional Amounts with respect to, any Debentures registered in the name of the
Rule 144A Global Security Holder on the applicable record date will be payable
by the Trustee to or at the direction of the Rule 144A Global Security Holder in
its capacity as the registered holder under the Indenture. Under the terms of
the Indenture, the Company and the Trustee may treat the persons in whose names
the Debentures, including the Rule 144A Global Security, are registered as the
owners thereof for the purpose of receiving such payments. Consequently, neither
the Company nor the Trustee has or will have any responsibility or liability for
the payment of such amounts to beneficial owners of Debentures. The Company
believes, however, that it is currently the policy of the Depository immediately
to credit the accounts of the relevant Participants with such payments, in
amounts proportionate to their respective holdings of beneficial interests in
the relevant security as shown on the records of the Depository. Payments by the
Depository's Participants and the Depository's Indirect Participants to the
beneficial owners of Debentures are governed by standing instructions and
customary practice and are the responsibility of the Depository's Participants
or the Depository's Indirect Participants.
EXCHANGE AND TRANSFER
At the option of the holder thereof and subject to the terms of the
Debentures and of the Indenture, Registered Debentures are exchangeable for an
equal aggregate principal amount of Registered Debentures of different
authorized denominations, in each case without service charge (other than the
cost of delivery) and
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upon payment of any taxes and other governmental charges. Registered Debentures
shall be registered as provided in the Indenture. The registered holder of a
Registered Debenture will be treated by the Company, the Trustee and their
respective agents for all purposes as the owner of such Registered Debenture.
The transfer of Registered Debentures may be registered, and Registered
Debentures may be presented in exchange for other Registered Debentures of
different authorized denominations, at the office of the Trustee in The City of
New York, without service charge (other than the cost of delivery) and upon
payment of any taxes or other governmental charges. Registered Debentures may
also be presented for purposes of transfer or such exchange, at the offices of
the paying agents in London (which will initially be The Chase Manhattan Bank,
N.A. or Luxembourg (which will initially be Chase Manhattan Bank Luxembourg
S.A.), or such other paying agents as may be specified in notices to the holders
of Debentures in accordance with "Notices" below.
In the event of a redemption in part, the Company is not required (i) to
register the transfer of Registered Debentures for a period of 15 days
immediately preceding the date on which notice is given identifying the serial
numbers of the Debentures called for such redemption; (ii) to register the
transfer or exchange of any such Registered Debenture, or portion thereof,
called for redemption.
Subject to certain conditions, any person having a beneficial interest in
the Rule 144A Global Security may, upon request to the Trustee, exchange such
beneficial interest for Debentures in the form of certificated Debentures. Upon
any such issuance, the Trustee is required to register such certificated
Debentures in the name of, and cause the same to be delivered to, such person or
persons (or the nominee of any thereof). All such certificated Debentures will
be subject to the legend requirements described in the Indenture. In addition,
if (i) the Company notifies the Trustee in writing that the Depository is no
longer willing or able to act as a depository and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of
Debentures in the form of certificated Debentures under the Indenture, then,
upon surrender by the Rule 144A Global Security Holder of the Rule 144A Global
Security, Debentures in certificated form will be issued to each person that the
Rule 144A Global Security Holder and the Depository identify as being the
beneficial owner of the related Debentures.
Neither the Company nor the Trustee is liable for any delay by the Rule
144A Global Security Holder or the Depository in identifying the beneficial
owners of Debentures, and the Company and the Trustee may conclusively rely on,
and are protected in relying on, instructions from the Rule 144A Global Security
Holder or the Depository for all purposes.
CONVERSION RIGHTS
The Debentures are convertible into Common Stock, currently (after giving
effect to a 100% stock dividend paid by the Company in July 1996) at the
conversion price of $26.25 per share (equivalent to approximately 38 shares of
Common Stock for each $1,000 principal amount of Debentures), at any time on and
after the date following the 40 day period beginning May 7, 1996 the "Exchange
Date"), and prior to redemption or maturity. The right to convert a Debenture
called for redemption or delivered for repurchase will terminate at the close of
business on the fifth day (or if such day is not a Business Day, the next
succeeding Business Day) next preceding the redemption date for such Debenture.
Holders of the Debentures will have the right to convert Debentures called for
redemption until terminated in accordance with the preceding sentence.
The right of conversion attaching to any Debenture may be exercised by the
holder thereof by delivering the Debenture at the specified office of a
conversion agent (including such office in Luxembourg, as described under
"Payments, Paying Agents and Conversion Agents" below), accompanied by a duly
signed and completed notice of conversion. The conversion date shall be the date
on which the Debenture and the duly signed and completed notice of conversion
shall have been so delivered. As promptly as practicable on or after the
conversion date, the Company will cause to be delivered at such office of the
conversion agent certificates representing the number of shares of Common Stock
deliverable upon conversion, together with payment in lieu of any fractional
shares. A holder delivering a Debenture for conversion will not be required to
pay any taxes or duties payable in respect of the issuance or delivery of Common
Stock on conversion but will be
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required to pay any tax or duty which may be payable in respect of any transfer
involved in the issuance or delivery of the Common Stock in a name other than
that of the holder of the Debenture. Certificates representing shares of Common
Stock issuable upon conversion of the Debentures will be issued and delivered by
the Company's transfer agent for the Common Stock to the transfer agent for the
Debentures upon notice from the conversion agent under the Indenture only after
all taxes and duties, if any, payable by such holder have been paid. Such
certificates will be delivered to the address specified by such holder in its
completed notice of conversion.
In the case of any Registered Debenture that has been converted after any
Interest Record Date, but on or before the next Interest Payment Date, interest,
the stated due date of which is on such Interest Payment Date, shall be payable
on such Interest Payment Date notwithstanding such conversion, and such interest
shall be paid to the holder of such Registered Debenture who is a holder on such
Interest Record Date. Any Registered Debenture so converted must be accompanied
by payment of an amount equal to the interest payable on such Interest Payment
Date on the principal amount of Registered Debentures being surrendered for
conversion.
The conversion price is subject to adjustment in certain events, including
(i) dividends (and other distributions) payable in Common Stock on any class of
capital stock of the Company, (ii) the issuance to all holders of Common Stock
of rights, options or warrants entitling them to subscribe for or purchase
Common Stock (or securities convertible into Common Stock) at less than the
then-current market price (as determined in accordance with the Debentures)
unless holders of Debentures are entitled to receive the same upon conversion,
(iii) subdivisions, combinations and reclassifications of Common Stock and (iv)
distributions to all holders of Common Stock of evidences of indebtedness of the
Company or assets (including securities, but excluding those rights, options,
warrants, dividends and distributions referred to above, dividends and
distributions paid in cash out of the retained earnings of the Company). In
addition to the foregoing adjustments, the Company is permitted to make such
downward adjustments in the conversion price as it considers to be advisable in
order that any event treated for US federal income tax purposes as a dividend of
stock or stock rights will not be taxable to the holders of the Common Stock.
Adjustments in the conversion price of less than $0.25 will not be required, but
any adjustment that would otherwise be required to be made will be taken into
account in the computation of any subsequent adjustment. Fractional shares of
Common Stock are not to be issued or delivered upon conversion, but, in lieu
thereof, a cash adjustment will be paid based upon the then-current market price
of Common Stock.
Subject to the foregoing, no payments or adjustments will be made upon
conversion on account of accrued interest on the Debentures or for any dividends
or distributions on any shares of Common Stock delivered upon such conversion.
Notice of any adjustment of the conversion price will be given in the manner set
forth herein under " Notices" below.
Conversion price adjustments or omissions in making such adjustments may,
under certain circumstances, be deemed to be distributions that could be taxable
as dividends under the Code to holders of Debentures or of Common Stock.
In the event that the Company should merge with another company, become a
party to a consolidation or sell or transfer all or substantially all of its
assets to another company, each Debenture then outstanding would, without the
consent of any holder of Debentures, become convertible only into the kind and
amount of securities, cash and other property receivable upon the merger,
consolidation or transfer by a holder of the number of shares of Common Stock
into which such Debenture might have been converted immediately prior to such
merger, consolidation or transfer.
REDEMPTION
Unless previously redeemed, converted or purchased and canceled by the
Company, the Debentures will mature on May 1, 2006 and shall be redeemed at
their principal amount.
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OPTIONAL REDEMPTION
The Debentures may be redeemed, at the option of the Company, in whole or
in part, at any time on and after May 15, 1999, upon notice as described below,
at a redemption price equal to 103% of their principal amount if redeemed during
the period commencing May 15, 1999 through April 30, 2000, 102% of their
principal amount if redeemed during the 12-month period commencing May 1, 2000,
101% of their principal amount if redeemed during the 12-month period commencing
May 1, 2001 and 100% of their principal amount if redeemed during the 12-month
period commencing May 1, 2002 and thereafter, in each case together with accrued
and unpaid interest to the date fixed for redemption. In the event of a partial
redemption, the Debentures to be redeemed will be selected by the Trustee not
more than 75 days before the date fixed for redemption, by such method as the
Trustee shall deem fair and appropriate.
Debentures may be redeemed, in whole but not in part, upon notice as
described below, at the option of the Company at any time, if the Company shall
determine that as a result of any change in or amendment to the laws or any
regulations or rulings of the US or any political subdivision or taxing
authority thereof or therein affecting taxation, or any amendment to, or change
in, an official application or interpretation of such laws, regulations or
rulings, which amendment or change is announced or becomes effective on or after
the date of this Offering Circular, the Company has or will become obligated to
pay Additional Amounts on the Debentures or coupons, as described below under
"Payment of Additional Amounts," and such obligation cannot be avoided by the
Company taking reasonable measures available to it; provided, however, that no
such notice of redemption shall be given earlier than 90 days prior to the
earliest date on which the Company would be obligated to pay such Additional
Amounts were a payment in respect of the Debentures then due; and, provided,
further, that at the time such notice is given, such obligation to pay such
Additional Amounts remains in effect. In case of any such redemption, the
redemption price will be 100% of the principal amount of the Debentures,
together in each case with accrued and unpaid interest to the date fixed for
redemption. The Company is required to deliver to the Trustee a certificate
stating that the Company is entitled to effect such redemption and that the
conditions precedent to the right of the Company to redeem the Debentures have
occurred and an opinion of counsel stating that the legal conditions precedent
to the right of the Company to effect such redemption have occurred.
NOTICES OF REDEMPTION
Notice of intention to redeem Debentures will be given as described under
"Notices" below. In the case of redemption of all Debentures, notice will be
given once not more than 60 nor less than 30 days prior to the date fixed for
redemption. In the case of a partial redemption, notice will be given twice, the
first such notice to be given not more than 60 nor less than 45 days prior to
the date fixed for redemption and the second such notice to be given not more
than 45 nor less than 30 days prior to the date fixed for redemption.
Notices of redemption will specify the date fixed for redemption, the
applicable redemption price, the date on which the conversion privilege expires
and, in the case of a partial redemption, the aggregate principal amount of
Debentures to be redeemed and the aggregate principal amount of Debentures which
will be outstanding after such partial redemption. In addition, in the case of a
partial redemption, the first notice will specify the last date on which
exchanges or transfers of Debentures may be made pursuant to the provisions of
"Exchange and Transfer" above and the second notice will specify the serial
numbers of the Debentures and the portions thereof called for redemption.
In addition, the Company may at any time and from time to time repurchase
the Debentures in the open market or in private transactions at prices it
considers attractive. Debentures repurchased by the Company will be canceled.
CHANGE OF CONTROL
Each holder of a Debenture will have the right, at such holder's option, to
cause the Company to purchase such Debenture, in whole but not in part, for a
cash amount equal to 100% of the principal amount, together with accrued and
unpaid interest to the repurchase date, if a Change of Control (as defined
herein) occurs or has occurred. Notice with respect to the occurrence of a
Change of Control will be given as
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described under "Notices" below and not later than 30 days after the Exchange
Date or the date of the occurrence of such Change of Control. The date fixed for
such purchase will be a date not less than 30 nor more than 60 days after notice
of the occurrence of a Change of Control is given (except as otherwise required
by law). To be purchased, a Debenture must be received with a duly executed
written notice, substantially in the form provided on the reverse side of such
Debenture, at the office of a paying agent not later than the fifth day (or if
such day is not a Business Day, the next succeeding Business Day) prior to the
date fixed for such purchase. All Debentures purchased by the Company will be
canceled. Holders of Debentures who have tendered a notice of purchase will be
entitled to revoke their election by delivering a written notice of such
revocation to a paying agent on or prior to the date fixed for such purchase. In
addition, holders of Debentures will retain the right to require such Debentures
to be converted into Common Stock (or other securities, property or cash,
payable in lieu thereof by reference to the adjustment price as provided under
the adjustment provision, see "Conversion Rights") prior to the purchase date,
so long as notice to that effect, including such holder's nontransferable
receipt for the Debentures from a paying agent, is delivered to a paying agent
on or prior to the close of business on the fifth day (or if such day is not a
Business Day, the next succeeding Business Day) next preceding the applicable
Redemption Date.
A "Change of Control" will be deemed to have occurred (i) upon any merger
or consolidation of the Company with or into any person or any sale, transfer or
other conveyance, whether direct or indirect, of all or substantially all of the
assets of the Company, on a consolidated basis, in one transaction or a series
of related transactions, if, immediately after giving effect to such
transaction, any "person" or "group" (as such terms are used for purposes of
Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable) is or
becomes the "beneficial owner," directly or indirectly, of more than 50% of the
total voting power in the aggregate normally entitled to vote in the election of
directors, managers, or trustees, as applicable, of the transferee or surviving
entity, other than any such person or group that held such voting power as of
the date of the Indenture, (ii) when any "person" or "group" (as such terms are
used for purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or
not applicable) is or becomes the "beneficial owner," directly or indirectly, of
more than 50% of the total voting power in the aggregate normally entitled to
vote in the election of directors of the Company, other than any such person or
group that held such voting power as of the date of the Indenture, or (iii)
when, during any period of 12 consecutive months after the Closing Date,
individuals who at the beginning of any such 12-month period constituted the
Board of Directors of the Company (together with any new directors whose
election by such Board or whose nomination for election by the stockholders of
the Company was approved by a vote of a majority of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved), cease for any
reason to constitute a majority of the Board of Directors of the Company then in
office.
The phrase "all or substantially all" of the assets of the Company is
likely to be interpreted by reference to applicable state law at the relevant
time, and will be dependent on the facts and circumstances existing at such
time. As a result, there may be a degree of uncertainty in ascertaining whether
a sale or transfer of "all or substantially all" of the assets of the Company
has occurred. For purposes of this definition, (i) the terms "person" and
"group" shall have the meaning used for purposes of Rules 13d-3 and 13d-5 of the
Exchange Act as in effect on the Closing Date, whether or not applicable; and
(ii) the term "beneficial owner" shall have the meaning used in Rules 13d-3 and
13d-5 under the Exchange Act as in effect on the Closing Date, whether or not
applicable, except that a "person" shall not be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time or upon
the occurrence of certain events.
The Change of Control provisions described above may make more difficult or
discourage a takeover of the Company, and, thus, the removal of incumbent
management. The Change of Control provisions will not prevent a leveraged buyout
led by Company management, a recapitalization of the Company or change in a
majority of the members of the Board of Directors which is approved by the
then-current Board of Directors and may not afford the holders of Debentures
protection in the event of a highly leveraged transaction, reorganization,
restructuring, merger, spin-off or similar transaction that may adversely affect
such holders, if such transaction does not constitute a Change of Control, as
set forth above.
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The Company is required to comply with the provisions of Rule 13e-4 and any
other tender offer rules under the Exchange Act which may then be applicable and
to file a Schedule 13E-4 or any other schedule required thereunder in connection
with any offer by the Company to purchase Debentures at the option of holders
thereof upon a Change of Control. The Change of Control purchase feature was
not, however, as of the date of the Debenture Offering Circular, the result of
management's knowledge of any specific efforts to accumulate shares of Common
Stock or to obtain control of the Company by means of a merger, tender offer,
solicitation of proxies or consents or otherwise, or part of a plan to implement
a series of anti-takeover measures.
The Company could, in the future, enter into certain transactions,
including certain recapitalizations of the Company, that would not constitute a
Change of Control under the Debentures, but that would increase the amount of
Senior Indebtedness (or any other indebtedness of the Company or its
subsidiaries) outstanding at such time. There are no restrictions in the
Debentures or the Indenture on the creation of additional Senior Indebtedness
(or any other indebtedness of the Company or its subsidiaries), and, under
certain circumstances, the incurrence of significant amounts of additional
indebtedness by the Company or any of its subsidiaries could have an adverse
effect on the Company's ability to service its indebtedness, including the
Debentures. If such a Change of Control were to occur, there can be no assurance
that the Company would have sufficient funds at the time of such event to pay
the Change of Control purchase price for all Debentures tendered by the holders
thereof. A default by the Company on its obligation to pay the Change of Control
purchase price could, pursuant to cross-default provisions, result in
acceleration of the payment of other indebtedness of the Company outstanding at
that time.
Certain of the Company's existing and future agreements relating to its
indebtedness could prohibit the purchase by the Company of the Debentures
pursuant to the exercise by a holder of Debentures of the foregoing option,
depending on the financial circumstances of the Company at the time any such
purchase may occur, because such purchase could cause a breach of certain
covenants contained in such agreements. Such a breach may constitute an event of
default under such indebtedness as a result of which any repurchase could,
absent a waiver, be blocked by the subordination provision of the Debentures.
See "Subordination." Failure of the Company to repurchase the Debentures when
required would result in an Event of Default with respect to the Debentures
whether or not such repurchase is permitted by the subordination provisions.
PAYMENTS, PAYING AGENTS AND CONVERSION AGENTS
The principal of, premium, if any, and interest on Registered Debentures is
payable in United States dollars. Payments of such principal and premium, if
any, will be made against surrender of Registered Debentures at the corporate
trust office of the Trustee in The City of New York or, subject to any
applicable laws and regulations, at the offices of the paying agents in London
or Luxembourg (or such other paying agencies as may be specified in notices to
the holders of Debentures in accordance with "Notices" below) by United States
dollar check drawn on, or wire transfer to a United States dollar account
maintained by the holder with, a bank located in The City of New York. Payments
of any installment of interest on Registered Debentures will be made by a United
States dollar check drawn on a bank in The City of New York mailed to the holder
at such holder's registered address or (if arrangements satisfactory to the
Company and the Trustee are made) by wire transfer to a dollar account
maintained by the holder with a bank in The City of New York. Payment of such
interest on any Interest Payment Date will be made to the person in whose name
such Registered Debenture is registered at the close of business on the Interest
Record Date prior to the relevant Interest Payment Date. Accrued interest
payable on any Registered Debenture that is redeemed will be payable against
surrender of such Registered Debenture in the manner described above with
respect to payments of principal on Registered Debentures, except Registered
Debentures that are redeemed on a date after the close of business on the
Interest Record Date immediately preceding such Interest Payment Date and on or
before the Interest Payment Date, on which interest will be paid to the holder
of record on the Interest Record Date.
The Debentures may be surrendered for conversion or exchange at the
corporate trust office of the Trustee in The City of New York or, at the option
of the holder and subject to applicable laws and regulations, at the office of
any of the conversion agents.
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The Company has initially appointed the Trustee as paying agent and
conversion agent and has initially appointed Chase Manhattan Bank Luxembourg
S.A. as additional paying agent in Luxembourg. These appointments may be
terminated at any time and additional or other paying and conversion agents may
be appointed, provided that until the Debentures have been delivered for
cancellation, or monies sufficient to pay the principal of and premium, if any,
and interest on the Debentures have been made available for payment and either
paid or returned to the Company as provided in the Indenture, a paying,
conversion and transfer agent will be maintained (i) in The City of New York for
the payment of the principal of, premium, if any, and interest on Registered
Debentures only and for the surrender of Debentures for conversion and (ii) in a
European city that, so long as the Debentures are listed on the Luxembourg Stock
Exchange and the rules of such Exchange shall so require, will be Luxembourg,
for the payment of the principal of, premium, if any, and interest on Debentures
and for the surrender of Debentures for conversion, payment, redemption,
transfer or exchange. Notice of any such termination or appointment and of any
change in the office through which any paying, conversion, or transfer agent
will act will be given in accordance with "Notices" below.
All monies paid by the Company to a paying agent for the payment of
principal of, premium, if any, or interest on any Debenture that remain
unclaimed at the end of two years after such principal, premium or interest
shall have become due and payable will be repaid to the Company, and the holder
of such Debenture or any related coupon will thereafter look only to the Company
for payment thereof.
PAYMENT OF ADDITIONAL AMOUNTS
The Company will pay to the holder of any Debenture or any related coupon
who is a United States Alien such additional amounts ("Additional Amounts") as
may be necessary in order that every net payment of the principal of, premium,
if any, and interest on such Debenture, and any cash payments made in lieu of
issuing shares of Common Stock upon conversion of a Debenture, after withholding
for or on account of any present or future tax, assessment or governmental
charge imposed upon or as a result of such payment by the United States or any
political subdivision or taxing authority thereof or therein, will not be less
than the amount provided for in such Debenture or in such coupon to be then due
and payable; provided, however, that the foregoing obligations to pay Additional
Amounts shall not apply to any one or more of the following:
(i) any tax, assessment or other governmental charge which would not
have been so imposed but for (a) the existence of any present or former
connection between such holder (or between a fiduciary, settlor,
beneficiary, member or stockholder of, or a person holding a power over,
such holder, if such holder is an estate, trust, partnership or
corporation) and the United States, including, without limitation, such
holder (or such fiduciary, settlor, beneficiary, member, stockholder or
person holding a power) being or having been a citizen or resident or
treated as a resident thereof or being or having been engaged in a trade or
business therein or being or having been present therein or having or
having had a permanent establishment therein, (b) such holder's present or
former status as a personal holding company, foreign personal holding
company, passive foreign investment company, foreign private foundation or
other foreign tax-exempt entity, or controlled foreign corporation for
United States federal income tax purposes or a corporation which
accumulates earnings to avoid United States federal income tax, or (c) such
holder's status as a bank extending credit pursuant to a loan agreement
entered into in the ordinary course of business;
(ii) any tax, assessment or other governmental charge which would not
have been so imposed but for the presentation by the holder of such
Debenture or any related coupon for payment on a date more than ten days
after the date on which such payment became due and payable or on the date
on which payment thereof is duly provided, whichever occurs later;
(iii) any estate, inheritance, gift, sales, transfer or personal or
intangible property tax or any similar tax, assessment or other
governmental charge;
(iv) any tax, assessment or other governmental charge which would not
have been imposed but for the failure to comply with certification,
information, documentation or other reporting requirements concerning the
nationality, residence, identity or present or former connection with the
United States of the holder or beneficial owner of such Debenture or any
related coupon if such compliance is required by
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statute, regulation or ruling of the United States or any political
subdivision or taxing authority thereof or therein as a precondition to
relief or exemption from such tax, assessment or other governmental charge;
(v) any tax, assessment or other governmental charge which is payable
otherwise than by deduction or withholding from payments of principal of,
premium, if any, or interest on such Debenture;
(vi) any tax, assessment or other governmental charge imposed on
interest received by a person holding, actually or constructively, 10% or
more of the total combined voting power of all classes of stock of the
Company entitled to vote; or
(vii) any tax, assessment or other governmental charge required to be
withheld by any paying agent from any payment of principal of, premium, if
any, or interest on any Debenture or interest on any coupon appertaining
thereto if such payment can be made without such withholding by any other
paying agent; nor will Additional Amounts be paid with respect to payment
of the principal of, premium, if any, or interest on any such Debenture (or
cash in lieu of issuance of shares of Common Stock upon conversion) to a
person other than the sole beneficial owner of such payment, or that is a
partnership or a fiduciary to the extent such beneficial owner, member of
such partnership or beneficiary or settlor with respect to such fiduciary
would not have been entitled to the Additional Amounts had such beneficial
owner, member, beneficiary or settlor been the holder of such Debenture or
any related coupon.
EVENTS OF DEFAULT
The Indenture defines an "Event of Default" with respect to the Debentures
as any of the following events: (i) the failure by the Company to pay any
installment of interest on, or Additional Amounts with respect to, the
Debentures as and when the same becomes due and payable and the continuance of
any such failure for a period of 30 days, (ii) the failure by the Company to pay
all or any part of the principal of, or premium, if any, on the Debentures as
and when the same becomes due and payable at maturity, redemption, by
acceleration or otherwise, (iii) the failure of the Company to perform any
conversion of Debentures required under the Indenture and the continuance of any
such failure for a period of 60 days, (iv) the failure by the Company to observe
or perform any other covenant or agreement contained in the Debentures or the
Indenture and, subject to certain exceptions, the continuance of such failure
for a period of 60 days after appropriate written notice is given to the Company
by the Trustee or to the Company and the Trustee by the holders of at least 25%
in aggregate principal amount of the Debentures outstanding, (v) certain events
of bankruptcy, insolvency or reorganization in respect of the Company or any of
its subsidiaries and (vi) a default in the payment of principal, premium, if
any, or interest when due that extends beyond any stated period of grace
applicable thereto or an acceleration for any other reason of the maturity of
any Indebtedness of the Company or any of its subsidiaries with an aggregate
principal amount in excess of $25 million.
The Debentures provide that if an Event of Default occurs and is
continuing, then the Company will provide notice thereof to the Trustee within
five Business Days after the Company becomes aware of such Event of Default, and
the Trustee shall then notify the holders of Debentures thereof within 90 days
after its receipt of notice from the Company. If an Event of Default occurs and
is continuing, the Trustee or the holders of 25% in aggregate principal amount
of the Debentures then outstanding may, by notice in writing to the Company (and
to the Trustee, if given by the holders) (an "Acceleration Notice"), declare all
principal and accrued interest thereon and Additional Amounts thereof, if any,
to be due and payable immediately.
Prior to the declaration of acceleration of the maturity of the Debentures,
the holders of a majority in aggregate principal amount of the Debentures at the
time outstanding may waive on behalf of all the holders any default, except a
default in the payment of principal of or interest on any Debenture not yet
cured, or a default with respect to any covenant or provision that cannot be
modified or amended without the consent of the holder of each outstanding
Debenture affected. Subject to the provisions of the Indenture relating to the
duties of the Trustee, the Trustee is under no obligation to exercise any of its
rights or powers under the Indenture at the request, order or direction of any
of the holders, unless such holders have offered to the Trustee reasonable
security or indemnity. Subject to all provisions of the Indenture and applicable
law, the holders of a majority in aggregate principal amount of the Debentures
at the time outstanding will have the
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right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee, or exercising any trust or power conferred on
the Trustee.
LIMITATION ON MERGER, SALE OR CONSOLIDATION
The Indenture provides that the Company may not, directly or indirectly,
consolidate with or merge with or into another person or sell, lease, convey or
transfer all or substantially all of its assets (computed on a consolidated
basis), whether in a single transaction or a series of related transactions, to
another Person or group of affiliated Persons, unless (i) either (a) in the case
of a merger or consolidation the Company is the surviving entity or (b) the
resulting, surviving or transferee entity is a corporation organized under the
laws of the US, any state thereof or the District of Columbia and expressly
assumes by written agreement all of the obligations of the Company in connection
with the Debentures and the Indenture; and (ii) no default or Event of Default
shall exist or shall occur immediately after giving effect on a pro forma basis
to such transaction.
Upon any consolidation or merger or any transfer of all or substantially
all of the assets of the Company in accordance with the foregoing, the successor
corporation formed by such consolidation or into which the Company is merged or
to which such transfer is made, shall succeed to, and be substituted for, and
may exercise every right and power of, the Company under the Indenture with the
same effect as if such successor corporation had been named therein as the
Company, and the Company will be released from its obligations under the
Indenture and the Debentures, except as to any obligations that arise from or as
a result of such transaction.
AMENDMENTS AND SUPPLEMENTS
The Indenture contains provisions permitting the Company and the Trustee to
enter into a supplemental indenture for certain limited purposes without the
consent of the holders. With the consent of the holders of not less than a
majority in aggregate principal amount of the Debentures at the time
outstanding, the Company and the Trustee are permitted to amend or supplement
the Indenture or any supplemental indenture or modify the rights of the holders
or waive compliance by the Company with any provision of the Indenture or the
Debentures; provided, that no such amendment, supplement, modification or waiver
may, without the consent of each holder affected thereby: (i) change the Stated
Maturity of any Debenture or reduce the principal amount thereof or the rate (or
extend the time for payment) of interest thereon or any premium payable upon the
redemption thereof, or change the place of payment where, or the coin or
currency in which, any Debenture or any premium or the interest thereon is
payable, or impair the right to institute suit for the enforcement of any such
payment or the conversion of any Debenture on or after the due date thereof
(including, in the case of redemption, on or after the redemption date), or
reduce the redemption price, or alter the redemption or Change of Control
provisions in a manner adverse to the holders, (ii) reduce the percentage in
principal amount of the outstanding Debentures, the consent of whose holders is
required for any such amendment, supplemental indenture or waiver provided for
in the Indenture, (iii) adversely affect the right of such holder to convert
Debentures or (iv) modify any of the waiver provisions, except to increase any
required percentage or to provide that certain other provisions of the Indenture
cannot be modified or waived without the consent of the holder of each
outstanding Debenture affected thereby.
Any instrument given by or on behalf of any holder of a Debenture in
connection with any consent to any such amendment, supplement, modification or
waiver will be irrevocable once given and will be conclusive and binding on all
subsequent holders of such Debenture and related coupons. Any amendment,
supplement, modification or waiver to the Indenture or to the terms and
conditions of the Debentures will be conclusive and binding on all holders of
Debentures and related coupons, whether or not they have given such consent or
were present at any meeting, and on holders of Debentures and related coupons,
whether or not notation of such amendment, supplement, modification or waiver is
made upon the Debentures or related coupons.
RULE 144A INFORMATION REQUIREMENT
The Company has agreed to furnish to the holders or beneficial owners of
the Debentures or the underlying Common Stock and prospective purchasers of the
Debentures or the underlying Common Stock designated by the holders of the
Debentures or the underlying Common Stock, upon their request, the
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information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act until such time as such securities are no longer "restricted
securities" within the meaning of Rule 144 under the Securities Act.
REPORTS
The Company is required to deliver to the Trustee and to each holder of
Debentures, within 15 days after it is required to file such with the
Commission, annual and quarterly consolidated financial statements substantially
equivalent to financial statements required to be included in reports filed with
the Commission including, with respect to annual information only, a report
thereon by the Company's certified independent public accountants as such is
required in such reports to the Commission, in each case, together with
management's discussion and analysis of financial condition and results of
operations.
NOTICES
Notices to holders of the Debentures will be given by publication in a
leading daily newspaper in the English language of general circulation in The
City of New York and in London and, so long as the Debentures are listed on the
Luxembourg Stock Exchange, in a daily newspaper of general circulation in
Luxembourg or, if publication in either London or Luxembourg is not practical,
in Europe. Such publication is expected to be made in The Wall Street Journal
(Eastern Edition), the Financial Times and the Luxembourg Wort. In addition,
notices to holders of Registered Debentures will be given by mail to the
addresses of such holders as they appear in the register maintained by the
Trustee on the fifteenth day prior to such mailing. Such notices will be deemed
to have been given on the date of such publication or mailing or, if published
in such newspapers on different dates, on the date of the first such
publication.
REPLACEMENT OF DEBENTURES AND RELATED COUPONS
Debentures (including related coupons, if any) that become mutilated,
destroyed, stolen or lost will be replaced by the Company at the expense of the
holder thereof upon delivery to the Trustee of the Debentures and related
coupons or evidence of the loss, theft or destruction thereof satisfactory to
the Company and the Trustee. In the case of a lost, stolen or destroyed
Debenture or related coupon, an indemnity satisfactory to the Company and the
Trustee may be required at the expense of the holder of such Debenture or
related coupon before a replacement Debenture or related coupon, as the case may
be, will be issued.
GOVERNING LAW
The Debentures and the Indenture are governed by and construed in
accordance with the laws of the State of New York, without giving effect to its
conflicts of law rules.
MARKETABILITY
Prior to the offering hereby, there has been no public market for the
Debentures, and it is likely that only a limited market developed prior to the
date of this Registration Statement. The Debentures were initially sold pursuant
to exemptions from registration under the Securities Act.
CERTAIN DEFINITIONS
"Business Day" means, with respect to any act to be performed pursuant to
the Indenture or the terms of the Debentures, each Monday, Tuesday, Wednesday,
Thursday or Friday that is not a day on which banking institutions in the place
where such act is to occur are authorized or obligated by applicable law,
regulation or executive order to close.
"Capital Stock" means, with respect to any corporation, any and all shares,
interests, rights to purchase (other than convertible or exchangeable
Indebtedness), warrants, options, participations or other equivalents of or
interests (however designated) in stock issued by that corporation.
"Indebtedness" of any person means, without duplication, (i) all
liabilities and obligations, contingent or otherwise, of any such person, (a) in
respect of borrowed money, (b) evidenced by bonds, notes, debentures, loan
agreements or similar instruments or agreements, (c) representing the balance
deferred and unpaid of the purchase price of any property or services, except
such as would constitute trade payables to trade creditors in the ordinary
course of business that are not more than 90 days past their original due date,
(d) evidenced by bankers acceptances or similar instruments issued or accepted
by banks, (e) relating to a capitalized lease
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obligation, or (f) evidenced by a letter of credit or a reimbursement obligation
of such person with respect to any letter of credit; (ii) all obligations of
such person under hedging obligations, interest swap or similar arrangements;
(iii) all liabilities of others of the kind described in the preceding clauses
(i) or (ii) that such person has guaranteed or that is otherwise its legal
liability and all obligations to purchase, redeem or acquire any Capital Stock;
and (iv) any and all deferrals, renewals, extensions, amendments, modifications,
refinancings and refundings (whether direct or indirect) of any liability of the
kind described in any of the preceding clauses (i), (ii) or (iii), or this
clause (iv), whether or not between or among the same parties.
"Junior Securities" of any person means any Capital Stock and any
Indebtedness of such person that by its terms or the terms of the instrument
creating or evidencing it is stated to be (i) subordinated in right of payment
to the Debentures and has no scheduled installment of principal due, by
redemption, sinking fund payment or otherwise, on or prior to the Stated
Maturity of the Debentures and (ii) subordinated in right of payment to all
Senior Indebtedness at least to the same extent as the Debentures.
"Obligations" means any principal, premium, interest, penalties, fees,
indemnifications, costs, enforcement expenses, collateral protection expenses,
reimbursements, damages and other liabilities payable under the documentation
governing any Senior Indebtedness.
"Senior Indebtedness" of the Company means any principal, premium, if any,
and interest on, and fees, costs, enforcement expenses, collateral protection
expenses or other obligations with respect to any Indebtedness of the Company
other than the Debentures and Indebtedness that by its terms or the terms of the
instrument creating or evidencing it is stated to be not superior in right of
payment to the Debentures, but including guarantees given by the Company,
whether outstanding on the date of the Indenture or thereafter created,
incurred, assumed or guaranteed. In no event shall Senior Indebtedness include
(i) indebtedness of the Company owed or owing to any subsidiary of the Company
or any officer, director or employee of the Company or any subsidiary thereof or
(ii) any liability for taxes owed or owing by the Company.
"Stated Maturity" when used with respect to any Debenture, means May 1,
2006.
CERTAIN US FEDERAL TAX CONSIDERATIONS
The following is a summary of certain anticipated material United States
federal income tax consequences of holding and disposing of the Debentures, and,
to the extent it relates to matters of law or legal conclusions, represents the
opinion of the Company's counsel, Gibson, Dunn & Crutcher LLP. This discussion
is based on existing provisions of the United States Internal Revenue Code of
1986, as amended (the "Code"), Treasury regulations promulgated thereunder,
judicial decisions and administrative rulings, all of which are subject to
change or alternative construction with possible retroactive effect. This
summary does not give a detailed discussion of any state, local or foreign tax
considerations, nor does it purport to deal with all federal income tax
consequences applicable to all categories of investors, some of which may be
subject to special rules, such as foreign persons, banks, tax-exempt
organizations, insurance companies and dealers in stocks and securities. In
addition, the summary is generally limited to Debentures and the Stock into
which the Debentures are convertible which are held as "capital assets" within
the meaning of Section 1221 of the Code by persons who are citizens or residents
of the United States. No rulings will be sought from the Internal Revenue
Service (the "IRS") with respect to the federal income tax consequences of
holding and disposing of the Debentures.
THIS SECTION DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO AN INVESTOR'S DECISION TO PURCHASE THE
DEBENTURES. EACH INVESTOR SHOULD CONSULT WITH ITS OWN TAX ADVISOR CONCERNING THE
APPLICATION OF THE FEDERAL INCOME TAX LAWS AND OTHER TAX LAWS TO ITS PARTICULAR
SITUATION BEFORE DETERMINING WHETHER TO PURCHASE THE DEBENTURES.
INTEREST
Holders of Debentures will be required to include interest on Debentures in
gross income for federal income tax purposes in accordance with their methods of
accounting for such purposes.
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DISPOSITION
Upon the sale, exchange or redemption of a Debenture, a holder generally
will recognize gain or loss in an amount equal to the difference between the
amount of cash received (and the fair market value of property received) and the
holder's adjusted basis in the Debenture (except to the extent the amount
realized is attributable to accrued interest on the Debentures which has not
been previously included in income, which amounts will be subject to the rules
generally applicable to interest). Any gain or loss upon a sale or other
disposition of a Debenture (including a sale to the Company) will be capital
gain or loss (which will be long-term if the Debenture has been held for more
than one year).
CONVERSION
A holder of a Debenture will not recognize gain or loss on the conversion
of such Debenture solely into Common Stock except with respect to cash in lieu
of fractional shares. The holding period of the Common Stock received upon
conversion of the Debenture will include the period during which the Debenture
was held, and the holder's aggregate basis in the Common Stock received upon
conversion of the Debenture will be equal to the holder's aggregate basis in the
Debenture exchanged therefor, reduced by the portion of such basis that would be
allocated to cash received in lieu of a fractional share of Common Stock. A
holder of a Debenture will recognize gain for federal income tax purposes on the
receipt of cash in lieu of a fractional share of Common Stock in an amount equal
to the difference between the amount of cash received and such holder's adjusted
tax basis in such fractional share.
CONSTRUCTIVE DIVIDEND
If at any time the Company makes a distribution of property to stockholders
which would be taxable to such stockholders as a dividend for US federal income
tax purposes (for example, distributions of evidences of indebtedness or assets
of the Company, but generally not stock dividends or rights to subscribe for
Common Stock) and, pursuant to the antidilution provisions of the Indenture, the
Conversion Price of the Debentures is adjusted, such adjustment may be deemed to
be the payment of a taxable dividend to the holders or beneficial owners of the
Debentures (pursuant to Section 305 of the Code) and such holders or beneficial
owners may be subject to US federal tax.
BACKUP WITHHOLDING
Under current US federal income tax law, certain holders (except for
certain exempt holders such as corporations) may be subject to backup
withholding at a rate of 31 percent on payments of interest, principal, premium,
dividends payable with respect to the Common Stock into which the Debentures may
be converted and the proceeds of disposition of a Debenture or Common Stock.
Backup withholding will apply only if the holder (i) fails to furnish its
Taxpayer Identification Number ("TIN") which, for an individual, would be his
Social Security Number, (ii) furnishes an incorrect TIN, (iii) is notified by
the IRS that it has failed to properly report payments of interest and
dividends; or (iv) under certain circumstances, fails to notify, under penalty
of perjury, that it has furnished a correct TIN and has not been notified by the
IRS that it is subject to backup withholding for failure to report interest and
dividends payments. The amount of any backup withholding from a payment to a
holder will be allowed as a credit against such holder's US federal income tax
liability and may entitle such holder to a refund, provided that the required
information is furnished to the Internal Revenue Service. Holders should consult
their tax advisors regarding their qualification for exemption from backup
withholding and the procedure for obtaining such an exemption if applicable.
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SELLING SECURITY HOLDERS
The Debentures were issued by the Company on May 7, 1996, in a private
placement pursuant to Rule 144A and Regulation D under the Securities Act. The
following table sets forth, as of August 26, 1996, the name of each beneficial
owner of the Offered Debentures identified to the Company and the principal
amount of the Offered Debentures owned, and that may be sold, by each such
beneficial owner, based upon information furnished to the Company:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF PERCENTAGE OF
PRINCIPAL AMOUNT OF DEBENTURES THAT OUTSTANDING
NAME DEBENTURES OWNED MAY BE SOLD DEBENTURES(1)
- ---------------------------------------------- -------------------- -------------------- -------------
<S> <C> <C> <C>
Arnhold & S. Bleichroeder, Inc................ $2,100,000 $2,100,000 1.5 %
Bankers Trust Company......................... 4,745,000 4,745,000 3.3
Bankers Trust Company/NatWest Securities,
Ltd......................................... 2,335,000 2,335,000 1.6
Bank of Bermuda (New York) Ltd................ 400,000 400,000 *
Bank of New York.............................. 2,700,000 2,700,000 1.9
Bear, Stearns Securities Corp................. 6,950,000 6,950,000 4.8
Boston Safe Deposit & Trust Co................ 8,090,000 8,090,000 5.6
Bost & Co..................................... 200,000 200,000 *
Brown Brothers Harriman & Co.................. 9,770,000 9,770,000 6.8
Citibank, N.A................................. 2,315,000 2,315,000 1.6
Comdisco Foundation........................... 200,000 200,000 *
Crestar Bank.................................. 510,000 510,000 *
Firstar Trust Company......................... 540,000 540,000 *
First Interstate Bank of California........... 850,000 850,000 *
First National Bank of Chicago................ 3,750,000 3,750,000 2.6
Investors Fiduciary Trust Company/SSB......... 800,000 800,000 *
Investors Bank & Trust/M.F. Custody........... 1,500,000 1,500,000 1.0
Lehman Brothers International
(Europe) -- Prime Broker (LBI).............. 1,250,000 1,250,000 *
Mercantile Bank of St. Louis National
Association................................. 500,000 500,000 *
Mercantile, Safe Deposit and Trust Company.... 700,000 700,000 *
Montgomery Securities......................... 100,000 100,000 *
Morgan Stanley & Co., Incorporated............ 9,200,000 9,200,000 6.4
Northern Trust Co. -- Trust................... 900,000 900,000 *
PaineWebber, Inc.............................. 275,000 275,000 *
Pondwave & Co................................. 2,100,000 2,100,000 1.5
PNC National Association...................... 750,000 750,000 *
Smith Barney, Inc............................. 250,000 250,000 *
SSB -- Custodian.............................. 11,320,000 11,320,000 7.9
Wagner, Stott & Co............................ 500,000 500,000 *
</TABLE>
- ------------------
* Less than one percent.
