<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 18, 1997
REGISTRATION NO. 333-11383
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 5
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CITYSCAPE FINANCIAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 11-2994671
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) 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)
------------------------
COPIES TO:
<TABLE>
<S> <C>
SEAN P. GRIFFITHS, ESQ. DAVID J. JOHNSON, JR., ESQ.
GIBSON, DUNN & CRUTCHER LLP ANDREWS & KURTH, L.L.P.
200 PARK AVENUE 601 S. FIGUEROA STREET
NEW YORK, NEW YORK 10166 LOS ANGELES, CALIFORNIA 90017
(212) 351-4000 (213) 896-3100
(FACSIMILE) (212) 351-4035 (FACSIMILE) (213) 896-3137
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If the only securities on this Form are being offered pursuant to dividend
or interest reinvestment plans, please check the following box: [ ]
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, other than securities offered only in connection with dividend or interest
investment plans, 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. [ ]
------------------------
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.
================================================================================
<PAGE> 2
$79,380,000
[CITYSCAPE FINANCIAL LOGO]
6% CONVERTIBLE SUBORDINATED DEBENTURES
DUE MAY 1, 2006
(INTEREST PAYABLE MAY 1 AND NOVEMBER 1)
AND
3,824,000 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 $79,380,000
(the "Offered Debentures") aggregate principal amount of 6% Convertible
Subordinated Debentures due May 1, 2006 (the "Debentures") of Cityscape
Financial Corp., a Delaware corporation (the "Company"), and the shares of
common stock, par value $0.01 per share, of the Company (the "Common Stock")
that are issuable upon conversion of the Debentures and to the issuance of up to
800,000 additional shares of Common Stock that may be issued from time to time
by the Company as additional consideration for conversion of the Debentures. The
Debentures are convertible into a maximum of 3,024,000 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 Debentures and the shares of Common Stock to which this
Prospectus relates are collectively referred to herein as the "Securities." 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 April 17,
1997 was $14.75 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 on page 103), each holder of the
Debentures will have the right, subject to certain limitations and restrictions
contained in the Company's and its subsidiaries' credit agreements, 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. There can be no assurance that the Company will be able to
repurchase the Debentures upon a Change of Control. 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
on page 109). At March 31, 1997, existing Senior Indebtedness aggregated $414.3
million; additional obligations of the Company and its subsidiaries senior in
right of payment to the Debentures
aggregated $62.6 million; and no obligations of the Company were on parity with
or junior in right of payment to the Debentures. 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 and state 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 11 HEREOF FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
SECURITIES.
------------------------
THE DATE OF THIS PROSPECTUS IS APRIL 18, 1997
<PAGE> 3
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3 (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).
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed with the Commission and are hereby
incorporated by reference:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996;
2. The Company's Report on Form 8-K filed on April 11, 1997; and
3. The Company's description of the Common Stock contained in the
Company's Registration Statement on Form 8-A filed on December 1, 1995.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of the filing of the Registration
Statement of which this Prospectus forms a part and prior to the termination of
the offering of the Securities covered by this Prospectus shall be deemed to be
incorporated by reference herein and to be part hereof from the date of filing
such documents. Any statement contained herein or in a document, all or a
portion of which is incorporated or deemed to be incorporated by reference
herein, shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, upon the oral or written
request of any such person, a copy of any or all of the documents incorporated
herein by reference (other than exhibits to such documents, unless such exhibits
are expressly incorporated by reference into such documents). Written requests
for such copies should be directed to the Company's Secretary at 565 Taxter
Road, Elmsford, New York 10523.
2
<PAGE> 4
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 principally through
two 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; and
(ii) purchases on a flow basis through its Wholesale Loan Acquisition Program
from selected financial institutions and mortgage bankers known as loan
correspondents. The Company originates loans through a network of independent
mortgage brokers in 42 states and the District of Columbia, with its highest
producing broker accounting for 1.9% of the total US origination and purchase
volume for the year ended December 31, 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 purchased as complete loan packages. The highest producing loan
correspondent in the Wholesale Loan Acquisition Program accounted for 7.4% of
the total US origination and purchase volume for the year ended December 31,
1996.
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 fixed and adjustable
rate residential mortgage loans for refinancing, educational, home improvement
and debt consolidation purposes, fixed and adjustable rate purchase money
mortgage loans and mortgage loans on small multi-family and mixed-use properties
(collectively, "Core Products"). The Company also offers conventional home
improvement loans, Sav*-A-Loans(R) (loans to homeowners with little or no equity
in their property but who possess a favorable credit profile and debt-to-income
ratio) and, to a lesser extent, Title I home improvement loans partially insured
by the US Department of Housing and Urban Development (collectively, "Specialty
Products"). The Company also offers jumbo loans and, beginning in 1997,
conventional home mortgage loans (collectively, "Other Products"). For 1995 and
1996, the average principal balances of the Company's loans in the US were
$69,551 and $61,801 respectively, the weighted average interest rate on such
3
<PAGE> 5
loans were 11.9% and 12.0%, respectively, and the weighted average initial
loan-to-value ratios on the Core Products were 66.4% and 72.4%, respectively.
In May 1995, the Company commenced its UK operations with the formation of
City Mortgage Corporation Limited, an English corporation, which operates under
the trade name Cityscape (UK) Ltd. ("CSC-UK"), 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 and,
to a lesser extent, through direct marketing to occupants of government-owned
residential properties. The Company has entered into contracts with 45 of its UK
brokers, including 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 acquired J&J Securities Limited ("J&J")
and Greyfriars Group Limited (formerly known as Heritable Finance Limited and
referred to herein as "Greyfriars"), two UK-based mortgage lenders (referred to
respectively as the "J&J Acquisition" and the "Greyfriars Acquisition"). The J&J
Acquisition has provided the Company with greater strength in the second lien
loan market, additional 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 Greyfriars 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. Greyfriars' 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 1996, the
average principal balances of the Company's loans in the UK were $43,120 and
$17,400, respectively, the weighted average initial loan-to-value ratios on such
loans were 49.0% and 56.0%, respectively, and the weighted average interest
rates on such loans were 16.4% and 16.4%, respectively. Data for 1996 reflect
the loans acquired in the J&J Acquisition and the Greyfriars Acquisition.
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 December 31, 1996, the Company was
servicing an aggregate of $1.5 billion of US loans, including $34.1 million of
loans as master servicer and $15.0 million as contract servicer, and an
aggregate of $511.1 million of UK loans. At December 31, 1995 and December 31,
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 8.9%,
respectively, on its US loan portfolio and 8.6% and 15.4%, 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 expanded into the business of loan
servicing in the US during the last
4
<PAGE> 6
three years, the Company's loan portfolios were relatively unseasoned in 1994
and 1995. Accordingly, during 1996, the Company experienced an expected increase
in total US delinquencies as a percentage of the US serviced portfolio as a
result of seasoning of the portfolio. The 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, (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.
THE OFFERING
The following summary of certain terms of the Debentures is not complete
and is qualified by all of the terms contained in the Debentures and in the
Indenture (as defined herein). For a more detailed description of the terms of
the Securities, see "Description of Debentures" and "Description of Capital
Stock."
Securities Offered......... $79,380,000 aggregate principal amount of 6%
Convertible Debentures due 2006; up to 3,024,000
shares of Common Stock issuable upon conversion of
the Offered Debentures; and up to an additional
800,000 shares of Common Stock that may be issued
from time to time by the Company as additional
consideration for conversion of the Debentures.
Maturity Date.............. May 1, 2006.
Coupon..................... 6% per annum, payable semi-annually in arrears on
each May 1 and November 1.
Conversion Rights.......... The Debentures are convertible prior to redemption
or maturity, at the holder's option, into shares of
Common Stock at a conversion price of $26.25 per
share (equivalent to approximately 38 shares of
Common Stock for each $1,000 principal amount of
Debentures).
Use of Proceeds............ The Company will not receive any proceeds from the
sale of the Securities offered hereby.
Ranking.................... The Debentures are subordinated in right of payment
to all existing and future Senior Indebtedness (as
defined herein) of the Company and other
liabilities of the Company's subsidiaries. The
Company is a holding company with no business
operations of its own and is therefore dependent on
cash distributions from its subsidiaries to make
payments of interest and principal on the
Debentures. The ability of the Company to meet its
cash obligations on the Debentures is dependent
upon the ability of the Company's subsidiaries to
make cash distributions to the Company. Each
subsidiary must provide for its liabilities prior
to making any such cash distributions. Generally,
all debts of the Company are senior in right of
payment to the Debentures unless such debt
contractually provides that it is on parity with or
junior to the Debentures. At March 31, 1997,
existing Senior Indebtedness aggregated $414.3
million; additional obligations of the Company and
its subsidiaries that were senior in right of
payment to the Debentures aggregated $62.6 million;
and no obligations of the Company were on parity
with or junior in right of payment to the
Debentures.
Change of Control.......... Each holder has the option to cause the Company to
purchase its Debentures, in whole but not in part,
at a purchase price equal to 100% of the principal
amount thereof, plus accrued and unpaid interest
thereon
5
<PAGE> 7
through the date of repurchase, following a Change
of Control (as defined herein). There can be no
assurance that the Company will be able to purchase
the Debentures upon a Change of Control. In
addition, unless the parties to the Company's and
its subsidiaries' respective sources of funding
consent, the Company will be required upon a Change
of Control to purchase amounts outstanding under
its $150.0 million Senior Secured Facility (as
defined herein) and will be in breach of certain
covenants under substantially all of its sources of
funding, which could accelerate the Company's
obligations thereunder. See "Description of
Debentures -- Change of Control."
Optional Redemption........ The Debentures may be redeemed, at the option of
the Company, in whole or in part, at any time on or
after May 15, 1999 at the following redemption
prices (expressed as percentages of the principal
amount), in each case together with accrued and
unpaid interest to the date fixed for redemption:
<TABLE>
<CAPTION>
IF REDEEMED
DURING THE
PERIOD BEGINNING REDEMPTION PRICE
----------------- ----------------
<S> <C>
May 15, 1999.................................. 103%
May 1, 2000................................... 102%
May 1, 2001................................... 101%
May 1, 2002 and thereafter.................... 100%
</TABLE>
The Debentures may also be redeemed at the option
of the Company, in whole but not in part, at a
redemption price of 100% of their principal amount
plus accrued and unpaid interest through the date
of such redemption upon the occurrence of certain
changes in the law, rules, regulations or rulings
in the US, as a result of which the Company would
be required to pay Additional Amounts (as defined
herein).
Lack of Mandatory
Redemption................. Except to the extent necessary to avoid certain
reporting requirements with regard to United States
Aliens, the Company is not required to make any
mandatory redemption or annual sinking fund
payments.
Payment of Additional
Amounts.................. The Company will pay to any United States Alien
Additional Amounts in respect of or on account of
any present or future tax, assessment or
governmental charge imposed upon the occurrence of
certain changes in the law, rules, regulations or
rulings related to US federal income tax.
Restriction on
Consolidation, Merger or
Sale of Assets........... The Company may not consolidate with, merge into or
transfer all or substantially all of its assets to
another person unless (i) such person assumes all
the obligations of the Company under the Debentures
and the Indenture, (ii) no Default or Event of
Default shall have occurred and be continuing or
shall occur after giving pro forma effect to such
transaction and (iii) such person is a US
corporation.
Listing.................... The Debentures are listed on the Luxembourg Stock
Exchange and certain of the Debentures are
designated for trading on the Private Offering,
Resales and Trading through Automatic Linkages
System of the National Association of Securities
Dealers, Inc. ("PORTAL"). The Common Stock is
traded on Nasdaq under the symbol "CTYS."
6
<PAGE> 8
RISK FACTORS
See "Risk Factors" beginning on page 11 hereof 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 in September 1995 and in July 1996. Except as
otherwise specified, all information in this Prospectus regarding outstanding
shares excludes 1,906,699 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"), and
1,759,200 shares under the Company's 1995 Stock Option Plan (the "Stock Option
Plan") and 9,499 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 has been made in
this Prospectus using exchange rates at the end of the period for which the
relevant statements are prepared for balance sheet items and the weighted
average exchange rates for the relevant period for statement of operation items,
each based on 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"). At April 17, 1997, the Noon Buying Rate
was L1.00 = $1.63.
7
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary consolidated financial and other data set forth below 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>
CSC(1) COMPANY
---------------- ----------------------------------------------
YEAR ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, ----------------------------------------------
---------------- PRO FORMA
1992 1993 1994(2) 1995 1996 1996(3)
------ ------ ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Gain on sale of loans.................................. $1,005 $2,088 $ 5,691 $38,198 $156,252 $156,252
Mortgage origination
income............................................... 1,251 1,455 2,551 2,963 2,791 2,791
Interest income........................................ 612 536 1,900 6,706 29,304 32,216
Servicing income....................................... -- -- 414 777 3,750 4,250
Earnings from partnership
interest............................................. -- -- 391 482 754 754
Other.................................................. 131 378 227 385 6,364 7,490
------ ------ ------ ------- ------- -------
Total revenues....................................... 2,999 4,457 11,174 49,511 199,215 203,753
------ ------ ------ ------- ------- -------
Costs and expenses:
Salaries and employee benefits......................... 1,188 1,939 4,280 12,165 40,852 44,308
Other costs and expenses............................... 1,718 2,195 5,041 14,581 73,255 80,556
------ ------ ------ ------- ------- -------
Total expenses....................................... 2,906 4,134 9,321 26,746 114,107 124,864
------ ------ ------ ------- ------- -------
Earnings before minority interest, income taxes and
extraordinary item..................................... 93 323 1,853 22,765 85,108 78,889
Minority interest...................................... -- -- -- 2,379 -- --
------ ------ ------ ------- ------- -------
Earnings before income taxes and extraordinary item...... 93 323 1,853 20,386 85,108 78,889
Provision for income taxes............................... 3 8 1,450(4) 8,515 34,427 31,361
------ ------ ------ ------- ------- -------
Earnings before extraordinary
item................................................... 90 315 403 11,871 50,681 47,528
Extraordinary item....................................... -- -- -- (296)(5) -- --
------ ------ ------ ------- ------- -------
Net earnings............................................. $ 90 $ 315 $ 403 $11,575 $ 50,681 $ 47,528
====== ====== ====== ======= ======= =======
Earnings per share before extraordinary item............. $ 0.01 $ 0.02 $ 0.02 $ 0.50 $ 1.66 $ 1.52
Extraordinary item (per share)........................... -- -- -- (0.01)(5) -- --
------ ------ ------ ------- ------- -------
Earnings per share:
Primary.............................................. $ 0.01 $ 0.02 $ 0.02 $ 0.49 $ 1.66 $ 1.52
====== ====== ====== ======= ======= =======
Fully diluted........................................ N/A N/A N/A N/A $ 1.59 $ 1.47
====== ====== ====== ======= ======= =======
Weighted average shares outstanding:
Primary............................................ 20,000 20,000 20,560 23,838 30,537 31,184
====== ====== ====== ======= ======= =======
Fully diluted...................................... N/A N/A N/A N/A 34,153 34,800
====== ====== ====== ======= ======= =======
</TABLE>
8
<PAGE> 10
<TABLE>
<CAPTION>
COMPANY
---------------
AT DECEMBER 31,
1996
---------------
<S> <C>
BALANCE SHEET DATA:
Total assets.......................................................................... $ 810,202
Mortgage servicing receivables........................................................ 242,895
Trading securities(6)................................................................. 103,200
Mortgage loans held for sale, net..................................................... 102,222
Goodwill.............................................................................. 47,467
Total debt(7)......................................................................... 377,651
Total liabilities..................................................................... 671,370
Total stockholders' equity............................................................ 138,832
</TABLE>
<TABLE>
<CAPTION>
CSC (1)
------------------ COMPANY
----------------------------------
YEAR ENDED
DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------ ----------------------------------
1992 1993 1994(2) 1995 1996(8)
------- ------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
OPERATING STATISTICS:
Loan originations and purchases:
US......................................... $43,353 $77,586 $154,410 $417,864 $1,289,355
UK......................................... -- -- -- 41,395 463,546
------- ------- -------- -------- ----------
Total loan originations and purchases........ $43,353 $77,586 $154,410 $459,259 $1,752,901
======= ======= ======== ======== ==========
Average principal balance per loan originated
and purchased:
US......................................... $56 $74 $77 $70 $62
UK......................................... -- -- -- 43 17
Weighted average initial loan-to-value ratio:
US(9)...................................... -- -- 59.7% 66.4% 72.5%
UK......................................... -- -- -- 49.0 56.0
Loan sales:
US......................................... $40,975 $61,293 $138,041 $358,997 $1,277,500
UK......................................... -- -- -- 41,395 451,907
------- ------- -------- -------- ----------
Total loan sales............................. $40,975 $61,293 $138,041 $400,392 $1,729,407
======= ======= ======== ======== ==========
Loans serviced:
US(10)..................................... -- -- $ 56,340 $386,720 $1,519,395
UK......................................... -- -- -- 40,299 511,140
------- ------- -------- -------- ----------
Total loans serviced......................... -- -- $ 56,340 $427,019 $2,030,535
======= ======= ======== ======== ==========
Loans 30+ days past due as a percentage of
serviced portfolio:
US......................................... -- -- 3.4% 3.9% 8.9%
UK(11)..................................... -- -- -- 8.6 15.4
Charge-offs:
US......................................... -- -- -- $52 $167
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"). 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
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.
9
<PAGE> 11
(3) Gives pro forma effect to the J&J Acquisition and the Greyfriars
Acquisition as if such transactions had occurred on January 1, 1996. See
"Unaudited Pro Forma Consolidated Financial Statements" and Notes thereto.
(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) Represents the interest-only and residual mortgage securities that the
Company receives upon loan sales through securitizations in the US.
(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 $51.9 million and $190.5
million, average principal balance per UK loan originated and purchased of
$9,382 and $14,705, UK loan sales of $47.5 million and $153.7 million, UK
loans serviced of $51.9 million and $190.5 million and loans 30 or more
days past due as a percentage of UK serviced portfolio of 4.7% and 5.7%,
due to loans acquired as a result of the J&J Acquisition and the Greyfriars
Acquisition, respectively.
(9) Excludes the Company's Specialty Products and Other Products.
(10) Includes master servicing and contract servicing operations by the Company.
See "Business -- Loans -- Loan Servicing and Collections -- US."
(11) 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
Greyfriars Acquisition, the UK delinquency ratio would have been 16.5% at
December 31, 1996.
10
<PAGE> 12
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. 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. See "Description of
Debentures -- Subordination."
LACK OF PROTECTIVE COVENANTS
No Restrictions on Additional Indebtedness
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 March 31, 1997, existing Senior Indebtedness of the Company
and its subsidiaries aggregated $414.3 million; additional obligations of the
Company and its subsidiaries senior in right of payment to the Debentures
aggregated $62.6 million; and no obligations of the Company were on parity with
or junior in right of payment to the Debentures.
No Protection Against Adverse Changes
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. Further, the Indenture and the Debentures 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 effect such holders. Therefore, adverse
changes in the Company's financial condition or highly leveraged transactions
could occur, thereby increasing the risk that the Company may not have
sufficient funds to make payments on the Debentures when due, without causing a
default under the Indenture.
HOLDING COMPANY STRUCTURE
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.
11
<PAGE> 13
POTENTIAL INABILITY TO PURCHASE TENDERED DEBENTURES UPON A CHANGE OF CONTROL
Each holder has the option to cause the Company to purchase its Debentures,
in whole but not in part, at a purchase price equal to 100% of the principal
amount thereof, plus accrued and unpaid interest thereon through the date of
repurchase, following a Change of Control (as defined herein). There can be no
assurance that the Company will be able to repurchase the Debentures upon a
Change of Control. In addition, unless the parties to the Company's and its
subsidiaries' respective sources of funding consent, the Company will be
required upon a Change of Control to purchase amounts outstanding under its
$150.0 million Senior Secured Facility and will be in breach of certain
covenants under substantially all of its sources of funding, which could
accelerate the Company's obligations thereunder. See "Description of Debentures
- -- Change of Control."
NEGATIVE CASH FLOWS
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 generate
immediate cash flow on the date of sale. The recognition of gain on sale of
loans through securitizations 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 income taxes on the
gain on sale in the period recognized, although the Company does not expect to
receive the cash representing the gain until later periods as the related loans
are repaid or otherwise collected.
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, capital markets offerings,
pre-funding mechanisms through securitizations, loan origination fees, servicing
fees, net interest income and borrowings under its credit or warehouse
facilities to meet its working capital and other needs. For the years ended
December 31, 1995 and 1996, the Company had negative cash flow from operations
of $76.0 million and $165.5 million, respectively, due primarily to the
Company's sale of loans through securitizations. Also contributing to the
Company's negative cash flow is the increasing percentage of its loan volume
derived through the Wholesale Loan Acquisition Program and bulk purchases, which
have a greater negative impact on cash flows than loan volume derived from
independent mortgage brokers.
UNCERTAINTY AS TO 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."
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. The Company anticipates
that it will need to raise additional cash in the immediate future through the
issuance of additional debt or equity securities or additional bank borrowings
or a combination thereof. The Company has no commitments for additional debt,
equity or bank financings other than those described in this Prospectus
12
<PAGE> 14
and 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 FUNDING SOURCE
The Company has funded substantially all of its loan origination and
purchase volume and working capital requirements in the US and the UK through
financing facilities and 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").
During 1995 and 1996, the Company sold 10.3% and 93.8%, respectively, of its
loan originations and purchases to Greenwich. The US facility (the "US Greenwich
Facility") was 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 has been required to sell all of its loans to Greenwich.
The Company and/or Greenwich then resell these loans through securitizations or
whole loan sales. 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. The US Greenwich Facility
provided for the purchase and sale of $1.0 billion of loans. The Company and
Greenwich continued to purchase and sell loans after the facility amount was
exceeded through December 1996. The Company has a commitment from Greenwich to
enter into agreements to provide a $3.0 billion mortgage loan financing facility
at a rate of LIBOR plus 150 basis points, a $25.0 million residual financing
facility at a rate of LIBOR plus 300 basis points and a $3.0 billion
securitization facility, each for a term of one year, subject to execution of
definitive documents satisfactory to Greenwich as well as certain other
conditions. The Company and Greenwich, pending the completion of definitive
documents, are operating under the terms of the US Greenwich Facility structured
consistent with the new proposed arrangement, however, as a financing facility.
No definitive agreement exists with respect to the new arrangement nor can any
assurance be given that such an agreement will be reached. Because it is
structured as a financing facility and not as a purchase and sale facility, the
new arrangement with Greenwich could affect the timing of the Company's reported
gain on sale, adversely affecting gain on sale in a future period if the Company
fails to sell or securitize the loan origination and purchase volume for such
period. To the extent that the Company is not successful in maintaining with
Greenwich 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%, $13.0 million of which was paid in December
1996 and $25.0 million of which is payable 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 2015, 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 CSC prior to the repayment of all
outstanding balances under the working capital facility of the UK Greenwich
Facility and the Indenture contains certain covenants which could limit the
Company's operating and financial flexibility. See "Description of Debentures."
The Company's ability to sustain its growth is dependent on its ability to
secure further debt arrangements or warehouse credit facilities. See
"-- Negative Cash Flows" and "-- Uncertainty as to Availability of Funding
Sources."
13
<PAGE> 15
DEPENDENCE ON SECURITIZATIONS
General
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 of the
interest-only and residual certificates in the US, the fair value of excess
mortgage servicing receivables recognized through UK securitizations and on
sales into the US and UK purchase facilities. In determining excess mortgage
servicing receivables recognized through UK securitizations, the Company
excludes normal servicing and other ancillary fees and includes any prepayment
interest due. 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."
Reliance on Securitization Market
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.
Reliance on Credit Enhancements
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 cost of such
credit enhancement results in a reduction in the gain on sale of loans sold in
such securitization. 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 balances of the
senior interests issued by the related trust or to create reserve funds. This
application causes the aggregate principal amount of the loans and cash 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 and
excess mortgage servicing receivables the Company receives upon loan sales
through securitizations, thereby slowing, and in some circumstances, reducing
over the life of the related
14
<PAGE> 16
securitization, the flow of cash to the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Availability and Cost of Pre-Funding Mechanism
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. The portion of the deposit that is not recovered
by the Company is recorded as an expense of the securitization transaction which
results in a reduction in the gain on sale of the loans sold in such
securitization. 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."
POTENTIAL CHANGE IN VALUATION OF INTEREST-ONLY AND RESIDUAL CERTIFICATES AND
MORTGAGE SERVICING RECEIVABLES
The Company sells over 90% 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 receives 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 retains 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 based
upon their fair values. 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 applicable to the types of loans the Company originates
and purchases, 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 December 31, 1996, the Company's balance sheet reflected the fair value of
interest-only and residual certificates and mortgage servicing receivables of
$103.2 million and $242.9 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. For example, in the
fourth quarter of 1996 the Company determined that the value of the
interest-only and residual certificates from its August 1995 securitization had
been impaired in the amount of $1.4 million and accordingly wrote down the value
of such certificates by that amount. The impairment was primarily attributable
to a change in the loss assumptions with respect to such securitization to be
consistent with those of the Company's subsequent securitizations.
15
<PAGE> 17
No assurance can be given as to whether, and in what amounts, the Company in the
future may have to write down the value of the interest-only and residual
certificates from this or its other securitization transactions. 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."
CONSEQUENCES OF EXCEEDING PERMITTED DELINQUENCY AND DEFAULT LIMITS
The pooling and servicing agreements relating to the Company's
securitization transactions contain provisions with respect to the maximum
permitted loan delinquency rates and loan default rates, which, if exceeded,
would require amounts otherwise payable to the Company to be retained by the
related securitization trusts and would allow the termination of the Company's
right to service the related loans. The default rates on the pools of loans sold
in the March 1995 and August 1995 securitization transactions, the Company's
first two securitization transactions, have exceeded the permitted limits set
forth in the related pooling and servicing agreements. Accordingly,
overcollateralization requirements for these two securitizations have been
increased and cash otherwise payable to the Company from such securitizations is
being retained by the related trusts. No assurance can be given when, if ever,
such amounts will be released to the Company. In addition, this condition could
result in the termination of the Company's servicing rights with respect to the
securitizations' pools of loans by the trustee or the insurance company
providing credit enhancement for those transactions. For 1996, the revenues to
the Company from mortgage servicing rights on these pools of loans were
approximately $625,000. Although none of the parties to these transactions has
indicated its intention to terminate the Company's servicing rights and the
Company has no current expectation that they will do so, no assurance can be
given that any of such parties will not exercise its right to terminate. To
date, the permitted deliquency and default rates relating to the Company's other
securitizations have not been exceeded. However, such securitizations' loan
pools are less seasoned and no assurance can be given that such limits will not
be exceeded in the future. The retention of cash by securitization trusts or the
termination of the Company's servicing rights would have a material adverse
effect on the Company's results of operations and financial condition and could
affect the Company's ability to effect securitizations in the capital markets.
RISK OF ADVERSE ECONOMIC CONDITIONS
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 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 securitizations or whole loan sales.
HIGH-RISK BORROWERS
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
16
<PAGE> 18
or losses than anticipated, the Company's results of operations or financial
condition could be adversely affected.
LOAN DELINQUENCIES AND DEFAULTS
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."
RISKS FROM INTEREST RATE FLUCTUATIONS
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
would reduce the aggregate amount of payments received by the REMIC trusts
pursuant to the Company's securitizations which would require the Company as
holder of the residual interests in such securitizations to write down the value
of such servicing spread or the fair value of such interest-only and residual
certificates, adversely impacting earnings and the value of the Common Stock and
the Debentures. 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 long-term rates, while the senior interests in the related REMIC
trusts are priced on the basis of intermediate rates in the US. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Accounting Considerations."
RISKS RELATING TO 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. There can be no assurance
that the addition of these new operating procedures and personnel will be
sufficient to enable the Company to meet its growing operating needs. 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
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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 (commencing May 1996),
"Sav*-A-Loans(R)" (commencing May 1996), adjustable rate loans (commencing
October 1996), loans for occupants of government-owned residential properties in
the UK (commencing November 1996), conventional loans (commencing February 1997)
and, to a lesser extent, Title I loans (commencing December 1995), with which
the Company has relatively little experience. The Sav*-A-Loan(R) product, for
example, is offered to homeowners with little or no equity in their property but
who possess a favorable credit profile and debt-to-income ratio. The
Sav*-A-Loan(R) product has contributed and is expected to continue to contribute
an increasing percentage of the Company's US originations. 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. See
"Business -- Loans -- Loan Originations and Purchases."
CREDIT RISK ASSOCIATED WITH HIGH LTV LOANS
Certain of the Company's loan products have high loan-to-value ratios
("LTV") and, although secured by real property, the collateral of such loans
often will not be sufficient to cover the principal amount of the loans in the
event of default. The principal balance of such a loan, such as the Company's
"Sav*-A-Loan(R)" product, inclusive of other loans secured by the same property
often exceeds the value of the underlying property by as much as 25%.
Consequently, the Company is less likely to use foreclosure as a means to
mitigate its losses upon the default of such loans or to recover any meaningful
amounts in the event of a foreclosure. With respect to these loans, LTV
determinations are based on a value of the underlying property, which is set by
a full appraisal, a drive-by appraisal or, if owned less than 12 months, the
sale price. Accordingly, there can be no assurance that such values accurately
reflect prevailing market prices of such properties, either when made or upon a
default on the related loan. For such loans, the Company relies primarily on the
creditworthiness of the borrower and, with respect to Title I loans, also relies
on FHA co-insurance for repayment. Losses not covered by the underlying
properties, if in excess of the Company's allowance for such losses included in
the calculation of the gain on sale, could have a material adverse effect on the
Company's results of operations and financial condition. See
"Business -- Loans -- Loan Underwriting-US."
ABILITY OF THE COMPANY TO IMPLEMENT ITS GROWTH STRATEGY
The Company's growth strategy is dependent upon its ability to increase its
loan origination and purchase volume while maintaining its customary origination
fees, interest rate spreads and underwriting criteria with respect to such
increased loan origination and purchase volume. Implementation of this strategy
will depend in large part on the Company's ability to: (i) expand its broker
network in markets with a sufficient concentration of borrowers meeting the
Company's underwriting criteria; (ii) obtain adequate financing on favorable
terms; (iii) securitize loans profitably in the secondary market on a regular
basis; (iv) hire, train and retain skilled employees; and (v) continue to expand
in the face of increasing competition from other mortgage lenders. The Company's
failure with respect to any or all of these factors could impair its ability to
successfully implement its growth strategy which could have a material adverse
effect on the Company's results of operations and financial condition. The
Company will also incur start-up costs in connection with entering new markets
including costs associated with establishing new regional infrastructures. Such
additional costs could have a material adverse effect on the Company's results
of operations and financial condition. In addition, the Company's results of
operations will be adversely affected if revenues do not increase sufficiently
to compensate for the increase in operating expenses resulting from past,
current and future growth and expansion and there can be no assurance that any
expansion will be profitable or that it will not adversely affect the Company's
results of operations.
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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 L15.3 million ($23.3 million based on the Noon Buying Rate on the
date of such acquisition) 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 Greyfriars in exchange
for L41.8 million ($64.1 million based on the Noon Buying Rate on the date of
such acquisition) and 99,362 shares of Common Stock valued at $2.5 million.
Greyfriars' 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. See "The Company" and
"Business -- Loans -- Originations and Purchases -- UK Originations."
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 Greyfriars. Any acquisition
involves inherent uncertainties and risks, such as the effect on the acquired
business of integration into the Company, the availability of management
resources to oversee the operations of the acquired business, the risks of
entering markets in which the Company has no or limited direct prior experience,
operating in different geographical locations with different competitive
conditions, different demographic characteristics and different corporate
cultures and the potential loss of key employees of the acquired company.
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. There
can be no assurance that the financing necessary to complete such acquisitions
can be obtained by the Company on favorable terms, if at all. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business -- Business
Strategy."
In addition, in connection with its acquisitions of CSC-UK, J&J and
Greyfriars, the Company recognized $19.7 million, $5.2 million and $25.4
million, respectively, of goodwill. The Company may also recognize significant
amounts of goodwill in connection with future acquisitions. The Company is
amortizing goodwill recognized in its recent acquisitions over ten years, and
the relatively large amortization charge recognized in each such year may
significantly reduce earnings recorded in such period. 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
in the period such determination is made. Any such charge could have a material
adverse effect on the Company's financial results. In connection with its
acquisitions, the Company accounted for as a cost of acquisition restructuring
charges in the aggregate amount of $5.0 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 due to increased goodwill
amortization relating to the acquisitions. See "The Company."
Future acquisitions by the Company could result in potentially dilutive
issuances of equity securities, the incurrence of debt and contingent
liabilities and amortization expenses of additional goodwill and other
intangible assets, which could materially affect the Company's results of
operations or financial condition.
RISKS RELATED TO OPERATIONS IN THE UK
General
Since the Company commenced operations in the UK in May 1995, the Company's
UK operations have become an increasingly important contributor to the Company's
overall operating results. For the three months ended December 31, 1996, 19.1%
of the Company's total loan origination and purchase volume (as
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compared to 12.0% for the prior year's period) and 52.4% of the Company's total
revenues (as compared to 35.0% for the prior year's period) were attributable to
the Company's UK operations.
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 policies
of the UK government as well as the laws and policies of the US affecting
foreign trade and investment. The Prime Minister of the UK recently called for a
general election on May 1, 1997, by which time the governing Conservative Party
will have been in power for approximately 18 years. If the Labour Party, which
is currently leading in public polls, were to be elected, it is anticipated that
some shift in fiscal and social policy will result. The Company's UK operations
may be adversely affected by any such changes.
Business Prospects Risks
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 ("Conventional UK Lenders") in the late
1980s. Currently many of such borrowers obtain mortgage financing through
independent mortgage brokers predominantly funded by private investors. Since
commencing operations in the UK, the Company has derived its UK loan
originations primarily from mortgage brokers (with the exception of the loan
portfolios purchased as a result of the J&J Acquisition and the Greyfriars
Acquisition) and, to a lesser extent, recently through direct marketing to
occupants of government-owned residential properties in the UK. Approximately
60.5% and 30.7% of the Company's UK loans were originated through three mortgage
brokers in 1995 and 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. See "Business -- Loans -- UK Originations."
Legal and Regulatory Risks
The Company's mortgage lending 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, except in limited circumstances. The
government has announced its intention to bring before Parliament regulations
that would increase this amount. The CCA and regulations promulgated thereunder,
among other things, impose licensing obligations on CSC-UK and its subsidiaries,
define 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, generally limit a lender to a one-month
deferment with any calculations of prepayment interest under the Rule of 78s
method, require rebates to the borrower on early settlement and create a cause
of action for an "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/or 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
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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 (see discussion regarding the Office of Fair Trading (the
"OFT") initiative below). Approximately 36.9% (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, 1996. Of this 36.9%, 7.5%
were loans originated by CSC-UK, 25.7% by J&J and 66.8% by Greyfriars. By way of
example, if regulations were enacted to increase the regulated amount to
L25,000, an additional 28.1% of the Company's UK loans at December 31, 1996
would have been regulated. The Company cannot predict the likelihood of the
enactment of these regulations or the extent of such increase or any other
change to the CCA or any other legislation. The announced OFT regulatory
initiative 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. See
"Business -- Regulation -- UK."
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 result of the borrower's
contractual obligation to pay a stated amount of interest for the credit
extended. The Company's UK loans provide for prepayment fees to be determined in
one of two ways. For some of the Company's UK loans, the prepayment fee is based
on an amount equal to a certain number of months' interest; however, for the
majority of the Company's UK loans, 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 amount due on a majority of the Company's UK loans
in the case of prepayment is based on the amount of interest, at the Standard
Rate (as defined herein) or the Concessionary Rate (as defined herein)
(whichever is in effect on the date of prepayment), that has been "earned" and
calculated in accordance with the "Rule of 78s" method. Using this method, the
prepayment of a loan will often result in the Company receiving substantially
more than such loan's original principal balance.
There can be no assurance that regulatory developments in the UK, including
those that might be brought about by a change in the political party whose
members constitute a majority of Parliament as a result of May 1997 elections,
will not result in significant changes relating to certain provisions of many
CSC-UK loans, most notably the calculation of prepayments using the Rule of 78s
and the use of the standard/concessionary rate structure. The Company believes
that these provisions are enforceable under English law and do not violate
common law prohibitions on penalty interest. The enforceability of these
provisions, however, has not been tested in English courts. In the event an
appropriate English court were to address the issue, no assurance can be given
that such a court will not reach a holding that negatively affects the terms of
such loans, which holding could have a material adverse effect on the Company's
results of operations and financial condition.
In addition, CSC-UK received a letter in March 1997 from the OFT, the
Director General of which has responsibility, under the CCA, for the granting of
consumer credit licenses to mortgage lenders and for the subsequent monitoring
of their activities to ensure continued fitness to hold such licenses. The
Company believes the letter was also sent to other lenders, as well as
intermediaries and other entities involved directly or indirectly in the
non-status lending market. The letter states that, when determining the fitness
of licensees, the OFT will consider whether the licensee or its associates have
engaged in business practices which appear to be inappropriate, regardless of
their legality. The letter specifically sets forth certain practices deemed by
the OFT to fall within such categories.
The majority of the stated business practices are either (i) not applicable
to CSC-UK's operations or (ii) practices in which CSC-UK engages and believes
itself to be in compliance or easily able to modify its operations in order to
comply with the OFT letter. The OFT letter, however, questions the
appropriateness of standard/concessionary rate structures, as well as the
calculation of prepayments using the Rule of 78s method. The Company is
reviewing and evaluating its practices with respect to each issue raised in the
letter, but has not discussed with the OFT the concerns raised in the letter.
The Company does not believe regulatory initiatives set forth in the letter will
have a material adverse effect on any of its existing mortgage loans or to the
continuance of its licenses, although no assurances to that effect can be given
at this time.
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The Company believes that it may be required to modify aspects of its
standard/concessionary rate structure in response to the regulatory initiatives
set forth in the OFT letter. No assurances can be given as to the effect of such
modifications or that the OFT will not require the elimination of the
standard/concessionary rate structure, either of which could have a material
adverse effect in future periods on the Company's results of operations and
financial condition. The Company anticipates that it will continue to broaden
its UK product offerings with products that do not utilize the Rule of 78s to
calculate prepayments and, in light of the initiatives set forth in the OFT
letter, that the pace of such product broadening will accelerate. In future
periods, the Company believes that long-term loans utilizing the Rule of 78s
prepayments will represent an increasingly smaller percentage of its UK loan
origination and purchase volume and that the OFT's regulatory initiatives are
likely to result in the Company's elimination or modification of long-term loan
products utilizing the Rule of 78s. Such elimination or modification could have
a material adverse effect in future periods on the Company's results of
operations and financial condition, especially if the Company is unsuccessful in
its product broadening efforts. The Company is unable to determine at this time
how soon such elimination or modification will occur. See
"Business -- Regulation -- UK."
Dependence on Secondary Market
Since March 1996, CSC-UK has pooled and sold through securitizations an
increasing percentage of the loans which it originates. 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 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 and liquid market for whole loan sales
will develop similar to that in the US. 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. See
"Business -- Loans -- Loan Sales -- Securitizations."
Unseasoned Loan Portfolio
The Company has been servicing loans in the UK only since May 1995 and,
accordingly, the UK loan serviced portfolio is unseasoned. The Company has
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 43.3% at December 31, 1996.
Potential Change in Valuation of Mortgage Servicing Receivables
Due to the relatively brief period the Company has operated in the UK and
because the UK market for the types of loans sold by the Company has been very
fragmented and underserved, the Company has limited data on which to base
certain of the assumptions, including prepayment 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 fees and/or provide the borrower with an opportunity to pay a reduced
interest rate (the "Concessionary Rate") to the extent the borrower pays the
loan when due (as opposed to the standard interest rate (the "Standard Rate")
that would apply at any time during which any payment arrears exist). In its UK
securitizations, the Company acquires an uncertificated residual interest,
carried on the Company's balance sheet as mortgage servicing receivables, in the
excess cash flows generated by such securitizations. Following the sale of UK
loans into securitizations, the Company retains no control over the loans sold
and has no control over the borrowers' performance under such loans and no
control over the ability to realize prepayments calculated using the Rule of 78s
or interest rates in excess of the concessionary rate. Accordingly, even though
under the terms of the Company's UK securitizations, the Company is entitled to
such prepayments and interest in excess of the concessionary rate, there can be
no assurance that such prepayments or excess interest can be achieved. In
addition, in the event of a forced sale,
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any proceeds would be distributed first to pay related enforcement expenses,
then to pay any aggregate outstanding concessionary interest and then to pay the
holders of the senior interests, before any proceeds were available to pay the
holder of the residual interest. To the extent that actual prepayments occur at
a slower rate than assumed on UK loans, the Company may realize lower prepayment
calculations, or realize the prepayments 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 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 securitizations 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 "-- Potential Change in Valuation of 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 UK Greenwich Facility and 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 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. See
"Business -- Loans -- Loan Sales."
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.
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GEOGRAPHIC CONCENTRATION OF US OPERATIONS
Approximately 18.0% of the Company's US loan origination and purchase
volume for 1996 was derived from the state of New York. Although the Company is
licensed or registered in 42 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 affected by general trends in the New York economy and
the residential real estate market. Should a downturn occur in the New York
economy or its residential real estate market, the Company's equity position or
portfolio performance relating to existing New York loans would be adversely
affected. In particular, the economy and the residential real estate market in
and around New York City, where a significant portion of the Company's New York
loans have been originated, has historically been affected by fluctuations in
the financial markets. See "Business -- Loans -- Geographic Distribution of US
Loans."
COMPETITION
As a consumer finance company specializing in 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 and new market
entrants who are affiliated with some of the Company's US competitors. 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.
The UK market for the type of loans the Company originates is highly
fragmented and, for a variety of reasons, underserved by conventional lenders as
compared to the US market. The Company anticipates that it will face additional
competition in the UK in the future which will likely have a negative impact on
the average gain on sale realized upon the sale of UK loans and could 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 -- Loan Sales."