(1) Based on $143,750,000 of 6% Convertible Subordinated Debentures of which up
to $75,600,000 are offered hereby.
Additional Selling Security Holders may be identified and other information
concerning Selling Security Holders may be set forth in Prospectus Supplements
from time to time.
Except as otherwise described herein, none of the Selling Security Holders
has had a material relationship with the Company within the past three years.
Bankers Trust Company/NatWest Securities Ltd. ("BT NatWest") is an affiliate of
NatWest Securities Limited, which acted as one of the managers with respect to
the original placement of the Debentures and as one of the underwriters with
respect to the Company's December 1995 public offering of Common Stock. Another
affiliate of BT NatWest, National
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Westminster Bank Plc ("NatWest Plc"), has entered into a Stock Purchase
Agreement dated June 11, 1996 pursuant to which NatWest Plc has agreed, subject
to the satisfaction of certain regulatory and other customary conditions, to
acquire all of the outstanding capital stock of Greenwich Capital Holdings, Inc.
an affiliate of Greenwich. Bear, Stearns Securities Corp. is an affiliate of
Bear, Stearns & Co. Inc., which acted as one of the managers with respect to the
original placement of the Debentures and as one of the underwriters with respect
to the Company's August 1995 securitization.
Because the Selling Security Holders may offer all or only some of the
Offered Debentures that they now hold and/or shares of Common Stock issued upon
conversion thereof in the offering contemplated by this Prospectus and because
there are presently no agreements, arrangements or understandings concerning the
sale of any of the Offered Debentures or shares of Common Stock issuable upon
conversion thereof, no estimate can be given about the principal amount of
Offered Debentures or shares of Common Stock that will be held by the Selling
Security Holders after completion of this offering. See "Plan of Distribution."
PLAN OF DISTRIBUTION
The Company will not receive any of the proceeds from this offering. The
Selling Security Holders may sell all or a portion of the Offered Debentures and
shares of Common Stock issuable upon conversion thereof from time to time
directly to purchasers or through agents, dealers (who may act as principals for
their own account) or underwriters on terms to be determined at the times of
such sales. Any agent, dealer or underwriter through whom Offered Debentures or
shares of Common Stock are sold may receive compensation in the form of
underwriting discounts, commissions or concessions from the Selling Security
Holders and/or the purchasers of the Offered Debentures or shares of Common
Stock for whom they act as agent. To the extent required, the principal amount
of the Offered Debentures or the number of shares of Common Stock to be sold,
the offering price thereof, the name of each Selling Security Holder and each
agent, dealer and underwriter, if any, and any applicable discounts or
commissions concerning a particular offering will be set forth in an
accompanying Prospectus Supplement. The aggregate proceeds to the Selling
Security Holders from the Offered Debentures and shares of Common Stock offered
by the Selling Security Holders hereby will be the offering price of such
Offered Debentures and shares of Common Stock less applicable commissions or
discounts.
There is no assurance that the Selling Security Holders will sell any of
the Offered Debentures or shares of Common Stock offered hereby.
In order to comply with the securities laws of certain States or other
jurisdictions, if applicable, the Offered Debentures and shares of Common Stock
will be sold in such jurisdictions only through registered or licensed brokers
or dealers. In addition, in certain States or other jurisdictions, the Offered
Debentures and shares of Common Stock may not be sold unless they have been
registered or qualified for sale under the securities laws of such jurisdictions
or an exemption from the registration and qualification requirements of such
laws is available and the conditions of such exemption are satisfied.
The Selling Security Holders and any broker-dealers, agents or underwriters
that participate with the Selling Security Holders in the distribution of the
Offered Debentures or shares of Common Stock may be deemed to be "underwriters"
within the meaning of the Securities Act, in which case any commissions received
by such broker-dealers, agents or underwriters and any profit on the resale of
the Offered Debentures or shares of Common Stock purchased by them may be deemed
to be underwriting commissions or discounts under the Securities Act.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Offered Debentures or shares of Common Stock
offered hereby may not simultaneously engage in market making activities for
either the Debentures or the Common Stock for a period of nine business days (in
the case of the Debentures) or two business days (in the case of the Common
Stock) prior to the commencement of such distribution. In addition, each Selling
Security Holder and any other person who participates in a distribution of the
Debentures or shares of Common Stock will be subject to applicable provisions of
the Exchange Act and the rules and regulations thereunder, including Rules
10b-5, 10b-6 and 10b-7, which
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provisions may limit the timing of purchases and sales of Debentures or shares
of Common Stock by the Selling Security Holders. The applicable provisions of
the Exchange Act and the rules and regulations thereunder may effect the
marketability of the Debentures and shares of Common Stock and the ability of
any person to engage in market making activities for the Debentures or shares of
Common Stock.
To the Company's knowledge, no person presently intends to make a market in
the Debentures.
Pursuant to the Indenture, the Company will pay all expenses incident to
the preparation and filing of the registration statement of which this
prospectus is a part.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by Gibson, Dunn & Crutcher LLP, New York, New York.
EXPERTS
The consolidated financial statements of CSC for the year ended December
31, 1993 included in this Prospectus have been audited by Shane Yurman &
Company, independent auditors, as stated in its report appearing herein.
The consolidated financial statements of the Company as of and for the year
ended December 31, 1994 have been included herein in reliance upon the report of
KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing. The consolidated financial statements of the Company as of and for
the year ended December 31, 1995 have been included herein in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing, and upon the report of BDO Stoy Hayward, Registered
Auditors, appearing elsewhere herein.
The financial statements of J&J as of and for the years ended September 30,
1993, 1994 and 1995 have been included herein in reliance upon the report of BDO
Stoy Hayward, Registered Auditors, as stated in its report herein.
The financial statements of Heritable as of and for the years ended
December 31, 1993, 1994 and 1995 have been included herein in reliance upon the
report of KPMG, Registered Auditors, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
103
<PAGE> 106
CITYSCAPE FINANCIAL CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE SIX MONTHS
ENDED JUNE 30, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CITYSCAPE FINANCIAL CORP. FINANCIAL STATEMENTS:
Report of Independent Auditors by KPMG Peat Marwick LLP............................... F-2
Report of Independent Auditors by BDO Stoy Hayward.................................... F-3
Report of Independent Auditors by Shane Yurman & Company.............................. F-4
Consolidated Statements of Financial Condition at December 31, 1994 and 1995 and June
30, 1996 (unaudited)................................................................ F-5
Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and
1995 and for the six months ended June 30, 1995 (unaudited) and 1996 (unaudited).... F-6
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1993,
1994 and 1995 and for the six months ended June 30, 1996 (unaudited)................ F-7
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995 and for the six months ended June 30, 1995 (unaudited) and 1996 (unaudited).... F-8
Notes to Consolidated Financial Statements............................................ F-10
J&J SECURITIES LIMITED FINANCIAL STATEMENTS:
Report of Independent Auditors by BDO Stoy Hayward.................................... F-26
Statements of Financial Condition at September 30, 1994 and 1995 and June 30, 1996
(unaudited)......................................................................... F-27
Statements of Operations for the years ended September 30, 1993, 1994 and 1995 and for
the nine months ended June 30, 1995 (unaudited) and 1996 (unaudited)................ F-28
Statements of Stockholders' Equity for the years ended September 30, 1993, 1994 and
1995 and for the nine months ended June 30, 1996 (unaudited)........................ F-29
Statements of Cash Flows for the years ended September 30, 1993, 1994 and 1995 and for
the nine months ended June 30, 1995 (unaudited) and 1996 (unaudited)................ F-30
Notes to Financial Statements......................................................... F-31
HERITABLE FINANCE LIMITED FINANCIAL STATEMENTS:
Report of Independent Auditors by KPMG, Registered Auditors........................... F-35
Statements of Financial Condition at December 31, 1994 and 1995 and June 30, 1996
(unaudited)......................................................................... F-36
Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and for
the six months ended June 30, 1995 (unaudited) and 1996 (unaudited)................. F-37
Statements of Stockholders' Equity for the years ended December 31, 1993, 1994 and
1995 and for the six months ended June 30, 1996 (unaudited)......................... F-38
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and for
the six months ended June 30, 1995 (unaudited) and 1996 (unaudited)................. F-39
Notes to Financial Statements......................................................... F-40
</TABLE>
F-1
<PAGE> 107
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cityscape Financial Corp.:
We have audited the accompanying consolidated financial statements of
Cityscape Financial Corp. and Subsidiary (the "Company") as of and for the years
ended December 31, 1994 and 1995, as listed in the accompanying index. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of City Mortgage Corporation Limited, a wholly-owned subsidiary,
which statements reflect total assets constituting 12 percent and total revenues
constituting 26 percent in 1995 of the related consolidated totals. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for City Mortgage
Corporation Limited, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 1994
and 1995, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
New York, New York
March 27, 1996
F-2
<PAGE> 108
CITY MORTGAGE CORPORATION LIMITED
REPORT OF THE AUDITORS
To the shareholders of City Mortgage Corporation Limited
We have audited the accompanying consolidated financial statements of City
Mortgage Corporation Limited (the "Company") and its subsidiaries as of and for
the period ended December 31, 1995. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements 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 financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of City Mortgage Corporation
Limited and its subsidiaries as of December 31, 1995 and the results of their
operations and their cash flows for the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
BDO STOY HAYWARD
Chartered Accountants
and Registered Auditors
London
27 March 1996
F-3
<PAGE> 109
INDEPENDENT AUDITORS' REPORT
March 20, 1994
To The Board of Directors and Shareholders
Cityscape Financial Corp.
We have audited the accompanying Statements of Operations, Stockholders'
Equity and Cash Flows of Cityscape Corp. for the year ended December 31, 1993.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Cityscape
Corp., for the year ended December 31, 1993, in conformity with generally
accepted accounting principles.
Shane Yurman & Company
Certified Public Accountants
Monsey, New York
F-4
<PAGE> 110
CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 30,
1996
DECEMBER 31, DECEMBER 31, ------------
1994 1995
------------ ------------ (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents........................... $ 919,291 $ 3,598,549 $ 6,860,183
Cash held in escrow................................. 31,162 5,920,118 10,885,667
Marketable equity securities........................ -- -- 9,818,190
Accrued interest receivable......................... 348,907 555,031 2,176,552
Accounts receivable................................. 612,408 604,577 4,982,383
Prepaid commitment fees............................. -- -- 37,034,000
Mortgage servicing receivables...................... -- 22,059,107 117,274,653
Interest-only and residual certificates............. -- 15,571,455 45,414,617
Mortgage loans held for sale, net................... 16,681,514 74,223,393 114,348,602
Mortgage loans held for investment, net............. 516,583 1,024,204 4,510,991
Real estate owned, net.............................. 130,000 141,266 321,738
Long term receivable................................ 869,482 588,778 493,219
Equipment and leasehold improvements, net........... 412,482 2,380,571 6,254,176
Investment in partnership........................... 705,000 758,315 --
Goodwill............................................ -- 19,258,011 78,266,028
Other assets........................................ 588,919 3,704,652 24,352,218
----------- ------------ ------------
Total assets................................ $ 21,815,748 $150,388,027 $462,993,217
=========== ============ ============
LIABILITIES
Warehouse financing facilities...................... $ 14,680,435 $ 74,901,975 $ 72,796,772
Accounts payable and other liabilities.............. 702,214 16,410,833 42,005,248
Income taxes payable................................ 1,228,000 1,204,803 38,529,219
Standby financing facility.......................... -- 771,361 7,966,292
Notes payable....................................... -- -- 38,000,000
Subordinated debentures, net of discount............ 1,419,156 -- --
Convertible subordinated debentures................. -- -- 143,750,000
----------- ------------ ------------
Total liabilities........................... 18,029,805 93,288,972 343,047,531
----------- ------------ ------------
Common stock warrants............................... 609,205 -- --
----------- ------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 5,000,000 shares
authorized; no shares issued and outstanding..... -- -- --
Common stock, $.01 par value; 50,000,000 shares
authorized; 20,214,980, 28,900,732 and 29,626,452
issued and outstanding at December 31, 1994, 1995
and June 30, 1996, respectively.................. 202,149 289,007 296,264
Additional paid-in capital.......................... 2,571,130 44,838,143 57,435,086
Foreign currency translation adjustment............. -- (6,219) 448,168
Unrealized gain on marketable securities, net of
taxes............................................ -- -- 5,670,044
Retained earnings................................... 403,459 11,978,124 56,096,124
----------- ------------ ------------
Total stockholders' equity.................. 3,176,738 57,099,055 119,945,686
----------- ------------ ------------
COMMITMENTS AND CONTINGENCIES
Total liabilities and stockholders'
equity.................................... $ 21,815,748 $150,388,027 $462,993,217
=========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 111
CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------------------- --------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Gain on sale of loans........ $ 2,088,502 $ 5,691,165 $38,198,121 $12,471,351 $104,236,706
Mortgage origination
income.................... 1,455,521 2,551,679 2,963,444 1,404,636 2,191,649
Interest..................... 535,812 1,899,684 6,705,675 2,133,758 9,478,371
Servicing income............. -- 414,173 777,066 98,688 1,355,853
Earnings from partnership
interest.................. -- 391,000 481,789 431,000 260,000
Other........................ 377,548 226,758 384,543 43,440 636,190
----------- ----------- ----------- ----------- ------------
Total revenues.......... 4,457,383 11,174,459 49,510,638 16,582,873 118,158,769
----------- ----------- ----------- ----------- ------------
EXPENSES
Salaries and employee
benefits.................. 1,938,607 4,279,823 12,165,225 4,084,079 20,652,588
Interest expense............. 675,747 1,563,428 4,610,186 2,332,864 6,381,727
Selling expenses............. 345,437 588,029 2,895,113 917,903 4,374,906
Other operating expenses..... 1,174,389 2,889,720 6,581,244 2,690,706 9,806,575
Amortization of goodwill..... -- -- 493,794 -- 1,527,588
----------- ----------- ----------- ----------- ------------
Total expenses.......... 4,134,180 9,321,000 26,745,562 10,025,552 42,743,384
----------- ----------- ----------- ----------- ------------
Earnings before minority
interest, income taxes and
extraordinary item........ 323,203 1,853,459 22,765,076 6,557,321 75,415,385
Minority interest............ -- -- 2,379,235 845,608 --
----------- ----------- ----------- ----------- ------------
Earnings before income taxes
and extraordinary item.... 323,203 1,853,459 20,385,841 5,711,713 75,415,385
Provision for income taxes... 8,000 1,450,000 8,515,233 2,284,685 31,297,385
----------- ----------- ----------- ----------- ------------
Earnings before extraordinary
item...................... 315,203 403,459 11,870,608 3,427,028 44,118,000
Loss from extinguishment of
debt, net of taxes........ -- -- 295,943 -- --
----------- ----------- ----------- ----------- ------------
Net earnings................. $ 315,203 $ 403,459 $11,574,665 $ 3,427,028 $ 44,118,000
========== ========== ========== ========== ===========
PRIMARY EARNINGS PER SHARE OF
COMMON STOCK:
Before extraordinary
item................. $ 0.02 $ 0.02 $ 0.50 $ 0.16 $ 1.46
Extraordinary item...... -- -- (0.01) -- --
----------- ----------- ----------- ----------- ------------
Net earnings per share....... $ 0.02 $ 0.02 $ 0.49 $ 0.16 $ 1.46
========== ========== ========== ========== ===========
Fully diluted earnings per
share of common stock..... N/A N/A N/A N/A $ 1.41
========== ========== ========== ========== ===========
Weighted average number of
shares outstanding and
common stock equivalents
Primary(1).............. 20,000,480 20,560,944 23,838,000 22,081,628 30,152,067
========== ========== ========== ========== ===========
Fully diluted........... N/A N/A N/A N/A 31,940,693
========== ========== ========== ========== ===========
</TABLE>
- ---------------
(1) All amounts have been restated to reflect the 9,999,640 shares issued in
connection with the CSC Acquisition and the 100% stock dividends paid in
September 1995 and July 1996.
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 112
CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON PAID-IN TRANSLATION UNREALIZED RETAINED
SHARES(1) AMOUNT(1) CAPITAL(1) ADJUSTMENT GAIN EARNINGS TOTAL
---------- --------- ----------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992.... 20,000,480 $200,004 $ 825,400 $ -- $ -- $ 1,057,672 $ 2,083,076
Net earnings.................... -- -- -- -- -- 315,203 315,203
---------- --------- ----------- ----------- ---------- ----------- ------------
Balance at December 31, 1993.... 20,000,480 200,004 825,400 -- -- 1,372,875 2,398,279
Reclassification of S
corporation earnings........ -- -- 1,372,875 -- -- (1,372,875) --
Issuance of common stock
warrants.................... -- -- 225,000 -- -- -- 225,000
Issuance of common stock...... 214,500 2,145 147,855 -- -- -- 150,000
Net earnings.................. -- -- -- -- -- 403,459 403,459
---------- --------- ----------- ----------- ---------- ----------- ------------
Balance at December 31, 1994.... 20,214,980 202,149 2,571,130 -- -- 403,459 3,176,738
Issuance of common stock...... 5,085,752 50,858 20,680,513 -- -- -- 20,731,371
UK Acquisition................ 3,600,000 36,000 21,586,500 -- -- -- 21,622,500
Translation adjustment........ -- -- -- (6,219) -- -- (6,219)
Net earnings.................. -- -- -- -- -- 11,574,665 11,574,665
---------- --------- ----------- ----------- ---------- ----------- ------------
Balance at December 31, 1995.... 28,900,732 289,007 44,838,143 (6,219) -- 11,978,124 57,099,055
Unrealized gain on marketable
equity securities, net of
taxes....................... -- -- -- -- 5,670,044 -- 5,670,044
Issuance of common stock...... 78,358 783 324,723 -- -- -- 325,506
J&J Acquisition............... 548,000 5,480 9,789,164 -- -- -- 9,794,644
Heritable Acquisition......... 99,362 994 2,483,056 -- -- -- 2,484,050
Translation adjustment........ -- -- -- 454,387 -- -- 454,387
Net earnings.................. -- -- -- -- -- 44,118,000 44,118,000
---------- --------- ----------- ----------- ---------- ----------- ------------
Balance at June 30, 1996
(unaudited)................... 29,626,452 $296,264 $57,435,086 $ 448,168 $5,670,044 $56,096,124 $119,945,686
========== ========== ============ =========== ========== ============ =============
</TABLE>
- ---------------
(1) All amounts have been restated to reflect the 9,999,640 shares issued in
connection with the CSC Acquisition and the 100% stock dividends paid in
September 1995 and July 1996.
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 113
CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
----------- ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net earnings................. $ 315,203 $ 403,459 $ 11,574,665 $ 3,427,028 $ 44,118,000
Adjustments to reconcile
net earnings to net cash
used in activities:
Depreciation and
amortization......... 26,563 126,195 801,780 113,711 3,042,608
Income taxes payable.... 8,000 1,205,000 (23,197) 1,457,372 39,055,460
Earnings from
partnership
interest............. -- (391,000) (481,789) (431,000) (260,000)
Increase in mortgage
servicing
receivables.......... -- -- (22,059,107) (5,438,021) (97,164,591)
Increase in
interest-only and
residual
certificates......... -- -- (15,571,455) (4,277,266) (29,843,162)
Provision for losses.... -- 282,210 -- -- --
Net changes in operating
assets and liabilities:
Increase in accrued
interest
receivable........... (75,188) (113,423) (206,124) (82,267) (1,621,521)
Increase (decrease) in
mortgages
receivable........... (3,841,537) (6,410,011) (57,541,879) (8,013,995) 322,327
Other, net.............. (135,154) (451,472) 7,993,922 3,354,360 (4,949,453)
----------- ----------- ------------ ----------- ------------
Net cash used in
operating
activities......... (3,702,113) (5,349,042) (75,513,184) (9,890,078) (47,300,332)
----------- ----------- ------------ ----------- ------------
Cash flows from investing
activities:
Acquisition of J & J and
Heritable................. -- -- -- -- (82,068,974)
Net purchases of equipment... (241,013) (226,244) (1,941,417) (284,582) (3,389,575)
Net (advances) distributions
from partnership.......... (200,000) (114,000) 428,474 141,168 908,315
Increase in mortgages held
for investment............ (483,164) (33,419) (507,621) -- (713,787)
Increase in real estate
owned..................... -- (130,000) (11,266) -- (180,472)
----------- ----------- ------------ ----------- ------------
Net cash used in
investing
activities......... (924,177) (503,663) (2,031,830) (143,414) (85,444,493)
----------- ----------- ------------ ----------- ------------
</TABLE>
F-8
<PAGE> 114
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
----------- ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Increase (decrease) in warehouse
facility and notes payable........ $ 4,915,318 $ 4,715,157 $ 60,221,540 $ 8,832,791 $ (2,104,760)
Increase (decrease) in standby
financing facility................ -- -- 771,361 2,049,302 (1,138,261)
Issuance of subordinated
debentures........................ -- 2,000,000 -- -- 139,134,125
Net proceeds from issuance of common
stock in CSC-UK................... -- -- 500,000 500,000 --
Net proceeds from issuance of common
stock............................. -- 150,000 20,731,371 -- 115,355
Redemption of subordinated
debentures........................ (500,000) (200,000) (2,000,000) -- --
----------- ----------- ------------ ----------- ------------
Net cash provided by
financing activities....... 4,415,318 6,665,157 80,224,272 11,382,093 136,006,459
----------- ----------- ------------ ----------- ------------
Net increase (decrease) in cash and
cash equivalents..................... (210,972) 812,452 2,679,258 1,348,601 3,261,634
Cash and cash equivalents at
beginning of period............... 317,811 106,839 919,291 919,291 3,598,549
----------- ----------- ------------ ----------- ------------
Cash and cash equivalents at end of
period............................ $ 106,839 $ 919,291 $ 3,598,549 $ 2,267,892 $ 6,860,183
=========== =========== ============ =========== ============
Supplemental disclosure of cash flow
information:
Income taxes paid during the
period............................ $ 1,402 $ 245,000 $ 9,049,002 $ 1,463,625 $ 2,925,028
=========== =========== ============ =========== ============
Interest paid during the period...... $ 603,507 $ 1,439,075 $ 6,705,675 $ 1,437,812 $ 2,357,385
=========== =========== ============ =========== ============
</TABLE>
F-9
<PAGE> 115
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
AND JUNE 30, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
(EXCEPT FOR NOTE 17, ALL SHARES AND SHARE AMOUNTS HAVE BEEN
RESTATED TO REFLECT THE 1995 AND 1996 STOCK DIVIDENDS)
1. ORGANIZATION
Cityscape Financial Corp. ("Cityscape" or the "Company") is a consumer
finance company that, through its wholly-owned subsidiary, Cityscape Corp.
("CSC"), engages in the business of originating, purchasing, selling and
servicing mortgage loans secured primarily by one- to four-family residences.
The majority of the Company's loans are made to owners of single family
residences who use the loan proceeds for such purposes as debt consolidation,
financing of home improvements and educational expenditures, among others. In
the US, the Company is licensed or registered to do business in 35 states and
the District of Columbia. The Company commenced operations in the United Kingdom
in May 1995 with the formation of City Mortgage Corporation Limited ("CSC-UK"),
an English corporation that originates, sells and services loans in England,
Scotland and Wales in which the Company initially held a 50% interest and
subsequently purchased the remaining 50% (see Note 2). CSC-UK had no operations
and no predecessor operations prior to May 1995.
2. ACQUISITIONS
On April 27, 1994, Mandi of Essex, Ltd., ("Essex") acquired all of the
capital stock of CSC in an acquisition in which the shareholders of CSC acquired
beneficial ownership of 16,560,000 shares or 92% of Essex's common stock (the
"CSC Acquisition"). In connection with the CSC Acquisition, Essex changed its
name to Cityscape Financial Corp. From the date of its formation through the
date of the CSC Acquisition, Essex's activities were limited to (i) the sale of
initial shares in connection with its organization, (ii) a registered public
offering of securities and (iii) the pursuit of a combination, by merger or
acquisition. The CSC Acquisition was effective as of January 1, 1994, for
financial reporting purposes.
The CSC Acquisition and the issuance of common stock to the former CSC
shareholders resulted in the former shareholders of CSC obtaining a majority
voting interest in the Company. Generally accepted accounting principles require
that the company whose shareholders retain the majority interest in a combined
business be treated as the acquirer for accounting purposes. As a consequence,
the CSC Acquisition has been accounted for as a "reverse acquisition" for
financial reporting purposes and CSC is deemed to have acquired 100% interest in
the Company, as of the date of the acquisition, and therefore the historical
financial statements presented are those of CSC.
The figures for the years ended December 31, 1993 and 1994 include the
results of both Essex and CSC for the full years.
In January 1994, CSC acquired Astrum Funding Corp. ("Astrum") in exchange
for 6.25% of the outstanding shares of the Company. This transaction was
accounted for using the purchase method of accounting. The Astrum acquisition
resulted in the Company acquiring net assets of $1,185 and obtaining licenses to
act as a mortgage banker in 11 states in which it had not previously been
licensed. No additional fair market value was assigned to the net assets
received. Although the Company acquired the new licenses earlier than if it had
applied for licensing on its own, the Company assigned no value to such licenses
because they could have been obtained independently. Further, the Company
determined that due to the illiquidity of the Company's stock as well as the
relatively minimal interest granted to the Astrum shareholders, the Company's
stock had no fair value in excess of the net assets received in the acquisition.
In May 1995, the Company and three principals of a privately held UK-based
mortgage banker formed CSC-UK. CSC-UK operates in the United Kingdom (excluding
Northern Ireland, the "UK"), and lends to individuals who are unable to obtain
mortgage financing from conventional mortgage sources such as banks and building
societies because of impaired or unsubstantiated credit histories and/or
unverifiable income. On
F-10
<PAGE> 116
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
September 29, 1995, the Company entered into an agreement with the three other
shareholders of CSC-UK to acquire their 50% interest in CSC-UK not then owned by
the Company through the issuance of 3,600,000 shares of the Company's Common
Stock valued at $21.6 million (the "UK Acquisition"). The UK Acquisition was
completed as of September 30, 1995. The UK Acquisition resulted in the
recognition of $19.7 million of goodwill. In addition to the goodwill, the
Company acquired assets of $9.0 million, consisting primarily of mortgage
servicing receivables and assumed $4.1 million of liabilities. The UK
Acquisition was accounted for as a purchase transaction. No additional fair
market value was assigned to the net assets received in the UK Acquisition.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of the Company include the accounts
of CSC and its wholly owned subsidiaries. As a result of the acquisition of the
remaining 50% of CSC-UK at September 30, 1995, the consolidated statements of
financial condition include the accounts of CSC-UK. The consolidated statements
of operations include the accounts of CSC-UK with a corresponding minority
interest for the earnings from May 2, 1995 to September 29, 1995, representing
the 50% interest not held by the Company during this period. All significant
intercompany balances and transactions have been eliminated in consolidation.
The CSC Acquisition and the UK Acquisition have been accounted for under the
purchase method of accounting and, more specifically with respect to the CSC
Acquisition only, a "reverse acquisition" as described in Note 2 above.
Revenue Recognition
Gains and losses on sale of mortgage loans are recognized when mortgage
loans are sold to investors. The Company primarily sells loans on a non-recourse
basis, at a price above the face value of the loan. Gain on the sale of loans is
recorded on the settlement date. Included in gain on sale of loans is the
present value of the differential between the interest rate payable by an
obligor on a loan over the interest rate passed through to the purchaser
acquiring an interest in such loan, less applicable recurring fees including, in
the case of CSC-UK loans sold prior to January 1, 1996, a third party investment
bank's significant participation in the cash flows associated with such loans.
Prior to the adoption of SFAS No. 122 on October 1, 1995, applicable recurring
fees included the Company's normal servicing fees, which were recognized as
revenue in the period the loans were serviced. Effective with the adoption of
SFAS No. 122, normal servicing fees were no longer included as part of the
applicable recurring fees. When loans are sold, the Company recognizes as
current revenue the present value of the differential to be realized over the
anticipated average life of loans sold.
Included in the gain on sale of loans is gain on securitization
representing the fair value of the interest-only and residual certificates
received by the Company. Gains on sales from securitization represents the
difference between the proceeds received from the trust plus the fair value of
the interest only and residual certificates less the carry value of the loans
sold. Fair value of these certificates is determined based on various economic
factors, including loan types, sizes, interest rates, dates of origination,
terms and geographic locations. The Company also uses other available
information such as reports on prepayment rates, collateral value, economic
forecasts and historical default and prepayment rates of the portfolio under
review. The Company reviews these factors and, if necessary, adjusts the
remaining asset to the fair value of the interest-only and residual
certificates.
Although the Company believes it has made reasonable estimates of the fair
value of the interest-only and residual certificates likely to be realized, the
rate of prepayment and the amount of defaults utilized by the Company are
estimates and actual experience may vary from its estimates. The gain on
securitization recognized by the Company upon the sale of loans through
securitizations will have been overstated if prepayments or losses are greater
than anticipated. Higher than anticipated rates of loan prepayments or losses
would require the Company to write down the fair value of the interest-only and
residual certificates, adversely impacting earnings. Similarly, if
delinquencies, liquidations or interest rates were to be greater than was
initially assumed, the fair value of the interest-only and residual certificates
would be negatively impacted which would have an adverse effect on income for
the period in which such events occurred. Should the
F-11
<PAGE> 117
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimated average loan life assumed for this purpose be shorter than the actual
life, the amount of cash actually received over the lives of the loans would
exceed the gain previously recognized at the time the loans were sold through
securitizations and would result in additional income.
Interest income includes income from mortgage loans held for sale and
mortgage loans held for investment, in each case, recognized on an accrual
basis.
Servicing income includes servicing fees, prepayment penalties and late
payment charges earned for servicing mortgage loans owned by investors. All fees
and charges are recognized into income when collected.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and money market funds.
Such funds are deemed to be cash equivalents for purposes of the statements of
cash flows.
Equipment and Leasehold Improvements, Net
Equipment and leasehold improvements, net are stated at original cost less
accumulated depreciation and amortization. Depreciation is computed principally
by using the straight-line method based on the estimated lives of the
depreciable assets.
Expenditures for maintenance and repairs are charged directly to the
appropriate operating account at the time the expense is incurred. Expenditures
determined to represent additions and betterments are capitalized. Cost of
assets sold or retired and the related amounts of accumulated depreciation are
eliminated from the accounts in the year of sale or retirement. Any resulting
profit or loss is reflected in the statement of earnings.
Mortgage loans held for sale, net
Mortgage loans held for sale, net are reported at the lower of cost or
market value, determined on an aggregate basis. Market value is determined by
current investor yield requirements in accordance with SFAS No. 65 "Accounting
for Certain Mortgage Banking Activities." There was no allowance for market
losses on mortgage loans held for sale at December 31, 1994 and 1995,
respectively.
Mortgage loans held for investment, net
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." SFAS No. 114 requires lenders to measure the impairment
based on the present value of expected future cash flows discounted at the
loan's effective interest rate. As an alternative approach, SFAS No. 114 permits
recognition of the impairment based on an observable market price for the loan
or on the fair value of the collateral of the loan if the loan is collateral
dependent. An allowance for loan losses is to be maintained if the measure of
the impaired loan is less than its recorded value.
SFAS No. 114 was amended by SFAS No. 118 which allows for existing income
recognition practices to continue. As required, the Company adopted these
standards effective January 1, 1995, with no material impact on the financial
statements.
Mortgage Servicing Rights
Effective October 1, 1995, the Company adopted SFAS No. 122 "Accounting for
Mortgage Servicing Rights." The Statement amends SFAS No. 65 to require that a
mortgage banking enterprise recognize as separate assets the rights to service
mortgage loans for others, however those servicing rights are acquired. The
Statement requires the assessment of capitalized mortgage servicing rights for
impairment to be based on the current fair value of those rights. Mortgage
servicing rights are amortized in proportion to and over the period of the
estimated net servicing income.
F-12
<PAGE> 118
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of its adoption of SFAS No. 122 during the fourth quarter of
1995, the Company recognized net additional mortgage servicing assets of
approximately $460,000.
Income Taxes
The Company accounted for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under the asset and liability method of SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement and tax
reporting bases of existing assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply in the year
in which those temporary differences are expected to be recovered or settled.
Fair Values of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition, for which it
is practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based upon estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and the estimated future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. SFAS No. 107 excludes certain
financial instruments and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts does not represent
the underlying value of the Company.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and cash equivalents: The carrying amount of cash on hand and money
market funds is considered to be a reasonable estimate of fair market value.
Mortgage servicing receivables: The fair value was determined by using
estimated discounted future cash flows taking into consideration current
prepayment rates and default experience. The carrying amount is considered to be
a reasonable estimate of fair market value.
Interest-Only and Residual Certificates: The fair value was determined by
using estimated discounted future cash flows taking into consideration current
prepayment rates and default experience. The carrying amount is considered to be
a reasonable estimate of fair market value.
Mortgage loans held for sale, net: The fair values were estimated by using
current institutional purchaser yield requirements. The fair value of the
mortgage loans held for sale, net totaled $17.7 million and $79.4 million at
December 31, 1994 and 1995, respectively.
Mortgage loans held for investment, net: For mortgage loans held for
investment, net fair value has been estimated using a combination of the current
interest rate at which similar loans with comparable maturities would be made to
borrowers with similar credit ratings, and adjustments for the additional credit
risks associated with loans of this type. Since the loans have a weighted
average coupon rate of 15.7% and 15.1% at December 31, 1994 and 1995,
respectively, and since additional credit risk adjustments have been provided
through reserves for loan losses, the carrying value is a reasonable estimate of
fair value.
Warehouse financing facilities: This facility has an original maturity of
less than 120 days and, therefore, the carrying value is a reasonable estimate
of fair value.
Subordinated debentures, net of discount: Fair value was estimated based
on rates currently available for debt with similar terms and remaining
maturities.
F-13
<PAGE> 119
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Standby Financing Facilities: The carrying amount of standby financing
facilities is considered to be a reasonable estimate of fair market value.
The notes that follow reflect fair values where appropriate for the
financial instruments of the Company, utilizing the assumptions and
methodologies as defined above.
Goodwill Amortization
The Company recognizes goodwill for the purchase price in excess of the
fair market value of net assets acquired. Goodwill is amortized as an expense on
a straight line basis over a period of ten years. The carrying value of goodwill
is analyzed quarterly by the Company based upon the expected revenue and
profitability levels of the acquired enterprise to determine whether the value
and future benefit may indicate a decline in value. If the Company determines
that there has been a decline in the value of the acquired enterprise, the
Company writes down the value of the goodwill to the revised fair value.
Real estate owned, net
Real estate owned consists of real estate acquired through foreclosure or
deed-in-lieu of foreclosure on defaulted loan receivables. These properties are
carried at the lower of fair values less estimated selling costs or the
acquisition cost of the properties.
Earnings per Share
Earnings per share are based on the net income applicable to common stock
divided by the weighted average number of common shares and common share
equivalents outstanding during the year, after giving retroactive effect to two
100% stock dividends (see Note 17).
Foreign Currency Translation
The Company reflects the results of CSC-UK in accordance with SFAS No. 52,
"Foreign Currency Translation." To the extent there are foreign currency
translation gains or losses, such gains or losses are considered unrealized and
are recorded and reported as a separate component of stockholders' equity.
Reclassifications
Certain amounts in the statements have been reclassified to conform with
the 1995 classifications.
New Accounting Pronouncement
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" which is effective for fiscal years beginning after December 15,
1995. SFAS No. 123 establishes financial accounting and reporting standards for
stock-based employee compensation plans, and allows either expensing the value
of stock-based compensation over the period earned, or disclosing in the notes
to the consolidated financial statements the pro forma impact to net income and
earnings per share as if the fair value of the awards had been charged to
compensation expense. The Company has not completed its analysis of the
statement, nor has it decided upon the expense recognition or disclosure
provisions of the statement.
4. MORTGAGE SERVICING RECEIVABLES
This represents the unamortized net present value of the mortgage servicing
retained by the Company taking into account several factors including industry
practices. The amount is amortized over the estimated lives of the underlying
receivables sold.
F-14
<PAGE> 120
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The activity in the mortgage servicing receivables is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
-----------
<S> <C>
Balance, beginning of year.............................................. --
Additions............................................................... $22,375,568
Amortization............................................................ (316,461)
-----------
Balance, end of year.................................................... $22,059,107
===========
</TABLE>
For the year ended December 31, 1995, $307.9 million of loans were sold
with servicing retained by the Company; the Company recorded mortgage servicing
receivables with respect to $89.8 million of such loans. Such loans were
generally sold at par with the Company retaining a participation in future cash
flows. The Company discounts the cash flows on the underlying loans sold at a
rate it believes a purchaser would require as a rate of return. The weighted
average rate used to discount the cash flow for the period ended December 31,
1995 was approximately 10.1%. The mortgage servicing receivable is amortized
using the same discount rate used to determine the original servicing recorded.
Effective October 1, 1995, the Company adopted SFAS No. 122 "Accounting for
Mortgage Servicing Rights." This statement changed the methodology used to
measure impairments of its mortgage servicing receivable. The new accounting
methodology measures the asset's impairment on a disaggregate basis based on the
predominate risk characteristic of the portfolio and discounts the asset's
estimated future cash flow using a current market rate. The Company has
determined the predominate risk characteristic to be interest rate risk. The
fair value of the existing mortgage servicing rights as of December 31, 1995 was
approximately $23.1 million, which was in excess of book value and did not
require a valuation allowance to be established. The market valuation was based
upon the type of servicing, the level of servicing fee, current market
prepayment speeds based upon coupon rate and a blended discount rate of 10.2% on
the estimated future cash flows.
At June 30, 1996, the carrying amount of existing mortgage servicing rights
is considered to be a reasonable estimate of fair value. Accordingly, no
valuation allowance is required.
5. INTEREST-ONLY AND RESIDUAL CERTIFICATES
The interests that the Company receives upon loan sales through
securitizations are in the form of interest-only and residual mortgage
securities which are classified as interest-only and residual certificates.
In conjunction with loans sold through these securitizations, the Company
recorded interest-only and residual certificates totaling $15.6 million ($4.8
million of interest-only certificates and $10.8 million of residual
certificates) which approximates their fair value at December 31, 1995.
In accordance with SFAS No. 115, the Company classifies the interest-only
and residual certificates as "trading securities" and, as such, they are
recorded at their fair value. Fair value of these certificates is determined
based on various economic factors, including loan types, sizes, interest rates,
dates of origination, terms and geographic locations. The Company also uses
other available information such as reports on prepayment rates, interest rates,
collateral value, economic forecasts and historical default and prepayment rates
of the portfolio under review. If the fair value of the interest-only and
residual certificates is different from the recorded value, the unrealized gain
or loss will be reflected on the Consolidated Statements of Operations.
During the year ended December 31, 1995, the Company sold $235.0 million of
its US loan origination and purchase volume in securitizations ($50.0 million in
March; $100.0 million in August; $85.0 million in December including $23.8
million under a pre-funding commitment which was funded after December 31,
F-15
<PAGE> 121
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1995). In loan sales through securitizations, the Company sells loans that it
has originated or purchased to a REMIC trust for a cash purchase price and
interests in such REMIC trusts which are represented by the interest-only and
residual certificates. The cash purchase price is raised through an offering of
pass-through certificates by the REMIC trust.
6. RESERVE FOR LOSSES
The activity in the reserve for losses on mortgage loans held for
investment, and real estate owned is summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Mortgages Held for Investment:
Balance, beginning of year.................. $ -- $ -- $250,210
Provision for losses........................ 40,000 250,210 --
Charge-offs................................. (40,000) -- (51,816)
------------ ------------ ------------
Balance, end of year........................ $ -- $250,210 $198,394
========== ========== ==========
Real Estate Owned:
Balance, beginning of year.................. $ -- $ -- $ 32,000
Provision for losses........................ -- 32,000 --
Charge-offs................................. -- -- --
------------ ------------ ------------
Balance, end of year........................ $ -- $ 32,000 $ 32,000
========== ========== ==========
</TABLE>
7. LONG-TERM RECEIVABLES
Pursuant to certain loan placement agreements, the Company receives yield
differential payments (interest override payments) on various loans. The present
value of these earnings to be realized in the future are recognized at the time
of sale (net of imputed interest) which contemplate substantially all loans
being prepaid within a five to seven year period.
8. EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
Equipment and leasehold improvements, net, at cost, are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Office equipment........................................... $565,684 $2,473,365
Leasehold improvements..................................... 16,000 37,076
Capitalized leases......................................... -- 337,415
------------ ------------
581,684 2,847,856
Accumulated depreciation................................... 169,202 467,285
------------ ------------
Balance, end of year....................................... $412,482 $2,380,571
========== ==========
</TABLE>
9. EARNINGS FROM PARTNERSHIP INTEREST
The earnings from partnership interest represents the Company's 9.09%
limited partnership interest (at December 31, 1995) in Industry Mortgage
Company, L.P., a Delaware limited partnership formed in 1993. Industry Mortgage
Company, L.P. originates, purchases, sells and services mortgage loans that are
secured
F-16
<PAGE> 122
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
primarily by one-to-four family residences. Pursuant to the terms of Industry
Mortgage Company, L.P.'s limited partnership agreement, the Company is obligated
to offer to sell $1.0 million of loans per month to Industry Mortgage Company,
L.P. at market prices. The Company entered into an agreement with Industry
Mortgage Company, L.P. whereby, in return for the payment of a fee, such monthly
obligation has been eliminated for the period from November 1, 1995, through
December 31, 1996. The Company records its investment under the equity method of
accounting and as such recognized $391,000 and $481,789 of equity earnings
during the year ended December 31, 1994 and 1995, respectively. Capital
contributions made to the partnership totaled $180,000 for the year ended
December 31, 1994; no capital contributions were made during the year ended
December 31, 1995. The Company received partnership distributions totaling
$66,000 and $428,474 for the years ended December 31, 1994 and 1995,
respectively.