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. During
1996, the Company experienced an increase in the weighted average loan-to-value
ratio on its Core Products and in the premiums it paid under its Wholesale Loan
Acquisition Program to its correspondents, and experienced a slower rate of
growth in originations from its independent mortgage brokers. The Company is
unable at this time to determine whether such increases and slowing will
continue in 1997. Furthermore, as the Company expands into the market of
borrowers with higher quality credit and loan products that require more
significant capital, 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
24
<PAGE> 26
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 volume and cost of its
wholesale loans resulting from competition from other purchasers of such loans,
market conditions and other factors.
US 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 "-- Risks Related to Operations in
the UK -- Legal and Regulatory Risks" and "Business -- Regulation."
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 1997, the Company adopted the Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfer and Servicing of Financial Assets and Extinguishment of
Liabilities." SFAS No. 125 addresses the accounting for all types of
securitization transactions, securities lending and repurchase agreements,
collateralized borrowing arrangements and other transactions involving the
transfer of financial assets. SFAS No. 125 distinguishes transfers of financial
assets that are sales from transfers that are secured borrowings. SFAS No. 125
is generally effective for transactions that occur after December 31, 1996, and
it is to be applied prospectively. SFAS No. 125 requires the Company to allocate
the total cost of mortgage loans sold to the mortgage loans sold (servicing
released), retained certificates and servicing rights based on their relative
values. The pronouncement also requires the Company to provide additional
disclosure about the retained certificates in its securitizations and to account
for these assets at fair value in accordance with SFAS No. 115. The Company does
not believe that SFAS No. 125 will have a material effect on the Company's
securitizations as currently structured; however,
25
<PAGE> 27
there can be no assurance that SFAS No. 125 will not have a material adverse
effect on future securitization structures the Company may employ, reduce the
Company's gain on sale of loans in the future or otherwise adversely affect the
Company's results of operations or financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Accounting Considerations."
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, 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. See
"Business -- Environmental Matters -- US."
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 connection with
disposal of waste, reimburse relevant enforcement authorities for clean-up costs
related to land and controlled waters and pay fines for non-compliance with
relevant laws and regulations. The potential liability of such persons may be
substantial and the presence of any polluting substances or the failure to
properly remediate such land may adversely affect the owner's or occupier's
ability to sell or rent the property on such land or to borrow using such
property as security. In addition to liability under statute, such persons may
be liable to third parties at common law for property damage, economic loss and
personal injury. See "Business -- Environmental Matters -- UK."
A lender may be deemed to be an "owner" upon enforcement of its interest in
a mortgaged property following default by a borrower depending on the method of
enforcement employed. A lender may also, depending on the degree of control it
has, be liable as a person who has caused or knowingly permitted pollution to
occur. A new statutory framework providing for the identification and allocation
of responsibility for costs associated with the investigation and clean-up of
contaminated land is set out in the Environmental Protection Act 1990, as
amended, and is expected to be implemented during 1997. Under this framework,
local authorities will have a duty to inspect land within their jurisdiction for
the purpose of identifying contamination.
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.
26
<PAGE> 28
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 affected by
the market price of the Common Stock. See "Price Range of Common Stock and
Dividend Policy."
COMMON STOCK ELIGIBLE FOR FUTURE SALE
As of March 31, 1997, 29,744,322 shares of Common Stock were outstanding.
Of these shares, 7,367,085 shares of Common Stock were 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, which
shares were subject to the resale limitations of Rule 144 promulgated under the
Securities Act. 22,377,237 of the shares of Common Stock outstanding were 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 addition, the Company has granted registration rights with respect to
4,140,000 shares of Common Stock currently outstanding and, as of March 31, 1997
had granted options to purchase up to 2,044,000 shares of Common Stock, of which
1,897,200 were outstanding, 145,800 had been exercised and 1,000 had expired.
The Company also has issued $143.8 million of Debentures (of which $79.4 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
Company may also issue up to 800,000 shares of Common Stock from time to time as
additional consideration for conversion of the Debentures.
In addition, on April 9, 1997, the Company completed a private placement of
5,000 shares of 6% Convertible Preferred Stock, Series A (the "Series A
Preferred Stock") with a liquidation preference of $10,000 per share and related
five-year warrants (the "Warrants"). Dividends on the Series A Preferred Stock
are cumulative and payable quarterly. Dividends are payable, at the option of
the Company, (i) in cash, (ii) in shares of Common Stock, valued at the closing
price on the day immediately preceding the dividend payment date, or (iii) by
increasing the liquidation preference in an amount equal to and in lieu of the
cash dividend payment. The Series A Preferred Stock is convertible into shares
of Common Stock, subject to certain restrictions and redemption rights, at a
conversion price equal to the lowest daily sales price of the Common Stock
during the four consecutive trading days immediately preceding such conversion,
discounted up to 4% and subject to certain adjustments. The Warrants are
exercisable into 500,000 shares of Common Stock at $20.625 per share, which is
equal to 125% of the closing sale price of the Common Stock on the date
immediately prior to the date of original issuance. The Company has provided
registration rights in connection with the resale of the Common Stock issued as
payment of dividends, upon the conversion of the Series A Preferred Stock or the
exercise of the Warrants.
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock or the availability of shares of Common Stock for future
sale would have on the market price of the Common Stock prevailing from time to
time. Sales of substantial amounts of Common Stock, or the perception that such
sales could occur, could have an adverse effect on the prevailing market prices
for the Common Stock. See "Shares Eligible for Future Sale."
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.
27
<PAGE> 29
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
and maintains key man life insurance in the amount of $2.0 million on Mr.
Grosser. 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 March 31, 1997, certain members of the Company's senior management
and Board of Directors beneficially owned an aggregate of 58.1% 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 without
further vote of the minority stockholders. See "Security Ownership of Certain
Beneficial Owners and Management."
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. See "Price
Range of Common Stock and Dividend Policy."
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 PORTAL. 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. See "Description of Debentures."
28
<PAGE> 30
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 lender 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.
In April 1996, CSC-UK acquired all of the outstanding capital stock of J&J,
a London-based mortgage lender in exchange for L15.3 million ($23.3 million
based on the Noon Buying Rate on the date of such acquisition) in cash and
548,000 shares of Common Stock valued at $9.8 million based upon the closing
price of the Common Stock on the date of such acquisition less a discount for
restrictions on the resale of such stock and incurred closing costs of $788,000.
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. Pursuant to the J&J Acquisition, the
Company acquired assets with a fair value of $73.8 million, consisting primarily
of mortgage loans of $73.0 million (inclusive of the $21.8 million value
assigned to the acquired mortgage servicing rights), and assumed liabilities
with a fair value of $45.1 million. The J&J Acquisition resulted in the
recognition of $5.2 million of goodwill, which is being amortized using the
straight-line method over a life of ten years.
In June 1996, CSC-UK acquired all of the outstanding capital stock of
Greyfriars, a mortgage lender based in Reading, England in exchange for L41.8
million ($64.1 million based on the Noon Buying Rate on the date of such
acquisition) in cash and 99,362 shares of Common Stock valued at $2.5 million
based upon the closing price of the Common Stock on the date of such acquisition
and incurred closing costs of $2.3 million. Greyfriars provides mortgage loans
to borrowers that generally have higher quality credit profiles than the
Company's typical UK borrowers. Pursuant to the Greyfriars Acquisition, the
Company acquired assets with a fair value of $225.4 million, consisting
primarily of mortgage loans of $221.2 million (inclusive of the $29.2 million
value assigned to the acquired mortgage servicing rights), and assumed
liabilities with a fair value of $181.9 million. The Greyfriars Acquisition
resulted in the recognition of $25.4 million of goodwill, which is being
amortized using the straight-line method over a life of ten years.
The Company also owns an equity 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 was eliminated. For the year ended December 31, 1995 and 1996, IMC
contributed approximately $480,000 and $754,000, 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 available-for-sale securities in
29
<PAGE> 31
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.
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 or the Company 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 in
September 1995 and July 1996.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
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.................................................... 36.00 24.75
Fourth quarter................................................... 29.50 19.00
Year ended December 31, 1997:
First quarter.................................................... 31.50 17.50
Second quarter (through April 17, 1997).......................... 17.38 14.25
</TABLE>
As of April 17, 1997, there were 332 stockholders of record of the
Company's Common Stock. On April 17, 1997, the closing price per share for the
Common Stock on Nasdaq was $14.75.
The Company has never paid any cash dividends on its Common Stock. The
Company intends to retain its future earnings to finance its operations and does
not anticipate paying cash dividends on its Common Stock in the foreseeable
future. Any decision made by the Company's Board of Directors to declare
dividends on its Common Stock 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. Accord-
30
<PAGE> 32
ingly, the Company's ability to pay dividends on its Common Stock 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."
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company on an actual basis as of December 31, 1996 and on a pro forma basis
giving effect to (i) the $50.0 million increase in the Senior Secured Facility,
(ii) the issuance of 5,000 shares of Series A Preferred Stock for $50.0 million
and (iii) the conversion of $110,000 of Debentures, each occurring after
December 31, 1996. This table should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
----------------------
ACTUAL PRO FORMA
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Warehouse financing facilities....................................... $ 89,434 $ 89,434
Other short-term debt................................................ 36,521 36,521
-------- --------
Total short-term debt........................................ $125,955 125,955
======== ========
Long-term debt:
Standby financing facility........................................... $ 7,966 $ 7,966
Notes and loans payable.............................................. 100,000 150,000(1)
Convertible Subordinated Debentures.................................. 143,730 143,620(2)
-------- --------
Total long-term debt......................................... 251,696 301,586
-------- --------
Stockholders' equity:
Preferred Stock, $.01 par value; 5,000,000 shares authorized; no
shares outstanding actual; 5,000 shares of 6% Convertible
Preferred Stock, Series A outstanding pro forma................... -- --(3)
Common Stock, $.01 par value; 50,000,000 shares authorized;
29,649,133 shares issued and outstanding actual; 29,653,323 shares
outstanding pro forma............................................. 296 296
Additional paid-in capital........................................... 57,783 107,893(4)
Foreign currency translation adjustment, net of taxes................ 9,765 9,765
Unrealized gain on available-for-sale securities, net of taxes....... 8,329 8,329
Retained earnings.................................................... 62,659 62,659
-------- --------
Total stockholders' equity................................... 138,832 188,942
-------- --------
Total capitalization......................................... $390,528 $ 490,528
======== ========
</TABLE>
- ---------------
(1) Reflects an additional $50.0 million outstanding under the Senior Secured
Facility.
(2) Reflects the conversion of $110,000 of Debentures.
(3) Reflects $50 from the issuance of 5,000 shares of Series A Preferred Stock.
(4) Reflects an additional $50.1 million from the issuance of 5,000 shares of
Series A Preferred Stock and the conversion of $110,000 of Debentures.
31
<PAGE> 33
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma consolidated financial data set forth below for the
year ended December 31, 1996 illustrate the estimated effects of (i) the J&J
Acquisition (including the sale of $47.5 million of loans acquired as a result
of such acquisition and the corresponding reduction of debt of $32.4 million
from the proceeds of such sale) and (ii) the Greyfriars Acquisition (including
the sale of $153.7 million of loans acquired as a result of such acquisition and
the corresponding reduction of debt of $153.7 million from the proceeds of such
sale), as if each such acquisition had occurred as of January 1, 1996. See "The
Company" and "Business -- Loans -- Loan Originations and Purchases -- UK
Originations" for descriptions of the acquired operations. The results of
operations of J&J and Greyfriars 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 Greyfriars 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 Greyfriars 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 Greyfriars 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 historical financial data set forth below for the
Company for the year ended December 31, 1996 have been derived from the audited
consolidated financial statements of the Company. The historical financial data
set forth for J&J and Greyfriars for the period beginning January 1, 1996
through the respective dates of their acquisition by the Company have been
derived from the consolidated financial statements of J&J and Greyfriars. The
unaudited pro forma consolidated financial data and the historical financial
data should be read together with the consolidated financial statements of the
Company, J&J and Greyfriars and related Notes included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------
ACQUISITIONS
COMPANY AS ---------------------- PRO FORMA
REPORTED J&J(1) GREYFRIARS(2) ADJUSTMENTS PRO FORMA
---------- -------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
REVENUES
Gain on sale of loans........... $156,252 $ -- $ -- $ -- $ 156,252
Mortgage origination income..... 2,791 -- -- -- 2,791
Interest income................. 29,304 6,978 12,264 (16,330)(3) 32,216
Servicing income................ 3,750 -- 500 -- 4,250
Earnings from partnership
interest..................... 754 -- -- -- 754
Other........................... 6,364 229 897 -- 7,490
-------- -------- -------- -------- --------
Total revenues.......... 199,215 7,207 13,661 (16,330) 203,753
-------- -------- -------- -------- --------
EXPENSES
Salaries and employee
benefits..................... 40,852 1,216 2,240 -- 44,308
Interest expense................ 20,224 1,194 5,477 (5,716)(4) 21,179
Selling expenses................ 23,889 -- 888 -- 24,777
Other operating expenses........ 25,367 2,804 1,345 -- 29,516
Amortization of goodwill........ 3,775 -- -- 1,309(5) 5,084
-------- -------- -------- -------- --------
Total expenses.......... 114,107 5,214 9,950 (4,407) 124,864
-------- -------- -------- -------- --------
Earnings before income taxes.... 85,108 1,993 3,711 (11,923) 78,889
Provision for income taxes...... 34,427 717 1,165 (4,948)(6) 31,361
-------- -------- -------- -------- --------
Net earnings...................... $ 50,681 $ 1,276 $ 2,546 $ (6,975) $ 47,528
======== ======== ======== ======== ========
Earnings per share:
Primary......................... $ 1.66 N/A N/A N/A $ 1.52
======== ======== ======== ======== ========
Fully diluted................... $ 1.59 N/A N/A N/A $ 1.47
======== ======== ======== ======== ========
Weighted average shares
outstanding:
Primary......................... 30,537 N/A N/A 647(7) 31,184
======== ======== ======== ======== ========
Fully diluted................... 34,153 N/A N/A 647(7) 34,800
======== ======== ======== ======== ========
</TABLE>
32
<PAGE> 34
Notes to Unaudited Pro Forma Financial Statements for the year ended December
31, 1996
(1) Reflects J&J historical operating results for the period ended April 23,
1996. In April 1996, the Company acquired all of the outstanding stock of
J&J in exchange for L15.3 million ($23.3 million based on the Noon Buying
Rate on the date of such acquisition) in cash and 548,000 shares of the
Company's Common Stock valued at $9.8 million based on the closing price of
the Common Stock on the date of such acquisition less a discount for
restrictions on the resale of such stock and incurred closing costs of
$788,000. The J&J Acquisition was accounted for as a purchase transaction.
The Company acquired assets with a fair value of $73.8 million, consisting
primarily of mortgage loans held for sale of $73.0 million (inclusive of the
value assigned to the acquired mortgage servicing rights) and assumed
liabilities with a fair value of $45.1 million. Additional fair market value
of $21.8 million, representing the value of the mortgage servicing
receivables, was assigned to the mortgage loans acquired. The J&J
Acquisition resulted in the recognition of $5.2 million of goodwill which is
being amortized using the straight-line method over a life of ten years.
Restructuring charges of $250,000 were recorded in connection with the J&J
Acquisition and have been included as a component of the fair value of the
liabilities assumed in such acquisition. These charges represent the costs
to integrate J&J's operations into CSC-UK's operations, consisting primarily
of (i) costs incurred to relocate J&J's operations to CSC-UK's headquarters
and (ii) employee severance costs. The integration and relocation of J&J's
operations are intended to provide greater efficiencies due to the
consolidation of the operations.
(2) Reflects Greyfriars historical operating results for the period ended June
14, 1996. In June 1996, the Company acquired all of the outstanding stock of
Greyfriars for L41.8 million ($64.1 million based on the Noon Buying Rate on
the date of such acquisition) in cash and 99,362 shares of the Company's
Common Stock valued at $2.5 million based on the closing price of the Common
Stock on the date of such acquisition and incurred closing costs of $2.3
million. The Greyfriars Acquisition was accounted for as a purchase
transaction. The Company acquired assets with a fair value of $225.4
million, consisting primarily of mortgage loans held for sale of $221.2
million (inclusive of the value assigned to the acquired mortgage servicing
rights) and assumed liabilities with a fair value of $181.9 million.
Additional fair market value of $29.2 million, representing the value of the
mortgage servicing receivables, was assigned to the net assets acquired. The
Greyfriars Acquisition resulted in the recognition of $25.4 million of
goodwill which is being amortized using the straight-line method over a life
of ten years. Restructuring charges of $4.8 million were recorded in
connection with the Greyfriars Acquisition and have been included as a
component of the fair value of the liabilities assumed in such acquisition.
These charges represent the costs to integrate Greyfriars' operations into
CSC-UK's operations, consisting primarily of (i) costs incurred to relocate
Greyfriars' operations to CSC-UK's headquarters including establishing
reserves for leases on premises to be vacated as part of this relocation and
(ii) employee severance costs. The integration and relocation of Greyfriars'
operations are intended to provide greater efficiencies due to the
consolidation of the operations.
(3) Represents the reduction of interest income resulting from the sale of
mortgage loans held for sale of $47.5 million for J&J and $153.7 million for
Greyfriars on January 1, 1996 as follows:
<TABLE>
<CAPTION>
HISTORICAL ACCRETED
INTEREST DISCOUNT ADJUSTMENTS
---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
J&J.................................................. $ 6,978 $ 678 $ (6,300)
Greyfriars........................................... 12,264 1,437 (10,827)
Greyfriars interest on unsold loans.................. 797
-------
Adjustment........................................... $(16,330)
=======
</TABLE>
"Accreted Discount" represents the increase in value for the period of the
mortgage servicing receivables which were recorded as a result of such
acquisitions at a discounted present value.
33
<PAGE> 35
"Greyfriars interest on unsold loans" was calculated as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
-----------
<S> <C>
Average mortgage loans held for sale - 1996....................... $ 165,000
Less:
Pro forma loans sold.............................................. 153,700
--------
Average balance outstanding during 1996........................... 11,300
Average interest rate on loans.................................... 15.6%
Accrued number of days held....................................... 165
--------
Interest accrued on unsold loans.................................. $ 797
========
</TABLE>
The average interest rate accrued on loans was estimated based upon dividing
the total interest income during 1995 by the 1995 average balance of
mortgage loans held for sale based upon the December 31, 1995 audited
financial statements.
(4) Represents the reduction of interest expense resulting from the application
of the cash proceeds from the sale of mortgage loans held for sale of $47.5
million for J&J and $153.7 million for Greyfriars to pay down existing debt
on January 1, 1996 as follows:
<TABLE>
<CAPTION>
J&J GREYFRIARS TOTAL
------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Debt paid down...................................... $32,400 $ 153,700 $186,100
Weighted average interest........................... 8.5% 7.0%
Number of days...................................... 113 165
------- -------- --------
Interest reduction.................................. $ 852 $ 4,864 $ 5,716
======= ======== ========
</TABLE>
(5) Reflects increased goodwill amortization related to the J&J Acquisition and
the Greyfriars Acquisition as if such acquisitions had occurred on January
1, 1996 as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
J&J............................................ $ 161
Greyfriars..................................... 1,148
------
Total.......................................... $1,309
======
</TABLE>
(6) Reflects the tax impact of the pro forma adjustments recorded at a 41.5%
effective tax rate.
(7) Reflects the pro forma impact of the 548,000 and 99,362 shares of Common
Stock issued in connection with the J&J Acquisition and the Greyfriars
Acquisition, respectively, as if such shares were issued and outstanding for
the entire year ended December 31, 1996.
34
<PAGE> 36
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected consolidated financial data set forth below as of December 31,
1992 and 1993 and for the years then ended have been derived from the audited
consolidated financial statements of CSC. The selected consolidated financial
data set forth below as of December 31, 1994, 1995 and 1996 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
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>
CSC(1) COMPANY
------------------- --------------------------------
YEAR ENDED DECEMBER YEAR ENDED
31, DECEMBER 31,
------------------- --------------------------------
1992 1993 1994(2) 1995 1996
------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Gain on sale of loans........................ $ 1,005 $ 2,088 $ 5,691 $38,198 $156,252
Net mortgage origination income.............. 1,251 1,455 2,551 2,963 2,791
Interest income.............................. 612 536 1,900 6,706 29,304
Servicing income............................. -- -- 414 777 3,750
Earnings from partnership interest........... -- -- 391 482 754
Other........................................ 131 378 227 385 6,364
------- ------- ------- ------- -------
Total revenues.......................... 2,999 4,457 11,174 49,511 199,215
Costs and expenses:
Salaries and benefits........................ 1,188 1,939 4,280 12,165 40,852
Other costs and expenses..................... 1,718 2,195 5,041 14,581 73,255
------- ------- ------- ------- -------
Total costs and expenses................ 2,906 4,134 9,321 26,746 114,107
Earnings before minority interest, income taxes
and extraordinary item....................... 93 323 1,853 22,765 85,108
Minority interest............................... -- -- -- 2,379 --
------- ------- ------- ------- -------
Earnings before income taxes and extraordinary
item......................................... 93 323 1,853 20,386 85,108
Income taxes.................................... 3 8 1,450(3) 8,515 34,427
------- ------- ------- ------- -------
Earnings before extraordinary item.............. 90 315 403 11,871 50,681
Extraordinary item.............................. -- -- -- (296)(4) --
------- ------- ------- ------- -------
Net earnings.................................... $ 90 $ 315 $ 403 $11,575 $ 50,681
======= ======= ======= ======= =======
Earnings per share before extraordinary item.... $ 0.01 $ 0.02 $ 0.02 $ 0.50 $ 1.66
Extraordinary item.............................. -- -- -- (0.01)(4) --
------- ------- ------- ------- -------
Earnings per share:
Primary...................................... $ 0.01 $ 0.02 $ 0.02 $ 0.49 1.66
======= ======= ======= ======= =======
Fully diluted................................ N/A N/A N/A N/A 1.59
======= ======= ======= ======= =======
Weighted average number of shares outstanding:
Primary...................................... 20,000 20,000 20,560 23,838 30,537
======= ======= ======= ======= =======
Fully diluted................................ N/A N/A N/A N/A 34,153
======= ======= ======= ======= =======
</TABLE>
35
<PAGE> 37
<TABLE>
<CAPTION>
CSC(1) COMPANY
------------------- --------------------------------------
DECEMBER 31, DECEMBER 31,
------------------- --------------------------------------
1992 1993 1994 1995 1996
------- -------- -------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............................................ $ 8,609 $ 13,605 $ 21,816 $ 152,519 $ 810,202
Mortgage servicing receivables.......................... -- -- -- 24,561 242,895
Trading securities(5)................................... -- -- -- 15,571 103,200
Mortgage loans held for sale, net....................... 6,430 10,271 16,681 73,852 102,222
Goodwill................................................ -- -- -- 19,258 47,467
Total debt(6)........................................... 6,310 10,165 16,100 75,673 377,651
Total liabilities....................................... 6,563 11,207 18,030 95,420 671,370
Total stockholders' equity.............................. 2,046 2,398 3,177 57,099 138,832
</TABLE>
<TABLE>
<CAPTION>
CSC(1)
------------------- COMPANY
------------------------------------
YEAR ENDED DECEMBER
31, YEAR ENDED DECEMBER 31,
------------------- ------------------------------------
1992 1993 1994(2) 1995 1996(7)
------- ------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING STATISTICS:
Loan originations and purchases:
US:
Core Products....................................... $43,353 $77,586 $154,410 $417,864 $1,115,959
Specialty Products.................................. -- -- -- -- 137,318
Other Products...................................... -- -- -- -- 36,078
------- ------- -------- -------- ----------
Total US....................................... $43,353 $77,586 $154,410 $417,864 $1,289,355
UK.................................................... -- -- -- 41,395 463,546
------- ------- -------- -------- ----------
Total loan originations and
purchases........................................... $43,353 $77,586 $154,410 $459,259 $1,752,901
======= ======= ======== ======== ==========
Average principal balance per loan originated and
purchased:
US...................................................... $56 $74 $77 $70 $62
UK...................................................... -- -- -- 43 17
Weighted average initial loan-to-value ratio:
US(8)................................................... -- -- 59.7% 66.4% 72.5%
UK...................................................... -- -- -- 49.0 56.0
Loan sales:
US...................................................... $40,975 $61,293 $138,041 $358,997 $1,277,500
UK...................................................... -- -- -- 41,395 451,907
------- ------- -------- -------- ----------
Total loan sales...................................... $40,975 $61,293 $138,041 $400,392 $1,729,407
======= ======= ======== ======== ==========
Loans serviced:
US(9)................................................... -- -- $ 56,340 $386,720 $1,519,395
UK...................................................... -- -- -- 40,299 511,140
------- ------- -------- -------- ----------
Total loans serviced.................................. -- -- $ 56,340 $427,019 $2,030,535
======= ======= ======== ======== ==========
Loans 30+ days past due as a percentage of serviced
portfolio:
US...................................................... -- -- 3.4% 3.9% 8.9%
UK(10).................................................. -- -- -- 8.6 15.4
Charge-offs:
US...................................................... -- -- -- $52 $167
UK(10).................................................. -- -- -- -- --
</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
36
<PAGE> 38
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 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 a one-time charge of $680,000 related to the change in tax status
in 1994 from an "S" corporation to a "C" corporation.
(4) Represents a loss, net of taxes, related to the early extinguishment of
subordinated debentures in December 1995.
(5) Represents the interest-only and residual mortgage securities that the
Company receives upon loan sales through securitizations in the US.
(6) 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."
(7) Includes UK loan originations and purchases of $51.9 million and $190.5
million, average principal balance per UK loan originated and purchased of
$9,382 and $14,705, UK loan sales of $47.5 million and $153.7 million, UK
loans serviced of $51.9 million and $190.5 million, and loans 30 or more
days past due as a percentage of UK serviced portfolio of 4.7% and 5.7%,
due to the loans acquired as a result of the J&J Acquisition and the
Greyfriars Acquisition, respectively.
(8) Excludes the Company's Specialty Products and Other Products.
(9) Includes master servicing and contract servicing operations by the
Company. See "Business -- Loans -- Loan Servicing and Collections -- US."
(10) 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 Greyfriars
Acquisition, the UK delinquency ratio would have been 16.5% at December
31, 1996.
37
<PAGE> 39
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 and accompanying Notes for the
years ended December 31, 1994, 1995 and 1996. 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. The Company
undertakes no obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of anticipated or unanticipated events.
GENERAL
Restatements
On September 26, 1996, the Company announced that it had determined that
certain adjustments should be made to the Company's previously issued financial
statements for the quarter ended June 30, 1996, to reflect a change in the
accounting treatment with respect to the valuation of assets acquired as a
result of the acquisitions of J&J and Greyfriars. The Company initially valued
the mortgage loans in the J&J Acquisition and the Greyfriars Acquisition at the
respective fair values which were estimated to approximate par (or historical
book value). Upon the subsequent sale of the mortgage portfolios, the Company
recognized the fair value of the mortgage servicing receivables retained and
recorded a corresponding gain for the fair value of such mortgage servicing
receivables. Upon subsequent review, the Company determined that the fair value
of such mortgage servicing rights should have been included as part of the fair
value of the mortgage loans acquired as a result of such acquisitions. The
effect of this accounting change resulted in the Company eliminating $50.9
million in revenues and approximately $6.3 million of expenses originally
recorded in connection with the acquisitions and a reduction in reported
earnings of $26.5 million or $0.78 per fully diluted share. Additionally, as a
result of this accounting change the goodwill initially recorded in connection
with such acquisitions was reduced from $60.5 million to $10.6 million resulting
in a reduction of goodwill amortization of approximately $496,000 from the
previously reported figure for the second quarter. The Staff of the Commission
has requested additional information from the Company in connection with the
accounting related to the J&J Acquisition and the Greyfriars Acquisition. The
Company is supplying such requested information.
On November 19, 1996, the Company announced that it had determined that
certain additional adjustments relating to the J&J Acquisition and the
Greyfriars Acquisition should be made to the financial statements for the
quarter ended June 30, 1996. These adjustments reflect a change in the
accounting treatment with respect to the $5.0 million of restructuring charges
and the $17.3 million of deferred taxes recorded as a result of such
acquisitions. The effect of these adjustments resulted in the Company increasing
the goodwill as initially restated in September 1996 from $10.6 million to $30.6
million reflecting the reclassification, as costs of the acquisitions, of (i)
the restructuring charges, previously recorded as an expense, and (ii) the
offset to the tax liability incurred as part of the purchase accounting
adjustments which had been previously recorded as a deferred tax asset. This
increase in goodwill resulted in an increase of amortization expense as
previously reported in the second quarter of 1996 of $170,692 and will result in
a $502,150 per quarter increase in amortization expense through the first
quarter of 2006. As a result of these adjustments, second quarter net earnings
increased by $2.8 million or $0.08 per fully diluted share, from $8.3 million or
$0.27 per fully diluted share, to $11.1 million or $0.35 per fully diluted
share. For the six months ended June 30, 1996, net earnings increased from the
previously reported $17.6 million or $0.58 per fully diluted share to $20.4
million or $0.66 per fully diluted share. Further, as a result of these
adjustments, there was increased goodwill amortization recorded during the third
quarter of 1996 which resulted in a $502,150 decrease in previously announced
net earnings of $0.02 per fully diluted share from $14.9 million or $0.45 per
fully diluted share to $14.4 million or $0.43 per fully diluted share. For the
nine months ended September 30, 1996, net earnings increased $2.3 million to
$34.8 million or $1.11 per fully diluted share from the previously announced
results of $32.5 million or $1.04 per fully diluted share.
38
<PAGE> 40
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, gains recognized from
premiums on loans sold through whole loan sales to institutional purchasers,
interest earned on loans held for sale, excess 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 gain on securitization
representing the fair value of the interest-only and residual certificates that
the Company receives upon the sale of loans through securitizations in the US
which are reflected as trading securities and the value of mortgage servicing
receivables that it recognizes through UK securitizations. 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 the costs of credit enhancements and trustee fees and, 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. Gain on
sale of loans constituted approximately 50.9% of total revenues in 1994, 77.2%
of total revenues in 1995 and 78.4% of total revenues in 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 42 states as of December 31, 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; (vi) the acquisitions of J&J and Greyfriars in the UK;
and (vii) the introduction and expansion of new products such as
"Sav*-A-Loans(R)" in the US.
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, dependence on securitizations, potential changes in the valuation of
interest-only and residual certificates and mortgage servicing receivables,
possible termination of servicing rights, sensitivity to economic slowdown and
fluctuation in interest rates, loan delinquencies and defaults particularly with
respect to loans made to high-risk borrowers, the effects of the Company's
recent expansion and product extensions, credit risks associated with loans made
at high loan-to-value ratios, the effects of acquisitions, risks related to
operations in the UK, contingent risks on loans, geographic concentration of US
operations, competition and legislative and regulatory risks.
39
<PAGE> 41
The following table highlights certain selected information relating to the
origination and purchase of loans by the Company during the periods shown.
LOAN ORIGINATION AND PURCHASES
<TABLE>
<CAPTION>
US
--------------------------------- UK
--------------------------
FOR THE YEAR ENDED FROM FOR THE YEAR
DECEMBER 31, FORMATION TO ENDED
--------------------------------- DECEMBER 31, DECEMBER 31,
1994 1995 1996 1995 1996
-------- -------- --------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loan originations and purchases:
Core Products:
Independent mortgage
brokers................... $149,724 $291,907 $ 414,411 $ 41,395 $220,034
Wholesale Loan Acquisition
Program................... 4,686 125,957 572,484 -- 1,045
-------- -------- ---------- ------- --------
Total Core Products....... 154,410 417,864 986,895 41,395 221,079
Specialty Products............. -- -- 137,318 -- --
Other Products................. -- -- 36,078 -- --
Bulk purchases................. -- -- 129,064 -- 242,467(1)
-------- -------- ---------- ------- --------
Total originations and
purchases................. $154,410 $417,864 $1,289,355 $ 41,395 $463,546
======== ======== ========== ======= ========
Weighted average interest
rate(2)........................ 11.1% 11.9% 12.0% 16.4% 16.4%
Weighted average initial loan-to-
value ratio(3)................. 59.7 66.4 72.5 49.0 56.0
Percentage of loans secured by
first mortgages................ 87.0 89.0 89.6 92.0 67.8
</TABLE>
- ---------------
(1) Includes $51.9 million of loans acquired as a result of the J&J Acquisition,
75.0% of which were secured by second mortgages, with a weighted average
interest rate of 23.6% and a weighted average initial loan-to-value ratio of
45.6%, and includes $190.5 million of loans acquired as a result of the
Greyfriars Acquisition, 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%.
(2) The UK weighted average interest rate represents the weighted average
blended rate. The weighted average Standard Rates were 17.4% and 18.3% and
the weighted average Concessionary Rates were 10.6% and 15.2% as of December
31, 1995 and 1996, respectively.
(3) Excludes the Company's Specialty Products and Other Products. 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 Originations and Purchases
The Company increased its US loan originations and purchases in 1996 to
$1.3 billion from $417.9 million in 1995, representing an annual growth rate of
208.5% over the 12 month period. The average principal balance of the Company's
US loans for 1996 was $61,801. The Company's US originations of Core Products
from brokers increased in 1996 to $414.4 million from $291.9 million in 1995,
representing an increase of $122.5 million (or 42.0%). During 1996, however, the
Company's US originations of Core Products from brokers did not change
materially on a quarter by quarter basis. Furthermore, as a source of the
Company's loan originations and purchases, the Company's Wholesale Loan
Acquisition Program grew faster than loans sourced through independent brokers
during 1996. The Company attributes these results to (i) the Company's policy,
as a result of regulatory concerns, against paying broker yield spread premiums
(the Company believes that many of its competitors make such payments) and (ii)
the shift in broker originations from Core Products to Specialty Products during
the second half of 1996. The Company's UK loan originations and purchases for
1996 were $463.5 million, including loan portfolios of $51.9 million and $190.5
million acquired
40
<PAGE> 42
as a result of the J&J Acquisition and the Greyfriars Acquisition, respectively.
The average principal balance of the Company's UK loans for 1996 was $17,400, a
decrease of $25,720 from the average principal balance of the Company's UK loans
for 1995 of $43,120 primarily due to the inclusion of the loans acquired as a
result of the J&J Acquisition ($51.9 million of loans at an average principal
balance of $9,382) and the Greyfriars Acquisition ($190.5 million of loans at an
average principal balance of $14,705). During 1996, the Company broadened its UK
loan products to include loans that do not use the Rule of 78s prepayment
calculation and that generally have lower broker commissions as compared to
those paid with respect to long-term Rule of 78s loan products.
During 1996, the weighted average initial loan-to-value ratio on the
Company's US Core Products increased to 72.5% from 66.4% during 1995 primarily
due to an increase in originations of the Company's "A" risk loans (49.6% of
total Core Product originations in 1996 as compared to 44.6% in 1995), as well
as the Company's new programs offering loans with higher loan-to-value ratios to
borrowers with higher credit quality in response to competition. The rate of
increase in the loan-to-value ratios declined in the second half of 1996, and
the Company expects such rate of increase will slow during 1997 and stabilize
near the current level. Such slowing or stabilization, however, cannot be
assured and will depend upon many factors, including the acceptance of new
products offered by the Company and the effect of increased competition in the
Company's markets.
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. See "Business --
Loans -- Loan Sales." During 1995 and 1996, the Company sold $400.4 million and
$1.7 billion of loans, respectively, of which $105.8 million and $73.5 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 $154.5
million, or 67.1% and 77.6% of the Company's total revenues, in 1995 and 1996,
respectively. Gains on whole loan sales represented 10.2% and 1.1% of the
Company's total revenues in 1995 and 1996, respectively.
During 1995 and 1996, loan sales included $359.0 million and $1.3 billion
of US loan sales, respectively, and $41.4 million and $451.9 million of UK loan
sales, respectively. During 1995 and 1996, gains on US loan sales totaled $26.3
million (7.3% weighted average gain) and $76.8 million (6.0% weighted average
gain), respectively, and gains on UK loan sales totaled $11.9 million (28.7%
weighted average gain) and $79.4 million (31.7% weighted average gain excluding
the $201.2 million of loans sold that were acquired as a result of the J&J
Acquisition and the Greyfriars Acquisition), respectively.
The higher weighted average gain on UK loan sales as compared to US loan
sales was primarily a result of the higher average blended interest rate on UK
loan originations (16.4% for UK loan originations as compared to 12.0% for US
loan originations for 1996), greater amounts due upon prepayment in the UK and
pass-through rates to investors in the Company's UK securitizations that are
similar to the pass-through rates on certificates issued in the Company's US
securitizations for the period. The Company believes that the higher average
blended interest rates on its UK loan originations are primarily a result of the
highly fragmented UK market that is generally underserved by Conventional UK
Lenders. Such higher average blended interest rates contribute to higher
weighted average gains on UK loan sales. See "Business -- General -- UK
Overview." Typically, the Company's UK loans are calculated using the Standard
Rate and may provide the opportunity for a borrower to pay a Concessionary Rate
to the extent that the borrower pays his or her loan when due and is current on
previous loan payments. During 1996, Standard Rates on the Company's UK loans
ranged from 7.3% to 20.7% expressed as a flat rate, or 12.0% to 27.6% expressed
as an annual percentage rate, and Concessionary Rates ranged from 5.4% to 9.9%
expressed as a flat rate, or 10.36% to 14.25% expressed as an annual percentage
rate. The blended interest rate on UK loans is an assumed rate based upon the
weighted average Standard Rate of 18.3% and a weighted average Concessionary
Rate of 15.2% for 1996. The appropriateness of loan products that utilize
standard/concessionary rate structures has recently been questioned by the OFT.
See "Business -- Regulation -- UK."
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<PAGE> 43
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 or the Concessionary Rate (whichever is in effect on the date of
prepayment) 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 prepayments after the 18th, 120th and 180th
months calculated using a six-month deferment at the Standard Rate would require
the borrower to pay L45,872 or 31.1% more than the original principal balance
(or L41,080 or 17.4% more than the original principal balance if the prepayment
were calculated using a one-month deferment), L54,651 or 56.1% more than the
original principal balance (L48,869 or 39.6% more than the original principal
balance if the prepayment were calculated using a one-month deferment) and
L51,440 or 47.0% more than the original principal balance (L32,277 or 7.8% less
than the original principal balance if the prepayment were calculated using a
one-month deferment), respectively. The appropriateness of secured long-term
loan products that utilize Rule of 78s prepayments has recently been questioned
by the OFT. In future periods, the Company believes that long-term loans
utilizing Rule of 78s prepayments will represent an increasingly smaller
percentage of its UK loan origination and purchase volume and that the OFT's
regulatory initiatives are likely to result in the Company's elimination or
modification of long-term loan products utilizing Rule of 78s. Such elimination
or modification could have a material adverse effect in future periods on the
Company's results of operations and financial condition, especially if the
Company is unsuccessful in its efforts to broaden its product base. The Company
is unable to determine at this time how soon such elimination or modification
will occur.
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 period up to 90 days after the
closing date (the "Pre-funding Period"), 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 1996, however, the Company retained the servicing or
master servicing rights for approximately 74.2% and 98.4%, respectively, of the
loans it sold. As of December 31, 1996, the Company was servicing 24,820 US
loans with an aggregate principal balance of $1.5 billion, representing a 371.9%
increase over an aggregate principal balance of $311.6 million serviced as of
December 31, 1995. Revenue generated from loan servicing amounted to 1.6% and
1.9% of total revenues for 1995 and 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
three years, the Company's US serviced portfolio was relatively unseasoned in
1994 and 1995. Accordingly, during 1996 the Company experienced an expected
increase in total US delinquencies as a percentage of the US
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<PAGE> 44
serviced portfolio as a result of seasoning of the portfolio. No assurances,
however, can be given as to the Company's future delinquency experience.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------------------
1994 1995 1996
--------------------- --------------------- ------------------------
DOLLARS % OF DOLLARS % OF % OF
IN SERVICED IN SERVICED DOLLARS 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% $1,470,344 100.0%
------- ----- -------- ----- ---------- -----
30-59 days delinquent............ -- -- 5,479 1.8 55,182 3.7
60-89 days delinquent............ 142 0.6 1,580 0.5 20,358 1.4
90 days or more delinquent....... 679 2.8 4,968 1.6 55,684 3.8
------- ----- -------- ----- ---------- -----
Total US delinquencies............. $ 821 3.4% $ 12,027 3.9% $ 131,224 8.9%
------- ----- -------- ----- ---------- -----
US REO property.................... $ 130 0.5% $ 141 -- $ 1,010 0.1%
</TABLE>
The Company has been servicing loans in the UK since the inception of
CSC-UK in May 1995. As of December 31, 1996, CSC-UK was servicing UK loans with
an aggregate principal balance of $511.1 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
December 31, 1996 will be indicative of delinquency experience in the future.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------------
1995 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% $ 511,140 100.0%
------- ----- ------- -----
30-59 days delinquent................... 1,087 2.7 24,142 4.7
60-89 days delinquent................... 423 1.1 10,667 2.1
90 days or more delinquent.............. 1,926 4.8 43,941 8.6
------- ----- ------- -----
Total UK delinquencies............... $ 3,436 8.6% $ 78,750 15.4%
------- ----- ------- -----
</TABLE>
- ---------------
(1) Includes the J&J serviced portfolio of $41.9 million with total
delinquencies of $18.2 million or 43.3%, of which $3.8 million or 9.0% was
30-59 days delinquent, $2.6 million or 6.3% was 60-89 days delinquent and
$11.8 million or 28.1% was 90 days or more delinquent. Includes the
Greyfriars serviced portfolio of $233.5 million with total delinquencies of
$21.9 million or 9.4%, of which $7.8 million or 3.3% was 30-59 days
delinquent, $3.1 million or 1.3% was 60-89 days delinquent and $11.0 million
or 4.7% was 90 days or more delinquent. Excluding the portfolios acquired as
a result of the J&J Acquisition and the Greyfriars Acquisition, the UK
delinquency ratio would have been 16.5% at December 31, 1996.
RESULTS OF OPERATIONS
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total revenues increased $149.7 million or 302.4% to $199.2 million in 1996
from $49.5 million in 1995. This increase was due primarily to higher gains on
sale of loans resulting from the combined US and UK increased loan origination
and purchase volume and volume of loans sold compared to the prior period and
increased interest income resulting from higher average balances of loans held
for sale, as well as increased discount accretion recognized on higher average
balances of mortgage servicing receivables.