10. OTHER ASSETS
Other assets at December 31, 1994 and 1995 consist of the following:
<TABLE>
<CAPTION>
1994 1995
-------- ----------
<S> <C> <C>
Notes receivable............................................. $415,450 $ 232,813
Prepaid expenses............................................. 129,590 421,839
Deferred expenses............................................ -- 244,335
Loan receivables -- subwarehousing........................... -- 1,602,632
Other........................................................ 43,879 1,203,033
-------- ----------
Total.............................................. $588,919 $3,704,652
======== ==========
</TABLE>
Included in notes receivable above, are notes receivable from directors and
officers totaling $205,000 and $79,952 at December 31, 1994 and 1995,
respectively. These loans are at fixed rates of interest between 6% and 9% and
are for terms between one and three years. Loan receivables-subwarehousing
represent funds lent on a short term-basis to assist in the funding of loans by
certain of the Company's loan correspondents. Each borrowing under these
subwarehouse credit lines has a term of not more than 30 days. At December 31,
1995, there were applications pending for an additional $4.1 million of such
loans.
11. FINANCING FACILITIES AND LOAN PURCHASE AGREEMENTS
As of December 31, 1995, the Company had available a warehouse line of
credit with a group of banks (the "Warehouse Facility"). Pursuant to the
Warehouse Facility, the Company has available a secured revolving credit line of
$72.0 million in order to finance the Company's origination or purchase of
loans, pending sale to investors or for holding certain loans in its own
portfolio. The revolving credit line is settled on a revolving basis in
conjunction with ongoing loan sales and bears interest at a variable rate based
on (i) 25 basis points over the higher of either the prime rate or the federal
funds rate plus 50 basis points or (ii) LIBOR (A) divided by the result of one
minus the stated maximum rate at which reserves are required to be maintained by
Federal Reserve System member banks, (B) plus 175 basis points, as periodically
elected by the Company. The revolving credit portion of the Warehouse Facility
extends through June 1997. The balance outstanding at December 31, 1995 totaled
$72.1 million. In addition, the Warehouse Facility provides for a secured
revolving working capital credit line of up to $3.0 million to be used by the
Company for general corporate purposes. The working capital credit line operates
as a revolving facility until January 1, 1997 at which time any outstanding
balance under the working capital credit line converts to a term loan. The
working capital credit line bears interest at a variable rate based on 100 basis
points over the higher of the prime rate or the federal funds rate plus 50 basis
points. As of December 31, 1995, there was no balance outstanding against the
facility. The working capital portion of the Warehouse Facility terminates on
December 31, 1998. The Warehouse Facility also permits the Company to use up to
$10.0 million of the revolving credit line to provide a subwarehouse line of
credit to certain loan correspondents from whom the Company purchases loans.
F-17
<PAGE> 123
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has a $50.0 million loan purchase agreement whereby the Company
originates and then sells loans and retains the rights to repurchase loans at a
future date for whole loan sales to institutional investors or for sales through
securitizations. This agreement extends through June 1999.
The Company also has available an additional line of credit of $10.0
million as of December 31, 1995. Amounts borrowed under this facility are to be
collateralized by the interest-only and residual certificates the Company
receives upon loan sales through securitizations. As of December 31, 1995, this
line had an outstanding balance of $771,361. In connection with this standby
facility, the Company issued 450,000 common stock warrants in 1994 which were
exercised at $0.875 per share in connection with the Company's December 1995
stock offering.
In May 1995, CSC-UK and Greenwich entered into a mortgage loan purchase
agreement that included a working capital facility with respect to the funding
of fixed and variable rate, residential mortgage loans originated or purchased
by CSC-UK in the UK (the "Old Greenwich Facility"). Pursuant to the Old
Greenwich Facility, CSC-UK sold all of the loans it originated during 1995 to
Greenwich which was required to buy such loans. After the payment of certain
fees and expenses to CSC-UK, Greenwich received under the terms of Old Greenwich
Facility a significant participation in the cash flows associated with such 1995
loans, which participation with respect to such 1995 loans was purchased by
CSC-UK prior to 1995 year-end. The aggregate principal balance of loans sold to
Greenwich at December 31, 1995 under the Old Greenwich Facility was $41.4
million. Outstanding amounts under the working capital facility portion of the
Old Greenwich Facility accrued interest at a rate of LIBOR plus 250 basis points
during 1995 (9.11% at December 31, 1995). The outstanding balance under this
working capital facility was L1.8 million ($2.8 million) at December 31, 1995.
In March 1996, CSC-UK and Greenwich entered into a new mortgage loan
purchase agreement effective as of January 1, 1996 that includes a working
capital facility with respect to the funding of variable rate, residential
mortgage loans originated or purchased by CSC-UK in the UK (the "New Greenwich
Facility") and terminated the Old Greenwich Facility. Pursuant to the New
Greenwich Facility and with certain exceptions, CSC-UK sells all of the loans it
originates to Greenwich which must buy such loans. CSC-UK and/or Greenwich will
subsequently resell these loans through whole loan sales or securitizations. The
New Greenwich Facility includes a working capital facility pursuant to which
CSC-UK is advanced amounts based on a percentage of the principal balance of
loans originated or purchased by CSC-UK and sold to Greenwich, which advance may
not exceed L10.0 million in the aggregate outstanding at any time. Outstanding
amounts under this working capital facility bear interest at a rate of LIBOR
plus 255 basis points. This agreement expires as to the working capital facility
on May 1, 2000 and as to the purchase facility on December 31, 2015. Both CSC-UK
and Greenwich are prohibited from entering into substantially similar
transactions with other parties. CSC-UK agreed to pay a fee to Greenwich in
connection with the New Greenwich Facility in the aggregate amount of $38
million evidenced by two notes bearing interest at a rate of 6.2%, payable,
respectively, in amounts of $13 million on December 15, 1996 and $25 million on
December 15, 1997. Such fee is amortized over the life of the New Greenwich
Facility.
The Company is required to comply with various operating and financial
covenants as defined in the agreements described above. The continued
availability of funds provided to the Company under these agreements is subject
to the Company's continued compliance with these covenants.
The carrying amount of the financing facilities is considered to be a
reasonable estimate of fair value.
12. SUBORDINATED DEBENTURES AND COMMON STOCK WARRANTS WITH PUT OPTIONS
The Company had senior subordinated debentures in the principal amount of
$2.0 million which bore interest at a fixed rate of 8% and required four
mandatory principal repayments of $500,000 at six month intervals beginning on
January 31, 1998 and ending on July 21, 1999, the maturity date. In connection
with this financing in 1994, the lender received detachable warrants with a put
option feature to purchase 800,000
F-18
<PAGE> 124
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares of common stock. The put option feature permitted the warrant holder to
require the Company to retire the warrants at any time after July 21, 1999.
These warrants were initially valued at $609,205 based upon the terms of the
agreement and were subsequently exercised in connection with the Company's
December 1995 stock offering. The valuation of these warrants resulted in an
original issue discount on the debt, which was being amortized over the term of
the put option (five years) using the effective interest method. The debt is
shown on the accompanying consolidated financial statements net of the remaining
original issue discount of $580,844 at December 31, 1994. In December 1995, the
Company extinguished this debt with proceeds from the public offering of its
common stock (as more fully described in Note 17). As a result of this early
extinguishment of debt, the Company recorded an extraordinary loss of $295,943,
net of taxes.
The carrying value of the subordinated debentures is considered to be a
reasonable estimate of fair value.
13. OTHER OPERATING EXPENSES
Other operating expenses include the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
ACCOUNT DESCRIPTION 1993 1994 1995
--------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Professional fees.................................. $ 265,735 $ 745,105 $1,541,448
Travel and entertainment........................... 54,319 365,200 1,093,426
Telephone.......................................... 126,501 305,020 679,765
Foreclosure costs.................................. 192,499 283,909 34,388
Insurance.......................................... 112,961 199,396 318,567
Occupancy.......................................... 105,461 139,170 626,354
Office supplies.................................... 71,818 185,087 588,902
Other.............................................. 245,095 666,833 1,698,394
---------- ---------- ----------
Total.................................... $1,174,389 $2,889,720 $6,581,244
========= ========= =========
</TABLE>
14. INCOME TAXES
For years ending December 31, 1993 and prior, CSC had elected to be treated
as a subchapter S Corporation for federal and, where permitted, state income tax
purposes. As an S Corporation, CSC was not responsible for the payment of
federal income taxes. On January 1, 1994, CSC terminated its S Corporation
status and, accordingly, has been subject to federal and state income taxes as a
C Corporation since that date. As a result of the termination of the S
Corporation status, net deferred tax liabilities totaling $680,000 were
reinstated as of January 1, 1994 and were included as an income tax provision in
1994.
The sources of earnings before income taxes for the years ended December
31, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
---------- -----------
<S> <C> <C>
US........................................................... $1,853,459 $14,036,665
Foreign...................................................... -- 6,349,176
---------- -----------
Earnings before income taxes................................. $1,853,459 $20,385,841
========= ==========
</TABLE>
F-19
<PAGE> 125
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes for the years ended December 31, 1994 and
1995 are comprised of the following:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Current
Federal..................................................... $ 814,020 $5,295,717
State....................................................... 159,980 1,388,288
Foreign..................................................... -- 2,105,155
---------- ----------
974,000 8,789,160
Deferred
Federal..................................................... 397,817 (224,620)
State....................................................... 78,183 (49,307)
---------- ----------
476,000 (273,927)
---------- ----------
Provision for income taxes.................................... $1,450,000 $8,515,233
========= =========
</TABLE>
Deferred income taxes included in the statements of financial condition
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for tax reporting purposes primarily resulting from the use of the
cash basis for tax reporting purposes. A schedule of the temporary differences
and the related tax effect for the years ended December 31, 1994 and 1995 are as
follows:
<TABLE>
<CAPTION>
1994 1995
-------- ---------
<S> <C> <C>
Reserves........................................................ $112,884 $(242,752)
Investment in partnership....................................... 36,000 (89,255)
Change from cash to accrual..................................... 327,116 6,593
Other........................................................... -- 51,487
-------- ---------
$476,000 $(273,927)
======== =========
</TABLE>
The reconciliation of income tax computed at the US federal statutory tax
rate to the effective income tax rate for the years ended December 31, 1994 and
1995 is as follows:
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Federal income tax at statutory rate................................... 35.0% 35.0%
State and local taxes, net of federal tax benefit...................... 6.5 4.2
Difference in effective tax rate on foreign earnings................... -- 0.2
Deferred income taxes resulting from change in tax status.............. 36.7 --
Other, net............................................................. -- 2.4
---- ----
78.2% 41.8%
==== ====
</TABLE>
F-20
<PAGE> 126
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred taxes as of December 31, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
-------- ---------
<S> <C> <C>
Gross deferred tax assets....................................... $148,884 $ 868,406
Less: valuation allowance....................................... -- (284,779)
-------- ---------
Net deferred assets............................................. 148,884 583,627
-------- ---------
Deferred tax liabilities:
Current....................................................... 264,814 332,974
Non-current................................................... 360,070 452,728
-------- ---------
Total........................................................... 624,884 785,702
-------- ---------
Net deferred tax liabilities.................................... $476,000 $ 202,075
======== =========
</TABLE>
The net change in the total valuation allowance for the year ended December
31, 1995 was an increase of $284,779 representing a 100% valuation allowance
taken against the excess foreign tax credits from UK source income.
15. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution plan (401(k)) for all eligible
employees. Contributions to the plan are in the form of employee salary
deferrals which may be subject to an employer matching contribution up to a
specified limit at the discretion of the Company. In addition, the Company may
make a discretionary annual profit sharing contribution on behalf of its
employees. The Company's contribution to the plan amounted to approximately
$11,000 and $25,319 for the year ended December 31, 1994 and 1995, respectively.
Effective June 1, 1995, the Board of Directors adopted, and the
stockholders of the Company approved, the 1995 Stock Option Plan (the "Stock
Option Plan"). No more than 3,600,000 shares of Common Stock may be issued upon
exercise of options granted under the Stock Option Plan, and no eligible person
may receive options to purchase more than 600,000 shares of Common Stock during
any calendar year, subject to adjustment to reflect stock splits, stock
dividends and similar capital stock transactions. As of December 31, 1995, there
were 820,000 options granted under the Stock Option Plan at an exercise price of
$2.50 per share, of which 180,000 options were exercisable and none of which had
been exercised.
Effective December 1994, the Board of Directors adopted, and the
stockholders of the Company approved, the Company's 1995 Employee Stock Purchase
Plan (the "Stock Purchase Plan"). The Stock Purchase Plan permits eligible
employees of the Company to purchase Common Stock through payroll deductions of
up to ten percent of their compensation (including base salary or hourly
compensation and cash bonuses), up to a maximum of $25,000 for all purchase
periods ending within any calendar year. The price of Common Stock purchased
under the Stock Purchase Plan will be 85% of the lower of the fair market value
of a share of Common Stock on the commencement date or the termination date of
the relevant offering period as determined by the bid price listed on the
National Quotation Bureau, Inc. OTC Bulletin Board or the Nasdaq National Market
System, as applicable.
For the plan periods ending June 30, 1995, and December 31, 1995, employees
purchased 43,752 and 23,524 shares at a price of $0.77 and $2.34 per share
respectively. The Company recognizes as compensation expense the difference
between the fair market value and the purchase price of the stock.
F-21
<PAGE> 127
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases premises and equipment under operating leases with
various expiration dates. Minimum annual rental payments at December 31, 1995
are as follows:
<TABLE>
<S> <C>
1996..................................................................... $1,124,669
1997..................................................................... 1,066,020
1998..................................................................... 1,032,862
1999..................................................................... 917,584
2000..................................................................... 527,800
----------
Total.................................................................... $4,668,935
=========
</TABLE>
Rent expense for office space amounted to $102,000, $110,000 and $576,884
for the years ended December 31, 1993 and 1994 and 1995, respectively.
Litigation
In the normal course of business, the Company is subject to various legal
proceedings and claims, the resolution of which, in management's opinion, will
not have a material adverse effect on the consolidated financial position or the
results of operations of the Company.
Employee agreements
The Company has employment agreements with 11 officers of the Company. The
Company guarantees annual compensation ranging from approximately $160,000 to
$260,000 per year, plus bonuses (where applicable) in amounts as defined in the
agreements. The officers' compensation will be increased each year by an amount
approved by the Board of Directors. The agreements terminate upon the occurrence
of certain events as defined by the respective agreements.
17. STOCKHOLDERS' EQUITY
In April 1994, the Company effected a 12 for 1 forward stock split of the
existing 30,010 common stock shares of Essex and then issued 4,140,000 shares of
its common stock in exchange for 100% of the common stock (300 shares) of CSC
(see note 2). During 1994, the par value of the common stock was restated to
$.01 per share. Immediately following the CSC Acquisition, 500,000 shares of
Common Stock were issued to executive officers of the Company for net proceeds
of $100,000.
In June 1994, the Company issued warrants to purchase 225,000 (450,000
after giving effect to the 1995 Dividend discussed below) shares of Common Stock
in connection with obtaining a standby facility (see Note 12). These warrants
were recorded as an increase to additional paid in capital for the excess of the
fair value over the exercise price at the time of issuance.
During the fourth quarter of 1994, the Company issued an additional 53,625
shares of Common Stock to employees of the Company, resulting in net proceeds of
$50,650. The Company recognized approximately $19,000 as compensation expense
representing the difference between the fair market value and the purchase price
of the stock issued.
During the first nine months of 1995, the Company issued 21,438 shares,
(42,876 after giving effect to the dividend as discussed below), of Common Stock
resulting in an increase to Stockholders' equity of $158,568.
On September 29, 1995 the Company effected a 2 for 1 Common Stock split in
the form of a 100% stock dividend increasing the shares of Common Stock
outstanding by 5,075,183 (the "1995 Dividend"). As more
F-22
<PAGE> 128
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fully described in Note 2 in conjunction with the UK Acquisition, the Company
issued an additional 1,800,000 shares of Common Stock resulting in an increase
of $21.6 million to Stockholders' equity.
In December 1995, the Company completed a public offering of its common
stock in which the Company sold 1,250,000 shares of Common Stock at a public
offering price of $18.00 per share and the former warrant holders (as more fully
described above and in Note 12) sold 1,250,000 shares at the same price
resulting in net proceeds of approximately $20.7 million to the Company.
Directors who are not employees of the Company receive stock options
pursuant to the Company's Directors Plan. The Directors Plan provides for
automatic grants of an option to purchase 20,000 shares of Common Stock to the
Company's eligible non-employee directors upon their election to the Board of
Directors of the Company. Each eligible non-employee director is granted an
additional option, subject to certain restrictions, to purchase 3,000 shares of
Common Stock on each anniversary of his or her election so long as he or she
remains an eligible non-employee director of the Company. Initial options
granted under the Directors Plan generally vest 50% upon the first anniversary
of the grant date and 50% upon the second anniversary of the grant date. As of
December 31, 1995, 60,000 options at an average exercise price of $5.25 per
share had been granted under the Directors Plan, none of which had been
exercised.
On July 1, 1996, the Company effected a 2 for 1 Common Stock split in the
form of a 100% stock dividend, increasing the shares of Common Stock outstanding
by 14,806,709 (the "1996 Dividend").
18. SEGMENTAL REPORTING
For the years ended December 31, 1994 and December 31, 1995, revenues from
loan sales and servicing constituted the only line of the Company's revenues.
For the year ended December 31, 1994, there were three institutional purchasers
who each individually accounted for 10% or more of the total revenues (18.3%,
12.2% and 10.0%, respectively). For the year ended December 31, 1995, there was
one institutional purchaser who accounted for 10% or more of the total revenues
(23.5%).
Since May 1995, the Company's business activities have been conducted in
the US and the UK. Operating profit is total revenues less operating expenses.
In determining operating profit for each geographic area, the following items
have not been considered: interest expense, amortization of goodwill and income
taxes.
The following table summarizes the Company's business activities by
geographic regions.
<TABLE>
<CAPTION>
US UK CONSOLIDATED
------------ ----------- ------------
<S> <C> <C> <C>
Revenues...................................... $ 36,471,702 $13,038,936 $ 49,510,638
============ =========== ============
Operating profit.............................. $ 19,036,352 $ 8,832,704 $ 27,869,056
Interest expense.............................. (4,610,186)
Amortization of goodwill...................... (493,794)
Minority interest (UK)........................ (2,379,235)
------------
Earnings before income taxes and extraordinary
item........................................ $ 20,385,841
============
Identifiable assets........................... $112,005,523 $19,124,493 $131,130,016
Goodwill...................................... 19,258,011
------------
Total assets........................ $150,388,027
============
</TABLE>
F-23
<PAGE> 129
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. SELECTED QUARTERLY DATA (UNAUDITED)
The following represents selected quarterly financial data for the Company:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
1993
Revenues.......................... $ 906,603 $ 1,232,639 $ 983,217 $ 1,334,924
Net earnings...................... 100,874 111,367 82,432 20,530
Net earnings per share............ 0.01 0.01 -- --
1994
Revenues.......................... $ 1,803,455 $ 2,295,501 $ 2,304,948 $ 4,770,555
Net earnings...................... (482,878) 176,114 62,927 647,296
Net earnings per share............ (0.03) 0.01 0.01 0.03
1995
Revenues.......................... $ 5,836,052 $10,272,702 $ 14,734,050 $ 18,667,834
Earnings before extraordinary
item........................... 1,049,236 2,377,792 3,786,431 4,657,149
Net earnings...................... 1,049,236 2,377,792 3,786,431 4,361,206
Earnings per share before
extraordinary item............. 0.04 0.11 0.17 0.18
Net earnings per share............ 0.04 0.11 0.17 0.17
1996
Revenues.......................... $28,779,068 $89,379,701 N/A N/A
Net earnings...................... 9,273,144 34,844,856 N/A N/A
Primary net earnings per share.... 0.32 1.14 N/A N/A
</TABLE>
20. SUBSEQUENT EVENTS (UNAUDITED)
On April 23, 1996, CSC-UK acquired all the outstanding stock of J&J
Securities Limited ("J&J") a London-based mortgage banker for L15.0 million
($22.7 million) and 548,000 shares of the Company's Common Stock valued at $9.8
million (the "J&J Acquisition"). Of the $22.7 million in cash, $17.9 million was
paid at closing, $3.1 million was payable subject to the resolution of certain
tax issues related to J&J and $1.7 million is payable based upon the performance
of certain mortgage loans held by J&J. J&J has become a wholly-owned subsidiary
of CSC-UK. The J&J Acquisition was accounted for as a purchase transaction. J&J
provides secured mortgage loans to UK borrowers who are similar to the Company's
UK borrowers. The J&J Acquisition resulted in the recognition of $19.2 million
of goodwill. In addition to the goodwill, the Company acquired assets of $53.8
million, consisting primarily of mortgage loans held for sale, and assumed $38.8
million of liabilities. No additional fair market value was assigned to the net
assets received in the J&J Acquisition. On April 23, 1996, the loan portfolio
acquired as a result of the J&J Acquisition was sold at a gain of $21.8 million.
In May 1996, the Company issued $143.8 million of 6% Convertible
Subordinated Debentures due 2006 (the "Debentures"), convertible at any time
prior to redemption or maturity, at the holder's option, into shares of the
Company's Common Stock at a conversion price of $26.25, subject to adjustment.
The Debentures may be redeemed, at the option of the Company, in whole or in
part, at any time after May 15, 1999 at predetermined redemption prices together
with accrued and unpaid interest to the date fixed for redemption. The coupon at
6% per annum, is payable semi-annually on each May 1 and November 1, commencing
November 1, 1996. The terms of the indenture governing the Debentures do not
limit the incurrence of additional indebtedness by the Company, nor do they
limit the Company's ability to make payments such as dividends.
F-24
<PAGE> 130
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On June 14, 1996, CSC-UK acquired all of the outstanding stock of Heritable
Group Limited ("Heritable") for approximately $66.0 million, including 99,362
shares of the Company's Common Stock valued at $2.5 million (the "Heritable
Acquisition"). Heritable, a UK-based mortgage finance company, operates as a
wholly-owned subsidiary of CSC-UK. The Heritable Acquisition was accounted for
as a purchase transaction. Heritable originates a full range of mortgage loan
products secured primarily by single family residences geared towards borrowers
on the upper-end of the credit spectrum. The Heritable Acquisition resulted in
the recognition of $41.2 million of goodwill. In addition to the goodwill, the
Company acquired assets of $221.2 million, consisting primarily of mortgage
loans held for sale, and assumed $193.2 million of liabilities. No additional
fair market value was assigned to the net assets received in the Heritable
Acquisition. On June 14, 1996, a portion of the loan portfolio acquired as a
result of the Heritable Acquisition was sold at a gain of $29.2 million.
In June 1996, Industry Mortgage Company, L.P. (including its successor IMC
Mortgage Company, "IMC") converted into corporate form and effected a public
offering of common stock. In connection with this conversion, The Company's 9.1%
limited partnership interest (which had been accounted for using the equity
method) was converted into 5.8% equity interest in IMC, and accounted for as
marketable securities available for sale in accordance with SFAS No. 115.
Marketable equity securities in the amount of $9.8 million were recorded as an
asset at June 30, 1996, resulting in an unrealized gain of $5.7 million (net of
taxes) which, in accordance with SFAS No. 115, was reflected as a component of
stockholders' equity.
21. UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following table sets forth unaudited pro forma consolidated financial
data for the Company for the year ended December 31, 1995 illustrating the
estimated effects of (i) the UK Acquisition as if it had occurred on May 2,
1995, the date CSC-UK commenced operations, (ii) the J&J Acquisition as if it
had occurred as of January 1, 1995 and (iii) the Heritable Acquisition as if it
had occurred as of January 1, 1995. The unaudited pro forma consolidated
financial data do not purport to represent what the results of operations of the
Company would have actually been if the UK Acquisition, the J&J Acquisition and
the Heritable Acquisition had in fact occurred on such dates or to project the
results of operations or financial position of the Company for any future date
or period.
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
(EXCEPT PER SHARE DATA)
-----------------------
<S> <C>
Revenues................................................. $92,338
Earnings before extraordinary item....................... 21,847
Net earnings............................................. 21,551
Earnings per share before extraordinary item............. 0.84
Primary earnings per share............................... 0.83
</TABLE>
The following table sets forth unaudited pro forma consolidated financial
data for the Company for the six months ended June 30, 1996 illustrating the
estimated effects of (i) the J&J Acquisition as if it had occurred as of January
1, 1995 and (ii) the Heritable Acquisition as if it had occurred as of January
1, 1995. The results of operations of J&J and Heritable are included in the
Company's historical results from April 23, 1996 and June 14, 1996,
respectively, the dates of their respective acquisitions. The unaudited pro
forma consolidated financial data do not purport to represent what the results
of operations of the Company would have actually been if the J&J Acquisition and
the Heritable Acquisition had in fact occurred on such dates or to project the
results of operations or financial position of the Company for any future date
or period.
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
(EXCEPT PER SHARE DATA)
-----------------------
<S> <C>
Revenues................................................. $79,162
Net earnings............................................. 15,710
Primary earnings per share............................... 0.51
Fully diluted earnings per share......................... 0.51
</TABLE>
F-25
<PAGE> 131
J & J SECURITIES LIMITED
REPORT OF THE AUDITORS
To the shareholders of J & J Securities Limited:
We have audited the accompanying statements of financial condition of J & J
Securities Limited as of September 30, 1994 and 1995, and the related statements
of operations, stockholders' equity and cash flows for each of the years in the
three year period ended September 30, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United Kingdom, which do not differ in any material respect
from auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of J & J Securities Limited as
of September 30, 1994 and September 30, 1995 and the results of its operations
and its cash flows for each of the three years ended September 30, 1995 in
conformity with generally accepted accounting principles.
BDO STOY HAYWARD
Chartered Accountants
and Registered Auditors
London
November 30, 1995
F-26
<PAGE> 132
J & J SECURITIES LIMITED
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------- JUNE 30,
NOTE 1994 1995 1996
---- ------------ ----------- -----------
(AUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Cash at bank and in hand......................... $ 3,778,941 $ 1,401,175 $ 174,026
Mortgage loans net of provisions................. 4 48,950,652 46,657,205 --
Receivable from City Mortgage Corporation
Limited........................................ -- -- 16,258,963
Fixed assets net of accumulated depreciation..... 3 177,563 332,414 298,330
Other assets..................................... 72,047 106,870 48,168
------------ ----------- -----------
Total assets........................... $ 52,979,203 $48,497,664 $16,779,487
============ =========== ===========
LIABILITIES
Bank loans and overdrafts........................ $ 12,300,600 $12,345,060 $ --
Other creditors and accrued expenses............. 649,224 781,243 1,406,189
Deferred taxation................................ -- -- 2,796,840
Income taxes..................................... -- -- 579,567
Obligations under hire purchase agreements....... 15,398 100,047 164,703
Bank loan........................................ 7 51,358,135 43,804,708 --
------------ ----------- -----------
Total liabilities...................... 64,323,357 57,031,058 4,947,299
------------ ----------- -----------
Commitments and contingencies....................
STOCKHOLDERS' EQUITY
Common stock: 1,000 shares issued and
outstanding, $1.50 par value per share......... 1,496 1,496 1,496
Retained earnings/(deficit)...................... (12,268,882) (9,404,324) 10,811,247
Cumulative translation adjustment................ 923,232 869,434 1,019,445
------------ ----------- -----------
Total stockholders' equity.................. (11,344,154) (8,533,394) 11,832,188
------------ ----------- -----------
Total liabilities and stockholders'
equity............................... $ 52,979,203 $48,497,664 $16,779,487
============ =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE> 133
J & J SECURITIES LIMITED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEAR ENDED SEPTEMBER 30, ENDED JUNE 30,
----------------------------------------- -------------------------
NOTE 1993 1994 1995 1995 1996
---- ------------- ----------- ----------- ----------- -----------
(AUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
INTEREST
Interest income......... $ 13,858,521 $14,627,545 $13,792,453 $10,107,017 $ 7,260,518
Interest expense........ (5,603,931) (4,851,944) (4,641,334) (3,528,549) (1,197,630)
------------ ----------- ----------- ----------- -----------
Net interest income..... 8,254,590 9,775,601 9,151,119 6,578,468 6,062,888
Provision for loan
losses............... 3,140,497 1,766,313 1,046,700 648,893 16,720
------------ ----------- ----------- ----------- -----------
Net interest income
after provision for
loan losses.......... 5,114,093 8,009,288 8,104,419 5,929,575 6,046,168
Other income............ 490,958 235,846 336,597 301,445 255,159
------------ ----------- ----------- ----------- -----------
5,605,051 8,245,134 8,441,016 6,231,020 6,301,327
------------ ----------- ----------- ----------- -----------
OTHER EXPENSES
Salaries and employees
benefits............. 927,531 876,916 941,969 681,016 709,833
Directors' emoluments... 449,649 643,539 759,940 584,988 709,092
Other operating
expenses............. 3,727,630 3,537,539 3,874,549 2,946,648 3,486,078
------------ ----------- ----------- ----------- -----------
Total other expenses.... 5,104,810 5,057,994 5,576,458 4,212,652 4,905,003
------------ ----------- ----------- ----------- -----------
Earnings before income
taxes and
extraordinary item... 500,241 3,187,140 2,864,558 2,018,368 1,396,324
(Provision)/credit for
income taxes......... 5 -- 140,948 -- -- (556,430)
------------ ----------- ----------- ----------- -----------
Earnings before
extraordinary item... 500,241 3,328,088 2,864,558 2,018,368 839,894
Extraordinary gain from
extinguishment of
debt, net of taxes... 6 -- -- -- -- 19,375,677
----------- ----------- ----------- ----------- -----------
NET EARNINGS.............. $ 500,241 $ 3,328,088 $ 2,864,558 $ 2,018,368 $20,215,571
=========== =========== =========== =========== ===========
Earnings per share
before extraordinary
item................. $ 500.24 $ 3,328.09 $ 2,864.56 $ 2,018.37 $ 839.89
Extraordinary item...... -- -- -- -- 19,375.68
----------- ----------- ----------- ----------- -----------
Earnings per share...... $ 500.24 $ 3,328.09 $ 2,864.56 $ 2,018.37 $ 20,215.57
=========== =========== =========== =========== ===========
Weighted average number
of shares
outstanding.......... 1,000 1,000 1,000 1,000 1,000
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE> 134
J & J SECURITIES LIMITED
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------- TRANSLATION RETAINED
SHARES AMOUNT ADJUSTMENT EARNINGS/(DEFICIT) TOTAL
------ ------ ----------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
AUDITED
Balance at October 1, 1992.... 1,000 $1,496 $(1,208,847) $(16,097,211) $(17,304,562)
Translation adjustment...... -- -- 2,749,753 -- 2,749,753
Net earnings................ -- -- -- 500,241 500,241
------ ------ ----------- ------------------ ------------
Balance at September 30,
1993........................ 1,000 1,496 1,540,906 (15,596,970) (14,054,568)
Translation adjustment...... -- -- (617,674) -- (617,674)
Net earnings................ -- -- -- 3,328,088 3,328,088
------ ------ ----------- ------------------ ------------
Balance at September 30,
1994........................ 1,000 1,496 923,232 (12,268,882) (11,344,154)
Translation adjustment...... -- -- (53,798) -- (53,798)
Net earnings................ -- -- -- 2,864,558 2,864,558
------ ------ ----------- ------------------ ------------
Balance at September 30,
1995........................ 1,000 1,496 869,434 (9,404,324) (8,533,394)
UNAUDITED
Translation adjustment...... -- -- 150,011 -- 150,011
Net earnings................ -- -- -- 20,215,571 20,215,571
------ ------ ----------- ------------------ ------------
Balance at June 30, 1996.... 1,000 $1,496 $ 1,019,445 $ 10,811,247 $ 11,832,188
===== ====== ========== ============= ===========
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE> 135
J & J SECURITIES LIMITED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEAR ENDED SEPTEMBER 30, ENDED JUNE 30,
------------------------------------------ --------------------------
NOTE 1993 1994 1995 1995 1996
---- ------------ ------------ ------------ ----------- ------------
(AUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings................... $ 500,241 $ 3,328,088 $ 2,864,558 $ 2,018,368 $ 20,215,571
ADJUSTMENTS TO RECONCILE NET
EARNINGS TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Depreciation charges........... 156,106 114,109 172,441 63,262 85,556
Income taxes payable........... 128,728 402,666 -- -- 556,430
Gain on extinguishment of
debt......................... -- -- -- -- (19,375,677)
Loss/(Profit) on sale of
tangible fixed assets........ 21,404 (7,410) (57,228) -- --
Provisions for losses.......... 177,185 (3,213,008) (1,595,065) (1,032,334) (2,935,537)
NET CHANGES IN OPERATING ASSETS
AND LIABILITIES:
Increase in accrued interest
payable...................... 1,339,379 4,848,573 4,626,663 3,528,549 1,038,851
Decrease/(increase) in
receivables.................. (20,034) (35,719) (34,718) 12,753 279,338
Other, net..................... 52,933 61,105 215,227 77,566 698,019
------------ ------------ ------------ ----------- ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES..................... 2,355,942 5,498,404 6,191,878 4,668,164 562,551
------------ ------------ ------------ ----------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Net mortgage repayment less
advances in year............. (1,113,492) 8,181,101 4,067,551 3,380,888 (934,105)
Net purchase of equipment...... (60,408) (101,608) (269,520) (212,941) (58,164)
------------ ------------ ------------ ----------- ------------
NET CASH PROVIDED BY/(USED IN)
INVESTING ACTIVITIES........... (1,173,900) 8,079,493 3,798,031 3,167,947 (992,269)
------------ ------------ ------------ ----------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Bank loan repayments........... 217,075 (11,792,820) (12,400,440) (9,324,315) (764,202)
------------ ------------ ------------ ----------- ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES..................... 217,075 (11,792,820) (12,400,440) (9,324,315) (764,202)
------------ ------------ ------------ ----------- ------------
Net (decrease)/increase in cash
and cash equivalents........... 1,399,117 1,785,077 (2,410,531) (1,488,204) (1,193,920)
Cash and cash equivalents at
beginning of period.......... 714,204 1,987,280 3,778,941 3,778,941 1,401,175
Effects of foreign exchange
rate charges................. (126,041) 6,584 32,765 39,088 (33,229)
------------ ------------ ------------ ----------- ------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD...................... $ 1,987,280 $ 3,778,941 $ 1,401,175 $ 2,329,825 $ 174,026
------------ ------------ ------------ ----------- ------------
------------ ------------ ------------ ----------- ------------
SUPPLEMENTED DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid during the
period....................... -- -- -- -- $ 158,300
------------ ------------ ------------ ----------- ------------
------------ ------------ ------------ ----------- ------------
Income taxes (received)/paid
during the period............ $ (127,500) $ 402,666 -- -- --
------------ ------------ ------------ ----------- ------------
------------ ------------ ------------ ----------- ------------
</TABLE>
F-30
<PAGE> 136
J & J SECURITIES LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1993, 1994 AND 1995
AND JUNE 30, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
1. ORGANIZATION
J & J Securities Limited ("J&J") is a UK based company, registered in
England, providing mortgage loans secured on residential properties. J&J
conducts all its business in the UK and lends on the basis of first and second
mortgages on residential properties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared under and are in accordance
with generally accepted accounting procedures in the US. The following principal
accounting policies have been applied:
Mortgage loans
Mortgage loans are stated at cost plus accrued interest income less any
provision for permanent diminution in value. Specific provisions for permanent
diminution in value are made by reference to doubtful loans which fail to meet
certain criteria. This includes management's estimate of the value of the
underlying collateral. Recovery of the carrying value of such loans is dependent
to a great extent on economic, operating and other conditions that may be beyond
J&J's control. In addition a general provision is made in respect of losses
which, although not specifically identified, are likely to exist in any
portfolio of loans of this type.
Loans are placed on nonaccrual status on the occurrence of the criteria
referred to above. Loans may be reinstated to accrual status when, in the
opinion of management, the criteria are no longer applicable.
SFAS No. 114 "Accounting by Creditors for Impairment of a Loan" as amended
by SFAS No. 118 "Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosures" is effective for accounting periods beginning after
December 15, 1994. SFAS No. 114 addresses accounting by creditors for impairment
of a loan by specifying how allowances for credit losses for certain loans
should be determined. A loan is impaired when it is probable that the creditor
will be unable to collect all amounts in accordance with the contractual terms
of the loan agreement. As an expedient, impairment is measured based on the fair
value of the loan's collateral.
Revenue recognition
Mortgage loan interest accrues and is credited to the profit and loss
account on a monthly basis. Other interest, chargeable expenses and sundry
income are included on an accrual basis. All income derives from activities
within the United Kingdom.
Loan origination fees and certain direct loan origination costs are
recognized as an adjustment to the profit and loss accounts as incurred.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and money market funds.
Such funds are deemed to be cash equivalents for purposes of the statements of
cash flows.
Equipment and vehicles, net
Equipment and vehicles are stated at original cost less accumulated
depreciation. Depreciation is computed by using the straight-line method based
on the estimated lives of the depreciable assets.
Expenditures for maintenance and repairs are charged directly to the
appropriate operating account at the time the expense is incurred. Expenditures
determined to represent additions are capitalized. Cost of assets
F-31
<PAGE> 137
J & J SECURITIES LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
sold or retired and the related amounts of accumulated depreciation are
eliminated from the accounts in the year of sale or retirement. Any resulting
profit or loss is reflected in the statement of earnings.
Income taxes
J&J accounted for income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes." Under the asset and liability method of SFAS No. 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement and tax
reporting bases of existing assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply in the year
in which those temporary differences are expected to be recovered or settled.
J&J has potential net operating losses (NOL's) carried forward against
which a valuation reserve has been fully provided at each balance sheet date as
future income tax benefit in respect of these NOL's is only available as a
consequence of future income sufficient to enable the benefit to be realized.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Foreign currency translation
J&J reflects the result of its operations in accordance with SFAS No. 52,
"Foreign Currency Translation." To the extent there are foreign currency
translation gains or losses, such gains or losses are considered unrealized and
are recorded as a separate component of stockholders' equity.
3. FIXED ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------------------
1993 1994 1995
------------ ------------ -----------
<S> <C> <C> <C>
Cost
Office equipment.......................... $ 251,044 $ 293,404 $ 376,080
Motor vehicles............................ 277,689 342,668 365,522
------------ ----------- -----------
528,733 636,072 741,602
Less:
Accumulated depreciation............... 353,131 458,509 409,188
------------ ----------- -----------
Balance at end of period............... $ 175,602 $ 177,563 $ 332,414
============ =========== ===========
</TABLE>
4. MORTGAGE LOANS
The mortgage loan balance is summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------------------
1993 1994 1995
------------ ------------ -----------
<S> <C> <C> <C>
Mortgage loans.............................. $ 64,182,346 $ 59,304,209 $55,460,242
Provisions for losses..................... (13,000,982) (10,353,557) (8,803,037)
----------- ----------- ----------
Balance, end of year...................... $ 51,181,364 $ 48,950,652 $46,657,205
=========== =========== ==========
</TABLE>
The activity in the reserve for mortgage loans is summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1993 1994 1995
------------ ------------ -----------
<S> <C> <C> <C>
Balance, beginning of year.................. $ 12,824,868 $ 13,000,982 $10,353,557
Provision for losses...................... 3,140,497 1,766,313 1,046,700
Charge-offs............................... (2,963,312) (4,979,321) (2,641,765)
Effects of foreign exchange............... (1,071) 565,583 44,545
----------- ----------- ----------
Balance, end of year................... $ 13,000,982 $ 10,353,557 $ 8,803,037
=========== =========== ==========
</TABLE>
F-32
<PAGE> 138
J & J SECURITIES LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
The net provision for income taxes as presented in the statements of
operations for the years ended September 30, 1994 and 1995 is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30,
--------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Current (provision)/credit........................... -- $140,948 --
======== ======== ========
</TABLE>
6. EXTRAORDINARY GAIN
On November 20, 1995, J&J entered into an agreement with its bankers to
extinguish the long-term loan (see Note 7). This resulted in an extraordinary
gain of $19,375,677 net of taxes ($22,165,677 less applicable deferred income
taxes of $2,790,000).
7. LONG-TERM LOAN
J&J has a term loan with a bank secured by its mortgage portfolio. The
interest rate is 21 1/2% above the bank's prime rate. The aggregate amount of
the bank debt maturing at September 30 in each of the next five years and
thereafter is as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30, AMOUNT
------------------------- -----------
<S> <C>
1996............................................................ $12,345,060
1997............................................................ 12,345,060
1998............................................................ 12,345,060
1999............................................................ 6,769,528
2000............................................................ --
-----------
$43,804,708
===========
</TABLE>
Subsequent to the year end, on November 20, 1995 (see note 10), J&J entered
into an agreement with its bankers to discharge the liability at that time which
resulted in an extraordinary gain arising from the extinguishment of part of
this debt (see note 6). The new loan facilities included a three year term loan
of $28.5 million and a $7.9 million demand note. Interest on each of the new
facilities bears interest at a variable rate of 2.5% over the lender's prime
rate.
8. DIRECTORS' INTEREST IN TRANSACTIONS
A J&J director is a partner in a legal practice which provided legal and
management services to J&J for fees of $604,392, $386,296 and $516,825 for the
years ended September 30, 1993, 1994 and 1995, respectively.
A J&J director is a beneficial shareholder in Latchglen Limited trading as
London Trust Securities which received introductory commissions of $136,209,
$138,922 and $47,698 for the years ended September 30, 1995, 1994 and 1993,
respectively.
F-33
<PAGE> 139
J & J SECURITIES LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS UNDER OPERATING LEASES
J&J leases premises under operating leases with various expiration dates.
Minimum annual rental payments at September 30, 1995 are as follows:
<TABLE>
<S> <C>
1996.............................................................. $105,860
1997.............................................................. 105,860
1998.............................................................. 105,860
1999.............................................................. 31,600
2000.............................................................. 31,600
Thereafter........................................................ 31,600
--------
$412,380
========
</TABLE>
Rent expenses for office space amounted to $54,525, $47,519 and $72,456 for
the years ended September 30, 1993, 1994 and 1995, respectively.
10. POST BALANCE SHEET EVENTS
On November 20, 1995, J&J's indebtedness to its previous principal bankers,
The National Mortgage Bank Plc, was repaid in full after agreement for the
forgiveness of a certain amount of the debt outstanding.
On April 23, 1996 J&J was acquired by City Mortgage Corporation Limited.
From that date J&J ceased its lending operations while continuing to incur
certain incidental expenditures. It is anticipated that as of September 30,
1996, J&J will be wholly-dormant.