Gain on sale of loans increased $118.0 million or 308.9% to $156.2 million
in 1996 from $38.2 million in 1995. This increase was due primarily to CSC-UK's
gain on sale of loans of $79.4 million representing a 31.7% gain on the $250.7
million of loan sales in 1996 (which excludes the $201.2 million sale of
portfolios acquired as a result of the J&J Acquisition and the Greyfriars
Acquisition) compared to gain on sale of loans of $11.9 million representing a
28.7% gain on the $41.4 million of loan sales in 1995. The higher average gain
on
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<PAGE> 45
sale in 1996 was due primarily to the termination of the previous UK purchase
facility pursuant to which Greenwich retained a significant participation in
such gain. Additionally, the increase was due to the increased volume of US loan
sales at lower average gains ($1.3 billion of loan sales at a weighted average
gain of 6.0% ($76.8 million) in 1996 as compared to $359.0 million of loan sales
at a weighted average gain of 7.3% ($26.3 million) in 1995). The lower average
US gain on sale of loans recognized in 1996 was due primarily to the lower
average margins from bulk purchases which began during the second quarter of
1996, lower margins from correspondent wholesale loans, as well as lower margins
from changes in interest rates during the second quarter of 1996 offset by
higher margins on the sale of Specialty Products. The Company expects that the
UK gain on sale margin as a percentage of loan sales will decline in the future
resulting from new product offerings that are expected to carry lower weighted
average interest rates and lower prepayment fees.
Mortgage origination income decreased $171,910 or 5.8% to $2.8 million in
1996 from $3.0 million in 1995. This decrease was due primarily to lower fees
earned on the Company's domestic broker originations. It is anticipated that the
Company's domestic origination fees as a percentage of loans originated will
continue to decrease in the future. Mortgage origination income as a percentage
of revenues decreased to 1.4% in 1996 from 6.0% in 1995.
Interest income increased $22.6 million or 337.3% to $29.3 million in 1996
from $6.7 million in 1995. This increase was due primarily to the increased
balance of loans held for sale during 1996 resulting from the increased loan
origination and purchase volume in excess of loans sold during the period, as
well as interest income resulting from the accretion of the discount recorded on
mortgage servicing receivables.
Servicing income increased $2.9 million or 382.6% to $3.7 million in 1996
from $777,066 in 1995. This increased income was due primarily to an increase in
the average balances of US loans serviced to $933.6 million in 1996 from $140.3
million in 1995 and the increase in the average balances of UK loans serviced to
$330.0 million in 1996 from $17.3 million in 1995.
Earnings from partnership interest increased $271,874 or 56.4% to $753,663
in 1996 from $481,789 in 1995. This increase was due primarily to increased
earnings recognized from the equity interest in IMC during 1996. In June 1996,
IMC converted from partnership to corporate form and effected a public offering
of its 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's earnings as
revenues, but rather as available-for-sale securities in accordance with SFAS
No. 115.
Total expenses increased $87.4 million or 327.3% to $114.1 million in 1996
from $26.7 million in 1995. This increase was due primarily to increased
salaries, selling expenses and operating expenses related to increased loan
origination and purchase volume during 1996. Total expenses as a percentage of
total revenues increased to 57.2% in 1996 from 54.0% in 1995. During 1996,
amortization of goodwill related to the UK Acquisition, the J&J Acquisition and
the Greyfriars Acquisition totaled $3.8 million.
Salaries and employee benefits increased $28.7 million or 235.2% to $40.9
million in 1996 from $12.2 million in 1995. This increase was due primarily to
increased staffing levels to 638 US employees at December 31, 1996 compared to
264 US employees at December 31, 1995 and the increased staffing levels
associated with the UK operations (267 UK employees at December 31, 1996
compared to 71 UK employees at December 31, 1995) resulting from the growth in
loan origination and purchase volume and geographic expansion, increased loans
serviced, as well as the J&J Acquisition and the Greyfriars Acquisition.
Interest expense increased $15.6 million or 339.1%, to $20.2 million in
1996 from $4.6 million in 1995. This increase was due primarily to the interest
costs associated with the $143.8 million of Debentures issued during the second
quarter of 1996, as well as an increased balance of loans held pending sale
during 1996 resulting from the increased loan origination and purchase volume
during 1996.
Selling and other expenses increased $39.8 million or 418.9% to $49.3
million in 1996 from $9.5 million in 1995. This increase was due primarily to
increased selling costs of $21.0 million or 724.1% to $23.9 million in 1996 from
$2.9 million in 1995 as a result of increased selling and commission costs for
UK loan originations (primarily as a result of the higher commissions paid to
brokers who have entered into right of first refusal agreements with the
Company) and increased professional fees, travel and entertainment and occupancy
costs incurred to support the increased loan origination and purchase volume.
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<PAGE> 46
Net earnings increased $39.1 million or 337.1% to $50.7 million in 1996
from $11.6 million in 1995. This growth in net earnings was due primarily to
increased revenues resulting from an increase in US and UK loan origination and
purchase volume and volume of loans sold during 1996 as the Company expanded its
geographic base to 42 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
pre-funding.
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 IMC. For the year ended December 31, 1995, IMC recorded revenues of
approximately $19.7 million comprised primarily 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.
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 expense 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.
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<PAGE> 47
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 2,842.2% 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.
FINANCIAL CONDITION
December 31, 1996 Compared to December 31, 1995
Cash and cash equivalents decreased $1.5 million or 41.7% to $2.1 million
at December 31, 1996 from $3.6 million at December 31, 1995.
Securities purchased under agreements to resell represent US Treasury
securities borrowed from the repo desk of a counterparty to facilitate the
delivery of US Treasury securities sold short as part of the Company's strategy
to manage interest rate risk on loan originations. The balance at December 31,
1996 was $154.2 million, and there was no corresponding asset at December 31,
1995.
Available-for-sale securities in the amount of $14.6 million were recorded
as an asset at December 31, 1996 as a result of the Company's equity interest in
IMC. Prior to June 1996, the Company had recorded a 9.1% limited partnership
interest in IMC. At December 31, 1995, the Company's investment in partnerships
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 available-for-sale
securities in accordance with SFAS No. 115. Available-for-sale securities are
reported on the Company's 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 $218.3 million or 887.4% to $242.9
million at December 31, 1996 from $24.6 million at December 31, 1995. This
increase was due primarily to the $50.9 million of mortgage servicing
receivables recorded as a result of the J&J Acquisition and the Greyfriars
Acquisition and the $187.0 million recognized as a result of the increase of
loan sales primarily in the UK with servicing retained, partially offset by
$19.6 million of amortization.
Trading securities, which consist of interest-only and residual
certificates, increased $87.6 million or 561.5% to $103.2 million at December
31, 1996 from $15.6 million at December 31, 1995. This increase was due to the
$993.6 million of US securitizations completed during 1996.
Prepaid commitment fees of $38.0 million 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, to be amortized over the 20-year life of the UK
Greenwich Facility. The unamortized balance at December 31, 1996 was $35.9
million. There was no corresponding asset at December 31, 1995.
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<PAGE> 48
Mortgage loans held for sale, net increased $28.3 million or 38.3% to
$102.2 million at December 31, 1996 from $73.9 million at December 31, 1995.
This increase was due primarily to the volume of US loans originated exceeding
loan sale volume in 1996 and loans acquired as part of the Greyfriars
Acquisition which were not yet sold.
Mortgage loans held for investment, net increased $7.3 million or 730.0% to
$8.3 million at December 31, 1996 from $1.0 million at December 31, 1995. This
increase was due primarily to the Company's increased loan origination and
purchase volume and the inclusion of $3.1 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 December 31, 1996 from 0.7% at December 31,
1995.
Credit enhancement deposits represent initial reserve funds established on
UK securitizations and sales into purchase facilities. The balance at December
31, 1996 was $35.1 million, and there was no corresponding asset at December 31,
1995.
Goodwill, net of amortization, increased $28.2 million or 146.1% to $47.5
million at December 31, 1996 from $19.3 million at December 31, 1995. This
increase was due primarily to the goodwill recorded in connection with the J&J
Acquisition and the Greyfriars Acquisition of $5.2 million and $25.4 million,
respectively, offset by $3.8 million of amortization during 1996.
Other assets increased $25.0 million or 581.4% to $29.3 million at December
31, 1996 from $4.3 million at December 31, 1995. This increase was due primarily
to the inclusion of subwarehouse loan receivables at December 31, 1996 of $14.9
million compared to $1.6 million at December 31, 1995 and the inclusion of
deferred costs of $5.3 million related to the issuance of the Debentures.
Warehouse financing facilities outstanding increased $14.5 million or 19.4%
to $89.4 million at December 31, 1996 from $74.9 million at December 31, 1995.
This increase was due primarily to the increased origination and purchase volume
in excess of the volume of loans sold as reflected in the increase in mortgages
held for sale, net.
Securities sold but not yet purchased represent US Treasury securities sold
short as part of the Company's strategy to manage interest rate risk on loan
originations. The balance at December 31, 1996 was $152.9 million, and there was
no corresponding liability at December 31, 1995.
Accounts payable and other liabilities increased $33.8 million or 206.1% to
$50.2 million at December 31, 1996 from $16.4 million at December 31, 1995. This
increase was due primarily to the inclusion of CSC-UK and increased escrow
balances associated with the increased loan servicing portfolio.
Allowance for losses increased $31.6 million or 1,504.8% to $33.7 million
at December 31, 1996 from $2.1 million at December 31, 1995. This increase was
due primarily to increased loans sold in the UK with servicing rights retained.
Notes and loans payable totaled $136.5 million at December 31, 1996
representing the $100.0 million outstanding under the Company's Senior Secured
Credit Agreement (the "Senior Secured Facility") with a group of lenders for
which CIBC Wood Gundy Securities Corp. ("CIBC") serves as agent, the $25.0
million note payable recorded in connection with the UK Greenwich Facility, $6.5
million of advances under the US Greenwich Facility and the $5.0 million term
loan with The First National Bank of Boston ("Bank of Boston").
Stockholders' equity increased $81.7 million or 143.1% to $138.8 million at
December 31, 1996 from $57.1 million at December 31, 1995. This increase was due
primarily to net earnings of $50.7 million in 1996 and stock issued in
connection with the J&J Acquisition and the Greyfriars Acquisition totaling
$12.3 million, in addition to an $8.3 million unrealized gain on
available-for-sale securities, net of taxes and a foreign currency translation
adjustment, net of taxes of $9.8 million.
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
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and capital expenditures. The Company uses its cash flow from whole loan sales,
loans sold through securitizations, capital markets offerings, pre-funding
mechanisms through securitizations, loan origination fees, processing fees, net
interest income and borrowings under its warehouse facility, US purchase
facilities, standby facilities and UK purchase facility to meet its working
capital needs and to fund acquisitions such as the J&J Acquisition and the
Greyfriars 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 1994, 1995 and 1996, the Company used operating cash of
approximately $5.4 million, $76.0 million and $165.5 million, respectively.
Additionally in 1994 and 1995, the Company used $470,244 and $1.5 million,
respectively, in investing activities. In 1996, $100.7 million of cash was
provided by investing activities, primarily from the proceeds from the sale of
loan portfolios acquired as a result of the J&J Acquisition and the Greyfriars
Acquisition. 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 income taxes 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 activities of $6.7 million, $80.2 million and $63.4 million,
respectively.
The Company is required to comply with various operating and financial
covenants as defined in the agreements described below, including maintaining an
adjusted leverage ratio of senior debt to adjusted tangible net worth of less
than 10:1, an adjusted tangible net worth greater than $50.0 million and a
collateral coverage ratio of 1.2:1. The covenants in certain of the Company's
sources of funding also restrict actions by the Company and its subsidiaries,
including, among other things (i) the incurrence and existence of indebtedness,
(ii) the incurrence and existence of liens or other encumbrances, (iii) the
payment of dividends and repurchases of capital stock, (iv) investments, loans
and advances, (v) the incurrence and existence of contingent obligations, (vi)
consolidations, mergers and sales of assets, (vii) the incurrence and existence
of payment restrictions affecting subsidiaries, (viii) certain transactions with
affiliates, (ix) changes in lines of businesses, (x) transfers of assets to
subsidiaries and (xi) the incurrence and existence of negative pledges. The
description above of the covenants contained in the Company's credit facilities
and other sources of funding does not purport to be complete and is qualified in
its entirety by reference to the exhibits filed as part of the Registration
Statement of which this Prospectus is a part. The continued availability of
funds provided to the Company under these agreements is subject to the Company's
continued compliance with these covenants. In addition, the Indenture and the
Debentures permit the holders of the Debentures to require the Company to
purchase the Debentures upon a Change of Control.
The Company's business requires continual access to short- and long-term
sources of debt and equity capital. While management believes that it 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.
The Company's cash requirements may be significantly influenced by possible
acquisitions or strategic alliances, although there are no present agreements
with respect to any significant acquisitions or strategic alliances.
The Company anticipates that it will need to raise additional cash in the
immediate future through the issuance of additional debt or equity securities or
additional bank borrowings or a combination thereof. The Company has no
commitments for additional debt, equity or bank financings other than as
described in this Prospectus and 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.
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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 (7.4% at December 31, 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
$66.3 million at December, 31, 1996. The Revolving Credit Line extends through
June 1997.
The Warehouse Facility also permits the Company to use up to 20.0% 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 December 31, 1996, the aggregate balance of
loans outstanding under this program was $14.9 million (including self-funded
loans), with applications pending for an additional $19.3 million of loans.
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 (8.5% at December 31, 1996) and are due upon
demand. The agreement terminates on June 30, 1997. The outstanding balance under
the loan and security agreement was $5.9 million at December 31, 1996.
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 December 31, 1996 under the US Purchase Facility was
$3.6 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 December 31, 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 (7.5% at December 31, 1996)
and the agreement extends through June 1999. In October 1996, the Company
entered into a $5.0 million unsecured revolving credit facility with the Bank of
Boston (the "Bank of Boston Facility"). The Bank of Boston Facility bears
interest at a variable rate based on the Bank of Boston Base Rate plus 50 basis
points (8.75% at December 31, 1996). Advances under the Bank of Boston Facility
are due on October 24, 1997. As of December 31, 1996, the outstanding balance of
the unsecured revolving credit facility was $5.0 million.
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 sold loans to Greenwich which were subsequently included
in securitizations. In addition, the Company was 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 (7.3% at December 31, 1996). The US Greenwich Facility provided
for the purchase and sale of $1.0 billion of loans. The Company and Greenwich
continued to purchase and sell loans after the facility amount was exceeded
through December 1996. The Company has a commitment from Greenwich to enter into
agreements to provide a $3.0 billion mortgage loan financing facility at a rate
of
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LIBOR plus 150 basis points, a $25.0 million residual financing facility at a
rate of LIBOR plus 300 basis points and a $3.0 billion securitization facility,
each for a term of one year, subject to execution of definitive documents
satisfactory to Greenwich as well as certain other conditions. The Company and
Greenwich, pending the completion of definitive documents, are operating under
the terms of the US Greenwich Facility structured consistent with the new
proposed arrangement, however, as a financing facility. No definitive agreement
exists with respect to the new arrangement nor can any assurance be given that
such an agreement will be reached. Because it is structured as a financing
facility and not a purchase and sale facility, the new arrangement with
Greenwich could affect the timing of the Company's reported gain on sale,
adversely affecting gain on sale in a future period if the Company fails to sell
or securitize the loan origination and purchase volume for such period. The
Company retains servicing rights on all loans sold pursuant to the US Greenwich
Facility.
In October 1996, the Company entered into a $100.0 million Senior Secured
Facility with a group of lenders for which CIBC serves as agent. In January
1997, the Senior Secured Facility was increased to $150.0 million. The Senior
Secured Facility terminates on October 30, 1998, and carries an initial interest
rate of 11.0%, increasing 0.5% on the first day of each quarter commencing July
1, 1997 up to a maximum of 15.0%. Pursuant to the Senior Secured Facility, the
Company paid a 1.0% commitment fee and is required to pay (i) a 1.0% funding fee
on the amount of each borrowing, (ii) extension fees of 1.0% on June 30, 1997
and 0.5% on the last day of each fiscal quarter thereafter on the amount
outstanding on such dates and (iii) commitment cancellation and prepayment fees
of 1.0% of the amount cancelled or prepaid if terminated on or before July 1,
1997, 2.0% of the amount cancelled or prepaid if terminated after July 1, 1997
but on or before April 1, 1998 and 3.0% of the amount cancelled or prepaid if
terminated thereafter. As of March 31, 1997, the outstanding balance under the
Senior Secured Facility was $150.0 million, of which $30.0 million was used to
repay an outstanding note with the Bank of Boston and $13.0 million was used to
repay an outstanding note with Greenwich.
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 (8.1% at December 31, 1996). This agreement expires as to
the working capital facility on December 31, 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%, $13.0 million of which was paid in December 1996 and $25.0
million of which is payable 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 ($17.1
million) at December 31, 1996.
Loan Sales
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 1996, the Company sold
$138.0 million, $105.8 million and $73.5 million in whole loan sales,
respectively, accounting for 100%, 24.8% and 5.6% of all loan sales in the
respective periods.
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
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depend on market conditions, costs of securitization and the availability of
credit enhancement options to the Company. 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. The Company also uses overcollateralization accounts as a means of
providing credit enhancement for its securitizations. This mechanism slows the
flow of cash to the Company and causes some or all of the amounts otherwise
distributable to the Company as cash flow in excess of amounts payable as
current interest and principal on the securities issued in its securitizations
to be deposited in an overcollateralization account for application to cover
certain losses or to be released to the Company later if not so used. This
temporary or permanent redirection of such excess cash flows reduces the present
value of such cash flows, which are the principal component of the gain on the
sale of the securitized loans recognized by the Company in connection with each
securitization. See "-- General -- Loan Sales."
If interest rates rise between the time the Company originates or purchases
the loans and the time the loans are priced at securitization, the spread
narrows, resulting in a loss in the value of the loans. In the US, to protect
against such risk, the Company, from time to time, sells short United States
Treasury securities. Under this strategy, there is an inverse relationship
between the value of the short position and the value of the loans. If interest
rates increase, the value of the short position would increase, offsetting the
decrease in the value of the loans. Conversely, if interest rates decrease, the
value of the short position would decrease, offsetting the increase in the value
of the loans. Thus, through the use of this strategy, the Company is able to
stabilize financing cost. Before employing this strategy, the Company performs
an analysis of its loans taking into account, among other things, interest rates
and maturities to determine the amount, type, duration and proportion of each
treasury security to sell short so that such risk is more effectively managed.
The Company executes the sale of the treasury securities with a large, reputable
securities firm and uses the proceeds received to acquire treasury securities
under repurchase agreements.
The Company also reduces its interest rate risk for its US securitizations
by employing, from time to time, a pre-funding strategy. Under this strategy,
the Company securitizes a portion of its loans held for sale while selling
future loans in a pre-funded securitization. In a pre-funded securitization, the
principal amount of the asset-backed securities issued in the securitization
exceeds the principal balance of loans initially delivered to the securitization
trust. The proceeds from the pre-funded portion are held in trust earning money
market yields until released upon delivery of additional loans. The Company
agrees to deliver additional loans into the securitization trust in an aggregate
amount equal to the excess of the principal balance of the asset-backed
securities over the principal balance of the loans initially delivered. In
pre-funded securitizations, the Company predetermines the borrowing costs with
respect to loans it subsequently purchases and delivers into the securitization
trust. However, the Company incurs an expense in pre-funding securitizations
equal to the difference between the money market yields earned on the proceeds
held in trust prior to the subsequent delivery of loans and the interest rate
paid on the asset-backed securities.
The Company derives a significant portion of its income by recognizing
gains upon the sale of loans through securitizations based on 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 excess 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 its UK securitizations, the Company acquires an uncertificated residual
interest, carried on the Company's balance sheet as mortgage servicing
receivables, in the excess cash flows generated by such securitizations.
Following the sale of UK loans into securitizations, the Company retains no
control over the loans sold and has no control over the borrowers' performance
under such loans and no control over the ability to realize prepayments
calculated using the Rule of 78s or interest rates in excess of the
concessionary rate.
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Accordingly, even though under the terms of the Company's UK securitizations,
the Company is entitled to such prepayments and interest in excess of the
concessionary rate, there can be no assurance that such prepayments or excess
interest can be achieved. In addition, in the event of a forced sale, any
proceeds would be distributed first to pay related enforcement expenses, then to
pay any aggregate outstanding concessionary interest and then to pay the holders
of the senior interests, before any proceeds were available to pay the holder of
the residual interest.
In the case of a UK securitization, or the sale of loans into a purchase
facility, the Company recognizes as a gain the value of the excess mortgage
servicing receivable retained. 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 based on their fair values. 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 applicable to the types of loans
the Company originates and purchases (giving consideration to such risks as
default and collection) 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
December 31, 1996, the Company's balance sheet reflected the fair value of
interest-only and residual certificates and mortgage servicing receivables of
$103.2 million and $242.9 million, respectively.
The UK non-conforming lending industry is a very fragmented, underserved
market and, therefore, lacks published industry information on other portfolios
that would aid in developing the Company's prepayment models. As a result, the
Company's gain on sale assumptions have been based on CSC-UK's historical
operating experience since its inception in May 1995, as well as on the
performance of portfolios originated and serviced by an entity formerly operated
by the managing directors of CSC-UK. The Company believes these additional
portfolios serve as an appropriate model to use in determining its assumptions
because the loans that comprise such portfolios are similar to the loans
originated by the Company in that both portfolios consist of loans that are (i)
non-conforming, (ii) primarily in first lien position and (iii) at relatively
low loan-to-value ratios. With respect to the Company's typical UK loan product
that provides for prepayments based on the Rule of 78s, during 1995 and 1996,
the Company recorded a gain on sale of approximately 40%, of which gain
approximately half was contributed from assumed prepayment interest. The
calculation assumes prepayment rates on an annualized basis of the then
outstanding principal balance of the loan pool of 7.5% in year one, 15% in year
two, 20% in year three and 25% in year four and thereafter. The actual
prepayment rates for such loans during 1995 and 1996 approximated 7.9%. For
comparison, the prepayment rate during such periods on the Company's US loans
approximated 16.0%. In addition, such calculation assumes a loss rate of 1.8%
per annum on the outstanding principal balance of the underlying mortgage loans
calculated from the date of inception of the securitization. On such loans, the
Company also assumes that 70.0% of the borrowers will pay interest at the
concessionary rate. This assumption yields an effective interest rate on such
loans of approximately 16.4% which is consistent with the Company's actual
weighted average interest rate on such loans in the UK loan portfolio at
December 31, 1995 and 1996.
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 affected 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. See "Business -- Loan
Sales -- Securitizations."
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Convertible Debentures
In May 1996, the Company issued $143.8 million of 6% Convertible
Subordinated Debentures due 2006 (of which $79.4 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. During the fourth quarter of 1996, $20,000 of the Debentures were
converted into shares of Common Stock. To date, an aggregate of $130,000 of the
Debentures have been converted into Common Stock.
Series A Convertible Preferred Stock
On April 9, 1997, the Company completed a private placement of 5,000 shares
of 6% Convertible Preferred Stock, Series A with a liquidation preference of
$10,000 per share and related Warrants. Dividends on the Series A Preferred
Stock are cumulative payable quarterly. Dividends and are payable, at the option
of the Company, (i) in cash (ii) in shares of Common Stock, valued at the
closing price on the day immediately preceding the dividend payment date, or
(iii) by increasing the liquidation preference in an amount equal to and in lieu
of the cash dividend payment. The Series A Preferred Stock is convertible into
shares of Common Stock, subject to certain restrictions and redemption rights,
at a conversion price equal to the lowest daily sales price of the Common Stock
during the four consecutive trading days immediately preceding conversion,
discounted up to 4% and subject to certain adjustments. The Warrants are
exercisable at any time within five years of issuance for an aggregate of
500,000 shares of Common Stock at an exercise price of $20.625 per share, which
is equal to 125% of the closing sale price of the Common Stock on the date
immediately prior to the date of original issuance. The Company has provided
registration rights in connection with the resale of the Common Stock issuable
as payment of dividends, upon the conversion of the Series A Preferred Stock or
the exercise of the Warrants. See "Description of Capital Stock -- Preferred
Stock -- Series A Convertible Preferred Stock."
ACCOUNTING CONSIDERATIONS
On January 1, 1997, the Company adopted SFAS No. 125, "Accounting for
Transfer and Servicing of Financial Assets and Extinguishment of Liabilities."
SFAS No. 125 addresses the accounting for all types of securitization
transactions, securities lending and repurchase agreements, collateralized
borrowing arrangements and other transactions involving the transfer of
financial assets. SFAS No. 125 distinguishes transfers of financial assets that
are sales from transfers that are secured borrowings. SFAS No. 125 is generally
effective for transactions that occur after December 31, 1996, and it is to be
applied prospectively. SFAS No. 125 will require the Company to allocate the
total cost of mortgage loans sold to the mortgage loans sold (servicing
released), retained certificates and servicing rights based on their relative
values. The pronouncement also will require the Company to provide additional
disclosure about the retained certificates. The adoption of SFAS No. 125 will
not have a material impact on the Company's gain on sale from securitizations as
they are currently structured; however, there can be no assurance that SFAS No.
125 will not have a material adverse effect on future securitization structures
the Company may employ, reduce the Company's gain on sale of loans in the future
or otherwise adversely affect the Company's results of operations or financial
condition.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" which
simplifies the standards for computing earnings per share previously found in
APB No. 15, "Earnings per Share" and makes them comparable to international
earnings per share standards. SFAS No. 128 is effective for historical
statements issued for periods ending after December 15, 1997. The Company has
not completed its analysis of this 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 42 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 principally through
two 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; and
(ii) purchases on a flow basis through its Wholesale Loan Acquisition Program
from selected financial institutions and mortgage bankers known as loan
correspondents. The Company originates loans through a network of independent
mortgage brokers, with its highest producing broker accounting for 1.9% of the
total US origination and purchase volume in 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 7.4% of the total US
origination and purchase volume in 1996. In June 1996, the Company first
participated in the secondary market for loans offered on a bulk basis by loan
correspondents. From time to time, the Company may make bulk purchases if it
believes it has the excess 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.
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 fixed rate residential
mortgage loans for refinancing, educational, home improvement and debt
consolidation purposes, fixed and adjustable rate purchase money mortgage loans
and mortgage loans on small multi-family and mixed-use properties. The Company
also offers adjustable rate mortgage loans, jumbo loans and "Sav*-A-Loan(R)"
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
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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 "Sav*-A-Loans(R)."
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 and 1996, however, the Company sold a
substantial portion of its loan production in securitizations. In the US, the
Company funds its originations and purchases through warehouse lines of credit
and purchase and sale facilities. 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 $73.5 million of its US loan production in whole
loan sales to institutional investors in 1995 and 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 the related
decline in home prices, poor underwriting practices and decline in home values
caused in part by the significant reduction in the deductibility of mortgage
interest for UK personal income tax purposes (enacted in 1988), resulted in
unacceptable losses for Conventional UK lenders who made loans to these
borrowers during that period. As a result of these losses, 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 lending institutions, if at all.
The Company originates loans in the UK through a network of independent
mortgage brokers and, to a lesser extent, through direct marketing to occupants
of government-owned residential properties in the UK. The Company has entered
into contracts with 45 of its UK brokers, including 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 acquired
J&J and Greyfriars, two previously unaffiliated UK-based mortgage lenders. 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 the UK and a greater share of the fragmented UK market through
additional broker relationships and the expansion of offered products. The
Greyfriars 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.
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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.
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, 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.
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 Company's UK loans provide for prepayment fees to be determined in
one of two ways. For some of the Company's UK loans, the prepayment fee is based
on an amount equal to a certain number of months' interest; however, for the
majority of the Company's UK loans, 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 amount due on a majority of the Company's loans in
the case of a prepayment is based upon the amount of interest, at the Standard
Rate or the Concessionary Rate (whichever is in effect on the date of
prepayment), 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
fees 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
prepayments after the 18th, 120th and 180th months calculated using a six-month
deferment at the Standard Rate would require the borrower to pay L45,872, or
31.1% more than the original principal balance (L41,080 or 17.4% more than the
original principal balance if the prepayment were calculated using a one-month
deferment), L54, 651 or 56.1% more than the original principal balance (L48,869
or 39.6% more than the original principal balance if the prepayment were
calculated using a one-month deferment) and L51,440 or 47.0% more than the
original principal balance (L32,277 or 7.8% less than the original principal
balance if the prepayment were calculated using a one-month deferment),
respectively.
The Company believes that the standard/concessionary rate structure
utilized in some of its loan products is enforceable under English law, and that
providing for a Standard Rate that can be reduced to a Concessionary Rate upon
prompt payment does not contravene the common law rule against charging penalty
interest. In addition, the Company believes that the provisions of such loans
entitling the Company to accelerate repayment upon the occurrence of specified
events of default and to calculate the interest rebate
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using the Rule of 78s with a six-month deferment are not penalties. A recent UK
regulatory initiative questions standard/concessionary rate structures and the
use of the Rule of 78s. See "--Regulation--UK."
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 UK loan sales through
securitizations of L32.0 million ($49.6 million), L64.5 million ($102.0 million)
and L116.3 million ($189.2 million), respectively, in March, October and
November 1996.
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. In the UK, the Company originates loans
principally 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 42 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 acquired J&J and Greyfriars. 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
Greyfriars 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 lenders, if at all.
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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 45 of its brokers, including 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 has begun direct marketing of a new loan product designed
for occupants of government-owned residential properties in the UK.
Expansion of Wholesale Operations
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.
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 45 of its brokers,
including 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 December 1995 the Company expanded loan production volume to include Title I
home improvement loans, in May 1996 the Company expanded loan production volume
to include conventional home improvement loans and in
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February 1997 the Company expanded loan production volume to include
conventional loans. The Company also offers adjustable rate mortgage loans,
jumbo loans and "Sav*-A-Loans(R)" (loans to homeowners with 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 make home improvements). In addition, the Greyfriars
Acquisition has provided the Company with expanded loan product offerings to UK
borrowers with higher quality credit than the Company's typical UK borrowers.
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(R)," jumbo
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 42
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, on occasion, 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 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
--------------------------------- --------------------------
FORMATION
YEAR ENDED DECEMBER 31, THROUGH YEAR ENDED
--------------------------------- DECEMBER 31, DECEMBER 31,
1994 1995 1996 1995 1996
-------- -------- --------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Independent Mortgage Brokers:
Principal balance............... $149,724 $291,907 $ 548,242 $ 41,395 $220,034
Number of loans................. 1,947 4,161 9,173 960 8,042
Average principal balance per
loan......................... $ 76.9 $ 70.2 $ 59.8 $ 43.1 $ 27.4
Wholesale Loan Acquisition
Program:
Principal balance............... $ 4,686 $125,957 $ 612,049 -- 1,045
Number of loans................. 60 1,847 9,431 -- 47
Average principal balance per
loan......................... $ 78.1 $ 68.2 $ 64.9 -- $ 22.2
Bulk Purchases(1):
Principal balance............... -- -- $ 129,064 -- $242,467
Number of loans................. -- -- 2,259 -- 18,527
Average principal balance per
loan......................... -- -- $ 57.1 -- $ 13.1
Total Loan Originations and
Purchases:
Principal balance............... $154,410 $417,864 $1,289,355 $ 41,395 $463,546
Number of loans................. 2,007 6,008 20,863 960 26,616
Average principal balance per
loan......................... $ 76.9 $ 69.6 $ 61.8 $ 43.1 $ 17.4
</TABLE>
- ---------------
(1) For the year ended December 31, 1996, the UK data represent the loan
portfolios acquired as a result of the J&J Acquisition and the Greyfriars
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 1996, $291.9 million or 69.9% and $548.2
million or 42.5%, 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 1996, the single highest producing independent mortgage broker
accounted for 6.4% and 1.9%, respectively, of the Company's US loan originations
and purchases, and the ten highest producing independent mortgage brokers
accounted for 21.0% and 7.8%, respectively, of the 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.
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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 $612.0 million
(47.5%) of the Company's total US loan origination and purchase volume for 1994,
1995 and 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 7.4% of the
Company's US loan originations and purchases during 1995 or 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 Purchases. In June 1996, the Company first participated in the
secondary market for loans offered on a bulk basis by other originators. The
Company completed bulk purchases of $129.1 million in loans as of December 31,
1996. Bulk purchases accounted for 10.0% of the Company's total US loan
origination and purchase volume in 1996.
In the case of bulk purchases, 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. From time to time, the Company may make bulk
purchases if it believes it has the underwriting, management and servicing
capabilities and capital resources necessary to compete effectively in this
market.
Geographic Distribution of US Loans. Although the Company is licensed or
registered in 42 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 contributed 37.0% of the Company's
total US loan origination and purchase volume for the year ended December 31,
1995 and 17.7% for the year ended December 31, 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 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 1996, the Company received its
license or became registered to conduct mortgage banking activities in 25
additional states.
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GEOGRAPHIC DISTRIBUTION OF US LOAN ORIGINATIONS
AND PURCHASES
<TABLE>
<CAPTION>
COMPANY
-----------------------------
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
States
New York............................... 67.2% 37.0% 17.7%
New Jersey............................. 2.1 6.4 10.9
Illinois............................... 12.2 17.6 10.0
Florida................................ -- 0.6 8.4
Maryland............................... 5.3 7.6 7.0
Ohio................................... -- 2.3 5.8
Indiana................................ 5.0 4.1 5.8
Michigan............................... -- 1.1 5.5
Georgia................................ -- 4.2 4.9
Pennsylvania........................... 0.4 5.8 4.6
Massachusetts.......................... 0.7 1.9 3.8
South Carolina......................... -- 1.7 2.5
Virginia............................... 1.7 2.5 2.0
North Carolina......................... -- 1.6 1.9
Connecticut............................ 4.5 1.4 1.7
California............................. -- -- 1.3
Tennessee.............................. -- -- 0.9
All other states....................... 0.9 4.2 5.3
----- ----- -----
Total.......................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
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 31 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 30.7% in
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 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. As of December 31, 1996, the Company had entered into such
right of first refusal contracts with 45 UK brokers.
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These brokers accounted for 70.0% and 50.0% of the Company's total UK loan
origination volume in 1995 and 1996, respectively.
The Company also expanded its originations sources in the UK through the
J&J Acquisition and the Greyfriars 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 1996 was 23.2% and 23.0%, respectively ,
as compared to that of 16.4% and 16.4%, respectively, on CSC-UK's loan portfolio
as of the same dates. J&J's loans are subject to prepayment fees. 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 fees.
The Company believes that the J&J Acquisition strengthens 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.
Greyfriars provides secured mortgage loans to individuals in the UK that
generally have higher quality credit profiles than the Company's typical UK
borrowers. Greyfriars 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 Greyfriars' 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
Greyfriars tend to have a lower interest rate than the blended interest rate on
loans made by CSC-UK. The weighted average interest rate on Greyfriars' loan
portfolio as of December 31, 1995 and 1996 was 14.8% and 13.8%, respectively, as
compared to that of 16.4% and 16.4%, respectively, on CSC-UK's loan portfolio as
of the same dates. Greyfriars' loans are subject to prepayment fees and to the
calculation of prepayments under the Rule of 78s method. Because the majority of
Greyfriars' loans are regulated, prepayments under the Rule of 78s method are
generally calculated with a one-month deferment which generally results in lower
prepayment fees.
The Greyfriars Acquisition represents an expansion in borrower and product
types complementary to the Company's other UK business. Greyfriars 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.
Greyfriars also originates several types of loans that the Company did not
previously offer. Greyfriars' business uses more traditional underwriting
guidelines and practices than those of CSC-UK, thereby expanding 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
Greyfriars 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, Greyfriars will be able
to increase its loan origination volume significantly.
The following table highlights certain selected information relating to the
origination and purchase of Core Product loans by the Company during the periods
shown.
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<PAGE> 65
CORE PRODUCT LOAN ORIGINATIONS AND PURCHASES
<TABLE>
<CAPTION>
US UK
--------------------------- -------------------------
FORMATION
YEAR ENDED DECEMBER 31, THROUGH YEAR ENDED
--------------------------- DECEMBER 31, DECEMBER 31,
1994 1995 1996(1) 1995 1996(2)
---- ---- ------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Type of property securing loan:
One- to four-family................... 98.3% 97.2% 95.5% 96.3% 98.5%
Multi-family/Mixed-use................ 1.7 2.8 4.5 3.7 1.5
Type of mortgage securing loan:
First mortgage........................ 87.0 89.0 94.0 92.0 67.8
Second mortgage....................... 13.0 11.0 6.0 8.0 32.2
Weighted average interest rate.......... 11.1 11.9 11.8 16.4 16.4
Weighted average initial loan-to-value
ratio(3).............................. 59.7 66.4 72.5 49.0 56.0
</TABLE>
- ---------------
(1) Including Specialty Products and Other Products, one- to four-family would
be 96.1%, multi-
family/mixed use would be 3.9%, first mortgage would be 89.6%, second
mortgage would be 10.4%, weighted average interest rate would be 12.0% and
weighted average initial loan-to-value ratio would be 75.5%.
(2) Includes $51.9 million of loans acquired as a result of the J&J Acquisition,
75.0% of which were secured by second mortgages, with a weighted average
interest rate of 23.6% and a weighted average initial loan-to-value ratio of
45.6%, and includes $190.5 million of loans acquired as a result of the
Greyfriars Acquisition, 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 One- to Four-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 one- to four-family
loans, whether originated through mortgage brokers or purchased on a flow basis
under the Wholesale Loan Acquisition Program.
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, with the exception of jumbo loans, which range from a minimum of
$500,000 to a maximum of $3.5 million. Under the Company's current policy, the
majority of the mortgage loans the Company acquires or originates (other than
Sav*-A-Loans(R)) 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%.
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
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<PAGE> 66
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" (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), the mortgage loans originated by the Company
generally have amortization schedules ranging from 15 years to 30 years and
require monthly payments which are due as of a scheduled day of each month which
is fixed at the time of origination. Balloon Loans 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.
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
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<PAGE> 67
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.
The following table sets forth certain information with respect to loan
applicants for one- to four-family loans based on the Company's internal
borrower classification, along with weighted average coupons, during the years
ended December 31, 1995 and 1996.
ONE- TO FOUR-FAMILY US LOAN ORIGINATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1995 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........................ $ 181.2 44.6% 11.2% $ 546.2 49.6% 11.2%
"B" Risk........................ 152.0 37.4 12.0 364.4 33.1 11.6
"C" Risk........................ 46.0 11.3 13.2 107.4 9.7 12.8
"D" Risk........................ 27.1 6.7 14.2 83.8 7.6 14.8
------ ----- ---- ------ ----- ----
Total...................... $ 406.3 100.0% 11.9% $ 1,101.8 100.0% 11.8%
====== ===== ==== ====== ===== ====
</TABLE>
The criteria currently used by the Company in classifying loan applicants
for one- to four-family loans can be generalized as follows:
"A" Risk. Under the "A" risk category, a loan applicant must have
generally repaid installment or revolving debt according to its terms.
- Existing mortgage loans: required to be current at the time the
application is submitted, with a maximum of one (or two on a case-by-case
basis) 30-day late payment(s) within the last 12 months being acceptable.
- Non-mortgage credit: minor derogatory items are allowed, but a letter of
explanation is required; any recent open collection accounts or open
charge-offs, judgments or liens would generally disqualify a loan
applicant from this category.
- Bankruptcy filings: must have been discharged more than four years prior
to closing with credit re-established.
- Maximum loan-to-value ratio: up to 80% (or 90% on an exception basis) is
permitted for a loan secured by an owner-occupied one-to-four family
residence; 75% (or up to 80% on an exception basis) for a loan secured by
an owner-occupied condominium; and 70% (or up to 80% on an exception
basis) for a loan secured by a non-owner occupied one- to four-family
residence.
- Debt service-to-income ratio: generally 45% or less.
"B" Risk. Under the "B" risk category, a loan applicant must have
generally repaid installment or revolving debt according to its terms.
- Existing mortgage loans: required to be current at the time the
application is submitted, with a maximum of three (or four on a
case-by-case basis) 30-day late payments within the last 12 months being
acceptable.
- Non-mortgage credit: some prior defaults may have occurred, but major
credit paid or installment debt paid as agreed may offset some
delinquency; any open charge-offs, judgments or liens would generally
disqualify a loan applicant from this category.
- Bankruptcy filings: must have been discharged more than two years prior
to closing with credit re-established.
- Maximum loan-to-value ratio: up to 80% (or 90% on an exception basis) is
permitted for a loan secured by an owner-occupied one- to four-family
residence; and 70% (or 80% on an exception basis) for a loan secured by a
non-owner-occupied one- to four-family residence.
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<PAGE> 68
- Debt service-to-income ratio: generally 50% or less (45% or less for 90%
loan-to-value ratios).
"C" Risk. Under the "C" risk category, a loan applicant may have
experienced significant credit problems in the past.
- Existing mortgage loans: must be brought current from loan proceeds;
applicant is allowed a maximum of five 30-day late payments and two
60-day late payment within the last 12 months.
- Non-mortgage credit: significant prior delinquencies may have occurred,
but major credit paid or installment debt as agreed may offset some
delinquency; all delinquent credit must be current or paid off.
- Bankruptcy filings: must have been discharged, and a minimum one year of
re-established credit is required.
- Maximum loan-to-value ratio: up to 75% (or 80% on an exception basis for
first time liens only) is permitted for a loan secured by an
owner-occupied one- to four-family residence; 65% for a loan secured by
an owner-occupied condominium; and 70% for a non-owner-occupied one- to
four-family residence.
- Debt service-to-income ratio: generally 50% or less.
"D" Risk. Under the "D" risk category a loan applicant may have
experienced significant credit problems in the past.
- Existing mortgage loans: must be brought current from loan proceeds and
no more than 150 days delinquent at closing; an explanation for such
delinquency is required.
- Non-mortgage credit: significant prior defaults may have occurred, but
the applicant must be able to demonstrate regularity in payment of some
credit obligations; all charge-offs, judgments, liens or collection
accounts must be paid off.
- Bankruptcy filings: open Chapter 13 bankruptcies will be considered with
evidence that the plan is being paid according to terms; outstanding
balance must be paid in full and discharged from loan proceeds.