F-34
<PAGE> 140
HERITABLE FINANCE LIMITED
REPORT OF INDEPENDENT AUDITORS
Auditors' report to:
The members of Heritable Finance Limited
We have audited the accompanying consolidated statements of financial
condition of Heritable Finance Limited and subsidiaries as of December 31, 1995
and 1994 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Heritable
Finance Limited and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.
Chartered Accountants
Registered Auditors
London, United Kingdom
April 2, 1996
F-35
<PAGE> 141
HERITABLE FINANCE LIMITED
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
1996
DECEMBER 31, DECEMBER 31, -----------
1994 1995
------------ ------------ (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash.................................................... $ 58 $ 47 $ 1,381
Accrued interest receivable............................. 1,583 1,699 1,790
Unamortized fees........................................ 2,982 3,962 1,078
Accounts receivable..................................... 799 379 521
Mortgage servicing rights............................... -- -- 30,479
Mortgage loans held for investment, net................. 159,806 172,702 39,501
Furniture, equipment and vehicles, net.................. 524 588 626
Other assets............................................ 2,142 2,125 163
-------- -------- --------
Total assets.................................... $167,894 $181,502 $ 75,539
======== ======== ========
LIABILITIES
Bank overdraft.......................................... $ -- $ -- $ --
Accounts payable and other liabilities.................. 1,588 1,678 3,773
Income taxes payable.................................... 1,095 2,127 14,249
Due to The Heritable and General Investment Bank
Limited.............................................. 163,037 171,028 --
Due to City Mortgage Corporation........................ -- -- 26,718
Negative goodwill....................................... 2,116 1,882 1,773
-------- -------- --------
Total liabilities............................... 167,836 176,715 46,513
-------- -------- --------
STOCKHOLDERS' EQUITY
Common stock 1,000 L1.00 par value "A" ordinary shares
authorized, issued and outstanding in 1994, 1995 and
1996................................................. 2 2 2
Common Stock, 9,000 L1.00 par value "B" ordinary shares
authorized, issued and outstanding in 1994, 1995 and
1996................................................. 14 14 14
Foreign currency translation adjustment................. 86 7 390
Retained earnings(deficit).............................. (44) 4,764 28,620
-------- -------- --------
Total stockholders' equity.............................. 58 4,787 29,026
-------- -------- --------
Total liabilities and stockholders' equity...... $167,894 $181,502 $ 75,539
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-36
<PAGE> 142
HERITABLE FINANCE LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE 6 MONTHS ENDED
------------------------------------------ -------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1993 1994 1995 1995 1996
------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
REVENUES
Interest income.................... $ 16,608 $ 17,978 $ 25,842 $ 12,797 $ 12,979
Fee and commission income.......... 2,355 3,846 4,530 1,991 1,650
Gain on sale of loans.............. -- -- -- -- 29,959
------------ ------------ ------------ ----------- -----------
Total revenues 18,963 21,824 30,372 14,788 44,588
------------ ------------ ------------ ----------- -----------
EXPENSES
Salaries and employee benefits..... 1,903 2,980 4,017 3,262 3,362
Interest expense................... 11,339 7,644 12,278 5,914 5,149
Fee and commission expenses........ 1,209 2,776 4,456 1,450 1,760
Other operating expenses........... 4,881 4,071 2,455 768 317
Release of general provisions on
sale of loans................... -- -- -- -- (1,530)
------------ ------------ ------------ ----------- -----------
Total expenses................ 19,332 17,471 23,206 11,394 9,058
------------ ------------ ------------ ----------- -----------
EARNINGS (LOSS) BEFORE INCOME
TAXES.............................. (369) 4,353 7,166 3,394 35,530
Provision (credit) for income
taxes........................... (84) 1,191 2,358 1,002 11,674
------------ ------------ ------------ ----------- -----------
NET EARNINGS (LOSS).................. $ (285) $ 3,162 $ 4,808 $ 2,392 $ 23,856
========== ========== ========== ========= =========
Earnings (loss) per share $ (28.50) $ 316.20 $ 480.80 $ 239.20 $2,385.60
========== ========== ========== ========= =========
Weighted average number of shares
outstanding 10,000 10,000 10,000 10,000 10,000
========== ========== ========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE> 143
HERITABLE FINANCE LIMITED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOREIGN
RETAINED CURRENCY
COMMON EARNINGS/ TRANSLATION
STOCK (DEFICIT) ADJUSTMENT TOTAL
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992.............................. $ 16 $ 990 $ -- $ 1,006
Net loss.................................................. -- (285) -- (285)
Foreign currency translation adjustment................... -- -- (20) (20)
---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1993.............................. 16 705 (20) 701
Net earnings.............................................. -- 3,162 -- 3,162
Dividend paid in year..................................... -- (3,911) -- (3,911)
Foreign currency translation adjustment................... -- -- 106 106
---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1994.............................. 16 (44) 86 58
Net earnings.............................................. -- 4,808 -- 4,808
Foreign currency translation adjustment................... -- -- (79) (79)
---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1995.............................. 16 4,764 7 4,787
Net earnings (unaudited).................................. -- 23,856 -- 23,856
Foreign currency translation adjustment(unaudited)........ -- -- 383 383
---------- ---------- ---------- ----------
BALANCE AT JUNE 30, 1996 (UNAUDITED)...................... $ 16 $ 28,620 $ 390 $ 29,026
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE> 144
HERITABLE FINANCE LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE 6 MONTHS
------------------------------------------ ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, ---------------------
1993 1994 1995 JUNE 30, JUNE 30,
------------ ------------ ------------ 1995 1996
--------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)......................... $ (285) $ 3,162 $ 4,808 $ 2,392 $ 23,856
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities:
Depreciation and amortization....... 324 262 59 73 42
Income taxes payable................ 27 301 1,071 758 12,122
Provision for losses................ (1,141) 2,236 797 1,403 (4,330)
(Gain) loss on disposal of fixed
assets............................ 49 (20) 13 7 (16)
Net changes in operating assets and
liabilities:
Other............................... 328 (2,683) (566) 5,032 (23,239)
(Increase) decrease in accrued
interest receivable............... 193 (952) (115) (167) (92)
-----------
-
----------- ----------- ------------ -----------
Net cash provided by (used in)
operating activities........... (505) 2,306 6,067 9,498 8,343
-----------
-
----------- ----------- ------------ -----------
Cash flows from investing activities:
Payment for acquisition of former
associate................................ -- (912) -- -- --
(Increase) decrease in mortgage loans held
for investment........................... 24,038 (8,359) (13,693) (16,747) 137,531
Net purchases of equipment.................. (249) (224) (376) (197) (230)
-----------
-
----------- ----------- ------------ -----------
Net cash (used in) provided by investing
activities............................... 23,789 (9,495) (14,069) (16,944) 137,301
-----------
-
----------- ----------- ------------ -----------
Cash flows from financing activities:
Dividends paid.............................. -- (3,911) -- -- --
Increase (decrease) in amounts due to: The
Heritable and General Investment Bank
Limited.................................. (23,265) 10,720 7,991 6,343 (171,028)
City Mortgage Corporation................ -- -- -- -- 26,718
-----------
-
----------- ----------- ------------ -----------
Net cash provided by (used in) financing
activities.................................. (23,265) 6,809 7,991 6,343 (144,310)
-----------
-
----------- ----------- ------------ -----------
Net increase (decrease) in cash............... 19 (380) (11) (1,103) 1,334
Cash at the beginning of the period........... 419 438 58 58 47
-----------
-
----------- ----------- ------------ -----------
Cash at the end of the period................. $ 438 $ 58 $ 47 $ (1,045) $ 1,381
=========== =========== ============ =========== ============
Supplemental disclosure of cash flow
information:
Income taxes paid (recovered)............... $ (951) $ 342 $ 1,479 -- --
=========== =========== ============ =========== ============
Interest paid............................... $ 11,339 $ 7,644 $ 12,278 $ 5,914 $ 5,357
=========== =========== ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-39
<PAGE> 145
HERITABLE FINANCE LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
AND JUNE 30, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
1. ORGANIZATION
Heritable Finance Limited ("the Company") is a consumer finance company
that engages in the business of providing mortgage loans secured primarily by
family residences in the UK. The majority of the Company's loans are second
mortgages made to owners of single family residences who use the loan proceeds
for such purposes as debt consolidation and financing of home improvements,
amongst others.
For the purposes of these financial statements the Group is defined as
Heritable Finance Limited and its subsidiary companies. The principal
subsidiaries at December 31, 1995, which are all registered in England and
Wales, are wholly owned, and are listed below:
Undertaking
Assured Funding Corporation Limited
Greyfriars Financial Services Limited
Heritable Capital Plan Limited
Home and Family Finance Limited
Home Mortgage Corporation Limited
Home Mortgages Limited
Homestead Finance Limited
Secured Funding Limited
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of preparation
The financial statements have been prepared in conformity with generally
accepted accounting principles. The preparation of the financial statements
requires the management of the Company to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as at the date of the financial statements and
the reported revenues and expenses for the reported periods. Actual results
could differ from those estimates.
Combination
The Group financial statements consolidate those of the Company and its
subsidiary companies as at December 31, 1995.
The consideration paid for companies acquired is allocated to each class of
tangible net asset on the basis of the fair value to the Group of those assets
at the date of acquisition. The excess of the purchase consideration over the
fair value of the tangible net assets at the date of acquisition is capitalised
as goodwill and is amortized over a period not exceeding ten years.
Where the purchase consideration is less than the fair value of the
tangible net assets acquired, negative goodwill is recognized which is allocated
against the fair value of any non-current assets acquired. Where non-current
assets are subsequently reduced to zero or, where there are no non-current
assets to allocate negative goodwill against, the balance is carried forward and
amortized over a period not exceeding ten years.
All significant intercompany transactions and balances among the
consolidated entities have been eliminated.
F-40
<PAGE> 146
HERITABLE FINANCE LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
AND JUNE 30, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
Fees and commission income
Fees are recognized when they have been earned, and have either been paid
or are considered to be recoverable with reasonable certainty.
Acquisition costs
Costs incurred in granting each advance are individually identified, and
are amortized in proportion to income earned on the advance over its term. In
the event of early repayment, any unamortized costs relating to that loan are
written off immediately. The total of unamortized cost at the balance sheet date
is included in advances to customers.
Bad and doubtful debts
Specific provisions are raised on loans which fall more than four
installments in arrears, unless it is evident that the degree of risk on the
loan is significantly increased. In such circumstances, the creation of a
provision is brought forward. Specific provisions are also raised on the
unsecured value of loans (which may be fully performing) to the extent that
there is a shortfall in security, and also where the outstanding loan balance
taken as a whole represents in excess of 150% of the loan balance at inception.
When there is no prospect of recovery, outstanding debt is written off.
In addition, general provisions are made having regard to the overall size
and characteristics of the Group's loan portfolio.
Furniture, equipment and vehicles, net
Furniture, equipment and vehicles, net are stated at original cost less
accumulated depreciation and amortization. Depreciation is computed principally
by using the straight line method based on the estimated lives of the
depreciable assets which are between three and five years.
Expenditures for maintenance and repairs are charged directly to the
appropriate operating account at the time the expense is incurred. Expenditures
determined to represent additions and betterments are capitalized. The cost of
assets sold or retired and the related amounts of accumulated depreciation are
eliminated from the accounts in the year of sale or retirement. Any resulting
profit or loss is reflected in the statement of operations.
Mortgage loans held for investment, net
Interest income includes income from mortgage loans held for investment,
and is recognized on an accrual basis.
SFAS No. 114 "Accounting by Creditors for Impairment of a Loan" (SFAS 114)
as amended by SFAS No. 118 "Accounting by Creditors for Impairment of a Loan --
Income Recognition and Disclosures" (SFAS 118) is effective for accounting
periods beginning after December 15, 1994. SFAS 114 addresses accounting by
creditors for impairment of a loan by specifying how allowances for credit
losses for certain loans should be determined. A loan is impaired when it is
probable that the creditor will be unable to collect all amounts in accordance
with the contractual terms of the loan agreement. As an expedient, impairment is
measured based on the fair value of the loan's collateral.
At December 31, 1995, the Group's net investment in non-accrual loans was
$36,097,950 after specific provisions of $13,004,578. The average net investment
during 1995 in such loans was $41,381,164. These
F-41
<PAGE> 147
HERITABLE FINANCE LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
AND JUNE 30, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
disclosures are based on the Group's provisioning policy as described above and
accordingly include loans where impairment is possible rather than probable.
Income Taxes
United Kingdom corporation tax and overseas taxes are provided, at
appropriate rates, on the taxable profits for the year.
Fair value of financial instruments
SFAS No. 107 "Disclosures about Fair Value of Financial Instruments" (SFAS
107) requires disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition for which it
is practicable to estimate that value. In cases where quoted market prices are
not available, fair value is based upon estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and the estimated future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realised
in immediate settlement of the instrument. SFAS 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amount does not represent the underlying
value of the Company.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
Cash
The carrying amount of cash on hand is considered to be a reasonable
estimate of fair market value.
Mortgage loans held for investment
The carrying value of loans held for investment is considered to be a
reasonable estimate of the fair market value.
Foreign currency translation
The functional currency of the Group is pounds' sterling. Assets and
liabilities are translated to USD rates current on December 31. Profit and loss
items are translated at average rates of exchange for the period. Exchange
differences arising from translation are taken to reserves.
3. INCOME TAXES
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
DOLLARS IN DOLLARS IN
THOUSANDS THOUSANDS
------------ ------------
<S> <C> <C>
Current:
UK corporation tax......................................... $1,003 $1,697
Deferred................................................... 92 430
------------ ------------
$1,095 $2,127
========== ==========
</TABLE>
F-42
<PAGE> 148
HERITABLE FINANCE LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
AND JUNE 30, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
The reconciliation of income tax computed at the UK corporation tax rate to
the effective income tax rate is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
UK corporation tax rate...................................... 33.0% 33.0%
Release of deferred tax valuation allowance.................. (6.3) --
Other........................................................ 0.7 (0.1)
------------ ------------
27.4% 32.9%
========== ==========
</TABLE>
Deferred taxes are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
DOLLARS IN DOLLARS IN
THOUSANDS THOUSANDS
------------ ------------
<S> <C> <C>
Deferred tax liabilities
Arising from tax treatment of acquisition costs.......... $ 681 $ 1,110
------------ ------------
Gross deferred tax assets
Capital allowances and depreciation...................... 47 55
General provision..................................... 542 594
Other................................................. -- 31
------------ ------------
589 680
------------ ------------
Net deferred tax liabilities............................... $ 92 $ 430
========== ==========
</TABLE>
4. RESERVE FOR LOSSES
The activity in the reserve for losses on mortgage loans held for
investment is summarized as follows:
Specific reserve
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------------------
1993 1994 1995
DOLLARS IN DOLLARS IN DOLLARS IN
THOUSANDS THOUSANDS THOUSANDS
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year.................. $ 5,726 $ 4,844 $ 12,267
Acquisition of former associate company....... -- 5,029 --
Provision for losses.......................... 2,883 4,890 4,380
Charge-offs................................... (3,430) (2,646) (3,002)
Recoveries.................................... (215) (271) (533)
Foreign currency translation adjustment....... (120) 421 (107)
------------ ------------ ------------
Balance at end of year........................ $ 4,844 $ 12,267 $ 13,005
========== ========== ==========
</TABLE>
F-43
<PAGE> 149
HERITABLE FINANCE LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
AND JUNE 30, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
General Reserve
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------------------
1993 1994 1995
DOLLARS IN DOLLARS IN DOLLARS IN
THOUSANDS THOUSANDS THOUSANDS
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year.................. $ 1,108 $ 851 $ 1,729
Acquisition of former associate company....... -- 685 --
Provision for losses.......................... (234) 126 87
Foreign currency translation adjustment....... (23) 67 (15)
------------ ------------ ------------
Balance at end of year........................ $ 851 $ 1,729 $ 1,801
========== ========== ==========
</TABLE>
The amounts in the reserve for losses are expressed gross. The Company
continues to record interest on impaired assets as an addition to the related
mortgage loan balance. The amount of interest credited on these loans amounted
to $3,649,561, $2,562,669 and $1,620,863 for the years ended December 31, 1995,
1994 and 1993, respectively. However, these amounts are offset by a
corresponding charge to the reserve for losses, such that the net balance of
mortgage loans held for investment after deducting the reserve for losses
remains unchanged.
5. FURNITURE, EQUIPMENT AND VEHICLES, NET
Furniture, equipment and vehicles, net at cost are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
DOLLARS IN DOLLARS IN
THOUSANDS THOUSANDS
------------ ------------
<S> <C> <C>
Furniture.................................................. $ 305 $ 65
Equipment.................................................. 1,628 710
Vehicles................................................... 302 335
------------ ------------
2,235 1,110
Less: accumulated depreciation............................. (1,711) (522)
------------ ------------
Furniture, equipment and vehicles, net..................... $ 524 $ 588
========== ==========
</TABLE>
6. AMOUNTS OWED TO THE HERITABLE AND GENERAL INVESTMENT BANK
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
DOLLARS IN DOLLARS IN
THOUSANDS THOUSANDS
------------ ------------
<S> <C> <C>
Advances from The Heritable and General Investment Bank
Limited........................................................ $158,684 $170,766
Group relief payable............................................. 442 262
Dividend payable................................................. 3,911 --
-------- --------
$163,037 $171,028
======== ========
</TABLE>
At December 31, 1995, advances of $152,494,819 bear interest at market
rates based on the three-month LIBOR rate plus a margin of 0.9%. The remaining
$18,270,997 bears no interest.
F-44
<PAGE> 150
HERITABLE FINANCE LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
AND JUNE 30, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
7. ACQUISITION OF HOME MORTGAGES LIMITED
On July 29, 1994, Heritable Finance Limited acquired the entire share
capital of Home Mortgages Limited.
The acquisition was accounted for under the purchase method of accounting.
The excess of the fair value of tangible net assets acquired over the
consideration paid gave rise to negative goodwill of $2,159,838 which has been
carried forward as a deferred credit and is being amortized over a period of ten
years.
8. EMPLOYEE BENEFIT PLAN
Heritable Finance Limited is a member of a non-contributory defined
benefits pension plan, The Heritable Group Retirement and Death Benefits Scheme.
Employees become eligible to join the plan following a probationary employment
period of six months and a minimum age of twenty-five years.
During the year ended December 31, 1995, $507,578 (1994: $436,578; 1993:
$394,242) was recognized as pension costs in the profit and loss account.
9. CONCENTRATION OF RISK
The Company operates as a mortgage provider in the UK domestic market with
various regional concentrations and is therefore vulnerable to fluctuations in
the UK housing market. For the year ended December 31, 1995 and 1994, there were
no customers who individually accounted for 10% or more of total revenues.
10. SUBSEQUENT EVENTS
At December 31, 1995, the Company was owned by The Heritable and General
Investment Bank Limited whose ultimate parent company was CoreStates Financial
Corp., a company incorporated in the US.
On June 14, 1996, Heritable Finance Limited was acquired by City Mortgage
Corporation Limited, an indirect wholly-owned subsidiary of Cityscape Financial
Corp., in exchange for cash and shares of that company's common stock.
Cityscape Financial Corp. is a US incorporated consumer finance company,
engaged in the business of originating, purchasing, selling and servicing
mortgage loans secured primarily by one- to four-family residences.
F-45
<PAGE> 151
HERITABLE FINANCE LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
AND JUNE 30, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
11. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases premises and equipment under operating leases with
various expiration dates. Both leases are subject to renegotiation every five
years. Minimum annual rental payments at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
DOLLARS IN
YEAR ENDED THOUSANDS
--------------------------------------------------------------------------- ----------
<S> <C>
1996....................................................................... $ 331
1997....................................................................... 331
1998....................................................................... 331
1999....................................................................... 331
2000....................................................................... 331
Thereafter................................................................. 3,338
------
Total...................................................................... $4,993
======
</TABLE>
Rent expense for office space amounted to $333,070, $265,188 and $316,962
for the years ended December 31, 1995, 1994 and 1993, respectively.
Litigation
In the normal course of business, the Company is subject to various legal
proceedings and claims, the resolution of which, in management's opinion, will
not have a material adverse effect on the consolidated statements of financial
condition or on the related consolidated statements of operations, stockholders'
equity and cash flows of the Company.
12. LOAN COMMITMENTS
At December 31, 1995 and 1994 there were no material undrawn loan
commitments.
F-46
<PAGE> 152
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR BY THE
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Summary............................... 3
Risk Factors.......................... 9
The Company........................... 21
Use of Proceeds....................... 22
Price Range of Common Stock and
Dividend Policy..................... 22
Capitalization........................ 23
Unaudited Pro Forma Consolidated
Financial Statements................ 24
Selected Consolidated Financial and
Other Data.......................... 29
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 32
Business.............................. 47
Management............................ 74
Certain Transactions.................. 81
Security Ownership of Certain
Beneficial Owners and Management.... 83
Description of Capital Stock.......... 84
Shares Eligible for Future Sale....... 86
Description of Debentures............. 86
Certain US Federal Tax
Considerations...................... 99
Selling Security Holders.............. 101
Plan of Distribution.................. 102
Legal Matters......................... 103
Experts............................... 103
Index to Financial Statements......... F-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
$75,600,000
6% CONVERTIBLE
SUBORDINATED DEBENTURES
DUE MAY 1, 2006
(INTEREST PAYABLE MAY 1
AND NOVEMBER 1)
AND
2,880,000
SHARES OF
COMMON STOCK
LOGO
----------------------------
PROSPECTUS
----------------------------
, 1996
------------------------------------------------------
------------------------------------------------------
<PAGE> 153
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Registrant estimates that expenses in connection with the offering
described in this registration statement will be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........................ $26,069
Printing expenses.......................................................... *
Accounting fees and expenses............................................... *
Legal fees and expenses.................................................... *
Listing fees............................................................... *
Fees and expenses (including legal fees) for qualifications under state
securities laws.......................................................... *
Transfer agent's fees and expenses......................................... *
Miscellaneous.............................................................. *
-------
Total............................................................ $ *
=======
</TABLE>
- ---------------
* To be filed by amendment.
All amounts except the Securities and Exchange Commission registration fee
are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145(a) of the Delaware General Corporation Law (the "GCL") provides
that a Delaware corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise,
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding if he or she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had no cause to believe his
or her conduct was unlawful.
Section 145(b) of the GCL provides that a Delaware corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses actually
and reasonably incurred by such person in connection with the defense or
settlement of such action or suit if he or she acted under similar standards,
except that no indemnification may be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of his or her duty to the
corporation unless and only to the extent that the court in which such action or
suit was brought shall determine that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to be indemnified for such expenses as the court shall deem
proper.
Section 145 of the GCL further provides that to the extent a director or
officer of a corporation has been successful in the defense of any action, suit
or proceeding referred to in subsection (a) and (b) or in the defense of any
claim, issue or matter therein, such officer or director shall be indemnified
against expenses actually and reasonably incurred by him or her in connection
therewith; that indemnification provided for by Section 145 shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled,
and that the corporation may purchase and maintain insurance on behalf of a
director or officer of the corporation against any liability asserted against
such officer or director and incurred by him or her in any such
II-1
<PAGE> 154
capacity or arising out of his or her status as such, whether or not the
corporation would have the power to indemnify him or her against such
liabilities under Section 145 of the GCL.
As permitted by Section 102(b)(7) of the GCL, the Company's Certificate of
Incorporation provides that a director shall not be liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director.
However, such provision does not eliminate or limit the liability of a director
for acts or omissions not in good faith or for breaching his or her duty of
loyalty, engaging in intentional misconduct or knowingly violating a law, paying
a dividend or approving a stock repurchase which was illegal, or obtaining an
improper personal benefit. A provision of this type has no effect on the
availability of equitable remedies, such as injunction or rescission, for breach
of fiduciary duty.
The Company's Bylaws require the Company to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Company) by reason
of the fact that he is or was a director, officer, employee or agent of the
Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company, and with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, does not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, that he had
reasonable cause to believe that his conduct was unlawful.
In addition, the Company's Bylaws require the Company to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Company to procure a judgment in its favor by reason of the fact that he is or
was a director, officer, employee or agent of the Company, or is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company, except that no indemnification may
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable for negligence or misconduct in the performance
of his duty to the Company unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Any indemnification (unless ordered by a court) made by the Company may be
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct as set forth
above. Such determination must be made (i) by the Board by a majority vote of a
quorum consisting of directors who were not parties to such action, suit or
proceeding, or (ii) if such a quorum is not obtainable, or, even if obtainable,
a quorum of disinterested directors so directs, by independent legal counsel in
a written opinion, or (iii) by the stockholders.
To the extent that a director, officer, employee or agent of the Company
has been successful on the merits or otherwise in defense of any covered action,
suit or proceeding, or in defense of any covered claim, issue or matter therein,
he will be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
Expenses incurred by an officer or director in defending a civil or
criminal action, suit or proceeding may be paid by the Company in advance of the
final disposition of such action, suit or proceeding as authorized by the Board
in the specific case upon receipt of an undertaking by or on behalf of the
director or officer to repay
II-2
<PAGE> 155
such amount unless it shall ultimately be determined that he is entitled to be
indemnified by the Company as authorized in this Article. Such expenses incurred
by other employees and agents may be so paid upon such terms and conditions, if
any, as the Board deems appropriate.
The Company presently maintains policies of directors' and officers'
liability insurance in the amount of $10.0 million.
The form of Underwriting Agreement to be filed as Exhibit 1.1 to this
Registration Statement provides for indemnification by the Underwriters of the
Company, its directors, officers and controlling persons against certain
liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Company has issued shares of Common Stock or granted options for such
shares pursuant to compensation arrangements with directors, officers, employees
and consultants of the Company. On May 3, 1994, 200,000 shares of Common Stock
were issued at $0.50 per share, or $100,000, to an employee as additional
compensation. On October 17, 1994, 50,000 shares of Common Stock were issued at
$1.00 per share, or $50,000, to an employee as additional compensation. On
December 30, 1994, 3,625 shares of Common Stock were issued to certain employees
of the Company as additional compensation in consideration for services to the
Company. On February 13, 1995, 500 shares of Common Stock were issued to Tim S.
Ledwick as additional compensation in consideration for services to the Company.
On January 2, 1995, 10,000 shares of Common Stock were issued to a consultant as
compensation in consideration for consulting services rendered. On July 1, 1995,
10,938 shares of Common Stock were issued at $3.08 per share, or $33,702, to
certain employees pursuant to the Company's 1995 Employee Stock Purchase Plan.
On January 1, 1996, 11,762 shares were issued at $4.68 per share (giving effect
to the 100% stock dividend paid on September 29, 1995), or $55,046, to certain
employees pursuant to the Company's 1995 Employee Stock Purchase Plan. All of
these issuances were exempt from registration pursuant to Rule 701 promulgated
under the Securities Act and, except as noted, are described without giving
effect to the 100% stock dividends paid on September 29, 1995 and July 1, 1996.
On April 27, 1994, the Company issued 1,380,000 (without giving effect to
the 100% stock dividends paid on September 29, 1995 and July 1, 1996) shares of
Common Stock to each of Messrs. Grosser, Patent and Fensterheim pursuant to
Cityscape's acquisition of CSC in exchange for 100% of the outstanding common
stock of CSC. The issuance was exempt from registration pursuant to Section 4(2)
of the Securities Act.
As of September 30, 1995, the Company issued 1,200,000 shares of Common
Stock to each of David A. Steene, Martin H.S. Brand and Gerald Epstein as
consideration for the 50% of the capital stock of CSC-UK not already owned by
the Company. This issuance was exempt from registration pursuant to Section 4(2)
of the Securities Act. In addition, Messrs. Steene, Brand and Epstein must be
offered piggyback registration rights when the Company proposes to register any
shares of its Common Stock for the benefit of Messrs. Grosser, Patent or
Fensterheim under the Securities Act (other than under a registration statement
on Form S-8).
On April 23, 1996, the Company issued an aggregate of 548,000 shares of
Common Stock to Messrs. Michael Jaye and David Johnson as consideration for the
J&J Acquisition. This issuance was exempt from registration pursuant to Section
4(2) of the Securities Act. In addition, Messrs. Jaye and Johnson must be
offered piggyback registration rights when the Company proposes to register any
shares of its Common Stock for the benefit of Messrs. Grosser, Patent or
Fensterheim under the Securities Act (other than under a registration statement
on Form S-8).
In May 1996, the Company issued $143.8 million of 6% Convertible
Subordinated Debentures due 2006. A portion of the offering was sold to foreign
investors in reliance on Regulation S under the Securities Act. The offering was
additionally sold in the US to qualified institutional investors pursuant to
Rule 144A of the Securities Act and to certain accredited investors in reliance
on Section 4(2) of the Securities Act.
II-3
<PAGE> 156
On June 14, 1996, the Company issued an aggregate of 99,362 shares of
Common Stock to Object International Company, Inc., Reads Trustees Limited and
Martin Young as consideration for the Heritable Acquisition. This issuance was
exempt from registration pursuant to Regulation S of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ -----------------------------------------------------------------------------------
<C> <S>
3.1* Certificate of Incorporation of the Company, as amended
3.2* Bylaws of the Company, as amended
4.1* Specimen Common Stock Certificate
4.2* Registration Rights Agreement, dated as of April 26, 1996, among the Company,
NatWest Securities Limited, Bear, Stearns & Co. Inc., CIBC Wood Gundy Securities
Corp. and Wasserstein Perella Securities, Inc.
4.3* Indenture, dated as of May 7, 1996, between the Company and The Chase Manhattan
Bank, N.A.
5.1* * Opinion of Gibson, Dunn & Crutcher LLP
10.1* Lease Agreement, dated as of September 30, 1993, between CSC and Taxter Park
Associates, as amended by the First Amendment to Lease, dated as of April 19, 1994,
and the Second Amendment to Lease, dated as of May 12, 1995
10.2* Sublease Agreement Between KLM Royal Dutch Airlines and CSC, dated as of December
5, 1994
10.3* Employment Agreement, dated as of January 1, 1995, between CSC and Robert Grosser
10.4* Employment Agreement, dated as of January 1, 1995, between CSC and Robert C. Patent
10.5* Employment Agreement, dated as of November 1, 1992, between CSC and Robert M.
Stata, as amended by the Amendment Agreement, dated as of January 1, 1994
10.6* Employment Agreement, dated as of July 1, 1995, between CSC and Cheryl P. Carl
10.7* Employment Agreement, dated as of July 1, 1995, between CSC and Eric S. Goldstein
10.8* Employment Agreement, dated as of July 1, 1995, between CSC and Steven Weiss
10.9* Letter agreement, dated as of August 18, 1994, between CSC and Tim S. Ledwick
10.10 * Employment Agreement, dated as of July 1, 1995, between CSC and Jonah L. Goldstein
10.11 * Agreement of Limited Partnership of Industry Mortgage Company, L.P., dated as of
July 1, 1993, between Industry Mortgage Corporation and the Limited Partners of
Industry Mortgage Company, L.P., including CSC, as amended by the First Amended and
Restated Agreement of Limited Partnership of Industry Mortgage Company, L.P., dated
as of January 1, 1994, by the First Amendment to First Amended and Restated
Agreement of Limited Partnership of Industry Mortgage Company, L.P., dated as of
March, 1994, and the Second Amendment to First Amended and Restated Agreement of
Limited Partnership of Industry Mortgage Company, L.P., dated as of July 1994
10.12 * Master Agreement for Sale and Purchase of Mortgages, dated as of July 1, 1993,
between CSC and Industry Mortgage Company L.P.
10.13 * Master Agreement for Sale and Purchase of Mortgage Loans, dated as of March 11,
1994, between CSC and Bank of Boston
10.14 * ContiMortgage Wholesale Second Mortgage Program Master Agreement for Sale and
Purchase of Mortgages, dated as of August 23, 1991, between CSC and ContiMortgage
Corporation, as amended by the First Amendment to Master Agreement for Purchase and
Sale, dated as of November 22, 1993, by the Second Amendment to Master Agreement
for Purchase and Sale, dated as of January 28, 1994 and by the Third Amendment,
dated as of November 9, 1994
10.15 * Standby Financing and Investment Banking Services Agreement, dated as of June 24,
1994, between CSC and ContiTrade
10.16 * Ongoing Agreement of Purchase and Sale of Mortgage Loans, dated as of November 12,
1993, between CSC and NationsCredit Financial Services Corporation of America
10.17 * Letter agreement, dated as of December 15, 1994, between NationsCredit Corporation
and CSC
10.18 * Promissory Note, dated as of December 9, 1993, between CSC and Center Capital
Corporation
</TABLE>
II-4
<PAGE> 157
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ -----------------------------------------------------------------------------------
<C> <S>
10.19 * Revolving Credit, Security, and Term Loan Agreement, dated as of June 30, 1995
among CSC, the Company, CoreStates Bank, N.A., Harris Trust and Savings Bank, NBD
Bank and NatWest Bank N.A., as amended by Amendment No. 1 to the Revolving Credit
Agreement, dated as of August 30, 1995
10.20 * The Company's 1995 Stock Option Plan
10.21 * The Company's 1995 Non-Employee Directors Stock Option Plan
10.22 * Pooling and Servicing Agreement, dated as of March 10, 1995, among CSC, ContiTrade
and Chemical Bank
10.23 * Indemnification Agreement, dated as of March 30, 1995, among CSC, ContiTrade and
Municipal Bond Investors Assurance Corporation
10.24 * Insurance Agreement, dated as of March 10, 1995, among CSC, Chemical Bank and
Municipal Bond Investors Assurance Corporation
10.25 * Purchase Price Letter, dated as of March 30, 1995, between CSC and ContiTrade
10.26 * Pooling and Servicing Agreement, dated as of July 31, 1995, between CSC and Harris
Trust and Savings Bank
10.27 * Indemnification Agreement, dated as of August 24, 1995, between CSC, ContiFinancial
Services Corporation and Financial Security Assurance Inc.
10.28 * Insurance and Indemnity Agreement, dated as of July 31, 1995, between CSC and
Financial Security Assurance Inc.
10.29 *+ Mortgage Loan Purchase Agreement, dated as of May 26, 1995, between CSC-UK and
Greenwich International, Ltd.
10.30 *+ Letter, dated as of May 26, 1995, from Greenwich International, Ltd. to CSC-UK
regarding purchase commitment with respect to first and second mortgage loans
located in the United Kingdom
10.31 *+ Servicing Agreement, dated as of May 26, 1995, among CSC-UK, City Mortgage
Servicing Limited and Greenwich International, Ltd.
10.32 * Stock Purchase Agreement, dated as of September 29, 1995, among the Company, David
Steene, Martin Brand and Gerald Epstein
10.33 * Service Agreement, dated as of April 5, 1995, between CSC-UK and David Steene
10.34 * Service Agreement, dated as of April 5, 1995, between CSC-UK and Martin Brand
10.35 * Service Agreement, dated as of April 5, 1995, between CSC-UK and Gerald Epstein
10.36 * Agreement, dated as of May 1, 1995, between CSC-UK and J.L.B. Equities, Inc.
10.37 * Lease, dated as of August 2, 1995, among The Standard Life Assurance Company, City
Mortgage Services Limited and CSC-UK
10.38 * Agreement and Plan of Reorganization, dated as of April 12, 1994, among Essex, CSC
and Shareholders of CSC
10.39 * Stock Purchase Agreement, dated November 15, 1993, between CSC and Spectrum
Financial Consultants, Inc.
10.40 * Pooling and Servicing Agreement, dated as of November 27, 1995, among CSC,
ContiTrade Services L.L.C. and Harris Trust and Savings Bank
10.41 * Insurance and Indemnity Agreement, dated as of November 27, 1995, between CSC and
Financial Security Assurance Inc.
10.42 * Indemnification Agreement, dated as of December 6, 1995, among CSC, Financial
Security Assurance Inc. and ContiFinancial Services Corporation
10.43 * Purchase Price Letter, dated as of December 6, 1995, between CSC and ContiTrade
Services L.L.C.
10.44 * Stock Option Agreement dated as of March 6, 1996 among the Company, CSC-UK, J&J and
Messrs. Jaye and Johnson
10.45 * Asset Purchase Agreement dated as of March 6, 1996 among the CSC-UK, J&J, UK Credit
and certain shareholders of UK Credit
10.46 * Service Deed, dated April 23, 1996 between J&J and Alec David Johnson
10.47 * Service Deed, dated April 23, 1996 between J&J and Michael Robin Jaye
</TABLE>
II-5
<PAGE> 158
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ -----------------------------------------------------------------------------------
<C> <S>
10.48 *++ Letter Agreement, dated as of March 28, 1996, from Greenwich to CSC-UK regarding
purchase commitment with respect to first and second mortgage loans located in the
UK
10.49 * Letter Agreement, dated March 28, 1996, between Greenwich and CSC-UK regarding
termination of prior agreement
10.50 * Subscription Agreement, dated April 26, 1996, among the Company, NatWest, Bear,
Stearns & Co. Inc., CIBC Wood Gundy Securities Corp. and Wasserstein Perella
Securities, Inc.
10.51 * Agreement for the Sale and Purchase of the Entire Issued Share Capital of Heritable
Group Limited, dated June 14, 1996, among the Company, CSC-UK, Heritable and
certain stockholders of Heritable
10.52 * Covenant Letter and related Pledge Agreement, Pledge Agreement, Stock Pledge
Agreement and Collateral Assignment, each dated April 11, 1996, among The First
National Bank of Boston, the Company and CSC, as amended by the Letter Agreement
and related Commercial Promissory Note and the Confirmation of Guaranty, each dated
June 13, 1996
10.53 * Purchase and Sale Agreement, dated June 20, 1996 and effective as of February 2,
1996, between CSC and Greenwich Capital Financial Products, Inc.
10.54 * Third Amendment to Lease, dated as of April 17, 1996, between CSC and Taxter Park
Associates
10.55 * Lease, dated as of April 18, 1996, among the Standard Life Assurance Company, City
Mortgage Servicing Limited and CSC-UK
10.56 * Lease Agreement, dated as of July 7, 1996, between CSC and Robert Martin Company
10.57 Loan Agreement, dated as of August 6, 1996, between CSC and CoreStates
10.58 Employment Agreement, dated as of January 1, 1996, between CSC and Tim S. Ledwick
10.59 Employment Agreement, dated as of February 1, 1996, between CSC and Robert J.
Blackwell
11.1* Computation of Earnings Per Share
21.1* Subsidiaries of the Company
23.1 Consent of Shane Yurman & Company
23.2* * Consent of KPMG Peat Marwick LLP
23.3* * Consent of KPMG, Registered Auditors
23.4 Consent of BDO Stoy Hayward
23.5* * Consent of Gibson, Dunn & Crutcher LLP (contained in Exhibit 5.1**)
24.1 Power of Attorney (included on signature page of Registration Statement)
25.1 Statement of Eligibility of Trustee
27.1* Financial Data Schedule
</TABLE>
- ---------------
* Previously filed with the Commission and hereby incorporated by reference
** To be filed by amendment
+ Confidential treatment granted
++ Confidential treatment requested
(b) Financial Statements
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement: (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933; (ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement.
II-6
<PAGE> 159
(2) For the purpose of determining any liability under the Securities
Act of 1933, each posteffective 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 such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, 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 such indemnification is against public policy as expressed in the 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 director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, 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 Act and will be governed by the final adjudication of
such issue.
II-7
<PAGE> 160
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Village of Elmsford, State of New
York, on September 4, 1996.
CITYSCAPE FINANCIAL CORP.
By: /s/ ROBERT C. PATENT
------------------------------------
Robert C. Patent
Executive Vice President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert C. Patent and Jonah L. Goldstein and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each said attorneys-in-fact and agents or any
of them or their or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the capacity
indicated on September 4, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------ -------------------------------------------------
<C> <S>
/s/ ROBERT GROSSER Chairman of the Board, Chief Executive Officer,
- ------------------------------------------ President and Director (Principal Executive
Robert Grosser Officer)
/s/ ROBERT C. PATENT Vice Chairman of the Board, Executive Vice
- ------------------------------------------ President and Director
Robert C. Patent
/s/ ASHER FENSTERHEIM Director
- ------------------------------------------
Asher Fensterheim
/s/ JONAH L. GOLDSTEIN Director
- ------------------------------------------
Jonah L. Goldstein
/s/ ARTHUR P. GOULD Director
- ------------------------------------------
Arthur P. Gould
</TABLE>
II-8
<PAGE> 161
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------ -------------------------------------------------
<C> <S>
/s/ HOLLIS W. RADEMACHER Director
- ------------------------------------------
Hollis W. Rademacher
/s/ ROBERT M. STATA Director
- ------------------------------------------
Robert M. Stata
/s/ DAVID A. STEENE Director
- ------------------------------------------
David A. Steene
/s/ TIM S. LEDWICK Chief Financial Officer (Principal Financial and
- ------------------------------------------ Accounting Officer)
Tim S. Ledwick
</TABLE>
II-9
<PAGE> 162
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------- ----------------------------------------------------------------------- ------------
<C> <S> <C>
3.1* Certificate of Incorporation of the Company, as amended................
3.2* Bylaws of the Company, as amended......................................
4.1* Specimen Common Stock Certificate......................................
4.2* Registration Rights Agreement, dated as of April 26, 1996, among the
Company, NatWest Securities Limited, Bear, Stearns & Co. Inc., CIBC
Wood Gundy Securities Corp. and Wasserstein Perella Securities, Inc....
4.3* Indenture, dated as of May 7, 1996, between the Company and The Chase
Manhattan Bank, N.A. ..................................................
5.1** Opinion of Gibson, Dunn & Crutcher LLP.................................
10.1* Lease Agreement, dated as of September 30, 1993, between CSC and Taxter
Park Associates, as amended by the First Amendment to Lease, dated as
of April 19, 1994, and the Second Amendment to Lease, dated as of May
12, 1995...............................................................
10.2* Sublease Agreement Between KLM Royal Dutch Airlines and CSC, dated as
of December 5, 1994....................................................
10.3* Employment Agreement, dated as of January 1, 1995, between CSC and
Robert Grosser.........................................................
10.4* Employment Agreement, dated as of January 1, 1995, between CSC and
Robert C. Patent.......................................................
10.5* Employment Agreement, dated as of November 1, 1992, between CSC and
Robert M. Stata, as amended by the Amendment Agreement, dated as of
January 1, 1994........................................................