- Maximum loan-to-value ratio: up to 70% is permitted for a loan secured by
an owner-occupied one- to four-family residence; 60% for a loan secured
by an owner-occupied condominium; and 65% for a non-owner-occupied one
-to
-four-family residence.
- Debt service-to-income ratio: generally 50% or less.
Exceptions. As described above, the Company uses the foregoing categories
and characteristics only as guidelines. On a case-by-case basis, the Company may
determine that the prospective mortgagor warrants a risk category upgrade, a
debt service-to-income ratio exception, a pricing exception, a loan-to-value
exception or an exception from certain requirements of a particular risk
category (collectively called an "Upgrade" or an "Exception"). An Upgrade or
Exception may generally be allowed if the application reflects certain
compensating factors, among others: low loan-to-value ratio; pride of ownership;
stable employment or length of occupancy at the applicant's current residence.
An Upgrade or Exception may also be allowed if the applicant places a down
payment in escrow equal to at least 20% of the purchase price of the mortgaged
property, or if the new loan reduces the applicant's monthly aggregate debt
load. Accordingly, the Company may classify in a more favorable risk category
certain mortgage loans that, in the absence of such compensating factors, would
satisfy only the criteria of a less favorable risk category.
Underwriting Guidelines for 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 mixed-use
properties. A potential mortgagor of such a property must have established
credit and any excessive judgment liens or bankruptcies generally would
disqualify the application. If a potential mortgagor is attempting to obtain a
mortgage on a multi-family or mixed-use property with two to six units, then
such multi-family or mixed-use property should have net income at least equal to
debt service. If a potential mortgagor is attempting to obtain a mortgage on a
multi-family or mixed-use property with seven units or more, then such
multi-family or mixed-use property should have net income of at least 120% of
debt
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<PAGE> 69
service. The maximum loan-to-value ratio the Company allows for a mixed-use
property is usually no greater than 65%. The Company requires a Phase I
Environmental Report for mortgage loans secured by properties with seven or more
units and may require a Phase I Report on other property depending on the use or
prior use of the subject property or the contents of the related appraisal
report.
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. 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(R). The Company's
"Sav*-A-Loan(R)" 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 or debt
consolidation. Under the "Sav*-A-Loan(R)" 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(R)"
purchased or originated by the Company generally ranges from a minimum of
$10,000 to a maximum of $75,000, with interest rates generally ranging from
13.0% to 16.0%. Under current policy, 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, with adjustable interest
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<PAGE> 70
rates based on LIBOR. 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.
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. 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 December 31, 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), 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. The Company has recently
introduced a new product targeted to higher credit profile borrowers that
permits loan-to-value ratios of up to 85%.
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 Greyfriars,
the collateral property
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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%,
Greyfriars 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 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 1996, the Company sold $138.0 million, $359.0
million and $1.3 billion of loans, representing 89.4%, 85.9% and 99.1% of total
US originations and purchases during these periods, respectively. In addition,
the Company sold $41.4 million and $451.9 million of UK loans, representing 100%
and 97.5%, respectively, of its total UK loan originations and purchases,
including the loan portfolios acquired as a result of the J&J Acquisition and
the Greyfriars Acquisition, during 1995 and 1996.
Securitizations. During 1995 and 1996, the Company sold $235.0 million and
$993.6 million, respectively, of its US loan origination and purchase volume in
securitizations. Pursuant to the US Greenwich Facility, the Company sold loans
to Greenwich which were subsequently included in securitizations. During 1995
and 1996, sales of loans to Greenwich accounted for 23.5% and 70.5%,
respectively, of the Company's total revenues. In US 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 Company
retains no interest in the loans sold into such REMIC trust other than its
interest as a holder of the interest-only and residual certificates issued by
such REMIC trust. 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
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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 and as such bears
the greatest degree of risk regarding the performance of such mortgage loans.
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. 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.
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 losses. 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.
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 delinquency rates on the pools of
loans sold in two of the Company's earlier securitizations have exceeded the
permitted limits set forth in the related pooling and servicing agreements. As a
result of the exceeded limits, the Company has been required to maintain in the
related reserve accounts all funds that would have otherwise been paid to the
Company in respect of the interest-only and residual certificates.
Loans originated by the Company in the UK are immediately sold to
Greenwich. During 1995 and 1996, such sales to Greenwich represented 100.0% of
the Company's UK loan origination and purchase volume. 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 Greyfriars held all of their loans for
investment. Following the respective acquisitions, the Company sold, with
servicing retained, $47.5 million of J&J's loan portfolio and $153.7 million of
Greyfriars' 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 loan sales through UK securitizations, the Company sells loans that it
has originated or purchased to a UK issuer vehicle. Immediately following such
sale, the vehicle either issues notes to a receivables trust that holds the
assets or retains the benefit of the mortgage loans. The Company receives a cash
purchase price
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upon the sale of its loans and acquires an uncertificated residual interest in
the excess cash flows generated by the securitization. All payments made on the
mortgage loans are collected and distributed first to the vehicle and second to
the Company which is entitled to the residual amounts. In securitizations
without a receivables trust, profits are derived pursuant to a contractual right
of the Company to receive deferred consideration (i.e., additional consideration
for the sale of the loans, deferred until sufficient funds are available in any
month). The amount of that deferred consideration approximates the amounts the
Company would have been entitled to as seller under the receivables trust
structure. In neither UK securitization structure are the interests in the
securitization "certificated" as such interests are in the Company's US
securitizations.
The Company recognizes as current revenue the fair value of the residual
interests acquired upon securitization. Realization of the value of these
residual interests 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. The Company also provides credit
enhancement on UK securitizations in the form of overcollateralization. These
overcollateralization accounts take the form of initial deposits provided by the
Company and additional reserve funds to build overcollateralization levels
through the retention of excess servicing distributions.
Following the sale of UK loans into securitizations, the Company retains no
control over the loans sold and has no control over the borrowers' performance
under such loans and no control over the ability to realize prepayments
calculated using the Rule of 78s or interest rates in excess of the
concessionary rate. Accordingly, even though under the terms of the Company's UK
securitizations, the Company is entitled to such prepayments and interest in
excess of the concessionary rate, there can be no assurance that such
prepayments or excess interest can be achieved. In addition, in the event of a
forced sale, any proceeds would be distributed first to pay related enforcement
expenses, then to pay any aggregate outstanding concessionary interest and then
to pay the holders of the senior interests, before any proceeds were available
to pay the holder of the residual interest.
In both US and UK securitizations, 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% ($33.2 million) and 98.9% ($154.5 million) of the Company's
total (US and UK) gain on sale of loans for 1995 and 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 5.8%, respectively, of all US loan sales
in 1995 and 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. 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 0.9%,
respectively, of the Company's total revenues in 1994, 1995 and 1996.
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 1996, the Company
repurchased 73 loans for $4.7 million and gave premium rebates totaling $92,908.
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For 1994, 1995 and 1996, premiums from whole loan sales accounted for 100%
($5.7 million), 19.0% ($5.0 million) and 2.2% ($1.7 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 servicing rights to 74.2% of the $359.0
million in US loans it sold during 1995 and 97.8% of the $1.3 billion in US
loans it sold during 1996.
As of December 31, 1996, the Company was servicing 24,820 US loans
representing an aggregate of $1.5 billion, including $34.1 million of loans as
master servicer for other servicers, $15.0 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 1.9% of total revenues for 1995 and 1996, respectively.
In August 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 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. Company collectors have computer access to telephone numbers, payment
histories, loan information and all past collection notes. In the first quarter
of 1997, the Company implemented a "predictive dialer" program, whereby
delinquent accounts are automatically telephoned and the call transferred
immediately to the next available collector whose computer will simultaneously
provide the relevant information on the account. Following a start-up period,
the Company believes that this program will improve the efficiency of the
Company's collectors.
In November 1996, the Company began subcontracting the servicing of its
loans more than ten but less than 30 days delinquent which allows the Company's
collectors to focus on its more seriously delinquent accounts. Account
information is transmitted by the Company to the subcontractor and the
subcontractor places calls to delinquent accounts on a daily basis.
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
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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 will be necessary.
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 1996
---------------------- ---------------------- ------------------------
DOLLARS % OF DOLLARS % OF % OF
IN SERVICED IN SERVICED DOLLARS 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% $1,470,344 100.0%
------- ----- -------- ----- ---------- -----
30-59 days delinquent........ -- -- 5,479 1.8 55,182 3.7
60-89 days delinquent........ 142 0.6 1,580 0.5 20,358 1.4
90 days or more delinquent... 679 2.8 4,968 1.6 55,684 3.8
------- ----- -------- ----- ---------- -----
Total US delinquencies......... $ 821 3.4% $ 12,027 3.9% $ 131,224 8.9%
======= ===== ======== ===== ========== =====
US REO property................ $ 130 0.5% $ 141 -- $ 1,010 --
======= ===== ======== ===== ========== =====
</TABLE>
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 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 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 within a prescribed period
of time to prevent the scheduled foreclosure sale. 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
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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 some states, waivers of homestead rights may not be
enforceable in other states. In addition, some of the Company's pooling and
servicing agreements contain restrictions on the Company's ability to foreclose
on properties.
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 Greyfriars 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, Greyfriars 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
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is then made, Greyfriars sends a letter instructing the borrower to contact
Greyfriars' collections department within seven days. If no contact is made, the
account is passed to the pre-litigation department.
Greyfriars' 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, Greyfriars
will commence proceedings for a possession order in an attempt to encourage
payment. If payment is still not made, Greyfriars 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 Greyfriars should receive a portion of the sale
proceeds. Greyfriars 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 DECEMBER 31,
---------------------------------------------------
1995 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% $ 511,140 100.0%
------- ----- -------- -----
30-59 days delinquent............................ 1,087 2.7 24,142 4.7
60-89 days delinquent............................ 423 1.1 10,667 2.1
90 days or more delinquent....................... 1,926 4.8 43,941 8.7
------- ----- -------- -----
Total UK delinquencies................... $ 3,436 8.6% $ 78,750 15.4%
======= ===== ======== =====
</TABLE>
- ---------------
(1) Includes the J&J serviced portfolio of $41.9 million with total
delinquencies of $18.2 million or 43.3%, of which $3.8 million or 9.0% was
30-59 days delinquent, $2.6 million or 6.3% was 60-89 days delinquent and
$11.8 million or 28.1% was 90 days or more delinquent. Includes the
Greyfriars serviced portfolio of $233.5 million with total delinquencies of
$21.9 million or 9.4%, of which $7.8 million or 3.3% was 30-59 days
delinquent, $7.8 million or 1.3% was 60-89 days delinquent and $11.0 million
or 4.7% was 90 days or more delinquent. Excluding the portfolios acquired as
a result of the J&J Acquisition and the Greyfriars Acquisition, the UK
delinquency ratio would have been 16.5% at December 31, 1996.
The Company believes that its UK underwriting policies 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
December 31, 1996 on the CSC-UK loan servicing portfolio. During 1996, the
average balance of loans serviced for the period totaled $330.0 million. With
the acquisitions of J&J and Greyfriars, CSC-UK has expanded its loan servicing
business in the UK. As a result of the J&J Acquisition and the Greyfriars
Acquisition, the Company acquired additional loan serviced portfolios of an
aggregate of $242.4 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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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 to apply any monies upon a sale of the mortgaged property to repay
the debt owed to the senior lienholder prior to applying such monies, to the
extent available, to discharge the debt owed to such junior lienholders.
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 December 31, 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 75 business development
representatives and six 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 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's current direct marketing to potential borrowers is
limited to marketing of a new loan product designed for occupants of
government-owned residential properties in the UK. Independent mortgage brokers
advertise their services to borrowers through several means, including
advertisements in national UK newspapers and, more recently, on television. 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.
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. With the increase in competition during
1996, the Company experienced an increase in the weighted average loan-to-value
ratio on its Core Products and in the premiums it paid under its Wholesale Loan
Acquisition Program to its correspondents, and experienced a slower rate of
growth in originations from its independent mortgage brokers. The Company is
unable at this time to determine whether such increases and slowing will
continue in 1997.
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
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competition is from private investors and, more recently, new market entrants
who are affiliated with some of the Company's US competitors who are currently
funding the origination volume of independent mortgage brokers. Due to the
relative lack of competition for the type of loans the Company originates in the
UK, the Company has attained a substantially higher weighted average gain on
loans in the UK than it has in the US. 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.
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 limited partnership interest, which was 9.1% at
December 31, 1995, was converted into a 5.8% 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 was eliminated. For the
years ended December 31, 1995 and 1996, IMC contributed approximately $480,000
and $754,000, respectively, to the Company's pre-tax income. As a result of
IMC's conversion into corporate form, 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 lending 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, except in limited
circumstances. The government has announced
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its intention to bring before Parliament regulations that would increase this
amount. The Company cannot predict the likelihood of enactment of these
regulations nor the extent of such increase. 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 enforcement to be
given to the borrower, generally limit a lender to a one-month deferment with
any calculations of prepayment interest under the Rule of 78s method, require
rebates to the borrower on early settlement and create a cause of action for an
"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. Approximately 36.9% (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, 1996. Of the $51.9 million of loans
acquired as a result of the J&J Acquisition and the $190.5 million of loans
acquired as a result of the Greyfriars 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.
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 UK 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 (see
discussion regarding the OFT initiative below). The Company cannot predict the
likelihood of the enactment of regulations increasing the regulated amount under
the CCA or any other change to the CCA or any other legislation. The announced
OFT regulatory initiative 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.
There can be no assurance that regulatory developments in the UK, including
those that might be brought about by a change in the political party whose
members constitute a majority of Parliament as a result of May 1997 elections,
will not result in significant changes relating to certain provisions of many
CSC-UK loans, most notably the calculation of prepayments using the Rule of 78s
and the use of the standard/concessionary rate structure. The Company believes
that these provisions are enforceable under English law and do not violate
common law prohibitions on penalty interest. The enforceability of these
provisions, however, has not been tested in English courts and accordingly, no
assurance can be given that such a court will not reach a holding that
negatively affects the terms of such loans, which holding could have a material
adverse effect on the Company's results of operations and financial condition.
In addition, CSC-UK received a letter in March 1997 from the OFT, the
Director General of which has responsibility, under the CCA, for the granting of
consumer credit licenses to mortgage lenders and for the subsequent monitoring
of their activities to ensure continued fitness to hold such licenses. The
Company believes the letter was also sent to other lenders, as well as
intermediaries and other entities involved directly or indirectly in the
non-status lending market. The letter states that, when determining the fitness
of licensees, the OFT will consider whether the licensee or its associates have
engaged in business practices which appear to be inappropriate, regardless of
their legality. The letter specifically sets forth certain practices deemed by
the OFT to fall within such categories.
The majority of the stated business practices are either (i) not applicable
to CSC-UK's operations or (ii) practices in which CSC-UK engages and believes
itself to be in compliance or easily able to modify its operations in order to
comply with the OFT letter. The OFT letter, however, questions the
appropriateness of standard/concessionary rate structures, as well as the
calculation of prepayments using the Rule of 78s method. The Company is
reviewing and evaluating its practices with respect to each issue raised in the
letter, but has not discussed with the OFT the concerns raised in the letter.
The Company does not believe regulatory initiatives set forth in the letter will
have a material adverse effect on any of its existing mortgage loans or to the
continuance of its licenses, although no assurances to that effect can be given
at this time.
The Company believes that it may be required to modify aspects of its
standard/concessionary rate structure in response to the regulatory initiatives
set forth in the OFT letter. No assurances can be given as to
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the effect of such modifications or that the OFT will not require the
elimination of the standard/concessionary rate structure, either of which could
have a material adverse effect in future periods on the Company's results of
operations and financial condition. The Company anticipates that it will
continue to broaden its UK product offerings with products that do not utilize
the Rule of 78s to calculate prepayments and, in light of the initiatives set
forth in the OFT letter, that the pace of such product broadening will
accelerate. In future periods, the Company believes that long-term loans
utilizing the Rule of 78s prepayments will represent an increasingly smaller
percentage of its UK loan origination and purchase volume and that the OFT's
regulatory initiatives are likely to result in the Company's elimination or
modification of long-term loan products utilizing the Rule of 78s. Such
elimination or modification could have a material adverse effect in future
periods on the Company's results of operations and financial condition,
especially if the Company is unsuccessful in its product broadening efforts. The
Company is unable to determine at this time how soon such elimination or
modification will occur.
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 connection with
disposal of waste, reimburse relevant enforcement authorities for clean-up costs
related to land and controlled waters and pay fines for non-compliance with
relevant laws and regulations. The potential liability of such persons may be
substantial and the presence of any polluting substances or the failure to
properly remediate such land may adversely affect the owner's or occupier's
ability to sell or rent the property on such land or to borrow using such
property as security. In addition to liability under statute, such persons may
be liable to third parties at common law for property damage, economic loss and
personal injury.
A lender may be deemed to be an "owner" upon enforcement of its interest in
a mortgaged property following default by a borrower depending on the method of
enforcement employed. A lender may also, depending on the degree of control it
has, be liable as a person who has caused or knowingly permitted pollution to
occur. A new statutory framework providing for the identification and allocation
of responsibility for costs associated with the investigation and clean-up of
contaminated land is set out in the Environmental Protection Act 1990, as
amended, and is expected to be implemented during 1997. Under this framework,
local authorities will have a duty to inspect land within their jurisdiction for
the purpose of identifying contamination.
There currently 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.
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EMPLOYEES
As of December 31, 1996, the Company had a total of 638 US employees, eight
of whom were part-time employees and 630 of whom were full-time employees, and
267 UK employees. Of the Company's employees, 4.2% were in management, 67.6%
were in sales and marketing, 14.1% were in administrative support and 14.1% were
in servicing. The Company had 409 employees working at its New York headquarters
as of December 31, 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.
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 $564,000. The leases expire
on August 31, 2000. The Company has leased an additional 17,000 square feet of
office space at 8 Skyline Drive, Hawthorne, New York and an additional 36,000
square feet of office space at 555 White Plains Road, Tarrytown, New York. The
Hawthorne lease provides for an initial aggregate annual rent of approximately
$246,500 and for scheduled increases in square footage up to an aggregate of
approximately 35,000 square feet and annual rent up to an aggregate annual rent
of approximately $510,000 and expires in 2001. The Tarrytown lease provides for
an initial aggregate annual rent of approximately $750,000 and for scheduled
increases in annual rent up to an aggregate rent of approximately $810,000 and
expires in 2001. The Company's UK offices are located at Croxley Business Park,
Watford, Hertfordshire, where, commencing September 1996, the Company leases
approximately 57,000 square feet of office space at an aggregate annual rent of
approximately $1.4 million, an increase from the previous lease of 10,500 square
feet at an aggregate annual rent of approximately $236,000 to accommodate the
Company's expanding production and future growth needs. The lease provides for
increases at the end of each five year period to the market rate at such time
and expires in 2021, subject to the ability of the Company to terminate the
lease on the tenth anniversary thereof. The Company believes that its offices
are suitable and adequate for present purposes and for anticipated increases in
its business activities in the UK but anticipates requiring additional office
space in the US to meet its growth needs for the next 12 months.
LEGAL PROCEEDINGS
The Company is a party to various 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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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............. 67 Director; Director of CSC
Jonah L. Goldstein............ 61 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................ 44 Vice President and Secretary; Senior Vice
President/Operations, Secretary and Director of CSC
Steven P. Weiss............... 40 Senior Vice President/Sales and Director of CSC
Eric S. Goldstein............. 35 Senior Vice President/Loan Servicing of CSC
Tim S. Ledwick................ 39 Vice President and Chief Financial Officer; Senior
Vice President, Chief Financial Officer of CSC
Robert J. Blackwell........... 58 Senior Vice President/Specialty Products Division of
CSC
Steven M. Miller.............. 41 Senior Vice President/Managing Director of CSC
CSC-UK:
David A. Steene............... 37 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.
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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 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 subsidiary 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 and Vice
President since June 1996. 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.
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Tim S. Ledwick has been Chief Financial Officer of the Company since March
1995 and Vice President since June 1996. Mr. Ledwick also has served as Vice
President, Chief Financial Officer of CSC since September 1994. Mr. Ledwick was
promoted to Senior Vice President of CSC in March 1997. From 1992 until 1994,
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/Specialty Products Division of
CSC since January 1996. In August 1996, Mr. Blackwell was promoted to Senior
Vice President/Specialty Products 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.
Steven M. Miller has been Senior Vice President/Managing Director of CSC
since March 1997. Mr. Miller's responsibilities include direction of the
Company's securitizations and capital markets and strategic planning activities.
Previously, Mr. Miller was Senior Vice President and Co-Head of the Asset Backed
Group of Greenwich Capital Markets, Inc. Mr. Miller became a Senior Vice
President at Greenwich Capital Markets, Inc. in 1992 and also was named Co-Head
of the Asset Backed Group in May 1995. Prior to that time, Mr. Miller was a Vice
President at Greenwich Markets, Inc.
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. Gould and Rademacher are the members of the
compensation committee, Messrs. Gould, Rademacher and Patent are the members of
the audit committee and Messrs. Gould and Rademacher are the members of 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.
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<PAGE> 87
In addition, non-employee directors of the Company receive an annual
retainer of $10,000 and, if chairman of a committee of the Board of Directors,
an additional $3,000 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.