10.6* Employment Agreement, dated as of July 1, 1995, between CSC and Cheryl
P. Carl................................................................
10.7* Employment Agreement, dated as of July 1, 1995, between CSC and Eric S.
Goldstein..............................................................
10.8* Employment Agreement, dated as of July 1, 1995, between CSC and Steven
Weiss..................................................................
10.9* Letter agreement, dated as of August 18, 1994, between CSC and Tim S.
Ledwick................................................................
10.10* Employment Agreement, dated as of July 1, 1995, between CSC and Jonah
L. Goldstein...........................................................
10.11* Agreement of Limited Partnership of Industry Mortgage Company, L.P.,
dated as of July 1, 1993, between Industry Mortgage Corporation and the
Limited Partners of Industry Mortgage Company, L.P., including CSC, as
amended by the First Amended and Restated Agreement of Limited
Partnership of Industry Mortgage Company, L.P., dated as of January 1,
1994, by the First Amendment to First Amended and Restated Agreement of
Limited Partnership of Industry Mortgage Company, L.P., dated as of
March, 1994, and the Second Amendment to First Amended and Restated
Agreement of Limited Partnership of Industry Mortgage Company, L.P.,
dated as of July 1994..................................................
10.12* Master Agreement for Sale and Purchase of Mortgages, dated as of July
1, 1993, between CSC and Industry Mortgage Company L.P. ...............
10.13* Master Agreement for Sale and Purchase of Mortgage Loans, dated as of
March 11, 1994, between CSC and Bank of Boston.........................
</TABLE>
<PAGE> 163
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------- ----------------------------------------------------------------------- ------------
<C> <S> <C>
10.14* ContiMortgage Wholesale Second Mortgage Program Master Agreement for
Sale and Purchase of Mortgages, dated as of August 23, 1991, between
CSC and ContiMortgage Corporation, as amended by the First Amendment to
Master Agreement for Purchase and Sale, dated as of November 22, 1993,
by the Second Amendment to Master Agreement for Purchase and Sale,
dated as of January 28, 1994 and by the Third Amendment, dated as of
November 9, 1994.......................................................
10.15* Standby Financing and Investment Banking Services Agreement, dated as
of June 24, 1994, between CSC and ContiTrade...........................
10.16* Ongoing Agreement of Purchase and Sale of Mortgage Loans, dated as of
November 12, 1993, between CSC and NationsCredit Financial Services
Corporation of America.................................................
10.17* Letter agreement, dated as of December 15, 1994, between NationsCredit
Corporation and CSC....................................................
10.18* Promissory Note, dated as of December 9, 1993, between CSC and Center
Capital Corporation....................................................
10.19* Revolving Credit, Security, and Term Loan Agreement, dated as of June
30, 1995 among CSC, the Company, CoreStates Bank, N.A., Harris Trust
and Savings Bank, NBD Bank and NatWest Bank N.A., as amended by
Amendment No. 1 to the Revolving Credit Agreement, dated as of August
30, 1995...............................................................
10.20* The Company's 1995 Stock Option Plan...................................
10.21* The Company's 1995 Non-Employee Directors Stock Option Plan............
10.22* Pooling and Servicing Agreement, dated as of March 10, 1995, among CSC,
ContiTrade and Chemical Bank...........................................
10.23* Indemnification Agreement, dated as of March 30, 1995, among CSC,
ContiTrade and Municipal Bond Investors Assurance Corporation..........
10.24* Insurance Agreement, dated as of March 10, 1995, among CSC, Chemical
Bank and Municipal Bond Investors Assurance Corporation................
10.25* Purchase Price Letter, dated as of March 30, 1995, between CSC and
ContiTrade.............................................................
10.26* Pooling and Servicing Agreement, dated as of July 31, 1995, between CSC
and Harris Trust and Savings Bank......................................
10.27* Indemnification Agreement, dated as of August 24, 1995, between CSC,
ContiFinancial Services Corporation and Financial Security Assurance
Inc. ..................................................................
10.28* Insurance and Indemnity Agreement, dated as of July 31, 1995, between
CSC and Financial Security Assurance Inc. .............................
10.29*+ Mortgage Loan Purchase Agreement, dated as of May 26, 1995, between
CSC-UK and Greenwich International, Ltd. ..............................
10.30*+ Letter, dated as of May 26, 1995, from Greenwich International, Ltd. to
CSC-UK regarding purchase commitment with respect to first and second
mortgage loans located in the United Kingdom...........................
10.31*+ Servicing Agreement, dated as of May 26, 1995, among CSC-UK, City
Mortgage Servicing Limited and Greenwich International, Ltd. ..........
10.32* Stock Purchase Agreement, dated as of September 29, 1995, among the
Company, David Steene, Martin Brand and Gerald Epstein.................
10.33* Service Agreement, dated as of April 5, 1995, between CSC-UK and David
Steene.................................................................
</TABLE>
<PAGE> 164
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------- ----------------------------------------------------------------------- ------------
<C> <S> <C>
10.34* Service Agreement, dated as of April 5, 1995, between CSC-UK and Martin
Brand..................................................................
10.35* Service Agreement, dated as of April 5, 1995, between CSC-UK and Gerald
Epstein................................................................
10.36* Agreement, dated as of May 1, 1995, between CSC-UK and J.L.B. Equities,
Inc. ..................................................................
10.37* Lease, dated as of August 2, 1995, among The Standard Life Assurance
Company, City Mortgage Services Limited and CSC-UK.....................
10.38* Agreement and Plan of Reorganization, dated as of April 12, 1994, among
Essex, CSC and Shareholders of CSC.....................................
10.39* Stock Purchase Agreement, dated November 15, 1993, between CSC and
Spectrum Financial Consultants, Inc. ..................................
10.40* Pooling and Servicing Agreement, dated as of November 27, 1995, among
CSC, ContiTrade Services L.L.C. and Harris Trust and Savings Bank......
10.41* Insurance and Indemnity Agreement, dated as of November 27, 1995,
between CSC and Financial Security Assurance Inc. .....................
10.42* Indemnification Agreement, dated as of December 6, 1995, among CSC,
Financial Security Assurance Inc. and ContiFinancial Services
Corporation............................................................
10.43* Purchase Price Letter, dated as of December 6, 1995, between CSC and
ContiTrade Services L.L.C. ............................................
10.44* Stock Option Agreement dated as of March 6, 1996 among the Company,
CSC-UK, J&J and Messrs. Jaye and Johnson...............................
10.45* Asset Purchase Agreement dated as of March 6, 1996 among the CSC-UK,
J&J, UK Credit and certain shareholders of UK Credit...................
10.46* Service Deed dated April 23, 1996 between J&J and Alec David Johnson...
10.47* Service Deed dated April 23, 1996 between J&J and Michael Robin Jaye...
10.48* Letter Agreement, dated as of March 28, 1996, from Greenwich to CSC-UK
regarding purchase commitment with respect to first and second mortgage
loans located in the UK................................................
10.49* Letter Agreement, dated March 28, 1996, between Greenwich and CSC-UK
regarding termination of prior agreement...............................
10.50* Subscription Agreement, dated April 26, 1996, among the Company,
NatWest, Bear, Stearns & Co. Inc., CIBC Wood Gundy Securities Corp. and
Wasserstein Perella Securities, Inc. ..................................
10.51* Agreement for the Sale and Purchase of the Entire Issued Share Capital
of Heritable Group Limited, dated June 14, 1996, among the Company,
CSC-UK, Heritable and certain stockholders of Heritable................
10.52* Covenant Letter and related Pledge Agreement, Pledge Agreement, Stock
Pledge Agreement and Collateral Assignment, each dated April 11, 1996,
among The First National Bank of Boston, the Company and CSC, as
amended by the Letter Agreement and related Commercial Promissory Note
and the Confirmation of Guaranty, each dated June 13, 1996.............
10.53* Purchase and Sale Agreement, dated June 20, 1996 and effective as of
February 2, 1996, between CSC and Greenwich Capital Financial Products,
Inc. ..................................................................
10.54* Third Amendment to Lease, dated as of April 17, 1996, between CSC and
Taxter Park Associates.................................................
</TABLE>
<PAGE> 165
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------- ----------------------------------------------------------------------- ------------
<C> <S> <C>
10.55* Lease, dated as of April 18, 1996, among the Standard Life Assurance
Company, City Mortgage Servicing Limited and CSC-UK....................
10.56* Lease Agreement, dated as of July 7, 1996, between CSC and Robert
Martin Company.........................................................
10.57 Loan Agreement, dated as of August 6, 1996, between CSC and
CoreStates.............................................................
10.58 Employment Agreement, dated as of January 1, 1996, between CSC and Tim
S. Ledwick.............................................................
10.59 Employment Agreement, dated as of February 1, 1996, between CSC and
Robert J. Blackwell....................................................
11.1* Computation of Earnings Per Share......................................
21.1* Subsidiaries of the Company............................................
23.1 Consent of Shane Yurman & Company......................................
23.2** Consent of KPMG Peat Marwick LLP.......................................
23.3** Consent of KPMG, Registered Auditors...................................
23.4 Consent of BDO Stoy Hayward............................................
23.5** Consent of Gibson, Dunn & Crutcher LLP (contained in Exhibit 5.1**)....
24.1 Power of Attorney (included on signature page of Registration
Statement).............................................................
25.1 Statement of Eligibility of Trustee....................................
27.1* Financial Data Schedule................................................
</TABLE>
- ---------------
* Previously filed with the Commission and hereby incorporated by reference
** To be filed by amendment
+ Confidential treatment granted
++ Confidential treatment requested
<PAGE> 1
Exhibit 10.59
LOAN AGREEMENT
dated as of August 6, 1996
BETWEEN
CITYSCAPE CORP.
as Borrower
and
CORESTATES BANK, N.A.,
as Lender
$10,000,000
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
ARTICLE I. DEFINITIONS AND ACCOUNTING TERMS.................................................. 1
Section 1.01. Definitions ......................................................... 1
Section 1.02. Accounting Terms...................................................... 10
Section 1.03. Computation of Time Periods........................................... 11
Section 1.04. Rules of Construction................................................. 11
ARTICLE II. THE LOAN......................................................................... 11
Section 2.01. The Loan; The Note.................................................... 11
Section 2.02. Repayment and Prepayment.............................................. 11
Section 2.03. Interest.............................................................. 12
Section 2.04. Fees.................................................................. 12
Section 2.05. Method of Payment of Interest and Fees................................ 12
Section 2.06. Use of Proceeds....................................................... 12
ARTICLE III. COLLATERAL...................................................................... 12
Section 3.01. Grant of Security Interest............................................ 12
Section 3.02. Responsibility for Collateral......................................... 14
Section 3.03. Representations and Warranties
Concerning Collateral............................................... 14
Section 3.04. Covenants and Agreements Concerning
Collateral......................................................... 16
Section 3.05. Uniform Commercial Code Financing
Statements......................................................... 17
Section 3.06. Collection Rights..................................................... 17
Section 3.07. Attorney-in-Fact...................................................... 18
Section 3.08. The Borrower Remains Liable........................................... 18
ARTICLE IV. CONDITIONS PRECEDENT............................................................. 19
Section 4.01. Conditions Precedent to the Loan...................................... 19
ARTICLE V. REPRESENTATIONS AND WARRANTIES.................................................... 20
Section 5.01. Formation, Good Standing and Due
Qualification...................................................... 20
Section 5.02. Power and Authority; No Conflicts..................................... 20
Section 5.03. Legally Enforceable Agreements........................................ 20
Section 5.04. Litigation............................................................ 20
Section 5.05. Financial Statements.................................................. 20
Section 5.06. Ownership and Liens................................................... 21
Section 5.07. Taxes................................................................. 21
Section 5.08. ERISA................................................................. 21
Section 5.09. Operation of Business; Prior or Existing
Restrictions, Etc.................................................. 21
Section 5.10. No Default on Outstanding Judgments or
Orders.......................,,.................................... 22
Section 5.11. No Defaults on Other Agreements....................................... 22
Section 5.12. Labor Disputes and Acts of God........................................ 22
Section 5.13. Environmental Protection.............................................. 22
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 5.14. Management of Borrower................................................ 23
Section 5.15. Compliance with Laws.................................................. 23
Section 5.16. Solvency.............................................................. 23
ARTICLE VI. REMEDIES......................................................................... 23
Section 6.01. Remedies.............................................................. 23
Section 6.02. Application of Proceeds............................................... 24
Section 6.03. The Bank May Perform.................................................. 25
Section 6.04. The Bank's Duties..................................................... 25
Section 6.05. Continuing Security Interest; Transfer
of Note............................................................ 25
ARTICLE VII. MISCELLANEOUS................................................................... 26
Section 7.01. No Waiver; Cumulative Remedies........................................ 26
Section 7.02. Set-Off............................................................... 26
Section 7.03. Amendments............................................................ 26
Section 7.04. Costs and Expenses; Indemnification................................... 26
Section 7.05. Binding Effect; Assignment;
Participation...................................................... 27
Section 7.06. Notices............................................................... 27
Section 7.07. Usury................................................................. 27
Section 7.08. Table of Contents; Headings........................................... 28
Section 7.09. Severability ......................................................... 28
Section 7.10. Counterparts ......................................................... 28
Section 7.11. Integration ......................................................... 28
Section 7.12. GOVERNING LAW......................................................... 28
Section 7.13. JURISDICTION; IMMUNITIES.............................................. 28
Section 7.14. WAIVER OF JURY TRIAL.................................................. 29
</TABLE>
-ii-
<PAGE> 4
LOAN AND SECURITY AGREEMENT dated as of August 6, 1996,
by and between CoreStates Bank, N.A. (the "Bank") and CITYSCAPE
CORP. (the "Borrower").
BACKGROUND
WHEREAS, the Borrower engages in the business of
originating and investing in Mortgage Loans;
WHEREAS, the Bank, as a bank and as agent, together with
several other lenders, has extended credit to the Borrower under a Revolving
Credit, Security and Term Loan Agreement dated as of June 30, 1995 (the
"Syndicated Agreement") the terms of which relating to Wet Mortgage Loans are
incorporated herein. The Bank has disclosed to the other banks its desire to
make this loan and has received the consent and waiver of Majority Banks as
defined under the Syndicated Agreement; and
WHEREAS, the Bank is willing, subject to the terms and
conditions of this Agreement, to make a loan of $10,000,000 (the "Loan") to the
Borrower with the Borrower's obligation for repayment of such loan to be
secured, as hereinafter described, by Mortgage Loans.
NOW, THEREFORE, in consideration of the promises and the
agreements hereinafter set forth, and intending to be legally bound hereby, the
parties agree as follows:
ARTICLE I. DEFINITIONS AND ACCOUNTING TERMS
Section 1.01. Definitions. As used in this Agreement, the
following terms have the following meanings (terms defined in the singular are
to have a correlative meaning when used in the plural and vice versa):
"Advance" has the meaning given to such term in
Section 2.01 hereof.
"Affiliate" means, with respect to the Borrower, any Person:
(A) which directly or indirectly controls, or is controlled by, or is under
common control with the Borrower; (B) which directly or indirectly beneficially
owns or holds ten percent or more of any equity or partnership interest of the
Borrower; or (C) ten percent or more of the equity or partnership interest of
which is directly or indirectly beneficially owned or held by the Borrower.
"Agencies" means FNMA or FHLMC.
-1-
<PAGE> 5
"Agreement" means this Loan and Security Agreement, as
amended, supplemented or modified from time to time.
"Business Day" means any day on which commercial banks are not
authorized or required to close in Pennsylvania.
"Closing Date" means August 6, 1996, or such earlier date as
the parties shall agree.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time, together with all rules and regulations promulgated in
connection therewith.
"Collateral" has the meaning specified in Section 3.01.
"Collateral Documents" means the documents underlying the
Pledged Mortgage Loans including, but not limited to, the original note, a copy
of the mortgage certified by a reputable title insurer or a closing agent as a
true and correct copy of the mortgage as filed, an assignment of mortgages in
recordable form and such other documentation as required by the Bank.
"Collateral Market Value" means the then-current market price
obtainable for any Pledged Mortgage as reasonably determined by the Bank, in the
commercial markets regularly trading Mortgage Loans of a similar nature.
"Collateral Value of Eligible Mortgages" means, with respect
to each Eligible Mortgage Loan, an amount as of any date of determination, equal
to (i) with respect to Single Family Mortgage Loan 98%, and (ii) with respect to
Multi-Family/Mixed Use Mortgage Loans 92% of the lower of: (A) the outstanding
principal amount of such loan; or (B) the Collateral Market Value of such loan.
"Control" means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract, or
otherwise.
"Eligible Mortgage Loan" means (A) with respect to a
Conforming Mortgage Loan (as defined in the Syndicated Agreement), a Single
Family Mortgage Loan which meets each of the following criteria, as applicable:
(1) is one of the following: (a) a Traditional
First Mortgage Loan; (b) a FHA Mortgage Loan or VA Mortgage
Loan; or (c) a Jumbo Mortgage Loan.
(2) complies with all requirements (including all
covenants, representations and warranties) of this Agreement
-2-
<PAGE> 6
for the inclusion of such Mortgage Loan as Collateral
including all documentary requirements;
(3) is effectively pledged to the Bank and in
respect of which the Bank has a first perfected Lien not
subject to any other Liens or claims of any kind;
(4) is subject to a Purchase Commitment;
(5) the related Mortgage Note, assignment in
recordable form and a certified copy of the mortgage are either held by
the Bank pursuant to this Agreement or are pledged as Collateral in
accordance with the Wet Closing provisions enumerated in SECTION 4.05
of the Syndicated Agreement;
(6) was delivered to the Bank as Collateral within
five Business Days after the date of its funding and has not remained
as Collateral for more than thirty days from the date of delivery;
(7) will fully amortize within thirty years or
less after the date of origination and is not subject to any
negative amortization;
(8) is a first Lien on a Single Family Residence;
(9) is secured by a Single Family Residence which is
(1) an owner-occupied primary residence or (2) a second home;
(10) not more than 21 days have elapsed from the date
such Mortgage Loan was delivered to an Investor for examination and
purchase;
(11) not more than five business days have elapsed
from the date a Collateral document with respect to such Mortgage Loan
was delivered to the Borrower for correction or completion without the
return thereof to the Bank;
(12) is not a Wet Mortgage Loan in respect of which
the Bank has not received all Collateral documents required to be
delivered to the Bank within five Business Days after the funding of
such Wet Mortgage Loan or which do not comply fully with the Wet
Closing provisions enumerated in SECTION 4.05 of the Syndicated
Agreement; and
(13) is not a Mortgage Loan which the Bank
notifies the Borrower that, in the Bank's reasonable
opinion, is not satisfactory as Collateral; and
-3-
<PAGE> 7
(B) with respect to a Non-Conforming Mortgage Loan, a Mortgage
Loan which meets each of the following criteria, as applicable:
(1) is one of the following: (a) a Schedule A
Mortgage Loan, (b) a Special Category Mortgage Loan (as such
term is defined in the Syndicated Agreement), or (c) a
Multi-Family/Mixed Use Mortgage Loan.
(2) complies with all requirements (including all
covenants, representations and warranties) of this Agreement for the
inclusion of such Mortgage Loan as Collateral including all documentary
requirements;
(3) has been properly closed, issued and validly
authorized by, and is enforceable against, all parties thereto and
constitutes the item of Collateral purported to be represented by the
documents, instruments and agreements relating thereto delivered to the
Bank and/or pledged to the Bank;
(4) is effectively pledged to the Bank and in
respect of which the Bank has a first perfected Lien not
subject to any other Liens or claims of any kind;
(5) the related Mortgage Note, assignment in
recordable form and a certified copy of the mortgage are held by the
Bank prior to funding or are pledged as Collateral in accordance with
the Wet Closing provisions enumerated in Section 4.05 of the Syndicated
Agreement; or, if the Mortgage Loan was originated by a Person other
than the Borrower, (1) the related Mortgage Note, assignment in
recordable form and the mortgage (or a certified copy thereof) are held
by the Bank prior to the Bank's disbursing of any advance with respect
thereto and (2) such Mortgage Loan was not originated or purchased by
the Borrower more than 45 days prior to the date of the Bank's receipt
of the related Mortgage Note;
(6) is not in payment default for a period of
sixty days or more;
(7) will fully amortize within thirty years or less
after the date of origination; is not subject to any negative
amortization and is not a balloon Mortgage Loan the amortization of
which the Bank finds unacceptable;
(8) is a first or second Lien (except that Multi-
Family/Mixed Use loans may only be first Liens);
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(9) is secured by a premise which is (1) an
owner-occupied primary residence; (2) a second home or investor
property; or (3) a Multifamily/Mixed Use Property;
(10) not more than five business days have elapsed
from the date a Collateral document with respect to such Mortgage Loan
was delivered to the Borrower for correction or completion without the
return thereof to the Bank; and
(11) is not a Mortgage Loan which the Bank notifies
the Borrower that, in the Bank's reasonable opinion, is not
satisfactory as Collateral.
"Environmental Discharge" means any discharge or release of
any Hazardous Materials in violation of any applicable Environmental Law.
"Environmental Law" means any Law relating to pollution or the
environment, including, without limitation, Laws relating to noise or to
emissions, discharges, releases or threatened releases of Hazardous Materials
into the workplace, the community or the environment, or otherwise relating to
the generation, manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials.
"Environmental Notice" means any complaint, order, citation,
letter, inquiry, notice or other written communication from any Person (1)
affecting or relating to the Borrower's compliance with any Environmental Law in
connection with any activity or operations at any time conducted by the
Borrower, (2) relating to the occurrence or presence of or exposure to or
possible or threatened or alleged occurrence or presence of or exposure to
Environmental Discharges or Hazardous Materials at any of the locations or
facilities of the Borrower, including, without limitation (a) the existence of
any contamination or possible or threatened contamination at any such location
or facility and (b) remediation of any Environmental Discharge or Hazardous
Materials at any such location or facility or any part thereof; and (3) any
violation or alleged violation of any relevant Environmental Law.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, including any rules and regulation
promulgated thereunder.
"ERISA Affiliate" means any corporation or trade or business
which is a member of the same controlled group of corporations (within the
meaning of Section 414(b) of the Code) as the Borrower or is under common
control (within the meaning of Section 414(c) of the Code) with the Borrower.
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"Escrow Deposits" means all monies held by the Borrower
representing principal, interest, tax, insurance and other deposits or payments
made by mortgagors under Mortgage Loans.
"FHA" means the Federal Housing Administration and its
successors.
"FHA Mortgage Loan" means a Mortgage Loan which satisfies all
applicable rules and requirements to be insured by the FHA and which is insured
by the FHA.
"FHLMC" means the Federal Home Loan Mortgage
Corporation.
"Fiscal Year" means each period from January 1 to
December 31.
"FNMA" means the Federal National Mortgage Association
and its successors.
"GAAP" means generally accepted accounting principles in the
United States of America as in effect from time to time.
"Good Faith Contest" means the contest of an item if, in the
Bank's sole determination: (1) the item is diligently contested in good faith by
appropriate proceedings timely instituted; (2) adequate reserves are established
on the books of the Borrower with respect to the contested item; (3) during the
period of such contest, the enforcement of any contested item is effectively
stayed; and (4) the failure to pay or comply with the contested item could not
result in a Material Adverse Change.
"Governmental Approvals" means any authorization, consent,
approval, license, permit, certification, or exemption of, registration or
filing with or report or notice to, any Governmental Authority.
"Governmental Authority" means any nation or government, any
state or other political subdivision thereof, and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.
"Hazardous Materials" means any pollutant, effluents,
emissions, contaminants, toxic or hazardous wastes or substances, as any of
those terms are defined from time to time in or for the purposes of any relevant
Environmental Law, including, without limitation, asbestos fibers and friable
asbestos, polychlorinated biphenyls, and any petroleum or hydrocarbon-based
products or derivatives.
"HELOC Mortgage Loan" means "home equity line of
credit" and is a loan which is made pursuant to an open-end
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<PAGE> 10
credit plan, as that term is defined in Regulation Z, Section 226.2(a), which
loan is secured by the mortgagor's dwelling.
"Jumbo Mortgage Loan" means with respect to Conforming
Mortgage Loans an Eligible Residential Mortgage Loan in a principal amount equal
to or greater than the limits established from time to time by FNMA or FHLMC for
sale to FNMA or FHLMC but which Eligible Residential Mortgage Loan in all other
respects satisfies the requirements for sale to FNMA and FHLMC.
"Law" means any federal, state or local statute, law, rule,
regulation, ordinance, order, code, policy or rule of common law, now or
hereafter in effect, and in each case as amended, and any judicial or
administrative interpretation thereof by a Governmental Authority, including any
judicial or administrative order, consent decree or judgment.
"Lien" means any mortgage, deed of trust, pledge, security
interest, hypothecation, assignment, deposit arrangement, encumbrance, lien
(statutory or other), or preference, priority, or other security agreement or
preferential arrangement, charge, or encumbrance of any kind or nature
whatsoever (including, without limitation, any conditional sale or other title
retention agreement, any financing lease having substantially the same economic
effect as any of the foregoing, and the filing of any financing statement under
the Uniform Commercial Code or comparable law of any jurisdiction to evidence
any of the foregoing).
"Loan" has the meaning specified in the Background
Section hereof.
"Loan Documents" means this Agreement, the Note, each Monthly
Collateral Report, and the UCC-1 financing statements delivered in connection
with this Agreement, together with any and all documents, instruments and
materials issued, executed and/or delivered by the Borrower in connection with
any of the foregoing together with all amendments, restatements, and
modifications thereof.
"Material Adverse Change" means (1) a material adverse change
in the status of the business, results of operations, condition (financial or
otherwise), property or prospects of Borrower, (2) any event or occurrence of
whatever nature which could have a material adverse effect on Borrower's ability
to perform their obligations under the Loan Documents or (3) any material
adverse change in the Collateral or any event or occurrence of whatever nature
which could have a material adverse effect or result in a material adverse
change in the value, enforceability, collectability or the nature of the
Collateral.
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"Monthly Collateral Report" means the report, in form
acceptable to the Bank in its sole discretion, to be delivered by the Borrower
on a monthly basis to the Bank pursuant to Section 3.04 hereof.
"Mortgage" means a mortgage, deed of trust, security deed or
similar lien encumbering real property securing a Mortgage Loan.
"Mortgage Loan" means a loan which is secured by a
first or second Mortgage.
"Mortgage Note" means the note or other evidence of
indebtedness evidencing the indebtedness of a mortgagor on a Mortgage Loan.
"Multiemployer Plan" means a Plan defined as such in Section
3(37) of ERISA to which contributions have been made by the Borrower or any
ERISA Affiliate and which is covered by Title IV of ERISA.
"Multifamily/Mixed Use Mortgage Loan" means a Mortgage Loan
which is secured by a Mortgage which is a first lien on a Multifamily/Mixed Use
Property.
"Multifamily/Mixed Use Property means a completed structure
which satisfies the definitions, and fully complies with the guidelines,
contained in Attachment B to the Syndicated Agreement.
"Non-Conforming Mortgage Loan" means either a Schedule
A Mortgage Loan or a Special Category Mortgage Loan.
"Note" has the meaning specified in Section 2.01.
"Obligations" means (1) each and every obligation, covenant
and agreement of the Borrower now or hereafter existing contained in this
Agreement, and any of the other Loan Documents, whether for principal, interest,
fees, expenses, indemnities or otherwise, and any amendments or supplements
thereto, extensions or renewals thereof or replacements therefor, including but
not limited to all indebtedness, obligations and liabilities of Borrower to the
Bank now existing or hereafter incurred under or arising out of or in connection
with the Notes, this Agreement, the other Loan Documents, and any documents or
instruments executed in connection therewith, (2) all sums advanced in
accordance with this Agreement by or on behalf of the Bank to protect any of the
Collateral purported to be covered hereby, and (3) any amounts paid by the Bank
in preservation of any of the Bank's rights or interest in the Collateral,
together with interest on such amounts from the date such amounts are paid until
reimbursement in full at a rate per annum equal at all
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times to the Default Rate; in each case whether direct or indirect, joint or
several, absolute or contingent, liquidated or unliquidated, now or hereafter
existing, renewed or restructured, whether or not from time to time decreased or
extinguished and later increased, created or incurred, and including all
indebtedness of the Borrower under any instrument now or hereafter evidencing or
securing any of the foregoing.
"Operating Account" means the demand deposit account
established by the Borrower with the Bank for use by the Borrower for its
general business operations and for the payment to the Bank, by automatic debit,
of interest, fees and any other amounts payable from time to time hereunder.
"PBGC" means the Pension Benefit Guaranty Corporation and any
entity succeeding to any or all of its functions under ERISA.
"Person" means an individual, partnership, corporation,
business trust, joint stock company, trust, unincorporated association, joint
venture, Governmental Authority or other entity of whatever nature.
"Plan" means any employee benefit or other plan established or
maintained, or to which contributions have been made, by the Borrower or any
ERISA Affiliate and which is covered by Title IV of ERISA or to which Section
412 of the Code applies.
"Pledged Mortgage" means a mortgage underlying a
Pledged Mortgage Loan.
"Pledged Mortgage Loans" means all of the Mortgage Loans
pledged to the Bank hereunder as set forth on a loan request.
"Presence", when used in connection with any Environmental
Discharge or Hazardous Materials, means and includes presence, generation,
manufacture, installation, treatment, use, storage, handling, repair,
encapsulation, disposal, transportation, spill, discharge and release.
"Prime Rate" means at any time for the determination thereof
the rate of interest for loans which the Bank publicly announces from time to
time as its prime rate, such rate to change on the same date as the Bank
announces a change in its prime rate. The rate announced by the Bank as its
prime rate is a reference rate and does not necessarily represent the lowest or
best rate actually charged to any customer. The Bank may make commercial loans
or other loans at rates of interest at, above or below such rate. The interest
rate payable on the Loan shall change immediately with each change in the Bank's
Prime Rate.
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"Prohibited Transaction" means any transaction set forth in
Section 406 of ERISA or Section 4975 of the Code.
"Schedule A Mortgage Loan" means a Mortgage Loan which fails
to satisfy all of the requirements for sale to FNMA or FHLMC under their
standard mortgage loan purchase programs, but which satisfies all of the
applicable requirements of the Borrower's credit underwriting guidelines set
forth on Attachment A to the Syndicated Agreement.
"Single Family Mortgage Loan" means a Mortgage Loan which is
secured by a Mortgage which is a first or second Lien on a Single Family
Residence.
"Single Family Residences" means completed one to four family
residential dwellings and property related thereto.
"Subsidiary" means, as to any Person, a corporation of which
shares of stock having ordinary voting power (other than stock having such power
only by reason of the happening of a contingency) to elect a majority of the
board of directors or other managers of such corporation are at the time owned,
or the management of which is otherwise controlled, directly, or indirectly
through one or more intermediaries, or both, by such Person.
"Syndicated Agreement" has the meaning given to such
term in the Background Section hereof.
"Taxes" means taxes of the Borrower or of the Partners,
as determined in accordance with GAAP.
"Traditional First Mortgage Loan" means a Mortgage Loan which
(1) is a first Lien on a Single Family Residence, (2) is neither insured by the
FHA nor guaranteed by the VA, (3) matures in thirty (30) years or less, (4)
bears interest at a current market rate at the time of origination, and (5)
satisfies all requirements for sale to FNMA and FHLMC or any other Investor's
Conforming Loan programs.
"UCC" means the Pennsylvania Uniform Commercial Code in
effect on the date hereof.
"VA" means the Veterans Administration and its
successors.
Section 1.02. Accounting Terms. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP, and all
financial data required to be delivered hereunder shall be prepared in
accordance with GAAP, consistently applied.
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Section 1.03. Computation of Time Periods. Except as otherwise
provided in this Agreement, in the computation of periods of time from a
specified date to a later specified date, the word "from" means "from and
including" and words "to" and "until" each means "to but excluding".
Section 1.04. Rules of Construction. When used in this
Agreement: (1) a reference to time shall be the time in Philadelphia,
Pennsylvania; (2) a reference to an agreement, instrument or document shall
include such agreement, instrument or document as the same may be amended,
modified or supplemented from time to time in accordance with its terms and as
permitted by the Loan Documents; (3) a reference to a day shall be a calendar
day unless Business Day is specified.
ARTICLE II. THE LOAN
Section 2.01. The Loan; The Note. Subject to and upon the
terms and conditions set forth in this Agreement and in reliance upon the
representations and warranties set forth herein, the Bank agrees to lend to the
Borrower the lesser (i) of $10,000,000 and (ii) the Collateral Value of Eligible
Mortgage Loans as have been pledged to the Bank pursuant hereto. The Loan shall
be made available to the Borrower on the Closing Date and may be advanced in one
or more advances (each an "Advance") from and after the Closing Date, provided
that in no event shall the aggregate amount of all Advances hereunder exceed the
Collateral Value of Eligible Mortgages pledged hereunder. Advances shall be
requested and advanced in the manner set forth in the Syndicated Agreement. The
Borrower's obligation to repay the amounts outstanding under the Loan shall be
evidenced by a demand promissory note (the "Note") in the form attached hereto
as Exhibit "A".
Section 2.02. Repayment and Prepayment. (A) Repayment on
Demand. All outstanding principal, together with all accrued and unpaid interest
and any accrued and unpaid fees or other amounts due hereunder, shall be
immediately due and payable upon demand by the Bank.
(B) Voluntary Repayment. The Borrower may repay the Loan at
any time provided that any repayment is accompanied by all accrued and unpaid
interest and any accrued and unpaid fees or expenses. Amounts repaid may be
reborrowed subject to the terms and conditions set forth in this Agreement.
(C) Mandatory Repayment. To the extent one or more Pledged
Mortgage Loans cease to be Eligible Mortgage Loans, the Borrower shall
immediately repay the Loan in an amount sufficient to cause the amount of the
Loan then outstanding to be less than the aggregate Collateral Value of Eligible
Mortgage Loans.
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Section 2.03. Interest. The Borrower will pay interest on the
principal balance of the Loan at the Bank's Prime Rate plus .25% in arrears, on
the earlier of (i) first day of each month that the Loan is outstanding and (ii)
demand. From and after the date on which demand is made for repayment, interest
shall be payable at the Bank's Prime Rate plus 2.25%. All calculation of
interest shall be made on the basis of 360 day years for the actual number of
days elapsed.
Section 2.04. Fees. The Borrower shall pay to the Bank a fee
of $25,000 on the Closing Date. The Borrower's payment, and the Bank's receipt,
of any fees under this Agreement shall not constitute an agreement by the Bank
to extend credit to the Borrower on any basis other than a "Demand" basis.
Section 2.05. Method of Payment of Interest and Fees. The
Borrower shall make payment of interest, fees, and other amounts under this
Agreement and under the Note by means of the Bank's direct charge to the
Operating Account. The Borrower hereby authorizes the Bank to make such charges
from the Operating Account and in the event there are insufficient funds in the
Operating Account at the time the Bank attempts to make the charge, the Bank may
charge from time to time against any account the Borrower maintains with the
Bank the amount so due. Except to the extent provided in this Agreement,
whenever any payment to be made under this Agreement or under the Note shall be
stated to be due on any day other than a Business Day, such payment shall be
made on the next succeeding Business Day, and such extension of time shall in
such case be included in the computation of the payment of interest.
Section 2.06. Use of Proceeds. The Borrower will only use the
proceeds of the Loan to originate or purchase Mortgage Loans. The Borrower will
not, directly or indirectly, use any part of such proceeds: (x) for the purpose
of purchasing or carrying any margin stock within the meaning of Regulation U of
the Board of Governors of the Federal Reserve System or (y) to extend credit to
any Person for the purpose of purchasing or carrying any such margin stock.
ARTICLE III. COLLATERAL.
Section 3.01. Grant of Security Interest. In order to secure
the payment and performance in full of the Loan and the Obligations, the
Borrower hereby assigns and pledges to the Bank and hereby grants to the Bank a
security interest in and to the following, whether now owned or hereafter
acquired by the Borrower (the "Collateral"):
(a) All Pledged Mortgage Loans and the Mortgage
Note, Mortgages, and other collateral Documents evidencing
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<PAGE> 16
said Pledged Mortgage Loans, and all instruments, general intangibles,
property rights, proceeds and payments relating thereto, including
without limitation the following:
(1) All payments and prepayments of
principal, interest, and other income due or to become due on the
Pledged Mortgage Loans and all proceeds therefrom, and all the right,
title and interest of every nature whatsoever of the Borrower in and to
such property;
(2) All Liens with respect thereto or as
security therefor;
(3) All hazard insurance policies, title
insurance policies or condemnation proceeds with respect thereto;
(4) All prepayment premiums and late payment
charges with respect thereto;
(5) All real estate acquired by the Borrower
by deed in lieu of foreclosure or by foreclosure attributable to any
such Pledged Mortgage Loan;
(6) All right, title and interest of the
Borrower in and to all files, surveys, certificates, correspondence,
appraisals, computer programs, tapes, discs, cards, accounting records,
and other records, information, and related data of the Borrower with
respect to such Pledged Mortgage Loans;
(7) The proceeds from the sale or
securitization of any Collateral;
(8) All business records, computer tapes,
software, microfiche, etc., necessary to identify and locate the
Collateral.
(9) All proceeds of any and all of the
foregoing Collateral (including, without limitation, proceeds which
constitute property of the types described in any of the clauses of
this Section 3.01 and, to the extent not otherwise included, all
payments under insurance (whether or not the Bank or the Borrower is
the loss payee thereof), or any indemnity, warranty or guaranty,
payable by reason of loss or damage to or otherwise with respect to any
of the foregoing Collateral; and
(10) Subject to the terms of the Syndicated
Agreement, all cash from time to time deposited in any deposit account
of the Borrower with the Bank.
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<PAGE> 17
Section 3.02. Responsibility for Collateral. To the extent
required by Section 9-207 of the Uniform Commercial Code or other applicable
law, the Bank shall use reasonable care in the care, transmittal, custody and
preservation of Collateral in its possession; reasonable care shall be deemed to
be such care that the Bank exercises in the transmittal, care, preservation and
custody of its own property of a similar nature. Notwithstanding the foregoing,
the Bank shall have (1) no responsibility with respect to the risk of accidental
loss or damage to Collateral in its possession, (2) no obligation to provide
insurance for or in respect of the Collateral and (3) no responsibility for
Collateral not in its possession. The Bank shall have no fiduciary
responsibility or duty to the Borrower with respect to the care, preservation,
holding, maintenance or transmittal of the Collateral delivered to the Bank or
any other Person.
Section 3.03. Representations and Warranties Concerning
Collateral. The Borrower hereby represents and warrants to the Bank:
(A) Ownership; No Liens; Pledge to the Bank. The
Borrower is the legal and equitable owner of the Pledged Mortgage Loans
and all other items of Collateral related thereto (subject only to the
security interests in Collateral other than Mortgage Loans granted
under the Syndicated Agreement), free and clear of all Liens, except
for the Lien granted under this Agreement. Such Pledged Mortgage Loans
and other items of Collateral related thereto have been duly authorized
and validly issued by the Borrower thereunder and all items of
Collateral (a) comply, as applicable, with the requirements of this
Agreement, including those required for inclusion as Eligible Mortgage
Loans to the extent that the Borrower includes such Mortgage Loans in
its calculations of Eligible Mortgage Loans, and (b) have been validly
pledged or assigned to the Bank, subject to no other Liens, and the
Bank has a first perfected Lien therein within the meaning of the
applicable Uniform Commercial Code. The Borrower has the full right and
authority to pledge the Collateral pledged by it hereunder and has not
pledged the Collateral, or any part thereof, to any other Person.
(B) Compliance with Laws; Enforceability;
Modification; Required Documents, Etc. Each Pledged Mortgage Loan and
documents related thereto (1) has been made in compliance, in all
respects, with all requirements of the Real Estate Settlement
Procedures Act, the Equal Credit Opportunity Act, the Federal
Truth-In-Lending Act and all other applicable Laws, (2) is genuine,
valid, duly authorized, properly executed, properly recorded (or duly
delivered to the appropriate recording office for
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<PAGE> 18
recordation) and enforceable in accordance with its terms, without
defense or offset, (3) has not been modified or amended and has not had
any requirements thereof waived except for minor modifications in the
ordinary course of the Borrower's business which do not in any event
materially adversely affect the value or marketability of the relevant
item of Collateral, (4) complies with the terms of this Agreement, (5)
has been fully advanced in the respective face amounts thereof and (6)
is secured by a Mortgage which is a first or second Lien on the
respective Single Family Residence or Multi-Family/Mixed Use Property.
With respect to each such Pledged Mortgage, the Borrower has in its
possession all documents and instruments required to be possessed by
the Borrower (x) under this Agreement, and (y) under FNMA's or FHLMC's
rules, regulations or guidelines, if applicable, other than those
documents and instruments which are in the possession of the Bank.
(C) Defaults. No default, nor any event which would
become a default with notice or lapse of time or both, has occurred and
is continuing under any Pledged Mortgage Loan for a period in excess of
sixty days.
(D) Insurance Relating to Pledged Mortgages. All fire
and casualty policies covering the premises encumbered by such Mortgage
included in the Pledged Mortgage Loans (a) name the Borrower as the
insured under a standard mortgagee clause not less favorable to the
Borrower than the applicable standard mortgagee endorsement, (b) are in
full force and effect, and (c) afford insurance against fire and such
other hazards as are usually insured against in the broad form of
extended coverage insurance from time to time available. All flood,
title and other insurance policies (including required private mortgage
insurance) (i) name the Borrower as an additional insured under a
standard mortgagee clause not less favorable to the Borrower than the
applicable standard mortgagee endorsement, or in the case of title
insurance, the insured mortgagee, (ii) are in full force and effect,
and (iii) afford insurance against the hazards and risks required to be
insured against by either Agency or prudent underwriting practices. The
Borrower has complied with all requirements of the Agencies for
obtaining insurance with respect to such Pledged Mortgage.
(E) Escrow Deposits. All Escrow Deposits are held by
the Borrower or its servicer in accordance with applicable Laws and any
agreements relating to same and have been and will be applied to the
obligations for which they were deposited in accordance with any
agreements relating to same.
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Section 3.04. Covenants and Agreements Concerning
Collateral. The Borrower covenants and agrees as follows:
(A) Defense of Interests. It will defend the right,
title and interest of the Bank in and to the Pledged Mortgage Loan, the
Pledged Mortgages and all other items of Collateral against the claims
and demands of all Persons.
(B) Modification; Etc. Except as provided in Section
3.03(B)(3), it shall not amend, modify, or waive any of the terms and
conditions of, or settle or compromise any claim in respect of, any
Pledged Mortgage Loan or Pledged Mortgages or other Collateral, or any
rights related to any of the foregoing.
(C) Sale or Encumbrance. Other than under the
Syndicated Agreement, it shall not sell, option, assign, transfer or
otherwise alienate any Collateral, other than in the ordinary course of
its business and in accordance with the terms and provisions of this
Agreement, or permit any Collateral or any interest therein to be
subject to a Lien, except the Lien granted under this Agreement.
(D) Performance under Servicing Contracts; Escrow
Deposits. It shall cause all Pledged Mortgage Loans to be serviced in
accordance with its standard requirements. It, or its servicer shall
hold all Escrow Deposits in accordance with all applicable Laws and all
agreements relating to such Escrow Deposits, without commingling the
same with non-escrow funds, and the Borrower or its servicer shall hold
and apply the same for the purposes for which such Escrow Deposits were
collected in accordance with all applicable Laws and agreements.
(E) Failure to Qualify as Eligible Mortgage Loan. The
Borrower shall immediately notify the Bank of (1) any default under any
Pledged Mortgage Loan which continues beyond sixty days, (2) the
failure of any item of Collateral to satisfy any other requirement of
this Agreement as an Eligible Mortgage Loan, and (3) any other matter
which has a Material Adverse Effect on the Collateral.
(F) Further Assurances. From time to time, at the
expense of the Borrower (including the payment of all filing fees
whether the items are filed by the Borrower or by the Bank), the
Borrower will promptly execute and deliver all further instruments and
documents, and take all further actions, that may be necessary or
desirable, or that the Bank may request, in order to preserve, perfect
and protect any Lien granted or purported to be granted hereby or to
enable the Bank to exercise and enforce its rights and remedies
hereunder with respect to any Collateral. Without
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<PAGE> 20
limiting the generality of the foregoing, the Borrower will execute and
file such financing or continuation statements, or amendments thereto,
and such other instruments or notices, as may be necessary or
desirable, or as the Bank may request, in order to perfect and preserve
the Lien granted or purported to be granted to the Bank hereby.
(G) Inspection. The Bank or a representative thereof,
shall have the right at any reasonable time from time to time to enter
such Borrower's premises to inspect the Collateral, documents and
agreements related thereto and the records relating to the Collateral.
The Bank shall have the right to make abstracts or photocopies from or
of such Borrower's books and records pertaining to the Collateral and
the cost and expense of such abstracts and photocopy for the Bank shall
be borne by the Borrower.
(H) Monthly Collateral Reports. On the 15th day of
any month in which the Loan is outstanding, the Borrower shall deliver
to the Bank a Collateral Report in respect of the Collateral (the
"Monthly Collateral Report") in form and substance acceptable to the
Bank in its sole discretion.
Section 3.05. Uniform Commercial Code Financing Statements.
The Bank is hereby authorized to file in the name of the Borrower, without the
need for the Borrower's signature thereto, such UCC financing statements,
amendments thereto and continuations thereof which the Bank at any time
determines is necessary to perfect or better assure the Lien and other benefits
intended to be afforded hereby. A carbon, photographic or other reproduction of
this Agreement or any financing statement covering the Collateral or any part
thereof shall be sufficient as a financing statement where permitted by law.
Section 3.06. Collection Rights. Unless and until repayment is
demanded by the Bank hereunder, the Borrower shall be entitled to receive and
collect directly all principal and interest payable to the Borrower in respect
of the Collateral and to exercise all voting or consensual powers in respect of
the Collateral in a manner not inconsistent with the terms of this Agreement.
Upon demand for repayment, the Bank shall be entitled to receive and collect all
sums payable to the Borrower in respect of the Collateral, and in such case (i)
the Bank may, in the Bank's name or in the name of the Borrower or otherwise,
demand, sue for, collect or receive any money or property at any time payable or
receivable on account of or in exchange for any of the Collateral, but shall be
under no obligation to do so, (ii) the Borrower shall forthwith pay to the Bank
at its principal office all amounts thereafter received by the Borrower upon or
in respect of any of the Collateral, advising the Bank as to the source of such
funds, and (iii) all amounts so received
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and collected by the Bank shall be held by the Bank as part of the Collateral.
Section 3.07. Attorney-in-Fact. The Bank is hereby appointed
the agent and attorney-in-fact of the Borrower for the purpose of carrying out
the provisions of this Agreement, taking any action and executing any
instruments which the Bank may deem necessary or advisable to accomplish the
purposes hereof and to obtain for the Bank, the benefits of this Agreement, the
other Loan Documents, the Collateral and the security intended to be provided to
the Bank hereby and thereby, which agency and appointment as attorney-in-fact is
irrevocable and coupled with an interest. Without limiting the generality of the
foregoing, the Bank shall have the right and power in the place and stead of the
Borrower, and in the name of the Borrower or otherwise (from time to time and
without prior notice to or consent from the Borrower, and without releasing or
in any manner affecting the Borrower's Obligations hereunder): (i) to receive,
endorse and collect all checks, drafts or chattel paper made payable to the
order of the Borrower (provided that all such endorsements recite that they are
made without recourse) representing any payment on account of the principal,
interest or other amount on any of the Pledged Mortgages or other items of
Collateral, to give full discharge for the same and to complete any endorsements
or assignments made in blank or which are undated or otherwise incomplete or to
execute new endorsements (provided that all such endorsements recite that they
are made without recourse) or assignments to any Persons, (ii) to ask, demand,
collect, sue for, recover, compound, receive and give, acquitances and receipts
for moneys due and to become due under or in respect of any of the Collateral,
(iii) to file any claims or take any action or institute any proceedings which
the Bank deems necessary or desirable for the collection or completion of, or
perfection of its interest in any of the Collateral or otherwise to enforce the
rights of the Borrower or the Bank with respect to any of the Collateral, this
Agreement or the other Loan Documents, including, without limitation, the
endorsement of any Mortgage Note, and the creation, execution and recording of
any Assignment of Mortgage for any Pledged Mortgage and (iv) if the Borrower
fails to perform any obligation under this Agreement or the other Loan
Documents, to perform or cause performance of such obligation.
Section 3.08. The Borrower Remains Liable. Anything herein to
the contrary notwithstanding: (i) the Borrower shall remain liable under the
contracts and agreements included in the Collateral to the extent set forth
therein to perform all of their duties and obligations thereunder to the same
extent as if this Agreement had not been executed; (ii) the exercise by the Bank
of any of the rights hereunder shall not release the Borrower from any of its
duties or obligations under the contracts and agreements included in the
Collateral; and (iii)
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the Bank shall not have any obligation or liability under the contracts and
agreements included in the Collateral by reason of this Agreement, nor shall the
Bank be obligated to perform any of the obligations or duties of the Borrower
thereunder or to take any action to collect or enforce any claim for payment
assigned hereunder.
ARTICLE IV. CONDITIONS PRECEDENT
Section 4.01. Conditions Precedent to the Loan. The obligation
of the Bank to make the Loan is subject to the condition precedent that the Bank
shall have received on or before the Closing Date each of the following
documents, in form and substance satisfactory to the Bank and its counsel, and
each of the following requirements shall have been fulfilled:
(A) Resolutions. A duly executed resolution of the
board of directors of the Borrower authorizing the transaction
contemplated hereby;
(B) Note. The Note duly executed by the Borrower;
(C) Financing Statements, Etc. (i) Duly executed
financing statements (UCC-1) to be filed under the Uniform Commercial
Code of all jurisdictions necessary or, in the opinion of the Bank,
desirable to perfect the Lien created by this Agreement; (ii) duly
executed copies of the termination statements (UCC-3) to be filed under
the Uniform Commercial Code of all jurisdictions necessary, or in the
opinion of the Bank, desirable to terminate any Liens in favor of any
party other than the Bank; and (iii) Uniform Commercial Code searches
identifying all of the financing statements on file with respect to the
Borrower in all jurisdictions referred to under (a);
(D) Fees. All fees, costs and expenses payable to the
Bank, and its legal counsel, Drinker Biddle & Reath required to be paid
at or prior to the closing of the transactions contemplated hereby,
shall have been paid in full on the Closing Date.
(E) Receipt of Pledged Mortgage Loans and Collateral
Documents. The Bank shall have received all of the Pledged Mortgage
Loans and Collateral Documents and such documentation shall be
acceptable to the Bank in its sole discretion; and
(F) Additional Documentation. Such other approvals,
opinions or documents as the Bank may reasonably request.
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ARTICLE V. REPRESENTATIONS AND WARRANTIES
The Borrower hereby represents and warrants that:
Section 5.01. Formation, Good Standing and Due Qualification.
The Borrower is duly formed, validly existing and has all required authority to
transact business under the laws of the jurisdiction of its formation, has the
power and authority to own its assets and to transact the business in which it
is now engaged or proposed to be engaged, and is duly qualified to transact its
business under the laws of each other jurisdiction in which such qualification
is required or where such qualification is necessary to permit the Borrower to
enforce any Mortgage Loan.
Section 5.02. Power and Authority; No Conflicts. The
execution, delivery and performance by the Borrower of the Loan Documents to
which the Borrower is a party have been duly authorized and do not and will not:
(i) contravene the Borrower's Articles of Incorporation and ByLaws; (ii) violate
any provision of, or require any filing (other than the filing of the financing
statements contemplated by this Agreement), registration, consent or approval
under any Law, order, writ, judgment, injunction, decree, determination or award
presently in effect having applicability to the Borrower; (iii) result in a
breach of or constitute a default under or require any consent under any
indenture or loan or credit agreement or any other agreement, lease or
instrument to which the Borrower is a party or by which it or its properties may
be bound or affected; (iv) result in, or require, the creation or imposition of
any Lien (other than as created under this Agreement) upon or with respect to
any of the properties now owned or hereafter acquired by the Borrower; or (v)
cause the Borrower to be in default under any such Law, order, writ, judgment,
injunction, decree, determination or award or any such indenture, agreement,
lease or instrument.
Section 5.03. Legally Enforceable Agreements. Each Loan
Document to which the Borrower is a party is a legal, valid and binding
obligation of the Borrower, enforceable against the Borrower in accordance with
its terms.
Section 5.04. Litigation. There are no actions, suits or
proceedings pending or threatened, against or affecting the Borrower before any
court, governmental agency or arbitrator, which could, in any one case or in the
aggregate, result in a Material Adverse Change.
Section 5.05. Financial Statements. All financial information
furnished to the Bank concerning the operations of the Borrower, fairly present
the financial condition of the
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Borrower at such dates and the results of its operations for the periods covered
by such statements. No information, exhibit, or report furnished by any of the
Borrower to the Bank in connection with this Agreement, or otherwise, contain
any material misstatement of fact or omit to state a material fact or any fact
necessary to make the statements contained therein not materially misleading.
Section 5.06. Ownership and Liens. The Borrower has title to,
or valid leasehold interests in, all of its properties and assets, real and
personal, including the properties and assets, and leasehold interests reflected
in its financial statements subject only to the liens described therein.
Section 5.07. Taxes. The Borrower has filed all tax returns
(federal, state and local) required to be filed and have paid all taxes,
assessments and governmental charges and levies thereon to be due, including
interest and penalties, except to the extent they are the subject of a Good
Faith Contest.
Section 5.08. ERISA. The Borrower is in compliance in all
material respects with all applicable provisions of ERISA. Neither a Reportable
Event nor a Prohibited Transaction has occurred with respect to any Plan; no
notice of intent to terminate a Plan has been filed nor has any Plan been
terminated; no circumstance exists which constitutes grounds under Section 4042
of ERISA entitling the PBGC to institute proceedings to terminate, or appoint a
trustee to administer, a Plan, nor has the PBGC instituted any such proceedings;
neither the Borrower nor any ERISA Affiliate of the Borrower has completely or
partially withdrawn under Sections 4201 or 4204 of ERISA from a Multiemployer
Plan; the Borrower has met its minimum funding requirements under ERISA with
respect to all of its Plans and there are no unfunded vested liabilities; and
neither the Borrower nor any ERISA Affiliate of the Borrower has incurred any
liability to the PBGC under ERISA.
Section 5.09. Operation of Business; Prior or Existing
Restrictions, Etc. The Borrower possesses all licenses, qualifications
(including licenses and qualifications required in each state where each Single
Family Residence securing each Mortgage Loan acquired or originated by such
Borrower is located), Agency approvals, permits, franchises, patents,
copyrights, trademarks and trade names, or rights thereto, to conduct the
Borrower's business substantially as now conducted and as presently proposed to
be conducted and the Borrower is not in violation of any valid rights of others
with respect to any of the foregoing. The Borrower has disclosed all written
reports, actions and/or sanctions of any nature threatened, and all reviews,
investigations, examinations, audits, actions and/or sanctions that have been
undertaken and/or imposed as of the date of this Agreement and of which it has
knowledge, by any federal
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or state agency or instrumentality (including any Agency) with respect to either
the lending or related financial operations of each the Borrower. The Borrower
is not operating under any type of agreement or order (including, without
limitation, a supervisory agreement, memorandum of understanding, cease and
desist order, capital directive, supervisory directive, or consent decree) with
any state or federal banking department or government banking or other agency or
instrumentality (including any Agency), and the Borrower is in compliance with
any and all capital, leverage or other financial standards and requirements
imposed by any applicable regulatory authority, agency or instrumentality,
including any Agency.
Section 5.10. No Default on Outstanding Judgments or Orders.
The Borrower has satisfied all judgments and the Borrower is not in default with
respect to any judgment, writ, injunction, decree, rule or regulation of any
court, arbitrator or federal, state, municipal or other Governmental Authority,
commission, board, bureau, agency or instrumentality, domestic or foreign.
Section 5.11. No Defaults on Other Agreements. The Borrower is
not a party to any indenture, loan or credit agreement or any lease or other
agreement or instrument or subject to any certificate of incorporation or
restriction that would be violated by the transaction completed herein. The
Borrower is not in default in any respect in the performance, observance or
fulfillment of any of the obligations, covenants or conditions contained in any
agreement or instrument which could result in a Material Adverse Change.
Section 5.12. Labor Disputes and Acts of God. Neither the
business nor the properties of the Borrower has been and continues to be
affected by any fire, explosion, accident, strike, lockout or other labor
dispute, drought, storm, hurricane, hail, earthquake, embargo, act of God or of
the public enemy or other casualty (whether or not covered by insurance.
Section 5.13. Environmental Protection. The Borrower has
obtained all permits, licenses and other authorizations which are required under
all Environmental Laws, except to the extent failure to have any such permit,
license or authorization could not result in a Material Adverse Change. The
Borrower is compliance with all Environmental Laws and the terms and conditions
of the required permits, licenses and authorizations, and are also in compliance
with all other limitations, restrictions, conditions, standards, prohibitions,
requirements, obligations, schedules and timetables contained in those Laws or
contained in any plan, order, decree, judgment, injunction, notice or demand
letter issued, entered, promulgated or approved thereunder, except to the extent
failure to comply could not result in a Material Adverse Change. The Collateral
contains no
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Hazardous Materials that, under any Environmental Law currently in effect, (i)
would impose liability on the Borrower that could result in a Material Adverse
Change, or (ii) could result in the imposition of a Lien on the Collateral or
any portion thereof or any other assets of the Borrower, in each case if not
properly handled in accordance with applicable Law.
Section 5.14. Management of Borrower. As of the Closing Date,
there has been no change in the management of the Borrower.
Section 5.15. Compliance with Laws. The Borrower and the
operation of its business are in compliance with all applicable Laws.
Section 5.16. Solvency. To the best of the Borrower's
knowledge, the Borrower is, and after receipt of the Loan will be, solvent such
that: (i) the fair value of its assets (including without limitation the fair
salable value of the goodwill and other intangible property of the Borrower) is
greater than the total amount of its liabilities, including without limitation,
contingent liabilities, (ii) the present fair salable value of its assets
(including without limitation the fair salable value of the goodwill and other
intangible property of the Borrower) is not less than the amount that will be
required to pay the probable liability on its debts as they become absolute and
matured, and (iii) it is able to realize upon its assets and pay its debts and
other liabilities, contingent obligations and other commitments as they mature
in the normal course of business. The Borrower (i) does not intend to, and does
not believe that it will, incur debts or liabilities beyond its ability to pay
when such debts and liabilities mature, and (ii) is not engaged in a business or
transaction, or about to engage in a business or transaction, for which its
property would constitute unreasonably small capital after giving due
consideration to the prevailing practice in industry in which it is engaged. For
purposes of this Paragraph 5.16, in computing the amount of contingent
liabilities at any time, it is intended that such liabilities will be computed
at the amount which, in light of all the facts and circumstances existing at
such time, represents the amount that can reasonably be expected to become an
actual mature liability.
ARTICLE VI. REMEDIES
Section 6.01. Remedies. If the Borrower should fail to repay
the Loan immediately upon demand, the Bank may, immediately and without further
notice, exercise in respect of the Collateral, in addition to other rights and
remedies provided for herein, at Law or otherwise available to it, all the
rights and remedies of a secured party on default under the UCC (whether
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or not the applicable UCC applies to the affected Collateral) and also may (i)
require the Borrower to, and the Borrower agrees that it will at its expense and
upon request of the Bank forthwith, assemble all or part of the Collateral as
directed by the Bank and make it available to the Bank at a place to be
designated by the Bank, and (ii) without notice except as specified below, sell
the Collateral or any part thereof in one or more parcels at public or private
sale, at any of the Bank's offices or elsewhere, for cash, on credit or for
future delivery, and upon such other commercially reasonable terms. The Borrower
agrees that, to the extent notice of sale shall be required by Law, five days
prior notice to the Borrower of the time and place of any public sale or the
time after which any private sale is to be made shall constitute reasonable
notification. The Bank shall not be obligated to make any sale of Collateral
regardless of notice of sale having been given. The Bank may adjourn any public
or private sale from time to time by announcement at the time and place fixed
therefor, and such sale may, without further notice, be made at the time and
place to which it was so adjourned. All cash proceeds received by the Bank in
respect of any sale of, collection from, or other realization upon all or any
part of the Collateral may, in the discretion of the Bank, be held by the Bank
in Cash as Collateral for, and/or then or at any time thereafter applied in
accordance with the terms of Section 8.03 in whole or in part by the Bank
against, all or any part of the Obligations in such order as the Bank shall
elect.
Section 6.02. Application of Proceeds. The proceeds
of any sale or enforcement of all or any part of the Collateral
shall be applied by the Bank:
First, to the payment of the costs and expenses incurred by
the Bank in connection with such sale or enforcement of any rights and
benefits afforded hereby, by any other Loan Documents or at Law, of the
Liens granted hereunder of all or any part of the Collateral or of the
Liens, Collateral, any guaranty or other assurances granted under the
other Loan Documents, all costs and expenses incurred in collecting,
maintaining and preserving the Collateral, the enforcement of this
Agreement, the Note and the other Loan Documents, including payment to
the Bank's agents and counsel in accordance with Section 7.04, and all
expenses, liabilities and advances made or incurred by such parties in
connection therewith;
Second, to the payment of all accrued and unpaid
interest due and owing on the Loan;
Third, to the payment of all unpaid principal of the
Loan;
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Fourth, to the payment of all other amounts owed by the
Borrower in respect of the Loan Documents; and
Finally, to the payment to the Borrower, or to its successors
or assigns, or as a court of competent jurisdiction may direct, of any
surplus then remaining from such proceeds.
If the proceeds of any such sale are insufficient to cover the amounts described
in clauses First through Fourth, inclusive, above, the Borrower shall remain
liable for any deficiency.
Section 6.03. The Bank May Perform. If the Borrower fails to
perform any agreement contained in this Agreement, the Bank may itself perform
(but shall not be obligated to perform), or cause performance of, such
agreement, and the expenses of the Bank incurred in connection therewith shall
be payable by the Borrower under Section 7.04.
Section 6.04. The Bank's Duties. The powers conferred on the
Bank under this Agreement are solely to protect its interest in the Collateral
and shall not impose any duty upon the Bank to exercise any such powers. Except
for the safe custody of any Collateral in its possession and the accounting for
moneys actually received by it hereunder, the Bank shall not have any duty as to
any Collateral or as to the taking of any necessary steps to preserve rights
against prior parties or any other rights pertaining to any Collateral.
Section 6.05. Continuing Security Interest; Transfer of Note.
This Agreement creates a continuing Lien on and security interest in the
Collateral and shall (i) remain in full force and effect until payment in full
of all the Obligations to the Bank, (ii) be binding upon the Borrower, and its
successors and assigns, and (iii) inure to the benefit of the Bank and its
successors, transferees and assigns. Without limiting the generality of the
foregoing clause (iii), the Bank may assign or otherwise transfer any document
evidencing any Obligation held by it to its successors or any Affiliate, and
such other Person shall thereupon become vested with all the benefits in respect
thereof granted to the Bank herein or otherwise. Upon the payment in full of the
Obligations, the Lien granted hereby shall terminate and all rights to the
Collateral shall revert to the Borrower. Upon any such termination, the Bank
will, at the Borrower' expense, execute and deliver to the Borrower such
documents as the Borrower shall reasonably request to evidence such termination.
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ARTICLE VII. MISCELLANEOUS
Section 7.01. No Waiver; Cumulative Remedies. No failure or
delay on the part of the Bank in exercising any right, power or remedy hereunder
shall operate as a waiver thereof; nor shall any single or partial exercise of
any such right, power or remedy preclude any other or further exercise thereof
or the exercise of any other right, power or remedy hereunder. No waiver of any
provision hereof shall be effective unless the same shall be in writing and
signed by the Bank. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law. In the event of a dispute between the
Borrower and the Bank concerning the principal amount outstanding hereunder, the
interest rates applicable thereto, the payment of principal, interest and other
amounts hereunder, or concerning similar factual matters, absent manifest error,
the books and records of the Bank shall be prima facie presumed to be correct.
Section 7.02. Set-Off. The Borrower agrees that, in addition
to (and without limitation of) any right of setoff, bankers' lien or
counter-claim the Bank may have, the Bank shall have a right of setoff against,
and a Lien upon all property of all of the Borrower now or at any time in the
possession including, but not limited to, the Borrower's interest in any deposit
account, as security for all Obligations subject only to the Syndicated
Agreement. In the event that the Bank exercises such rights, the Bank will, to
the fullest extent permitted by law, apply the proceeds to the payment of its
portion of the Obligations hereunder prior to applying any such amount against
amounts due from the Borrower in connection with other transactions outside of
this Agreement.
Section 7.03. Amendments. Any of the provisions of this
Agreement may be waived, modified or amended in writing by any agreement or
agreements entered into by the Borrower and the Bank.
Section 7.04. Costs and Expenses; Indemnification. The
Borrower agrees to pay on demand (A) all reasonable costs and expenses of the
Bank in connection with the preparation, printing, execution, delivery and
administration of this Agreement, the Note, and the other instruments and
documents to be delivered hereunder (including the reasonable fees and
out-of-pocket expenses of the Bank's counsel with respect thereto; all
reasonable fees and expenses relating to any special audit or audits,
investigations, examinations, or the like, of the finances or operations of the
Borrower conducted by the Bank or the Bank's representatives), (B) all
reasonable costs and expenses, if any, of the Bank in connection with the
enforcement against Borrower of this Agreement, the Note and the other
instruments and documents to be delivered hereunder (including the reasonable
fees and out-of-pocket expenses of legal counsel
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with respect thereto) and (C) all reasonable costs, expenses and fees of the
Bank in connection with any amendment, renegotiation or extension of this
Agreement. The Borrower agrees to indemnify the Bank and its directors,
officers, employees and agents from, and hold each of them harmless against, any
and all losses, liabilities, claims, damages or expenses incurred by any of them
arising out of or by reason of any investigation or litigation or other
proceedings (including any threatened investigation or litigation or other
proceedings) relating to any actual or proposed use by the Borrower of the
proceeds of the Loan, including, without limitation, the reasonable fees and
disbursements of counsel incurred in connection with any such investigation or
litigation or other proceedings (but excluding any such losses, liabilities,
claims, damages or expenses incurred by reason of the gross negligence or
willful misconduct of the Person to be indemnified). THE OBLIGATIONS OF THE
BORROWER UNDER THIS SECTION 7.04 SHALL SURVIVE THE REPAYMENT IN FULL OF THE NOTE
AND THE OBLIGATIONS AND ALL AMOUNTS DUE UNDER OR IN CONNECTION WITH ANY OF THE
LOAN DOCUMENTS.
Section 7.05. Binding Effect; Assignment; Participation. This
Agreement shall become effective when it shall have been executed by the
Borrower and the Bank and it shall thereafter be binding upon and inure to the
benefit of the Borrower, the Bank and their respective successors and assigns,
except that the Borrower shall not have the right to assign its rights or
obligations hereunder or any interest herein.
Section 7.06. Notices. Except as specifically provided
otherwise in this Agreement or in any of the other Loan Documents, all notices
and the communications hereunder and thereunder shall be in writing or by
telephone, subsequently confirmed in writing. Notices in writing shall be
delivered personally or sent by certified or registered mail postage prepaid or
by telex or telecopy and shall be deemed received in the case of personal
delivery, when delivered against a receipt therefor, in the case of mailing, on
the fourth Business Day after mailing, in the case of telex, upon transmittal,
and in the case of telecopies, when transmitted, provided, that the sender of a
telex or telecopy must immediately confirm such transmittal in writing or by
telephone. A telephonic notice to the Bank, as understood by the Bank, will be
deemed to be the controlling and proper notice in the event of a discrepancy
with, or failure to receive, a confirming written notice.
Section 7.07. Usury. Anything herein to the contrary
notwithstanding, the obligations of the Borrower under this Agreement and the
Note shall be subject to the limitation that payments of interest shall not be
required to the extent that receipt thereof would be contrary to provisions of
applicable law limiting rates of interest which may be charged or collected by
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the Bank. Any payments of interest in excess of amounts permitted by applicable
law limiting rates of interest shall be applied to reduce the Obligations.
Section 7.08. Table of Contents; Headings. Any table of
contents and the headings and captions hereunder are for convenience only and
shall not affect the interpretation or construction of this Agreement.
Section 7.09. Severability. The provisions of this Agreement
are intended to be severable. If for any reason any provision of this Agreement
shall be held invalid or unenforceable in whole or in part in any jurisdiction,
such provision shall, as to such jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without in any manner affecting the validity
or enforceability thereof in any other jurisdiction or the remaining provisions
hereof in any jurisdiction.
Section 7.10. Counterparts. This Agreement may be executed in
any number of counterparts, all of which taken together shall constitute one and
the same instrument, and any party hereto may execute this Agreement by signing
any such counterpart.
Section 7.11. Integration. The Loan Documents set forth the
entire agreement among the parties hereto relating to the transactions
contemplated thereby and supersede any prior oral or written statements or
agreements with respect to such transactions.
Section 7.12. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED
BY, AND INTERPRETED AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS (BUT NOT
THE LAW OF CONFLICTS OF LAW) OF THE COMMONWEALTH OF PENNSYLVANIA.
Section 7.13. JURISDICTION; IMMUNITIES. THE BORROWER HEREBY
ABSOLUTELY AND IRREVOCABLY CONSENTS AND SUBMITS TO THE JURISDICTION OF THE
COURTS OF THE COMMONWEALTH OF PENNSYLVANIA OR THE UNITED STATES OF AMERICA FOR
THE EASTERN DISTRICT OF PENNSYLVANIA IN CONNECTION WITH ANY ACTIONS OR
PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE NOTES, ANY OTHER
LOAN DOCUMENT, OR THE BANKING RELATIONSHIP GIVING RISE TO THIS AGREEMENT; AND
THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION
OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH PENNSYLVANIA OR FEDERAL COURT.
IN ANY SUCH ACTION OR PROCEEDING, THE BORROWER HEREBY ABSOLUTELY AND IRREVOCABLY
WAIVES PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT, DECLARATION OR OTHER PROCESS
AND HEREBY ABSOLUTELY AND IRREVOCABLY AGREE THAT THE SERVICE THEREOF MAY BE MADE
BY CERTIFIED OR REGISTERED MAIL, POSTAGE PREPAID, TO THE BORROWER AT THEIR
ADDRESSES SPECIFIED BELOW (OR AT SUCH OTHER ADDRESSES AS
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THE BORROWER SHALL LAST SPECIFY TO THE BANK IN WRITING). THE BORROWER AGREE THAT
A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE
ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER
PROVIDED BY LAW. THE BORROWER FURTHER WAIVES ANY OBJECTION TO VENUE IN
PHILADELPHIA AND ANY OBJECTION TO AN ACTION OR PROCEEDING IN PHILADELPHIA ON THE
BASIS OF FORUM NON CONVENIENCE. THE BORROWER FURTHER AGREES THAT ANY ACTION OR
PROCEEDING BROUGHT AGAINST THE BANK WITH REGARD TO THIS CREDIT AGREEMENT SHALL
BE BROUGHT ONLY IN PENNSYLVANIA OR UNITED STATES FEDERAL COURT SITTING IN
PHILADELPHIA.
NOTHING IN THIS SECTION 7.13 SHALL AFFECT THE RIGHT OF THE
BANK TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE
RIGHT OF THE BANK TO BRING ANY ACTION OR PROCEEDING AGAINST THE BORROWER OR
THEIR PROPERTY IN THE COURTS OF ANY OTHER JURISDICTIONS.
TO THE EXTENT THAT THE BORROWER HAS OR HEREAFTER MAY ACQUIRE
ANY IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER
FROM SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF
EXECUTION, EXECUTION OR OTHERWISE) WITH RESPECT TO THEMSELVES OR THEIR PROPERTY,
THE BORROWER HEREBY IRREVOCABLY WAIVE SUCH IMMUNITY IN RESPECT OF THEIR
OBLIGATIONS UNDER THIS AGREEMENT, THE NOTE, AND ANY OTHER LOAN DOCUMENT.
Section 7.14. WAIVER OF JURY TRIAL. THE Borrower WAIVES ANY
RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY
RIGHTS (A) UNDER THIS AGREEMENT OR UNDER THE NOTES, THE OTHER LOAN DOCUMENTS, OR
ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE
FUTURE BE DELIVERED IN CONNECTION HEREWITH OR (B) ARISING FROM ANY BANKING
RELATIONSHIP GIVING RISE TO THIS AGREEMENT, AND AGREE THAT ANY SUCH ACTION OR
PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.
-29-
<PAGE> 33
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the day and year first above written.
CITYSCAPE CORP.
By: /s/ Cheryl P. Carl
--------------------------------
Its: Senior Vice President
--------------------------------
CORESTATES BANK, N.A.
By /s/ Merle Hassler
--------------------------------
Name: Merle Hessler
Title: Assistant Vice President
Address for Notices:
CoreStates Bank, N.A.
F.C. 1-8-12-7
1339 Chestnut Street
Philadelphia, PA 19101-7558
Attn: Merle Hessler
------------------
Telecopy No.: (800) 854-2537
<PAGE> 1
Exhibit 10.58
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of January 1, 1996, by and between CITYSCAPE CORP.,
having an office address at 565 Taxter Road, Elmsford, New York 10523
(hereinafter referred to as the "Company") and Tim S. Ledwick residing at 66
Merry Lane, Weston, CT (hereinafter referred to as the "Employee").
WITNESSETH:
WHEREAS, the Company desires to hire and retain the Employee as an
employee to perform certain services for the Company.
NOW THEREFORE, in consideration of the mutual covenants contained
herein and on the attached Schedule, and for other good and valuable
consideration the receipt of which is hereby acknowledged, the Company and the
Employee hereby agree as follows:
1. Employment of Executive.
(a) The Company hereby employs the Employee in the capacity
and for the position set forth on Item 1 of the Schedule attached hereto.
Employee hereby accepts such employment with the Company upon the terms and
conditions hereinafter set forth.
(b) The duties of the Employee shall include the duties and
services described in Item 2 of the Schedule, which duties and services shall
at all times be subject to the direction, approval and control of the Company
and shall include such other duties, as may be assigned by the Board of
Directors of the Company commensurate with the responsibilities normally
associated with Employee's position.
2. Services to be Rendered.
The Employee will devote Employee's full time and efforts to the
business and affairs of the Company and shall not during the term of this
Agreement be engaged in any other businesses; provided that the Employee may
engage in passive investments in businesses in which the Employee does not
participate. The Employee will always use Employee's best efforts to promote the
interests of the Company.
3. Term.
The term of this Agreement (the "Term") shall commence on
January 1, 1996, and shall continue until December 31, 1999, unless (i) extended
by the mutual agreement of the Company and the Employee or (ii) terminated as
hereinafter provided.
<PAGE> 2
4. Compensation.
(a) The Employee shall receive a salary as set forth on
Schedule Item 4. Effective January 1, 1996, the salary due and payable under
Schedule Item 4 shall be increased each January by the percentage increase, if
any, in the Consumer Price Index defined in (c) below between November 1995 and
November 1996 for the first increase and between November 1996 and November 1997
for the second increase, and November 1997 and November 1998 for the third
increase. The increases shall be cumulative, that is the base salary upon which
a CPI increase is determined is that which is in effect at the end of each year.
In no event shall the salary be reduced because of a percentage decline in the
Consumer Price Index.
(b) Each January, commencing with January 1997, the Board of
Directors of the Company shall review Employee's performance and the Board of
Directors may, in its sole discretion, elect to increase the salary then paid
to Employee; however, there shall be absolutely no obligation to do so.
(c) Consumer Price Index shall mean the Index published by the
United States Department of Labor for all Urban Consumers U.S. City Average
N.Y., N.J., CT. 1982-1984 = 100 or such successor Index as may be published
which most closely corresponds to this Index.
5. Benefits.
The Employee shall be entitled to participate in the regular
pension, profit sharing, health, disability, and other benefit programs of the
Company in effect from time to time on the same basis that other senior officers
of the Company participate therein. To the extent possible, without incurring
additional expense and without adversely affecting the right of any other
employee, the Company shall endeavor to eliminate or waive any waiting period
with respect to profit sharing and/or pension benefits as well as health
insurance benefits. The Employee shall be entitled, for the term hereof, to
annual vacations to be taken in accordance with the policies of the Company in
effect from time to time for senior officers.
6. Expenses.
The Company shall reimburse the Employee against appropriate
vouchers or other receipts for business expenses reasonably incurred by Employee
in the performance of Employee's duties pursuant to the terms hereof. In
addition, upon the submission of appropriate vouchers or other receipts, the
Company shall reimburse Employee for gas, tolls, and car phone charges. Employee
shall submit vouchers or other receipts once per calendar month and shall be
reimbursed by the Company within thirty (30) days of submission. Expenses shall
further include reimbursement for reasonable monthly car rental or car purchase
payments.
2
<PAGE> 3
7. Death and Disability.
In the event of the death of the Employee during the Term, the
Employee's employment hereunder shall automatically terminate. In the event of
the total disability of the Employee, the Employee's employment hereunder may
terminate at the option of the Board of Directors of the Company. For purposes
of this Agreement, "total disability" shall mean the Employee's inability to
perform Employee's regular and customary duties on behalf of the Company for a
period of no less than 120 consecutive days, or any 180 days during any twelve
(12) month period, with such "total disability" being established by a written
certification submitted by a medical doctor agreed to by the Employee and the
Company. In the absence of agreement, the Company and the Employee shall each
nominate a qualified medical doctor and these two (2) doctors shall select a
third qualified medical doctor, which third doctor shall make the determination
as to total disability. During the aforementioned 120 and 180 day periods,
Employee shall receive his regular salary less any Company provided disability
insurance proceeds Employee may receive. After the termination of these time
periods, no salary will be payable.
8. Cause.
By notice to the Employee, the President or the Board of
Directors of the Company may terminate this Agreement for Cause. As used
herein, "Cause" shall be defined as: (a) the refusal or failure by the Employee
to carry out specific directions of the Board of Directors which are of a
material nature and consistent with Employee's position described in the
Schedule, or the refusal or failure by the Employee to perform a material part
of the Employee's position described in the Schedule, or the refusal or
failure by the Employee to perform a material part of the Employee's duties
hereunder; (b) the commission by the Employee of a breach of any of the
provisions of this Agreement; (c) the commission by the Employee's relations
with the Company or any of its affiliates, or with any customer or business
contact of the Company or any of its affiliates ("dishonest" for these
purposes shall mean that Employee knowingly or recklessly made a material
misstatement or omission for Employee's personal benefit); (d) the conviction
of the Employee for any crime involving an act of moral turpitude; (e) any act
of insubordination or the wilful failure to carry out a written directive of
the Board of Directors which does not violate the terms of this Agreement; (f)
any breach under Sections 9 and 10 of this Agreement; or (g) the Employee's
gross incompetence. Notwithstanding the foregoing, no "Cause" for termination
shall be deemed to exist with respect to the Employee's acts described in
clauses (a) or (b) above, unless the Company shall have given written notice to
the Employee specifying the "Cause" with reasonable particularity and, within
ten (10) business days after such notice, Employee shall not have cured or
eliminated the problem or thing giving rise to such "Cause"; provided, however,
that (i) any periodic breach or continual breaching after notice and cure of
any provision of clauses (a) or (b) above, or (ii) a repeated breach after
notice and cure, of any provision of clauses (a) or (b) above, involving the
same or substantially similar actions or conduct, shall be grounds for
termination for cause without any additional notice from the Company. The
parties hereto agree that three (3) separate instances of a breach by the
Employee of the provisions of this Agreement
3
<PAGE> 4
during the Term shall be considered periodic, continual or repeated and shall
constitute "Cause" within the meaning of this Section 8.
9. NON-COMPETITION.
(a) During the Term and for six (6) months after the
expiration of the Term, except if the Employee terminates Employee's employment
hereunder as a result of a Continued Company Breach (as such term is defined in
((c)) below) the Employee agrees that Employee will not, directly or
indirectly, enter into or participate (whether as owner, partner, shareholder,
officer, director, salesman, consultant, employee, principal, or in any other
relationship or capacity) in any business operating or providing services in
any State in which the Company or its affiliates are operating or providing
services as of the date of termination which is, or owns, manages or performs
the following business activities and services: residential and commercial and
real estate lending; servicing loan portfolios and/or mortgage or real estate
brokerage services (a "Competing Entity"); provided, that the Employee may own
up to one percent (1%) of the outstanding equity securities of any Competing
Entity that is subject to the public reporting requirements of the Securities
Exchange Act of 1934.
(b) During the Term and for three (3) years after the
termination of the Employee's employment hereunder for any reason, the Employee
shall not, without the prior written consent of the Company, directly or
indirectly, (i) solicit, request, cause or induce any person who is at the
time, or twelve (12) months prior thereto had been, an employee of or a
consultant to the Company to leave the employ of or terminate Employee's
relationship with the Company or (ii) employ, hire, engage or be associated
with, or endeavor to entice away from the Company any such person, or any
customer of the Company or its affiliates or (iii) attempt to limit or
interfere with any business agreement or relationship existing between the
Company and/or its affiliates with a third party.
(c) As used herein, Continued Company Breach shall mean three
(3) separate instances of a material breach during the Term by the Company of
the obligations it owes the Employee pursuant to Section 1, Section 4(a) and
(c) and Section 5 hereof after the Company has received written notice from the
Employee regarding each such breach and the Company fails to cure each such
breach within ten (10) days of the receipt of such notice.
10. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION.
(a) The Employee acknowledges that as a result of Employee's
employment by the Company, the Employee, both during and after the Term, will
obtain secret and confidential information concerning the business of the
Company and its affiliates, including, without limitation, financial
information, trade secrets, information concerning the operations, sales,
personnel, suppliers, customers, costs, profits and pricing policies, "know
how" and certain business methodologies (the "Confidential Information").
4
<PAGE> 5
(b) During the Term and thereafter, the Employee shall
exercise all due and diligent precautions to protect the integrity of the
customer lists, mailing lists and sources thereof, statistical data and
compilations, agreements, contracts, manuals, memoranda, notes, records,
reports or other documents and any and all other materials embodying any
Confidential Information (the "Confidential Materials") and, upon the Company's
request in writing, Employee shall immediately return to the Company all such
Confidential Materials (and copies thereof) then in Employee's possession or
control.
(c) The Employee agrees that Employee will not at any time,
either during the Term of this Agreement or thereafter, divulge to any person
or entity any Confidential Information or deliver or permit any person or
entity to obtain any Confidential Materials except (i) when required in the
course of performing Employee's duties hereunder, (ii) with the Company's
express written consent; or (iii) where required to be disclosed by court
order, subpoena or other government process, or (iv) the Employee shall have no
responsibility for the divulgence of any information which is in the public
domain. If the Employee shall be required to make disclosure pursuant to the
provisions of clause (iii) of the preceding sentence, the Employee promptly,
but in no event more than 48 hours after learning of such subpoena, court
order, or other governmental process, shall notify, by personal delivery or by
electronic means, confirmed by mail, the Company and, at the Company's expense,
Employee shall: (x) take all reasonably necessary steps required by the Company
to defend against the enforcement of such subpoena, court order or other
government process, and (y) permit the Company to intervene and participate
with counsel of its choice in any proceeding relating to the enforcement
thereof.
(d) Upon termination of Employee's employment with the
Company, the Employee will promptly deliver to the Company all Confidential
Materials relating to the Company and its affiliates, which Employee may then
possess or have under Employee's control; provided, however, that Employee
shall be entitled to retain copies of such documents reasonably necessary to
document Employee's financial relationship (both past and future) with the
Company.
(e) The Employee acknowledges that (i) any breach of the
provisions of these Sections 9 and 10 may cause substantial and irreparable
harm to the Company for which the Company would have no adequate remedy at law,
and (ii) the provisions of this Agreement are reasonable and necessary for the
protection of the business of the Company and its affiliates.
11. REMEDIES.
(a) If Employee commits a breach, or threatens to commit a
breach, of any of the provisions of Sections 9 and 10, the Company shall have
the right and remedy:
(i) to have the provisions of this Agreement specifically
enforced by any court having equity jurisdiction; and
5
<PAGE> 6
(ii) to require Employee to account for and to pay over the
Company all damages suffered by the Company (including consequential and
incidental damages) as the result of any transactions constituting a breach of
any of the provisions of Sections 9 and 10, and Employee hereby agrees to
account for and pay over such damages to the Company;
(b) The Employee acknowledges and agrees that the services being
rendered hereunder to the Company are of a special, unique and extraordinary
character and that any such breach or threatened breach may cause substantial
and irreparable injury to the Company and that money damages will not provide
an adequate remedy to the Company. Employee further agrees that the Company in
any such equitable proceeding shall not have to prove irreparable harm.
(However, in a suit for damages, Company shall be required to prove the amount
of damages actually sustained.)
(c) Each of the rights and remedies enumerated in Section 11(a)
shall be independent of the other, and shall be severally enforceable, and such
rights and remedies shall be in addition to, and not in lieu of any other
rights and remedies available to the Company under law or equity.
(d) If any provision of Sections 9 or 10 is held to be
unenforceable because of the scope, duration or area of its applicability, the
court making such determination shall have the power to modify such scope,
duration, or area, or all of them, and such provision or provisions shall then
be applicable in such modified form.
12. INDEMNIFICATION.
(a) The Company hereby agrees to indemnify and hold harmless the
Employee, both during and after the expiration of the Term, from and against
any and all loss or liability including reasonable legal fees and legal
disbursements which the Employee may have to third parties as a result of the
proper performance of Employee's duties hereunder during the Term, to the
extent permitted by the laws of the State of New York. The Employee hereby
agrees to indemnify and hold harmless the Company from any and all loss or
liability which the Company suffers as a result of employee's breach of
Employee's obligations hereunder to the extent permitted by the laws of the
State of New York. When the Company assumes its obligation to indemnify and
hold harmless the Employee in connection with a claim or litigation, its
obligation with respect to such claim or litigation shall be limited to holding
the Employee harmless from and against any judgment or settlement approved by
the Company in connection with the claim or litigation. The Company reserves
the right to select counsel of its choosing to defend the Employee.
6
<PAGE> 7
(b) Whenever a claim shall arise for which any party may be
or become entitled to indemnification hereunder, the indemnified party shall
notify the indemnifying party promptly, and in the case of a third party claim,
in writing within ten (10) days of the indemnified party's first receipt of
written notice of such third party claim, and in any event within such shorter
period as may be legally required for the indemnifying party or parties to take
appropriate action to resist such claim. The failure to give a timely notice, as
provided in the preceding sentence, shall not operate as a waiver of an
indemnified party's right to indemnification, provided that the failure to give
such notice did not materially prejudice the legal rights of the indemnifying
party. such notice shall specify all facts known to the indemnified party giving
rise to such indemnity rights and shall estimate (to the extent determinable)
the amount of the liability arising therefrom.
13. NOTICE.
Any notice required hereunder shall be delivered by hand, or
sent by registered or certified mail, addressed to the other party hereto at
its address set forth above or at such other address as notice thereof shall
have been given in accordance with the provisions of this Section 13. Any such
notice shall become effective (a) if mailed, on the date indicated on the
receipt or if not accepted, the date indicated that delivery was attempted, and
(b) in the case of delivery by hand, upon delivery or attempted delivery as
shown on the records of the deliveries.
14. AGREEMENT; AMENDMENT.
This Agreement supersedes any prior agreements or
understandings, oral or written, between the parties hereto and represents
their entire understanding and agreement with respect to the subject matter
hereof. This Agreement can be amended, supplemented or changed, and any
provision hereof can be waived, only by written instrument making specific
reference to this Agreement which is signed by the party against whom
enforcement of any such amendment, supplement, modification or waiver is
sought. Any waiver of any breach of this Agreement shall not be construed to be
a continuing waiver or consent to any subsequent breach by any party hereto.
15. SEVERABILITY.
In the event of the invalidity or unenforceability of any one
or more provisions of this Agreement, such illegality or unenforceability shall
not affect the validity or enforceability of the other provisions hereof and
such other provisions shall be deemed to remain in full force and effect.
16. ASSIGNMENT; BINDING EFFECT.
This Agreement is not assignable by Employee without the prior
written consent of the Company. This Agreement shall be binding upon and shall
inure to the benefit of the Company and its successors and assigns. It is
agreed that in the event of a termination under this Agreement
7
<PAGE> 8
for any reason, all salary and benefits shall cease as of the date of
termination provided that all accrued salary, bonus and expenses shall be paid
to Employee or Employee's estate or legal representative as the case may be.
17. SECTION HEADINGS.
The Section Headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
18. GOVERNING LAW; VENUE.
This Agreement shall be construed and governed in accordance with
the laws of the State of New York. The parties hereto agree that any actions or
proceedings instituted to enforce rights hereunder shall be initiated in the
federal or state courts located in Westchester County, New York.
19. EXECUTION IN COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original, but all of which together shall
constitute one and the same instruments.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.
CITYSCAPE CORP.
By: /s/ SIGNATURE ILLEGIBLE
-------------------------
Name:
Title:
/s/ TIM S. LEDWICK
-------------------------
Employee
Tim S. Ledwick
8
<PAGE> 9
SCHEDULE
EMPLOYMENT CONTRACT
JANUARY 1, 1996 - DECEMBER 31, 1999
TIM S. LEDWICK
1. Position Chief Financial Officer
2. Duties & Services As determined by the Board of Directors
3. Salary $150,000 per annum
4. Bonus $15,000 per annum
An additional bonus may be granted at the
option of the Board of Directors.
5. Options In accordance with the Cityscape Financial Corp.
1995 Employee Stock Option Plan to purchase up
to 50,000 shares at $20.00 per share, the Fair
Market Value at the date of grant. The incentive
options granted may be exercised 20,000 shares
in 1996, 15,000 shares in 1997, and 15,000
shares in 1998. These options may not be
exercised more than five (5) years after grant
and terminate immediately upon termination of
the recipient's employment with the Company for
just cause, or 12 months after death or
permanent disability, or three months after
termination of employment for any other reason.
<PAGE> 1
EXHIBIT 10.59
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of February 1, 1996, by and between CITYSCAPE
CORP., having an office address at 565 Taxter Road, Elmsford, New York 10523
(hereinafter referred to as the "Company") and Robert J. Blackwell residing at
1421 Ratzer Road, Wayne, NJ 07470 (hereinafter referred to as the "Employee").
W I T N E S S E T H:
WHEREAS, the Company desires to hire and retain the Employee as an
employee to perform certain services for the Company.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and on the attached Schedule, and for other good and valuable
consideration the receipt of which is hereby acknowledged, the Company and the
Employee hereby agree as follows:
1. EMPLOYMENT OF EXECUTIVE.
(a) The Company hereby employs the Employee in the capacity
and for the position set forth on Item 1 of the Schedule attached hereto.
Employee hereby accepts such employment with the Company upon the terms and
conditions hereinafter set forth.
(b) The duties of the Employee shall include the duties and
services described in Item 2 of the Schedule, which duties and services shall
at all times be subject to the direction, approval and control of the Company
and shall include such other duties, as may be assigned by the Board of
Directors of the Company commensurate with the responsibilities normally
associated with Employee's position.
2. SERVICES TO BE RENDERED.
The Employee will devote Employee's full time and efforts to
the business and affairs of the Company and shall not during the term of this
Agreement be engaged in any other businesses; provided that the Employee may
engage in passive investments in businesses in which the Employee does not
participate. The Employee will always use Employee's best efforts to promote
the interests of the Company.
3. TERM.
The term of this Agreement (the "Term") shall commence on
February 1, 1996, and shall continue until January 31, 1999, unless (i)
extended by the mutual agreement of the Company and the Employee or (ii)
terminated as hereinafter provided.
<PAGE> 2
4. COMPENSATION.
(a) The Employee shall receive a salary as set forth on
Schedule Item 4. Effective February 1, 1996, the salary due and payable under
Schedule Item 4 shall be increased each February by the percentage increase, if
any, in the Consumer Price Index defined in (c) below between November 1995 and
November 1996 for the first increase and between November 1996 and November
1997 for the second increase, and November 1997 and November 1998 for the third
increase. The increases shall be cumulative, that is the base salary upon which
a CPI increase is determined is that which is in effect at the end of each
year. In no event shall the salary be reduced because of a percentage decline
in the Consumer Price Index.
(b) Each January, commencing with January 1996, the Board
of Directors of the Company shall review Employee's performance and the Board
of Directors may, in its sole discretion, elect to increase the salary then
paid to Employee; however, there shall be absolutely no obligation to do so.
(c) Consumer Price Index shall mean the Index published by
the United States Department of Labor for all Urban Consumers U.S. City Average
N.Y., N.J., CT. 1982-1984 = 100 or such successor Index as may be published
which most closely corresponds to this Index.
5. BENEFITS.
The Employee shall be entitled to participate in the regular
pension, profit sharing, health, disability, and other benefit programs of the
Company in effect from time to time on the same basis that other senior
officers of the Company participate therein. To the extent possible, without
incurring additional expense and without adversely affecting the right of any
other employee, the Company shall endeavor to eliminate or waive any waiting
period with respect to profit sharing and/or pension benefits as well as health
insurance benefits. The Employee shall be entitled, for the term hereof, to
annual vacations to be taken in accordance with the policies of the Company in
effect from time to time for senior officers.
6. EXPENSES.
The Company shall reimburse the Employee against appropriate
vouchers or other receipts for business expenses reasonably incurred by
Employee in the performance of Employee's duties pursuant to the terms hereof.
In addition, upon the submission of appropriate vouchers or other receipts, the
Company shall reimburse Employee for gas, tolls, and car phone charges.
Employee shall submit vouchers or other receipts once per calendar month and
shall be reimbursed by Company within thirty (30) days of submission. Expenses
shall further include reimbursement for monthly car rental or car purchase
payments of Six Hundred Dollars ($600) per month.
2
<PAGE> 3
7. DEATH AND DISABILITY.
In the event of the death of the Employee during the Term, the
Employee's employment hereunder shall automatically terminate. In the event of
the total disability of the Employee, the Employee's employment hereunder may
terminate at the option of the Board of Directors of the Company. For purposes
of this Agreement, "total disability" shall mean the Employee's inability to
perform Employee's regular and customary duties on behalf of the Company for a
period of no less than 120 consecutive days, or any 180 days during any twelve
(12) month period, with such "total disability" being established by a written
certification submitted by a medical doctor agreed to by the Employee and the
Company. In the absence of agreement, the Company and the Employee shall each
nominate a qualified medical doctor and these two (2) doctors shall select a
third qualified medical doctor, which third doctor shall make the determination
as to total disability. During the aforementioned 120 and 180 day periods,
Employee shall receive his regular salary less any Company provided disability
insurance proceeds Employee may receive. After the termination of these time
periods, no salary will be payable.
8. CAUSE.
By notice to the Employee, the President or the Board of
Directors of the Company may terminate this Agreement for Cause. As used
herein, "Cause" shall be defined as: (a) the refusal or failure by the Employee
to carry out specific directions of the Board of Directors which are of a
material nature and consistent with Employee's position described in the
Schedule, or the refusal or failure by the Employee to perform a material part
of the Employee's duties hereunder; (b) the commission by the Employee of a
breach of any of the provisions of this Agreement; (c) the commission by the
Employee of a fraudulent or dishonest act in Employee's relations with the
Company or any of its affiliates, or with any customer or business contact of
the Company or any of its affiliates ("dishonest" for these purposes shall mean
that Employee knowingly or recklessly made a material misstatement or omission
for Employee's personal benefit); (d) the conviction of the Employee for any
crime involving an act of moral turpitude; (e) any act of insubordination or
the wilful failure to carry out a written directive of the Board of Directors
which does not violate the terms of this Agreement; (f) any breach under
Sections 9 and 10 of this Agreement; or (g) the Employee's gross incompetence.
Notwithstanding the foregoing, no "Cause" for termination shall be deemed to
exist with respect to the Employee's acts described in clauses (a) or (b)
above, unless the Company shall have given written notice to the Employee
specifying the "Cause" with reasonable particularity and, within ten (10)
business days after such notice, Employee shall not have cured or eliminated
the problem or thing giving rise to such "Cause"; provided, however, that (i)
any periodic breach or continual breaching after notice and cure of any
provision of clauses (a) or (b) above, or (ii) a repeated breach after notice
and cure, of any provision of clauses (a) or (b) above, involving the same or
substantially similar actions or conduct, shall be grounds for termination for
cause without any additional notice from the Company. The parties hereto agree
that three (3) separate instances of a breach by the Employee of the provisions
of this Agreement
3
<PAGE> 4
during the Term shall be considered periodic, continual or repeated and shall
constitute "Cause" within the meaning of this Section 8.
9. NON-COMPETITION.
(a) During the Term except if the Employee terminates
Employee's employment hereunder as a result of a Continued Company Breach (as
such term is defined in ((c)) below) the Employee agrees that Employee will
not, directly or indirectly, enter into or participate (whether as owner,
partner, shareholder, officer, director, salesman, consultant, employee,
principal, or in any other relationship or capacity) in any business operating
or providing services in any State in which the Company or its affiliates are
operating or providing services as of the date of termination which is, or
owns, manages or performs the following business activities and services:
residential and commercial and real estate lending; servicing loan portfolios
and/or mortgage or real estate brokerage services (a "Competing Entity");
provided, that the Employee may own up to one percent (1%) of the outstanding
equity securities of any Competing Entity that is subject to the public
reporting requirements of the Securities Exchange Act of 1934.
(b) During the Term and for three (3) years after the
termination of the Employee's employment hereunder for any reason, the Employee
shall not, without the prior written consent of the Company, directly or
indirectly, (i) solicit, request, cause or induce any person who is at the
time, or twelve (12) months prior thereto had been, an employee of or a
consultant to the Company to leave the employ of or terminate Employee's
relationship with the Company or (ii) employ, hire, engage or be associated
with, or endeavor to entice away from the Company any such person, or any
customer of the Company or its affiliates or (iii) attempt to limit or
interfere with any business agreement or relationship existing between the
Company and/or its affiliates with a third party.
(c) As used herein, Continued Company Breach shall mean
three (3) separate instances of a material breach during the Term by the
Company of the obligations it owes the Employee pursuant to Section 1, Section
4(a) and (c) and Section 5 hereof after the Company has received written notice
from the Employee regarding each such breach and the Company fails to cure each
such breach within ten (10) days of the receipt of such notice.
10. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION.
(a) The Employee acknowledges that as a result of
Employee's employment by the Company, the Employee, both during and after the
Term, will obtain secret and confidential information concerning the business
of the Company and its affiliates, including, without limitation, financial
information, trade secrets, information concerning the operations, sales,
personnel, suppliers, customers, costs, profits and pricing policies, "know
how" and certain business methodologies (the "Confidential Information").
4
<PAGE> 5
(b) During the Term thereafter, the Employee shall exercise all due and
diligent precautions to protect the integrity of the customer lists, mailing
lists and sources thereof, statistical data and compilations, agreements,
contracts, manuals, memoranda, notes, records, reports or other documents and
any and all other materials embodying any Confidential Information (the
"Confidential Materials") and, upon the Company's request in writing, Employee
shall immediately return to the Company all such Confidential Materials (and
copies thereof) then in Employee's possession or control.
(c) The Employee agrees that Employee will not at any time, either
during the Term of this Agreement or thereafter, divulge to any person or
entity any Confidential Information or deliver or permit any person or entity
to obtain any Confidential Materials except (i) when required in the course of
performing Employee's duties hereunder, (ii) with the Company's express
written consent; or (iii) where required to be disclosed by court order,
subpoena or other government process, or (iv) the Employee shall have no
responsibility for the divulgence of any information which is in the public
domain. If the Employee shall be required to make disclosure pursuant to the
provisions of clause (iii) of the preceding sentence, the Employee promptly,
but in no event more than 48 hours after learning of such subpoena, court order,
or other governmental process, shall notify, by personal delivery or by
electronic means, confirmed by mail, the Company and, at the Company's expense,
Employee shall: (x) take all reasonably necessary steps required by the Company
to defend against the enforcement of such subpoena, court order or other
government process, and (y) permit the Company to intervene and participate
with counsel of its choice in any proceeding relating to the enforcement
thereof.
(d) Upon termination of Employee's employment with the Company, the
Employee will promptly deliver to the Company all Confidential Materials
relating to the Company and its affiliates, which Employee may then possess or
have under Employee's control; provided however, that Employee shall be
entitled to retain copies of such documents reasonably necessary to document
Employee's financial relationship (both past and future) with the Company.
(e) The Employee acknowledges that (i) any breach of the provisions of
these Sections 9 and 10 may cause substantial and irreparable harm to the
Company for which the Company would have no adequate remedy at law, and (ii)
the provisions of this Agreement are reasonable and necessary for the protection
of the business of the Company and its affiliates.
11. REMEDIES.
(a) If Employee commits a breach, or threatens to commit a breach, of
any of the provisions of Sections 9 and 10, the Company shall have the right
and remedy:
(i) to have the provisions of this Agreement specifically
enforced by any court having equity jurisdiction; and
5
<PAGE> 6
(ii) to require Employee to account for and to pay over the
Company all damages suffered by the Company (including consequential and
incidental damages) as the result of any transactions constituting a breach of
any of the provisions of Sections 9 and 10, and Employee hereby agrees to
account for and pay over such damages to the Company;
(b) The Employee acknowledges and agrees that the services being
rendered hereunder to the Company are of a special, unique and extraordinary
character and that any such breach or threatened breach may cause substantial
and irreparable injury to the Company and that money damages will not provide
an adequate remedy to the Company. Employee further agrees that the Company in
any such equitable proceedings shall not have to prove irreparable harm.
(However, in a suit for damages, Company shall be required to prove the amount
of damages actually sustained).
(c) Each of the rights and remedies enumerated in Section 11(a) shall
be independent of the other, and shall be severally enforceable, and such
rights and remedies shall be in addition to, and not in lieu of any other
rights and remedies available to the Company under law or equity.
(d) If any provision of Sections 9 or 10 is held to be unenforceable
because of the scope, duration or area of its applicability, the court making
such determination shall have the power to modify such scope, duration, or
area, or all of them, and such provision or provisions shall then be applicable
in such modified form.
12. INDEMNIFICATION.
(a) The Company hereby agrees to indemnify and hold harmless the
Employee, both during and after the expiration of the Term, from and against
any and all loss or liability including reasonable legal fees and legal
disbursements which the Employee may have to third parties as a result of the
proper performance of Employee's duties hereunder during the Term, to the
extent permitted by the laws of the State of New York. The Employee hereby
agrees to indemnify and hold harmless the Company from any and all loss or
liability which the Company suffers as a result of employee's breach of
Employee's obligations hereunder to the extent permitted by the laws of the
State of New York. When the Company assumes its obligation to indemnify and
hold harmless the Employee in connection with a claim or litigation, its
obligation with respect to such claim or litigation shall be limited to holding
the Employee harmless from and against any judgement or settlement approved by
the Company in connection with the claim or litigation. The Company reserves
the right to select counsel of its choosing to defend the Employee.
(b) Whenever a claim shall arise for which any party may be or become
entitled to indemnification hereunder, the indemnified party shall notify the
indemnifying party promptly, and in the case of a third party claim, in writing
within ten (10) days of the indemnified party's first
6
<PAGE> 7
receipt of written notice of such third party claim, and in any event within
such shorter period as may be legally required for the indemnifying party or
parties to take appropriate action to resist such claim. The failure to give a
timely notice, as provided in the preceding sentence, shall not operate as a
waiver of an indemnified party's right to indemnification, provided that the
failure to give such notice did not materially prejudice the legal rights of
the indemnifying party. Such notice shall specify all facts known to the
indemnified party giving rise to such indemnity rights and shall estimate (to
the extent determinable) the amount of the liability arising therefrom.
13. NOTICE.
Any notice required hereunder shall be delivered by hand, or
sent by registered or certified mail, addressed to the other party hereto at
its address set forth above or at such other address as notice thereof shall
have been given in accordance with the provisions of this Section 13. Any such
notice shall become effective (a) if mailed, on the date indicated on the
receipt or if not accepted, the date indicated that delivery was attempted, and
(b) in the case of delivery by hand, upon delivery or attempted delivery as
shown on the records of the deliveries.
14. AGREEMENT; AMENDMENT.
This Agreement supersedes any prior agreements or
understandings, oral or written, between the parties hereto and represents
their entire understanding and agreement with respect to the subject matter
hereof. This Agreement can be amended, supplemented or changed, and any
provision hereof can be waived, only by written instrument making specific
reference to this Agreement which is signed by the party against whom
enforcement of any such amendment, supplement, modification or waiver is
sought. Any waiver of any breach of this Agreement shall not be construed to be
a continuing waiver or consent to any subsequent breach by any party hereto.
15. SEVERABILITY.
In the event of the invalidity or unenforceability of any one
or more provisions of this Agreement, such illegality or unenforceability shall
not affect the validity or enforceability of the other provisions hereof and
such other provisions shall be deemed to remain in full force and effect.
16. ASSIGNMENT; BINDING EFFECT.
This Agreement is not assignable by Employee without the prior
written consent of the Company. This Agreement shall be binding upon and shall
inure to the benefit of the Company and its successors and assigns. It is
agreed that in the event of a termination under this Agreement for any reason,
all salary and benefits shall cease as of the date of termination provided that
all accrued salary, bonus and expenses shall be paid to Employee or Employee's
estate or legal representative as the case may be.
7
<PAGE> 8
17. SECTION HEADINGS.
The Section Headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
18. GOVERNING LAW; VENUE.
This Agreement shall be construed and governed in accordance with
the laws of the State of New York. The parties hereto agree that any actions or
proceedings instituted to enforce rights hereunder shall be initiated in the
federal or state courts located in Westchester County, New York.
19. EXECUTION IN COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original, but all of which together shall
constitute one and the same instruments.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.
CITYSCAPE CORP.
By: /s/ Robert Grosser
----------------------------
Name: Robert Grosser
Title: President
/s/ Robert J. Blackwell
-------------------------------
Employee
Robert J. Blackwell
8
<PAGE> 9
SCHEDULE
EMPLOYMENT CONTRACT
FEBRUARY 1, 1996 - JANUARY 31, 1999
ROBERT J. BLACKWELL
1. Position Vice President
2. Duties & Services Manage and oversee: Title I Lending Program and
Wholesale Loan Acquisition Program
3. Salary $200,000 per annum
4. Bonus A Bonus may be granted at the option of the
Board of Directors.
5. Options In accordance with the Cityscape Financial Corp.
1995 Employee Stock Option Plan to purchase up
to 150,000 shares at $20.00 per share, the Fair
Market Value at the date of grant. The incentive
options granted vest and may be exercised 50,000
shares in 1997, 50,000 shares in 1998, and
50,000 shares in 1999. These options may not be
exercised more than five (5) years after grant
and terminate immediately upon termination of
the recipient's employment with the Company for
just cause, or 12 months after death or
permanent disability, or three months after
termination of employment for any other reason.
9
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement relating to Cityscape
Financial Corp. and its subsidiaries (the "Company") on Form S-1 of our report,
dated March 20, 1994, appearing in the Prospectus which is a part of this
Registration Statement. We also consent to the references to us under the
headings "Selected Consolidated Financial and Other Data" and "Experts" in such
Prospectus.
SHANE YURMAN & COMPANY
Monsey, New York
September 4, 1996
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion in this Registration Statement on Form S-1 (the
"Registration Statement") of our report, dated March 27, 1996, for the period
ended December 31, 1995 relating to Cityscape Financial Corp. and its
subsidiaries.
We also consent to the inclusion in the Registration Statement of our
report, dated November 30, 1995 for the three years ended September 30, 1995
relating to J & J Securities Limited.
We also consent to the reference to our firm under the heading "Experts" in
the Registration Statement.
BDO STOY HAYWARD
London, England
September 4, 1996
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF
A TRUSTEE PURSUANT TO SECTION 305(b)(2) ________
THE CHASE MANHATTAN BANK
(Exact name of trustee as specified in its charter)
NEW YORK
(State of incorporation if not a national bank)
13-4994650
(I.R.S. employer identification No.)
270 PARK AVENUE
NEW YORK, NEW YORK
(Address of principal executive offices)
10017
(Zip Code)
William H. McDavid
General Counsel
270 Park Avenue
New York, New York 10017
Tel: (212) 270-2611
(Name, address and telephone number of agent for service)
CITYSCAPE FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 6199 11-2994671
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. employer
incorporation or organization) Classification Code Number) identification No.)
</TABLE>
565 TAXTER ROAD
ELMSFORD, NEW YORK 10523-5200
(914) 592-6677
(Address, including zip code, and telephone number,
including area code. of registrant's principal executive offices)
CONVERTIBLE SUBORDINATED DEBENTURES
(Title of securities)
<PAGE> 2
GENERAL
Item 1. General Information.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
New York State Banking Department, State House, Albany, New York
12110.
Board of Governors of the Federal Reserve System, Washington,
D.C., 20551
Federal Reserve Bank of New York, District No. 2, 33 Liberty
Street, New York, N.Y.
Federal Deposit Insurance Corporation, Washington, D.C., 20429.
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
Item 2. Affiliations with the Obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
- 2 -
<PAGE> 3
Item 16. List of Exhibits
List below all exhibits filed as a part of this Statement of
Eligibility.
1. A copy of the Articles of Association of the Trustee as now in
effect, including the Organization Certificate and the Certificates of Amendment
dated February 17, 1969, August 31, 1977, December 31, 1980, September 9, 1982,
February 28, 1985, December 2, 1991 and July 10, 1996.
2. A copy of the Certificate of Authority of the Trustee to Commence
Business (see Exhibit 2 to Form T-1 filed in connection with Registration
Statement No. 33-50010, which is incorporated by reference).
3. None, authorization to exercise corporate trust powers being
contained in the documents identified above as Exhibits 1 and 2.
4. A copy of the existing By-Laws of the Trustee.
5. Not applicable.
6. The consent of the Trustee required by Section 321(b) of the Act
(see Exhibit 6 to Form T-1 filed in connection with Registration Statement No.
33-50010, which is incorporated by reference).
7. A copy of the latest report of condition of the Trustee, published
pursuant to law or the requirements of its supervising or examining authority.
8. Not applicable.
9. Not applicable.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the
Trustee, The Chase Manhattan Bank, a corporation organized and existing under
the laws of the State of New York, has duly caused this statement of eligibility
to be signed on its behalf by the undersigned, thereunto duly authorized, all in
the City of New York and State of New York, on the 3RD day of September, 1996.
THE CHASE MANHATTAN BANK
By: Janet Robinson
---------------------------
Second Vice President
<PAGE> 4
[GRAPHIC OMITTED - CHASE LOGO]
The Chase Manhattan Bank
270 Park Avenue
New York, NY 10017-2070
Certificate
I, Jean E. Rugani, an Assistant Corporate Secretary of the
Chase Manhattan Bank (formerly known as Chemical Bank), a banking organization
organized under the laws of the State of New Nork, do hereby certify that
attached are true and correct copies of -
(a) the Organization Certificate of Chemical Bank, as approved and
filed in the office of the Superintendent of Banks of the
State of New York on November 26, 1968,
(b) a Certificate of Amendment of the Organization Certificate of
Chemical Bank as approved and filed in the office of the
Superintendent of Banks of the State of New York on February
17, 1969,
(c) a Certificate of Amendment of the Organization Certificate of
Chemical Bank as approved and filed in the office of the
Superintendent of Banks of the State of New York on September
8, 1977,
(d) a Certificate of Amendment of the Organization Certificate of
Chemical Bank as approved and filed in the office of the
Superintendent of Banks of the State of New York on January
29, 1981,
(e) a Certificate of Amendment of the Organization Certificate of
Chemical bank as approved and filed in the office of the
Superintendent of Banks of the State of New York on September
14, 1982,
(f) a Certificate of Amendment of the Organization Certificate of
Chemical Bank as approved and filed in the office of the
Superintendent of Banks of the State of New York on March 13,
1985;
(g) a Certificate of Amendment of the Organization Certificate of
Chemical Nank as approved and filed in the office of the
Superintendent of Banks of the State of New York on June 4,
1992; and
(h) a Certificate of Amendment of the Organization Certificate of
Chemical Bank as approved and filed in the office of the
Superintendent of Banks of the State of New York effective as
of July 13, 1996.
I further certify that said Organization Certificate, as
amended by said Certificates of Amendment, is in full force and effect on the
date hereof.
IN WITNESS WHEREOF I have hereunto set my hand and affixed the
seal of The Chase Manhattan Bank as of this 18th day of July 1996.
/s/ Jean E. Rugani
------------------------------
Jean E. Rugani
<PAGE> 5
I, Bernard Gassman , Deputy Superintendent of Banks of the State of New York, do
hereby certify that I have caused the annexed Copy of the Organization
Certificate of Chemical Bank dated November 26, 1968, and filed in the office of
the Superintendent of Banks on November 26, 1968 to be compared by a competent
clerk with the original on file in the Banking Department, and the same is a
correct copy of said Organization Certificate end of the whole thereof.
IN WITNESS WHEREOF, I have hereunto set my hand and
affixed the official seal of the Banking Department of
New York, N.Y., this 17th day of February 1968
/s/ Bernard Gassman
----------------------------------
DEPUTY SUPERINTENDENT
<PAGE> 6
ORGANIZATION CERTIFICATE
OF
CHEMICAL BANK
Received this 25th day of
November 1968
----------------------------------------
Superintendent of Banks
Filed for examination this 25th day of
November 1968
-----------------------------------------
Superintendent of Banks
Approved by the Banking Board by unanimous
instrument in writing on the 26th day of
November 1968
/s/[GRAPHIC OMITTED - Signature]
-----------------------------------------
Secretary of the Banking Board
Approved this 26th
day of of November 1968
-------------------------------------------
Superintendent of Banks
Filed in the office of
Superintendent of Banks
-------------------------------------------
this 26th day of November 1968
Recorded in the office of
-------------------------------------------
this _________________ day of _______19___
<PAGE> 7
ORGANIZATION CERTIFICATE
OF
CHEMICAL BANK
We, the undersigned all being of full age and citizens of the
United States, two of us being residents of the State of New York and three of
us being residents of states contiguous to the State of New York, for the
purpose of incorporating and organizing a trust company under the banking laws
of the State of New York do hereby certify as follows:
FIRST: The name by which the Corporation is to be known is
CHEMICAL BANK.
SECOND: The place where its office is to be located is 20 Pine
Street, Borough of Manhattan, City, County and State of New York.
THIRD: The amount of authorized capital stock which the
Corporation is hereafter to have is $510,000, and the number of shares into
which such capital stock is to be divided is 42,500 shares, each of the same
class and of the par value of $12 per share.
FOURTH: The names, places of residence and citizenship of the
incorporators and the number of shares of capital stock of the Corporation
subscribed for by each are as follows:
<PAGE> 8
<TABLE>
<CAPTION>
Number of
Place of Shares
Name Residence Citizenship Subscribed
---- --------- ----------- ----------
<S> <C> <C> <C>
William S. Renchard 200 E. 66th Street U.S. 84
New York, N.Y. 10021
Hulbert S. Aldrich 1088 Park Avenue U.S. 84
New York, N.Y. 10028
Howard W. McCall, Jr. 68 Dorchester Road U.S. 84
Darien, Conn. 06820
Walter M. Ross 442 North Street U.S. 84
Greenwich, Conn. 06830
Arthur P. Ringler 27 Londonberry Way U.S. 84
Summit, New Jersey 07901
</TABLE>
FIFTH: The number of directors of the Corporation shall be not
less than five nor more than fifteen; provided, however, that upon effectiveness
of the merger of Chemical Bank New York Trust Company into the Corporation the
number of directors of the Corporation shall be not less than seven nor more
than twenty-five.
SIXTH: The names of the incorporators who are to serve as
directors of the Corporation until the first annual meeting of stockholders of
the Corporation are:
William S. Renchard
Hulbert S. Aldrich
Howard W. McCall, Jr.
Walter M. Ross
Arthur P. Ringler
SEVENTH: The Corporation is to exercise the powers conferred
by Section 100 of the banking laws of the State of New York.
<PAGE> 9
IN WITNESS WHEREOF, the undersigned have executed this
Certificate this day of __________1968
/s/ William S. Renchard
--------------------------------------
William S. Renchard, Incorporator
/s/ Hulbert S. Aldrich
--------------------------------------
Hulbert S. Aldrich, Incorporator
/s/ Howard W. McCall, Jr.
--------------------------------------
Howard W. McCall, Jr., Incorporator
--------------------------------------
Walter M. Ross, Incorporator
/s/ Arthur P. Ringler
--------------------------------------
Arthur P. Ringler, Incorporator
<PAGE> 10
STATE OF NEW YORK, )
) ss.:
COUNTY OF NEW YORK, )
On this ____ day of _______ 1968 personally appeared before me
William S. Renchard, Hulbert S. Aldrich, Howard W. McCall, Jr., Walter M. Ross
and Arthur P. Ringler, to me known to be the persons described in and who
executed the foregoing certificate, and severally acknowledged that they
executed the same.
--------------------------
Notary Public
[Notarial Seal]
<PAGE> 11
Filed in the Office of the Superintendent
of Banks, State of New York, this
20 day of 19
- --------- ---------- ----
- -----------------------------------
ADMINISTRATIVE OFFICER
<PAGE> 12
I, FRANK WILLE, Superintendent of Banks of the State of New York, DO
HEREBY APPROVE, the annexed certificate entitled "Certificate of Amendment of
the Organization Certificate of CHEMICAL BANK under Section 8005 of the Banking
Law" dated 1969, providing for increase of capital stock from $ to $
IN WITNESS WHEREOF, I have
hereunto set my hand and
affixed the official seal
of the Banking Department
of Albany, this 17th
day of February 1969
-------------------------
Superintendent of Banks
<PAGE> 13
I, Bernard Gassman Deputy Superintendent of Banks of the State of New York, do
hereby certify that I have caused the annexed Copy of Certificate of Amendment
of the Organization Certificate of Chemical Bank dated February 10, 1969, and
filed in the office of the Superintendent of Banks on February 17, 1969 to be
compared by a competent clerk with the original on file in the Banking
Department, and the same is a correct copy of said Certificate of Amendment of
Organization Certificate and of the whole thereof.
IN WITNESS WHEREOF, I have
hereunto set my hand and
affixed the official seal
of the Banking Department
of New York, N.Y., this
17th day of February
1969
/s/ Bernard Gassman
----------------------------
Deputy Superintendent
<PAGE> 14
CERTIFICATE OF AMENDMENT
OF
THE ORGANIZATION CERTIFICATE
OF
CHEMICAL BANK
Under Section 8005 of the Banking Law
We, WILLIAM S. RENCHARD and RAYMOND F. ADAMS, being,
respectively, the President and the Secretary of CHEMICAL BANK, a New York
banking organization, do hereby certify as follows:
1. The name of the Corporation is Chemical Bank.
2. The date on which the Organization Certificate of the
Corporation was filed by the Superintendent of Banks of the State of New York is
November 26, 1968.
3. Paragraph THIRD of the Organization Certificate of the
Corporation, stating that the amount of the its authorized capital stock is
$510,000 and the number of shares into which such capital stock is to be divided
is 42,500 shares, each of the same class and of the par value of $12 per share,
is hereby amended to read as follows:
"THIRD: The amount of authorized capital stock which the
Corporation is hereafter to have is $160,731,564 and the number of shares into
which such capital stock is to be divided is 13,394,297 shares, each of the same
class and of the par value of $12 per share."
4. This amendment to the Organization Certificate was approved
by the votes, cast in person or by proxy at a special stockholders' meeting of
the Corporation duly held upon notice on December 30, 1968, by the holders of
record of all the outstanding shares of the capital stock of the Corporation.
<PAGE> 15
IN WITNESS WHEREOF, the undersigned have executed this
Certificate this day of February 1969.
-----------------------------
William S. Renchard
President
-----------------------------
Raymond F. Adams
Secretary
[Corporate Seal]
<PAGE> 16
STATE OF NEW YORK, )
) ss.:
COUNTY OF NEW YORK, )
I, RAYMOND F. ADAMS, being duly sworn, depose and say that I,
the said Raymond F. Adams, am the Secretary of CHEMICAL BANK, and that I have
read and signed the foregoing Certificate and known the contents thereof and the
statements therein contained are true.
----------------------------
Raymond F. Adams
Secretary
Subscribed and sworn to before me
this day of February 1969.
[GRAPHIC OMITTED - Signature]
- -------------------------------
Notary Public
<PAGE> 17
I, William J. Heaney, Deputy Superintendent of Banks of the State of
New York DO HEREBY APPROVE the annexed certificate entitled "Certificate of
Amendment of the Organization Certificate of under
Section 8005 of the Banking Law" dated 19 providing
for increase of capital stock from $ to $
IN WITNESS WHEREOF, I have
hereunto set my hand and
affixed the official seal
of the Banking Department
of New York, N.Y., this 8th
day of September 1977
Deputy [GRAPHIC OMITTED - Signature]
------------------------------
Superintendent of Banks
<PAGE> 18
CERTIFICATE OF AMENDMENT
OF
THE ORGANIZATION CERTIFICATE
OF
CHEMICAL BANK
Under Section 8005 of the Banking Law
We, DONALD C. PLATTEN and JOHN B. WYNNE, being, respectively,
the Chairman of the Board and the Secretary of CHEMICAL BANK, a New York banking
organization, do hereby certify as follows:
1. The name of the Corporation is Chemical Bank.
2. The date on which the Organization Certificate of the
Corporation was filed by the Superintendent of Banks of the State of New York is
November 26, 1968.
3. A Certificate of Amendment of the Organization Certificate
of Chemical Bank was filed by the Superintendent of Banks of the State of New
York on February 17, 1969.
4. Paragraph THIRD of the Organization Certificate of the
Corporation, as amended, stating that the amount of its authorized capital stock
is $160,731,564 and the number of shares into which such capital stock is to be
divided is 13,394,297 shares, each of the same class and of the par value of $12
per share, is hereby amended to read as follows:
<PAGE> 19
"THIRD: The amount of authorized capital stock which the
Corporation is hereafter to have is $187,200,000 and the number of shares into
which such capital stock is to be divided is 15,600,000 shares, each of the same
class and of the par value of $12 per share."
5. This amendment to the Organization Certificate was approved
by the votes cast in person or by proxy at a special stockholders' meeting, duly
held on August 31, 1977, by the holders of record of all the outstanding shares
of the capital stock of the Corporation.
IN WITNESS WHEREOF, the undersigned have executed this
Certificate this 31st day of August 1977.
------------------------------
DONALD C. PLATTEN,
Chairman of the Board
/s/ John B. Wynne
------------------------------
JOHN B. WYNNE
Secretary
[Corporate Seal]
<PAGE> 20
STATE OF NEW YORK, )
) ss. :
COUNTY OF NEW YORK, )
I, JOHN B. WYNNE, being duly sworn, depose and say that I, the
said JOHN B. WYNNE, am the Secretary of CHEMICAL BANK, and that I have read and
signed the foregoing Certificate and know the contents thereof and the
statements therein contained are true.
/s/ John B. Wynne
------------------------------
JOHN B. WYNNE
Secretary
Subscribed and sworn to before
me this day of 1977.
- -----------------------------------------
Notary Public
<PAGE> 21
I, DONALD J. KAVANAGH Deputy Superintendent of Banks of the State of New York,
DO HEREBY APPROVE the annexed certificate entitled "Certificate of Amendment of
the Organization Certificate of under Section 8005 of the Banking
Law" dated as of 19 , providing for increase of capital stock
from $ to
IN WITNESS WHEREOF, I have
hereunto set my hand and
affixed the official seal
of the Banking Department
of New York, N.Y., this
29th day of January 1981
[GRAPHIC OMITTED - Signature]
------------------------------
Deputy Superintendent of Banks
<PAGE> 22
CERTIFICATE OF AMENDMENT
OF
THE ORGANIZATION CERTIFICATE
OF
CHEMICAL BANK
Under Section 8005 of the Banking Law
We, DONALD C. PLATTEN and JOHN B. WYNNE, being, respectively,
the Chairman of the Board and the Secretary of CHEMICAL BANK, a New York banking
organization, do hereby certify as follows:
1. The name of the Corporation is Chemical Bank.
2. The date on which the Organization Certificate of the
Corporation was filed by the Superintendent of Banks of the State of New York is
November 26, 1968.
3. A Certificate of Amendment of the Organization Certificate
of Chemical Bank was filed by the Superintendent of Banks of the State of New
York on February 17, 1969.
4. A Certificate of Amendment of the Organization Certificate
of Chemical Bank was filed by the Superintendent of Banks of the State of New
York on September 8, 1977.
5. Paragraph THIRD of the Organization Certificate of the
Corporation, as amended, stating that the amount of its authorized capital stock
is $187,200,000 and the number of shares into which such capital stock is to be
divided is 15,600,000 shares, each of the same class and of the par value of $12
per share, is hereby amended to read as follows:
<PAGE> 23
"THIRD: The amount of authorized capital
stock which the Corporation is hereafter to have is
$203,580,000 and the number of shares into which such capital
stock is to be divided is 16,965,000 shares, each of the same
class and of the par value of $12 per share."
6. This amendment to the Organization Certificate was approved
by the votes cast in person or by proxy at a special stockholders' meeting, duly
held as of December 31, 1980, by the holders of record of all the outstanding
shares of the capital stock of the Corporation.
IN WITNESS WHEREOF, the undersigned have executed this
Certificate as of December 31, 1980.
-------------------------------
DONALD C. PLATTEN,
Chairman of the Board
/s/ John B. Wynne
------------------------------
JOHN B. WYNNE
Secretary
[Corporate Seal]
<PAGE> 24
STATE OF NEW YORK, )
) ss. :
COUNTY OF NEW YORK, )
I, JOHN B. WYNNE, being duly sworn, depose and say that I, the
said JOHN B. WYNNE, am the Secretary of CHEMICAL BANK, and that I have read and
signed the foregoing Certificate and know the contents thereof and the
statements therein contained are true.
/s/ John B. Wynne
------------------------------
JOHN B. WYNNE
Secretary
Subscribed and sworn to before
me this day of 1977.
- ----------------------------------
Notary Public
<PAGE> 25
I, PETER M. PHILBIN, Deputy Superintendent of Banks of the State of New
York, DO HEREBY APPROVE the annexed certificate entitled "Certificate of
Amendment of the Organization Certificate of under Section 8005
of the Banking Law" dated as of 19 , providing for increase
of capital stock from $ to
IN WITNESS WHEREOF, I have
hereunto set my hand and
affixed the official seal
of the Banking Department
of New York, N.Y., this
14th day of September 1982
--------------------------------
Deputy Superintendent of Banks
<PAGE> 26
CERTIFICATE OF AMENDMENT
OF
THE ORGANIZATION CERTIFICATE
OF
CHEMICAL BANK
Under Section 8005 of the Banking Law
We, DONALD C. PLATTEN and JOHN B. WYNNE, being, respectively,
the Chairman of the Board and the Secretary of CHEMICAL BANK, a New York banking
organization, do hereby certify as follows:
1. The name of the Corporation is Chemical Bank.
2. The date on which the Organization Certificate of the
Corporation was filed by the Superintendent of Banks of the State of New York is
November 26, 1968.
3. A Certificate of Amendment of the Organization Certificate
of Chemical Bank was filed by the Superintendent of Banks of the State of New
York on February 17, 1969.
4. A Certificate of Amendment of the Organization Certificate
of Chemical Bank was filed by the Superintendent of Banks of the State of New
York on September 8, 1977.
5. A Certificate of Amendment of the Organization Certificate
of Chemical Bank was filed by the Superintendent of Banks of the State of New
York on January 29, 1981.
<PAGE> 27
6. Paragraph THIRD of the Organization Certificate of the
Corporation, as amended, stating that the amount of its authorized capital stock
is $203,580,000 and the number of shares into which such capital stock is to be
divided is 16,965,000 shares, each of the same class and of the par value of $12
per share, is hereby amended to read as follows:
"THIRD: The amount of authorized capital stock which
the Corporation is hereafter to have is $287,580,000 and the
number of shares into which such capital stock is to be
divided is 23,965,000 shares, each of the same class and of
the par value of $12 per share."
7. This amendment to the Organization Certificate was approved
by the votes cast in person or by proxy at a special stockholders' meeting, duly
held as of September 8, 1982, by the holders of record of all the outstanding
shares of the capital stock of the Corporation.
IN WITNESS WHEREOF, the undersigned have executed this
Certificate this 9th day of September 1982.
---------------------------
DONALD C. PLATTEN,
Chairman of the Board
/s/ John B. Wynne
------------------------------
JOHN B. WYNNE
Secretary
[Corporate Seal]
<PAGE> 28
STATE OF NEW YORK, )
) ss. :
COUNTY OF NEW YORK, )
I, JOHN B. WYNNE, being duly sworn, depose and say that I, the
said JOHN B. WYNNE, am the Secretary of CHEMICAL BANK, and that I have read and
signed the foregoing Certificate and know the contents thereof and the
statements therein contained are true.
/s/ John B. Wynne
------------------------------
JOHN B. WYNNE
Secretary
Subscribed and sworn to before me this 9th day of September 1982.
- -----------------------------
Notary Public
<PAGE> 29
State of New York,
Banking Department
I, PETER M. PHILBIN, Deputy Superintendent of Banks of the State of New
York, DO HEREBY APPROVE the annexed certificate entitled "Certificate of
Amendment of the Organization Certificate of Chemical Bank under Section 8005 of
the Banking Law" dated February 28, 1985 providing for increase of capital stock
from $287,580,000, consisting of 23,965,000 shares of the par value of $12 per
share, to $315,000,000, consisting of 25,000,000 shares of the same par value
and 15,000,000 shares of preferred stock, par value of $1 per share, with such
terms as may be approved by the Board at the time of issuance of any class or
series of such preferred stock.
WITNESS, my hand and official seal of the Banking Department at the City of New
York, this 13th day of March in the Year of our Lord one thousand nine hundred
and eighty-five.
<PAGE> 30
CERTIFICATE OF AMENDMENT
OF
THE ORGANIZATION CERTIFICATE
OF
CHEMICAL BANK
Under Section 8005 of the Banking Law
We, WALTER V. SHIPLEY and JOHN B. WYNNE, being, respectively,
the Chairman of the Board and the Secretary of CHEMICAL BANK, a New York banking
organization, do hereby certify as follows:
1. The name of the Corporation is Chemical Bank.
2. The date on which the Organization Certificate of the
Corporation was filed by the Superintendent of Banks of the State of New York is
November 26, 1968.
3. A Certificate of Amendment of the Organization Certificate
of Chemical Bank was filed by the Superintendent of Banks of the State of New
York on February 17, 1969.
4. A Certificate of Amendment of the Organization Certificate
of Chemical Bank was filed by the Superintendent of Banks of the State of New
York on September 8, 1977.
5. A Certificate of Amendment of the Organization Certificate
of Chemical Bank was filed by the Superintendent of Banks of the State of New
York on January 29, 1981.
6. A Certificate of Amendment of the Organization Certificate
of Chemical Bank was filed by the Superintendent of Banks of the State of New
York on September 8, 1982.
<PAGE> 31
CERTIFICATE OF AMENDMENT
OF
THE ORGANIZATION CERTIFICATE
OF
CHEMICAL BANK
Under Section 8005 of the Banking Law
We, WALTER V. SHIPLEY and JOHN B. WYNNE, being, respectively,
the Chairman of the Board and the Secretary of CHEMICAL BANK, a New York banking
organization, do hereby certify as follows:
1. The name of the Corporation is Chemical Bank.
2. The date on which the Organization Certificate of the
Corporation was filed by the Superintendent of Banks of the State of New York is
November 26, 1968.
3. A Certificate of Amendment of the Organization Certificate
of Chemical Bank was filed by the Superintendent of Banks of the State of New
York on February 17, 1969.
4. A Certificate of Amendment of the Organization Certificate
of Chemical Bank was filed by the Superintendent of Banks of the State of New
York on September 8, 1977.
5. A Certificate of Amendment of the Organization Certificate
of Chemical Bank was filed by the Superintendent of Banks of the State of New
York on January 29, 1981.
6. A Certificate of Amendment of the Organization Certificate
of Chemical Bank was filed by the Superintendent of Banks of the State of New
York on September 8, 1982.
<PAGE> 32
7. Paragraph THIRD of the Organization Certificate of the
Corporation, as amended, stating that the amount of its authorized capital stock
is $287,580,000 and the number of shares into which such capital stock is to be
divided is 23,965,000 shares, each of the same class and of the par value of $12
per share, is hereby amended to read as follows:
"THIRD: The amount of authorized capital
stock which the Corporation hereafter is to have is
$315,000,000 and the number of shares into which such capital
stock is to be divided is 40,000,000 shares consisting of
25,000,000 shares of Common Stock, par value $12 per share,
and 15,000,000 shares of Preferred Stock, par value $1 per
share, which shall be issued in one or more classes or series
having such designations, relative rights, preferences or
limitations as fixed by the Board of Directors of the
Corporation at the time of issuance of any such Preferred
Stock."
8. This amendment to the Organization Certificate was approved
by a resolution adopted by the written consent of Chemical New York Corporation,
the sole stockholder of the Corporation, on February 28, 1985.
IN WITNESS WHEREOF, the undersigned have executed this
Certificate this 28th day of February 1985.
/s/ Walter V. Shipley
------------------------------------
Walter V. shipley
Chairman of the Board
/s/ John B. Wynne
------------------------------------
John B. Wynne
Secretary
[Corporate Seal]
<PAGE> 33
STATE OF NEW YORK
Banking Department
I, CARMINE M. TENGA, Deputy Superintendent of Banks of the State of New
York, DO HEREBY APPROVE the annexed Certificate entitled "Certificate of
Amendment of the Organization Certificate of CHEMICAL BANK under Section 8005 of
the New York Banking Law," dated December 2, 1991, providing for the following:
1) An increase in capital stock from $315,000,000, consisting of
25,000,000 shares of Common Stock, par value $12 per share,
and 15,000,000 shares of Preferred Stock, par value $1 per
share, to $699,000,000, consisting of 57,000,000 shares of
Common Stock, par value $12 per share, and 15,000,000 shares
of Preferred Stock, par value $1 per share; and
2) The location of the Principal office as New York, New York.
Witness, my hand and official seal of the Banking Department of the City of New
York, this 4th day of June in the Year of our Lord one thousand nine hundred and
ninety-two
/s/ Carmine M. Tenga
-------------------------------
Deputy Superintendent of Banks
<PAGE> 34
STATE OF NEW YORK, )
)
COUNTY OF NEW YORK, )
I, JOHN B. WYNNE, being duly sworn, depose and say that I, the
said JOHN B. WYNNE, am the Secretary of CHEMICAL BANK, and that I have read and
signed the foregoing Certificate and know the contents thereof and the
statements therein contained are true.
/s/ John B. Wynne
------------------------------
JOHN B. WYNNE
Secretary
Subscribed and sworn to before
me this 3rd day of December 1977.
- -----------------------------------
Notary Public
<PAGE> 35
CERTIFICATE OF AMENDMENT
OF
THE ORGANIZATION CERTIFICATE
OF
CHEMICAL BANK
Under Section 8005 of the Banking Law
We, WALTER V. SHIPLEY and JOHN B. WYNNE, being, respectively,
the Chairman of the Board and the Secretary of CHEMICAL BANK, a New York banking
organization, do hereby certify as follows:
1. The name of the Corporation is Chemical Bank.
2. The Organization Certificate of Chemical Bank was filed by
the Superintendent of Banks of the State of New York on November 26, 1968.
3. A Certificate of Amendment of the Organization Certificate
of Chemical Bank was filed by the Superintendent of Banks of the State of New
York on February 17, 1969.
4. A Certificate of Amendment of the Organization Certificate
of Chemical Bank was filed by the Superintendent of Banks of the State of New
York on September 8, 1977.
5. A Certificate of Amendment of the Organization Certificate
of Chemical Bank was filed by the Superintendent of Banks of the State of New
York on January 29, 1981.
6. A Certificate of Amendment of the Organization Certificate
of Chemical Bank was filed by the Superintendent of Banks of the State of New
York on September 8, 1982.
7. A Certificate of Amendment of the Organization Certificate
of Chemical Bank was filed by the Superintendent of Banks of the State of New
York on March 13, 1985.
<PAGE> 36
8. Article SECOND of the Organization Certificate, stating
that the place where the Corporation's office is to be located is 20 Pine
Street, New York, New York, is hereby amended and restated to read in its
entirety as follows:
"SECOND: The principal office of the Corporation is to be
located in New York, New York."
9. Article THIRD of the Organization Certificate, as amended,
stating that the amount of its authorized capital stock is $315,000,000 and the
number of shares into which such capital stock is to be divided is 40,000,000
shares consisting of 25,000,000 shares of Common Stock, par value $12 per share,
and 15,000,000 shares of Preferred Stock, par value $1 per share, is hereby
amended and restated to read in its entirety as follows:
"THIRD: The amount of authorized capital stock which the
Corporation is hereafter to have is $699,000,000 and the
number of shares into which such capital stock is to be
divided is 72,000,000 shares consisting of 57,000,000 shares
of Common Stock, par value $12 per share, and 15,000,000
shares of Preferred Stock, par value $1 per share, which shall
be issued in one or more classes or series having such
designations, relative rights, preferences or limitations as
fixed by the Board of Directors of the Corporation at the time
of issuance of any such Preferred Stock."
10. These amendments to the Organization Certificate were
approved by a resolution adopted by the written consent of Chemical Banking
Corporation, the sole stockholder of the Corporation, on December 2, 1991.
IN WITNESS WHEREOF, the undersigned have executed this
Certificate this 2nd day of December 1991. [GRAPHIC OMITTED]
/s/ Walter V. Shipley
--------------------------------
Walter V. Shipley
Chairman of the Board
/s/ John B. Wynne
--------------------------------
John B. Wynne
Secretary
<PAGE> 37
State of New York
BANKING DEPARTMENT
I, PETER M. PHILBIN, Deputy Superintendent of Banks of the State of New
York, DO HEREBY APPROVE the annexed certificate entitled "CERTIFICATE OF
AMENDMENT OF THE ORGANIZATION CERTIFICATE OF CHEMICAL BANK UNDER SECTION 8005 OF
THE BANKING LAW" dated July 10, 1996 providing for a change in name from
CHEMICAL BANK to THE CHASE MANHATTAN BANK and an increase in authorized capital
stock from $699,000,000, consisting of 15,000,000 shares with a par value of $1
each designated as Preferred Stock and 57,000,000 shares with a par value of $12
each designated as Common Stock to $1,335,000,000 consisting of 15,000,000
shares with a par value of $1 each designated as Preferred Stock and 110,000,000
shares with a par value of $12 each designated as Common Stock.
Such name change and increase in capital stock is to be effective July 13, 1996
Witness, my hand and official seal of the Banking Department at the City of New
York, this 11TH day of JULY in the Year of our Lord one thousand nine hundred
and NINETY-SIX
-----------------------------
Deputy Superintendent of Banks
<PAGE> 38
CERTIFICATE OF AMENDMENT
OF
THE ORGANIZATION CERTIFICATE
OF
CHEMICAL BANK
Under Section 8005 of the New York Banking Law
We, WALTER V. SHIPLEY and ANTHONY J. HORAN, being,
respectively, the Chairman of the Board and the Secretary of CHEMICAL BANK, a
New York banking organization, do hereby certify as follows:
1. The name of the Corporation is Chemical Bank.
2. The Organization Certificate of Chemical Bank was filed by
the Superintendent of Banks of the State of New York on November 26, 1968.
3. A Certificate of Amendment of the Organization Certificate
of Chemical Bank was filed by the Superintendent of Banks of the State of New
York on February 17, 1969.
4. A Certificate of Amendment of the Organization Certificate
of Chemical Bank was filed by the Superintendent of Banks of the State of New
York on September 8, 1977.
5. A Certificate of Amendment of the Organization Certificate
of Chemical Bank was filed by the Superintendent of Banks of the State of New
York on January 29, 1981.
6. A Certificate of Amendment of the Organization Certificate
of Chemical Bank was filed by the Superintendent of Banks of the State of New
York on September 8, 1982.
7. A Certificate of Amendment of the Organization Certificate
of Chemical Bank was filed by the Superintendent of Banks of the State of New
York on March 13, 1985.
<PAGE> 39
8. A Certificate of Amendment of the Organization Certificate
of Chemical Bank was filed by the Superintendent of Banks of the State of New
York on June 4, 1992.
9. Article FIRST of the Organization Certificate, stating that
the name by which the Corporation is to be known is CHEMICAL BANK, is hereby
amended and restated to read in its entirety as follows:
"FIRST: The name by which the Corporation is to be known is
THE CHASE MANHATTAN BANK."
10. Article THIRD of the Organization Certificate, as amended,
stating that the amount of its authorized stock which the Corporation is
hereafter to have is $699,000,000 and the number of shares into which such
capital stock is to be divided is 72,000,000 shares consisting of 57,000,000
shares of Common Stock, par value $12 per share, and 15,000,000 shares of
Preferred Stock, par value $1 per share, which shall be issued in one of more
classes or series having such designations, relative rights, preferences or
limitations as fixed by the Board of Directors of the Corporation at the time of
issuance of any such Preferred Stock, is hereby amended and restated to read in
its entirety as follows:
"THIRD: The amount of authorized capital stock which the
Corporation is hereafter to have is $1,335,000,000 and the number of shares into
which such capital stock is to be divided is 125,000,000 shares consisting of
110,000,000 shares of Common Stock, par value $12 per share, and 15,000,000
shares of Preferred Stock, par value $1 per share, which shall be issued in one
or more classes or series having such designations, relative rights, preferences
or limitations as fixed by the Board of Directors of the Corporation at the time
of issuance of any such Preferred Stock."
11. These amendments to the Organization Certificate were
approved by a resolution adopted by the written consent of The Chase Manhattan
Corporation, the sole stockholder of the Corporation, on July 3, 1996.
IN WITNESS WHEREOF, the undersigned have executed this
Certificate this 10th day of July, 1996. [GRAPHIC OMITTED]
/s/ Walter V. Shipley
--------------------------
Walter V. Shipley
Chairman of the Board
/s/ Anthony J. Horan
--------------------------
Anthony J. Horan
Secretary
<PAGE> 40
I, ANTHONY J. HORAN, being duly sworn, depose and say that I,
the said ANTHONY J. HORAN, am the Secretary of CHEMICAL BANK, and that I have
read and signed the foregoing Certificate and know the contents thereof and the
statements therein contained are true.
/s/ Anthony J. Horan
--------------------------
Anthony J. Horan
Secretary
Subscribed and sworn to before me this 10th day of July 1996.
/s/ Virginia Stark
- ---------------------------------
Notary Public
<PAGE> 41
BY-LAWS
THE CHASE MANHATTAN BANK
(formerly known as Chemical Bank)
AS AMENDED THROUGH
July 16, 1996
<PAGE> 42
CONTENTS
SUBJECT
<TABLE>
<CAPTION>
ARTICLE
<S> <C> <C>
I MEETINGS OF STOCKHOLDERS
Section 1.01 Annual Meeting
Section 1.02 Special Meetings
Section 1.03 Quorum
II BOARD OF DIRECTORS
Section 2.01 Number
Section 2.02 Vacancies
Section 2.03 Annual Meeting
Section 2.04 Regular Meetings
Section 2.05 Special Meetings
Section 2.06 Quorum
Section 2.07 Rules and Regulations
Section 2.08 Compensation
III COMMITTEES
Section 3.01 Executive Committee
Section 3.02 Examining Committee
Section 3.03 Other Committees
IV OFFICERS AND AGENTS
Section 4.01 Officers
Section 4.02 Clerks and Agents
Section 4.03 Term of Office
Section 4.04 Chairman of the Board
Section 4.05 President
Section 4.06 Vice Chairman of the Board
Section 4.07 Chief Financial Officer
Section 4.08 Controller
Section 4.09 Secretary
Section 4.10 General Auditor
Section 4.11 Powers and Duties of Other Officers
Section 4.12 Fidelity Bonds
V CORPORATE SEAL
VI FISCAL YEAR
VII INDEMNIFICATION
Section 7.01 Right of Indemnification
Section 7.02 Contracts and Funding
Section 7.03 Employee Benefit Plans
Section 7.04 Indemnification Not Exclusive Right
Section 7.05 Advancement of Expenses; Procedures
VII BY-LAWS
Section 8.01 Inspection
Section 8.02 Amendments
Section 8.03 Construction
</TABLE>
<PAGE> 43
BY-LAWS
OF
THE CHASE MANHATTAN BANK
ARTICLE I
MEETINGS OF STOCKHOLDERS
SECTION 1.01. Annual Meeting. The annual meeting of
stockholders of The Chase Manhattan Bank (herein called the Bank), shall be held
in the Borough of Manhattan, City of New York, State of New York, within the
first four months of each calendar year, on such date and at such time and place
as the Board of Directors (herein called the Board), may determine, for the
election of directors and the transaction of such other business as may properly
come before the meeting. Notice of such meeting, stating the purpose or purposes
thereof and the time when and the place where it is to be held and signed by the
Chairman of the Board (herein called the Chairman), the President, a Vice
Chairman of the Board or the Secretary or an Assistant Corporate Secretary of
the Bank, shall be served by personal delivery upon each stockholder of record
entitled to vote at such meeting not less than 10 nor more than 50 days before
said meeting.
SECTION 1.02. Special Meetings. A special meeting of the
stockholders may be called at any time by the Board, the Chairman, the
President, or a Vice Chairman of the Board, or upon the request in writing of
the holders of record of not less than 40% of the outstanding capital stock.
Notice of any special meeting, stating the time, place and purpose or purposes
thereof, shall be given by personal delivery to the stockholders in the manner
provided in Section 1.01 for the giving of notice of annual meetings of
stockholders. In the case of any meeting of stockholders, annual or special,
called for a purpose requiring other or further notice. Such notice shall be
give as required by law.
SECTION 1.03. Quorum. A majority of the outstanding common
stock, represented in person or by proxy, shall constitute a quorum at any
meeting of stockholders, unless otherwise provided by law; but less than a
quorum may adjourn any meeting, from time to time, and the meeting may be held
as adjourned, without further notice.
ARTICLE II.
BOARD OF DIRECTORS
SECTION 2.01. Number. The business and affairs of the Bank
shall be managed by or under the direction of a Board of Directors, of such
number as may be fixed from time to time by resolution adopted by the Board, but
in no event less than 7 or more 25, selected, organized and continued in
accordance with the provisions of the New York Banking Law. Each director
hereafter elected shall hold office until the next annual meeting of the
stockholders and until his successor is elected and has qualified, or until his
death or until he shall resign or shall have been removed.
<PAGE> 44
SECTION 2.02. Vacancies. In case of any increase in the number
of directors, the additional director or directors, and in case of any vacancy
in the board due to death, resignation, removal, disqualification or any other
cause, the successors to fill the vacancies, not exceeding one-third of the
entire Board, shall be elected by a majority of the directors then in office.
SECTION 2.03. Annual Meeting. An annual meeting of the
directors shall be held each year, without notice, immediately following the
annual meeting of stockholders. The time and place of such meeting shall be
designated by the Board. At such meeting, the directors shall, after qualifying,
elect from their own number a Chairman of the Board, a President and one or more
Vice Chairmen of the Board, and shall elect or appoint such other officers
authorized by these By-laws as they may deem desirable, and appoint the
Committees specified in Article III hereof. The directors may also elect to
serve at the pleasure of the Board, one or more Honorary Directors, not members
of the Board. Honorary Directors of the Board shall be paid such compensation or
such fees for attendance at meetings of the Board, and meetings of other
committees of the Board, as the Board shall determine from time to time.
SECTION 2.04. Regular Meetings. The Board shall hold a regular
meeting without notice at the principal office of the Bank on the third Tuesday
in each month, with the exception of the month of August, at such time as shall
be determined by the Board, unless another time or place within or without the
State, shall be fixed by resolution of the Board. Should the day appointed for a
regular meeting fall on a legal holiday, the meeting shall be held at the same
time on the preceding day or on such other day as the Board may order.
SECTION 2.05. Special Meetings. Special meetings of the Board
shall be held whenever called by the Chairman, the President, a Vice Chairman of
the Board, the Secretary or a majority of the directors at the time in office. A
notice shall be given as hereinafter in this Section provided of each such
special meeting, in which shall be stated the time and place of such meeting,
but, except as otherwise expressly provided by law or by these By-laws, the
purposes thereof need not be stated in such notice. Except as otherwise provided
by law, notice of each such meeting shall be mailed to each director, addressed
to him at his residence or usual place of business at least two (2) days before
the day on which such meeting is to be held, or shall be sent addressed to him
at such place by telegraph, cable, wireless or other form of recorded
communication or be delivered personally or by telephone not later than noon of
the calendar day before the day on which such meeting is to be held. At any
regular or special meeting of the Board, or any committee thereof, one or more
Board or committee members may participate in such meeting by means of a
conference telephone or similar communications equipment allowing all persons
participating in the meeting to hear each other at the same time. This type of
participation shall constitute presence in person at the meeting. Notice of any
meeting of the Board shall not, however, be required to be given to any director
who submits a signed waiver of notice whether before or after the meeting, or if
he shall be present at such meeting; and any meeting of the Board shall be a
legal meeting without any notice thereof having been given if all the directors
of the Bank then in office shall be present thereat.
SECTION 2.06. Quorum. One-third of the members of the entire
Board, or the next highest integer in the event of a fraction, shall constitute
a quorum, but if less than a quorum be present, a majority of those present may
adjourn any meeting from time to time and the meeting may be held as adjourned
without further notice.
<PAGE> 45
SECTION 2.07 Rules and Regulations. The Board may adopt such
rules and regulations for the conduct of its meetings and the management of the
affairs of the Bank as it may deem proper, not inconsistent with the laws of the
State of New York or these By-laws.
SECTION 2.08. Compensation. Directors shall be entitled to
receive from the Bank such fees for attendance at meetings of the Board or of
any committee, or both, as the Board from time to time determine. The Board may
also likewise provide that the Bank shall reimburse each such director or member
of such committee for any expenses paid by him on account of his attendance at
any such meeting. Nothing in this Section contained shall be construed to
preclude any director from serving the Bank in any other capacity and receiving
compensation therefor.
ARTICLE III
COMMITTEES
SECTION 3.01. Executive Committee. The Board, by resolution
adopted by a majority of the entire Board, shall appoint an Executive Committee
which, when the Board is not in session, shall have and may exercise all the
powers of the Board that lawfully may be delegated including, without
limitation, the power and authority to declare dividends. The Executive
Committee shall consist of such number of directors as the Board shall from time
to time determine, but not less than five and one of whom shall be designated by
the Board as Chairman thereof, as follows: (a) the Chairman of the Board, the
President, the Vice Chairmen of the Boar, and (b) such other directors, none of
whom shall be an officer of the Bank, as shall be appointed to serve at the
pleasure of the Board. The Board, by resolution adopted by a minority of the
entire Board, may designate one or more directors as alternate members of the
Executive Committee and the manner and circumstances in which such alternate
members shall replace or act in the place of absent or disqualified members of
the Executive Committee. The attendance of one-third of the members of the
Committee or their substitutes, or the next highest integer in the event of a
fraction, at any meeting shall constitute a quorum, and the act of a majority of
those present at a meeting thereof at which a quorum is present shall be the act
of the Committee. All acts done and powers conferred by the Committee from time
to time shall be deemed to be, and may be certified as being done or conferred
under authority of the Board. The Committee shall fix its own rules and
procedures, and the minutes of the meetings of the Committee shall be submitted
at the next regular meeting of the Board at which a quorum is present, or if
impracticable at the next such subsequent meeting. The Committee shall hold
meetings "On Call and such meetings may be called by the Chairman of the
Executive Committee, the Chairman of the Board, the President, a Vice Chairman
of the Board, or the Secretary. Notice of each such meeting of the Committee
shall be given by mail, telegraph, cable, wireless or other form of recorded
communication or be delivered personally or by telephone to each member of the
Committee not later than the day before the day on which such meeting is to be
held. Notice of any such meeting need not be given to any member of the
Committee who submits a signed waiver of notice whether before or after the
meeting, or if he shall be present at such meeting; and any meeting of the
Committee shall be a legal meeting without any notice thereof having been given,
if all the members of the Committee shall be present thereat. In the case of any
meeting, in the absence of the Chairman of the Executive Committee, such members
as shall be designated by the Chairman of the Executive Committee or the
Executive Committee shall act as Chairman of the meeting.
<PAGE> 46
SECTION 3.02. Examining Committee. The Board, by resolution
adopted by a majority of the entire Board, shall appoint an Examining Committee
composed of not less than three of its members, none of whom shall be an officer
of the Bank, to hold office at its pleasure and one of whom shall be designated
by the Board as chairman thereof. The Committee shall make such examination into
the affairs of the Bank and its loans and discounts and make such reports in
writing thereof as may be directed by the Board or required by the Banking Law.
The attendance of one third of the members of the Committee, or the next highest
integer in the event of a fraction, at any meeting shall constitute a quorum,
and the act of a majority of those present at a meeting thereof at which a
quorum is present shall be the act of the Committee.
SECTION 3.03. Other Committees. The Board, by resolution
adopted by a majority of the entire Board, may appoint, from time to time, such
other committees composed of not less than three of its members for such
purposes and with such duties and powers as the Board may determine. The
attendance of one-third of the members of such other committees, or the next
highest integer in the event of a fraction, at any meeting shall constitute a
quorum, and the act of a majority of those present at a meeting thereof at which
a quorum is present shall be the act
ARTICLE IV
OFFICERS AND AGENTS
SECTION 4.01. Officers. The officers of the Bank shall be (a)
a Chairman of the Board, a President and one or more Vice Chairmen of the Board,
each of whom must be a director and shall be elected by the Board; (b) a Chief
Financial Officer, a Controller, a Secretary and a General Auditor, each of whom
shall be elected by the Board; and (c) may include a Chief Credit Officer, a
Chief Administrative Officer, a Chief Technology Officer, one or more Group
Executives and such other officers as may from time to time be elected by the
Board or under its authority, or appointed by the Chairman or the President or a
Vice Chairman of the Board.
SECTION 4.02. Clerks and Agents. The Board may elect and
dismiss, or the Chairman or the President or a Vice Chairman of the Board may
appoint and dismiss, or delegate to any other officers authority to appoint and
dismiss, such clerks, agents and employees as may be deemed advisable for the
prompt and orderly transaction of the Bank's business, and may prescribe, or
authorize the appointing officers to prescribe, their respective duties, subject
to the provisions of these By-laws.
SECTION 4.03. Term of Office. The officers designated in
Section 4.01 (a) shall be elected by the Board at its annul meeting. The
officers designated in Section 4.01 (b) may be elected at the annual or any
other meeting of the Board. The officers designated in Section 4.01 (c) may be
elected at the annual or any other meeting of the Board or appointed at any time
by the designated proper officers. Any vacancy occurring in any office
designated in Section 4.01 (a) may be filled at any regular or special meeting
of the Board. The officers elected pursuant to Section 4.01 (a) shall each hold
office for the term of one year and until their successors are elected, unless
sooner disqualified or removed by a vote of two-thirds shall of the whole Board.
The officers elected by the Board pursuant to Section 4.01 (b) of these By-laws
shall hold office at the pleasure of the Board. All other officers, clerks,
agents and employees elected by the Board, or appointed by the Chairman, the
President or a Vice Chairman of the Board, or under their authority, shall hold
their respective offices at the pleasure of the Board or officers elected
pursuant to Section 4.01 (a).
<PAGE> 47
SECTION 4.04. Chairman of the Board. The Chairman shall be the
chief executive officer of the Bank and shall have, subject to the control of
the Board, general supervision and direction of the policies and operations of
the Bank. He shall preside at all meetings of the stockholders and at all
meetings of the Board. He shall have the right to execute any document or
perform any act which could be or is required to be executed or performed by the
President of the Bank. He shall have the power to sign checks, orders,
contracts, leases, notes, drafts and other documents and instruments in
connection with the business of the Bank, and together with the Secretary or an
Assistant Corporate Secretary or execute conveyances of real estate and other
documents and instruments to which the seal of the Bank is affixed. He shall
perform such other duties as from time to time may be prescribed by the Board.
SECTION 4.05. President. The President shall, subject to the
direction and control of the Board and the Chairman, participate in the
supervision of the policies and operations of the Bank. In general, the
President shall perform all duties incident to the office of President, and such
other duties as from time to time may be prescribed by the Board or the
Chairman. In the absence of the Chairman, the President shall preside at
meetings of stockholders and of the Board. The President shall have the same
power to sign for the Bank as is prescribed in these By-laws for the Chairman.
SECTION 4.06. Vice Chairman of the Board. The Vice Chairman of
the Board, or if there be more than one, then each of them, shall, subject to
the direction and control of the Board and the Chairman, participate in the
supervision of the policies and operations of the Bank, and shall have other
duties as may be prescribed from time to time by the Board or the Chairman. In
the absence of the Chairman and the President, a Vice Chairman, as designated by
the Chairman or the Board, shall preside at meetings of the stockholders and the
Board. Each Vice Chairman have the same power to sign for the Bank as is
prescribed in these By-laws for the Chairman.
SECTION 4.07. Chief Financial Officer. The Chief Financial
Officer shall have such powers and perform such duties as the Board, the
Chairman, the President, or a Vice Chairman of the Board may from time to time
prescribe, which duties may include, without limitation, responsibility for
strategic planning, corporate finance, control, tax and auditing activities, and
shall perform such other duties as may be prescribed by these By-laws.
SECTION 4.08. Controller. The Controller shall exercise
general supervision of the accounting departments of the Bank. He shall be
responsible to the Chief Financial Officer and shall render reports from time to
time relating to the general financial condition of the Bank. He shall render
such other reports and perform such other duties as from time to time may be
prescribed by the Chief Financial Officer, a Vice Chairman of the Board, the
President or the Chairman.
SECTION 4.09. Secretary. The Secretary shall:
(a) record all the proceedings of the meetings of the
stockholders, the Board and the Executive Committee in one or more books kept
for that purpose;
<PAGE> 48
(b) see that all notices are duly given in accordance with the
provisions of these By-laws or as required by law;
(c) be custodian of the seal of the Bank; and he may see that
such seal or a facsimile thereof is affixed to any documents the execution of
which on behalf of the Bank is duly authorized and may attest such seal when so
affixed; and
(d) in general, perform all duties incident to the office of
Secretary and such other duties as from time to time may be prescribed by the
Board and the Chairman.
SECTION 4.10. General Auditor. The General Auditor shall
exercise general supervision of the Auditing Division. He shall audit the
affairs of the Bank and its subsidiaries, including appraisal of the soundness
and adequacy of internal controls and operating procedures and shall ascertain
the extent of compliance with policies and procedures of the Bank. He shall be
responsible to the Board and shall make such audits and prepare such regular
reports as the Board, its Examining Committee or the Chairman may, from time to
time, require or as in his judgment are necessary in the performance of his
duties.
SECTION 4.11. Powers and Duties of Other Officers. The powers
and duties of all other officers of the Bank shall be those usually pertaining
to their respective officers, subject to the direction and control of the Board
and as otherwise provided in these By-laws.
SECTION 4.12. Fidelity Bonds. The Board, in its discretion,
may require any or all officers, agents, clerks and employees of the Bank to
give bonds covering the faithful performance of their duties or may obtain
insurance covering the same, in either case in form and amount approved by the
Board, the premiums thereon to be paid by the Bank.
ARTICLE V
CORPORATE SEAL
The corporate seal of the Bank shall be in the form of a circle and
shall bear the full name of the Bank and the words "Corporate Seal New York"
together with the logo of The Chase Manhattan Corporation.
ARTICLE VI
FISCAL YEAR
The fiscal year of the Bank shall be the calendar year.
<PAGE> 49
ARTICLE VII
INDEMNIFICATION
SECTION 7.01. Right to Indemnification. The Bank shall to the
fullest extent permitted by applicable law as then in effect indemnify any
person (the "Indemnitee") who was or is involved in any manner (including,
without limitation, as a party or a witness), or is threatened to be made so
involved, in any threatened, pending or completed investigation, claim, action,
suit or proceeding, whether civil, administrative or investigative (including,
without limitation, any action, suit or proceeding by or in the right of the
Bank to procure a judgment in its favor) (a "Proceeding") by reason of the fact
that he is or was a director, officer, employee or agent of the Bank, or is or
was serving at the request of the Bank as a director, officer or employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against all expenses (including attorney's fees), judgment, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such Proceeding. Such indemnification shall be a contract right and shall
include the right to receive payment in advance of any expenses incurred by the
Indemnitee in connection with such Proceeding, consistent with the provisions of
applicable law as then in effect.
SECTION 7.02. Contracts and Funding. The Bank may enter into
contracts with any director, officer, employee or agent of the Bank in
furtherance of the provisions of this Article VII and may create a trust fund,
grant a security interest or use other means (including, without limitation, a
letter of credit) to ensure the payment of such amounts as may be necessary to
effect indemnification as provided in this Article VII.
SECTION 7.03. Employee Benefit Plans. For purposes of this
Article VII, references to "other enterprises" shall include employee benefit
plans; references to "fines" shall include any excise taxes assessed on a person
with respect to any employee benefit plan; and references to "serving at the
request of the Bank" shall include any service as a director, officer, employee,
or agent of the Bank which imposes duties on, or involves services by, such
director, officer, employee, or agent with respect to any employee benefit plan,
its participants, or beneficiaries; and a person who acted in good faith and in
a manner he reasonably believed to be in the interest of the participant and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner not opposed to be the best interests of a corporation.
SECTION 7.04. Indemnification Not Exclusive Right. The right
of indemnification and advancement of expenses provided in this Article VII
shall not be exclusive of any other rights to which a person seeking
indemnification may otherwise be entitled, under any statute, by-law, agreement,
vote of stockholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding such
office. The provisions of this Article VII shall inure to the benefit of the
heirs and legal representatives of any person entitled to indemnity under this
Article VII and shall be applicable to Proceedings commenced or continuing after
the adoption of this Article VII whether arising from acts or omissions
occurring before or after such adoption.
<PAGE> 50
SECTION 7.05. Advancement of Expenses: Procedures. In
furtherance, but not limitation, of the foregoing provisions, the following
procedures and remedies shall apply with respect to advancement of expenses and
the right to indemnification under this Article VII:
(a) Advancement of Expenses. All reasonable expenses incurred
by or on behalf of the Indemnitee in connection with any Proceeding shall be
advanced to the Indemnitee by the Bank within twenty (20) days after the receipt
by the Bank of a statement or statements from the Indemnitee requesting such
advance or advances from time to time, whether prior to or after final
disposition of such Proceeding. Such statement or statements shall reasonably
evidence the expense incurred by the Indemnitee and, if required by the law at
the time of such advance, shall include or be accompanied by an undertaking by
or on behalf of the Indemnitee to repay the amounts advanced if, and to the
extent, it should ultimately be determined that the Indemnitee is not entitled
to be indemnified against such expenses.
(b) Written Request for Indemnification. To obtain
indemnification under this Article VII, an Indemnitee shall submit to the
Secretary of the Bank a written request, including such documentation and
information as is reasonably available to the Indemnitee and reasonably
necessary to determine whether and to what extent the Indemnitee is entitled to
indemnification (the "Supporting Documentation"). The determination of the
Indemnitee's entitlement to indemnification shall be made within a reasonable
time after receipt by the Bank of the written request for indemnification
together with the Supporting Documentation. The Secretary of the Bank shall,
promptly upon receipt of such a request for indemnification, advise the Board in
writing that the Indemnitee has requested indemnification.
(c) Procedure for Determination. The Indemnitee's entitlement
to indemnification under this Article VII shall be determined (i) by the Board
by a majority vote of a quorum (as defined in Article VII of these By-laws)
consisting of directors who were not parties to such action, suit or proceeding,
or (ii) if such quorum is not obtainable, or, even if obtained, a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (iii) by the stockholders, but only if a majority of the
disinterested directors, if they constitute a quorum of the Board, presents the
issue of entitlement to indemnification to the stockholders for their
determination.
ARTICLE VIII
BY-LAWS
SECTION 8.01. Inspection. A copy of the By-laws shall at all
times be kept in a convenient place at the principal office of the Bank, and
shall be open for inspection by stockholders during banking hours.
SECTION 8.02. Amendments. Except as otherwise specifically
provided by the statute, these By-laws may be added to, amended, altered or
repealed at any meeting of the Board by vote of a majority of the entire Board,
provided that written notice of any such proposed action shall be given to each
director prior to such meeting, or that notice of such addition, amendment,
alteration or repeal shall have been given at the preceding meeting of the
Board.
<PAGE> 51
SECTION 8.03. Construction. The masculine gender, where
appearing in these By-laws, shall be deemed to include the feminine gender.
I, JEAN E. RUGANI, Assistant Corporate Secretary of THE CHASE MANHATTAN
BANK, New York, New York, hereby certify that the foregoing is a true and
correct copy of the By-laws of said Bank and that said By-laws are in full force
and effect on the date hereof.
Dated:
/s/ Jean E. Rugani
----------------------
Jean E. Rugani
<PAGE> 52
Exhibit 7 to Form T-1
Bank Call Notice
RESERVE DISTRICT NO. 2
CONSOLIDATED REPORT OF CONDITION OF
The Chase Manhattan Bank
of 270 Park Avenue, New York, New York 10017
and Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System,
at the close of business March 31, 1996,
in accordance with a call made by the Federal
Reserve Bank of this District pursuant to the
provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
DOLLAR AMOUNTS
ASSETS IN MILLIONS
<S> <C> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and
currency and coin .................................................... $ 3,391
Interest-bearing balances ............................................ 2,075
Securities: ..............................................................
Held to maturity securities................................................ 3,607
Available for sale securities.............................................. 29,029
Federal Funds sold and securities purchased under
agreements to resell in domestic offices of the
bank and of its Edge and Agreement subsidiaries,
and in IBF's:
Federal funds sold ................................................... 1,264
Securities purchased under agreements to resell .... 354
Loans and lease financing receivables:
Loans and leases, net of unearned income $73,216
Less: Allowance for loan and lease losses 1,854
Less: Allocated transfer risk reserve ......... 104
-------
Loans and leases, net of unearned income,
allowance, and reserve .............................................. 71,258
Trading Assets ........................................................... 25,919
Premises and fixed assets (including capitalized
leases).............................................................. 1,337
Other real estate owned .................................................. 30
Investments in unconsolidated subsidiaries and
associated companies................................................. 187
Customer's liability to this bank on acceptances
outstanding ......................................................... 1,082
Intangible assets ........................................................ 419
Other assets ............................................................. 7,406
--------
TOTAL ASSETS ............................................................. $147,358
========
</TABLE>
- 4 -
<PAGE> 53
LIABILITIES
<TABLE>
<S> <C> <C>
Deposits
In domestic offices ..................................................... $ 45,786
Noninterest-bearing ..................................... $14,972
Interest-bearing .............................................. 30,814
-------
In foreign offices, Edge and Agreement subsidiaries,
and IBF's ............................................................... 36,550
Noninterest-bearing ........................................ $ 202
Interest-bearing .............................................. 36,348
-------
Federal funds purchased and securities sold under agreements
to repurchase in domestic offices of the bank and
of its Edge and Agreement subsidiaries, and in IBF's
Federal funds purchased ............................................. 11,412
Securities sold under agreements to repurchase ...... 2,444
Demand notes issued to the U.S. Treasury ........................ 699
Trading liabilities .......................................................... 19,998
Other Borrowed money:
With a remaining maturity of one year or less ........... 11,305
With a remaining maturity of more than one year .... 130
Mortgage indebtedness and obligations under capitalized
leases .................................................................. 13
Bank's liability on acceptances executed and outstanding 1,089
Subordinated notes and debentures ..................................... 3,411
Other liabilities ............................................................ 6,778
TOTAL LIABILITIES ............................................................ 139,615
--------
EQUITY CAPITAL
Common stock ................................................................. 620
Surplus ...................................................................... 4,664
Undivided profits and capital reserves ................................. 3,058
Net unrealized holding gains (Losses)
on available-for-sale securities ............................................. (607)
Cumulative foreign currency translation adjustments ......... 8
TOTAL EQUITY CAPITAL ........................................................ 7,743
--------
TOTAL LIABILITIES, LIMITED-LIFE PREFERRED
STOCK AND EQUITY CAPITAL ...................................... $147,358
========
</TABLE>
I, Joseph L. Sclafani, S.V.P. & Controller of the above-named bank, do hereby
declare that this Report of Condition has been prepared in conformance with the
instructions issued by the appropriate Federal regulatory authority and is true
to the best of my knowledge and belief.
JOSEPH L. SCLAFANI
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us, and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the appropriate Federal regulatory authority and is true and correct.
WALTER V. SHIPLEY )
EDWARD D. MILLER )DIRECTORS
THOMAS G. LABRECQUE )
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