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
<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................... 1996 $268,068 $1,326,997 -- -- $ 44,997(1)
President and Chief Executive 1995 259,155 275,788 -- -- 3,915(2)
Officer; President of CSC 1994 238,030 30,000 -- -- 1,100(2)
Robert C. Patent................. 1996 $226,174 884,665 -- -- $ 67,990(3)
Executive Vice President; 1995 219,550 183,858 -- -- 3,915(2)
Executive Vice President and 1994 208,000 10,000 -- -- 1,100(2)
Treasurer of CSC
David A. Steene.................. 1996 $218,359 726,038 -- --
Managing Director of 1995 104,867 -- -- -- --
CSC-UK 1994 -- -- -- --
Martin H.S. Brand................ 1996 $218,359 726,038 -- -- --
Lending Director of 1995 104,867 -- -- -- --
CSC-UK 1994 -- -- -- -- --
Gerald Epstein................... 1996 $218,359 726,038 -- -- --
Financial Director of 1995 104,867 -- -- -- --
CSC-UK 1994 -- -- -- -- --
</TABLE>
- ---------------
(1) Represents premium payments made by the Company pursuant to a split-dollar
life insurance policy that provided a benefit of $13,463.
(2) Reflects amounts paid as qualified matching contributions under the
Company's employee benefit plan. See "-- 401(k) Plan."
(3) Represents premium payments made by the Company pursuant to a split-dollar
life insurance policy that provided a benefit of $2,136.
Option Grants in 1996
None of the Named Executive Officers received grants of options from the
Company during 1996.
Aggregated Option Exercises in 1996 and 1996 Year-End Option Values
None of the Named Executive Officers held any options during the year ended
December 31, 1996.
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<PAGE> 88
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.
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 an 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 is for a term commencing on
November 1, 1992 and continuing through December 31, 1997. The agreement
provided for annual salary of $225,000 plus increases of 3% to 6% per year based
on the percentage increase in the Consumer Price Index. As of September 1, 1996,
the annual salary was increased to $275,000 for the remaining term of the
agreement, subject to such increases. In addition, the agreement provided for
payment to Mr. Stata of an annual bonus of $25,000 if the aggregate of loans
originated or purchased by the Company exceeds certain specified levels for each
year during the term of the agreement. Such bonus provision was amended as set
forth below. 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 are for a term commencing on July 1, 1995 and
continuing through December 31, 1998. Each agreement provided 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. As of September 1, 1996, the annual salary was increased to
$210,000 for the remaining term of each agreement. In addition, each agreement
provided for payment of an annual bonus of $30,000 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. Such bonus provision was amended as set forth
below. 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 1, 1996, 40,000 options as of
July 1, 1997 and 30,000 options as of July 1, 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 January 1997, the annual salary was increased to
$200,000. In addition, the agreement provided for payment of an annual bonus of
$15,000, and an additional bonus may be granted at the option of the Board of
Directors. Such bonus provision was amended as set forth below. 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
as of January 1, 1997 and 30,000 options as of January 1, 1998.
As of September 1, 1996, the Board of Directors approved a three year bonus
pool which replaced the existing bonus provisions in the employment agreements
of Messrs. Stata, Ledwick, Weiss, Eric Goldstein and Jonah Goldstein and Ms.
Carl. This pool provided that for 1996, because pre-tax profits of CSC exceeded
$16.9 million, each shared in a bonus pool of 5% of the pre-tax profits of CSC.
The participants in the pool
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<PAGE> 89
received a pro rata portion of the pool based on his or her annual salary up to
200% of salary with the payment of any excess being deferred and paid over three
years, one-third each year. Any deferred payment will earn interest at the
Citibank N.A. prime rate plus one percent. For 1997 and 1998, the CSC earnings
threshold for providing a pool will be increased based on the prior year's
pre-tax earnings plus the percentage increase, if any, in the Consumer Price
Index.
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 price of $10.00 per share in accordance with the Stock Option Plan. Of
the options granted, 100,000 options were exercisable as of January 15, 1997,
100,000 options as of January 15, 1998 and 100,000 options 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 L500,000 million in the aggregate for the term
of the agreement. As of September 1, 1996, the Board of Directors approved a
three year bonus pool which provided that for 1996, because pre-tax profits of
CSC-UK exceeded $8.2 million, each will share in a bonus pool of 3% of the
pre-tax profits of CSC-UK. The participants in the pool received a pro rata
portion of the pool based on his annual salary up to 200% of salary with the
payment of any excess being deferred and paid over three years, one-third each
year. Any deferred payment will earn interest at the Citibank N.A. prime rate
plus one percent. For 1997 and 1998, the CSC-UK earnings threshold for providing
a pool will be increased based on the prior year's pre-tax earnings plus the
percentage increase, if any, in the Consumer Price Index.
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 1996 plan year.
EMPLOYEE STOCK PLANS
Effective June 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
non-employee directors or the entire Board of Directors as a group 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 March 31,
1997, there were 1,759,200 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
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<PAGE> 90
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
salary, 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, 89,231 shares of Common Stock have been
issued pursuant to the Stock Purchase Plan.
CERTAIN TRANSACTIONS
GENERAL
In May 1994, the Company loaned Mr. Stata $100,000. The loan accrued
interest on the unpaid principal balance at a rate equal to 6%. This loan was
paid in full in January 1996.
The Company paid $175,000 in legal fees during 1996 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 1997.
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
1996, Ms. Fensterheim received $13,365 for such services and is anticipated to
be similarly compensated in 1997.
During 1996, the Company engaged Mr. Jay L. Botchman to render consulting
services on a monthly basis and paid him $12,500 per month for such services and
in connection with arranging the US Greenwich Facility paid him $400,000 for his
assistance in arranging such facility. The Company and Mr. Botchman agreed to
terminate the consulting arrangement as of December 31, 1996. In addition,
CSC-UK entered into an agreement with J.L.B. Equities, Inc., 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. For 1996, J.L.B. Equities, Inc. received $470,378 in payment of such
fees. This agreement terminates on December 31, 2015. 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 (4,140,000 in the aggregate) at a price of $1.25 per share which
represented a premium of approximately 33.0% over the bid price of $0.94 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 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 November 1996, Mr. Botchman entered into an
agreement to sell his interest in the option agreements to Franklin Mutual
Advisors, Inc., as agent for several related institutional investors, for an
aggregate purchase price of $82.3 million. Such options were exercised by
Franklin Mutual Advisors, Inc. in January 1997. The Company has granted to such
institutional investors registration rights relating to the resale of the
acquired shares of the Company's Common Stock. These registration rights require
the Company to (i) file a registration statement for the resale of the shares of
Common Stock subject to the options as soon as reasonably practicable and (ii)
use its reasonable efforts to cause the registration statement to be declared
effective as promptly as is reasonably practicable following the filing thereof,
but not prior to the earlier of the date the Commission declares effective the
first registration statement registering the Company's sale of newly issued
Common Stock and March 31, 1997. See "Shares Eligible for Future Sales."
In January 1996, Samboy Financial Corp., a Minnesota corporation
("Samboy"), began selling Title I and similar loans to the Company. During 1996,
Samboy sold $2.1 million of loans to the Company and, in the
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<PAGE> 91
first three months of 1997, sold $2.8 million of loans to the Company. Jonah L.
Goldstein owns 20% of the outstanding capital stock of Samboy.
Paul Goldstein, the son of Jonah L. Goldstein and brother of Eric S.
Goldstein, is employed as an Assistant Vice President of CSC. During 1996, he
received $277,851 and was granted 21,000 incentive stock options at exercise
prices ranging from $9.88 to $10.00 per share in accordance with the Stock
Option Plan for such services and is anticipated to be similarly compensated in
1997.
During 1996, Arthur P. Gould & Co., of which Mr. Gould is President,
received $60,000 for advisory services provided to the Company.
CSC-UK TRANSACTIONS
Pursuant to the UK Acquisition, 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 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 L200,000 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").
The Company believes that the terms of the respective affiliated
transactions described in this section are at least as favorable to the Company
as those that could be obtained from an unaffiliated source.
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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 March 31, 1997 (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)....................................................... 3,892,284 13.1%
Robert C. Patent(3)..................................................... 3,907,192 13.1
Asher Fensterheim(4)(5)................................................. 3,701,960 12.4
Jonah L. Goldstein(6)................................................... 461,352 1.5
Arthur Gould(5)......................................................... 20,000 *
Hollis W. Rademacher(5)................................................. 26,600 *
Robert M. Stata(7)...................................................... 802,400 2.7
Cheryl P. Carl(6)....................................................... 436,200 1.5
Steven P. Weiss(8)...................................................... 250,676 *
Eric S. Goldstein(6).................................................... 288,980 *
Tim S. Ledwick(9)....................................................... 83,406 *
Robert J. Blackwell(10)................................................. 100,000 *
Steven M. Miller........................................................ -- --
David A. Steene......................................................... 1,200,000 4.0
Martin H.S. Brand....................................................... 1,200,000 4.0
Gerald Epstein.......................................................... 1,202,200 4.0
All directors and executive officers as a group (16 persons)(11)........ 17,573,250 58.1%
Franklin Mutual Advisers, Inc.(12)...................................... 4,506,000 15.1%
</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) Includes 640 shares owned by Mr. Grosser's spouse, with respect to which
Mr. Grosser disclaims beneficial ownership. Mr. Grosser's business address
is 565 Taxter Road, Elmsford, New York 10523-5200.
(3) Includes 400 shares owned by Mr. Patent's spouse, with respect to which Mr.
Patent disclaims beneficial ownership. Mr. Patent's business address is 565
Taxter Road, Elmsford, New York 10523-5200.
(4) Includes 30,000 shares owned by Mr. Fensterheim's spouse, with respect to
which Mr. Fensterheim disclaims beneficial ownership. Mr. Fensterheim's
business address is 565 Taxter Road, Elmsford, New York 10523-5200.
(5) Includes options to purchase 20,000 shares granted pursuant to the
Directors Plan.
(6) Includes options to purchase 80,000 shares granted pursuant to the Stock
Option Plan.
(7) Includes 400 shares owned by Mr. Stata's spouse, with respect to all of
which Mr. Stata disclaims beneficial ownership.
(8) Includes options to purchase 40,000 shares granted pursuant to the Stock
Option Plan.
(9) Includes options to purchase 70,000 shares granted pursuant to the Stock
Option Plan.
(10) Includes options to purchase 100,000 shares granted pursuant to the Stock
Option Plan.
(11) See Notes (1)-(10).
(12) As agent for certain of its advisory clients. Franklin Resources, Inc.
disclaims beneficial ownership of all securities owned by its advisory
clients. The address of Franklin Mutual Advisers, Inc. is 51 John F.
Kennedy Parkway, Short Hills, New Jersey 07078.
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<PAGE> 93
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
29,744,322 were outstanding on March 31, 1997; and 5,000,000 shares of Preferred
Stock, par value $0.01 per share ("Preferred Stock"), of which 5,000 shares were
outstanding on April 9, 1997.
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 2,556,000 shares of Common Stock remain 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.
6% Convertible Preferred Stock, Series A
On April 9, 1997, the Company completed the private placement of 5,000
shares of 6% Convertible Preferred Stock, Series A, with a liquidation
preference (the "Liquidation Preference") of $10,000 per share, and related
Warrants, pursuant to which the Company received aggregate net proceeds (after
transaction fees and expenses) of approximately $49 million. The net proceeds
from the sale of the Series A Preferred Stock will be used for working capital
purposes or for the repayment of outstanding indebtedness under the Senior
Secured Facility.
Dividends on the Series A Preferred Stock are cumulative at the rate of 6%
of the Liquidation Preference per annum payable quarterly. Dividends are
payable, at the option of the Company, (i) in cash, (ii) in shares of Common
Stock valued at the closing price on the day immediately preceding the dividend
payment date or (iii) by increasing the Liquidation Preference in an amount
equal to and in lieu of the cash dividend payment.
The Series A Preferred Stock is redeemable at the option of the Company at
a redemption price equal to 105% of the Liquidation Preference at any time prior
to July 9, 1997 or thereafter at a redemption price equal to 120% of the
Liquidation Preference if the closing price of the Common Stock is less than
$17.50 per share (subject to adjustment) for ten consecutive trading days. In
addition, the Series A Preferred Stock is redeemable at the option of the
Company at a redemption price equal to 120% of the Liquidation Preference within
30 days of the occurrence of any of the following events: (i) the Common Stock
ceases to be listed on Nasdaq or a national securities exchange; (ii) the
Company is unable for any reason to issue Common Stock upon receipt of a notice
of conversion (such redemption only to the effected holders); (iii) the Company
fails to make certain cash payments when due as described below (such redemption
only to the effected holders); (iv) trading in the Common Stock is suspended by
Nasdaq or the principal market on which the Common
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Stock is traded for more than seven consecutive trading days; and (v) the
registration statement the Company is required to file with respect to the
resale of the Common Stock issuable upon conversion of the Series A Preferred or
exercise of the Warrants (the "Preferred Registration Statement") has not been
declared effective on or before October 6, 1997.
The Series A Preferred Stock is convertible into shares of Common Stock
subject to the following restrictions: each holder is entitled to convert up to
25% of its Series A Preferred Stock on the date of issuance; up to 50% (on a
cumulative basis) after 90 days; up to 75% (on a cumulative basis) after 180
days; and up to 100% after 270 days. The conversion price is equal to the lowest
daily sales price of the Common Stock during the four consecutive trading days
immediately preceding conversion (the "Conversion Period"), discounted by 2% for
conversions occurring on days 91 through 180 following original issuance, 3% for
conversions occurring on days 181 through 270 and 4% thereafter. Upon the
occurrence of any of the events that give rise to the Company's optional
redemption right described in clauses (i) through (v) of the previous paragraph,
the conversion restrictions will be lifted, the Conversion Period will be
increased to 15 consecutive trading days and the conversion discount will be
increased to 10%. In addition, during the continuance of such events or the
failure (beyond certain specified periods) of the Preferred Registration
Statement to remain effective and available for use, the dividend rate will be
increased to 15% and the Company will be obligated to make certain cash payments
to the holders of the Series A Preferred Stock, provided that if the Company is
prohibited from making such payments, such amounts will be added to the
Liquidation Preference. Any shares of Series A Preferred Stock outstanding on
the fifth anniversary of the original issuance date (subject to certain
extensions as provided in the Certificate of Designations) will be automatically
converted into Common Stock at the conversion price in effect on the date
thereof.
In the event of a Preferred Change of Control (as defined below) of the
Company, the conversion restrictions will be lifted and holders of the Series A
Preferred Stock may elect, within a specified period, to have the Company redeem
such stock at a redemption price equal to 110% of the Liquidation Preference.
For purposes of the Series A Preferred Stock, a Preferred Change of Control is
defined as (i) the sale, conveyance or disposition of all or substantially all
of the assets of the Company, (ii) the consolidation or merger of the Company,
in which the stockholders of the Company immediately preceding the merger or
consolidation fail to continue to own more than 50% of the voting power of the
capital stock of the surviving entity and (iii) the acquisition of more than 50%
of the voting power of the Company's capital stock by any entity or "group,"
subject to certain exceptions.
The Warrants are exercisable at any time within five years of issuance for
an aggregate of 500,000 shares of Common Stock at an exercise price per share of
$20.625, which is equal to 125% of the closing sale price of the Common Stock on
the date immediately prior to the date of original issuance of the Warrants.
The Company has provided registration rights in connection with the resale
of the Common Stock issued upon conversion of the Series A Preferred Stock or
the exercise of the Warrants and has agreed to file the Preferred Registration
Statement.
OPTIONS
As of March 31, 1997, the Company had granted options to purchase up to
2,044,000 shares of Common Stock, of which 1,897,200 options were outstanding,
at exercise prices ranging from $2.50 to $23.13 per share, 145,800 had been
exercised and 1,000 had expired, pursuant to the provisions of the Stock Option
Plan and Directors Plan. As of March 31, 1997, options to purchase 9,499 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 its future earnings to finance its operations and does
not anticipate paying cash dividends on its Common Stock in the foreseeable
future. Dividends on the Series A Preferred Stock are cumulative and payable
quarterly at a
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rate of 6% per annum. 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 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 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.
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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."
SHARES ELIGIBLE FOR FUTURE SALE
As of March 31, 1997, 29,744,322 shares of Common Stock were outstanding.
Of these shares, 7,367,085 shares of Common Stock were 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 were
subject to the resale limitations of Rule 144 promulgated under the Securities
Act ("Rule 144"). The remaining 22,377,237 shares of Common Stock outstanding
were 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. If all such shares were sold in the public market, holders of the Common
Stock would experience substantial dilution and the market price per share would
likely decrease significantly.
In general, under Rule 144, any person (or persons whose shares are
aggregated) who has beneficially owned shares for at least one year 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
(297,443 shares as of March 31, 1997) 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 two 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.
The Company granted registration rights to Franklin Mutual Advisors, Inc.,
as agent for several related institutional investors, with respect to the resale
of 4,140,000 shares of Common Stock currently outstanding. See "Certain
Transactions".
In addition, up to 1,907,015 shares of Common Stock may be issued upon
exercise of certain options that the Company has granted, of which options to
purchase 699,200 shares of Common Stock were exercisable as of March 31, 1997.
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 $79.4
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. To date, $130,000 of Debentures have been converted into shares
of Common Stock. See "Description of Debentures."
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On April 9, 1997, the Company also completed the private placement of 5,000
shares of 6% Convertible Preferred Stock, Series A, with a liquidation
preference of $10,000 per share and related Warrants. Dividends on the Series A
Preferred Stock are cumulative and payable quarterly. Dividends are payable, at
the option of the Company, (i) in cash, (ii) in shares of Common Stock, valued
at the closing price on the day immediately preceding the dividend payment date,
or (iii) by increasing the liquidation preference in an amount equal to and in
lieu of the cash dividend payment. The Series A Preferred Stock is convertible
into shares of Common Stock, subject to certain restrictions and redemption
rights, at a conversion price equal to the lowest daily sales price of the
Common Stock during the four consecutive trading days immediately preceding such
conversion, discounted by up to 4% and subject to certain adjustments. The
Warrants are exercisable into 500,000 shares of Common Stock at $20.625 per
share, which is equal to 125% of the closing sale price of the Common Stock on
the date immediately prior to the date of original issuance. The Company has
provided registration rights in connection with the resale of the Common Stock
issued as payment of dividends, upon the conversion of the Series A Preferred
Stock or the exercise of the Warrants. See "Description of Capital
Stock -- Preferred Stock -- 6% Convertible Preferred Stock, Series A."
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, each of which document is hereby incorporated by reference.
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 ($79.4 million).
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 March 31, 1997, existing Senior
Indebtedness of the Company and indebtedness of its subsidiaries aggregated
$62.6 million; additional obligations of the Company and its subsidiaries that
would be senior in right of payment to the Debentures aggregated $414.3 million;
and no obligations of the Company were on parity with or junior in right of
payment to the Debentures. 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 paid on November 1, 1996, amounted 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.
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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 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
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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 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
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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 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
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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 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
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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.
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
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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. There can be no assurance that the Company will
be able to repurchase the Debentures upon a Change of Control. Notice with
respect to the occurrence of a Change of Control will be given as 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
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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.
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
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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.
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.
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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 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.
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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 notify the holders of Debentures thereof within 90 days of the
occurrence of such Event of Default. 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 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
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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 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 AND COMPLIANCE CERTIFICATES
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.
The Company is required to deliver to the Trustee within 120 days after the
end of its fiscal year an Officers' Certificate complying with Section 314(a)(4)
of the Trust Indenture Act of 1939, as amended, and stating that a review of its
activities and the activities of its subsidiaries during the preceding fiscal
year has been made under the supervision of the signing officers with a view to
determining whether the Company has kept, observed, performed and fulfilled its
obligations under the Indenture and further stating, as to each such
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officer signing such certificate, whether or not the signer knows of any failure
by the Company or any significant subsidiary of the Company to comply with any
conditions or covenants in the Indenture.
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 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
108
<PAGE> 110
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.
US FEDERAL TAX CONSIDERATIONS
In the opinion of the Company's counsel, Gibson, Dunn & Crutcher LLP, the
following summary, to the extent it relates to matters of law or legal
conclusions, accurately describes the anticipated material United States federal
income tax consequences of holding and disposing of the Debentures. 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 Common 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
Except as described below, 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.
109
<PAGE> 111
TAXABLE 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 tax 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 amount will be subject to the rules
generally applicable to interest). A holder's adjusted tax basis in a Debenture
will be increased by any market discount previously included in income by the
holder and decreased by any amortizable bond premium previously deducted by the
holder. Except as described below with respect to accrued market discount, any
gain or loss upon a taxable 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. (To the extent that the Debentures converted are subject
to accrued market discount, as described below, the amount of the accrued market
discount will carry over to the Common Stock on conversion and will be treated
as ordinary income (to the extent that gain is recognized) on disposition of the
Common Stock). 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 initial tax basis in the Common Stock received upon
conversion of the Debenture will be equal to the holder's aggregate adjusted tax
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.
MARKET DISCOUNT
A purchaser of a Debenture may be subject to the market discount provisions
of the Code. Except as described below, gain recognized on the disposition of a
Debenture that has accrued market discount will be treated as ordinary income,
and not as capital gain, to the extent of such accrued market discount. "Market
discount" is defined generally as the excess, if any, of (i) the stated
redemption price at maturity of a debt obligation over (ii) the tax basis of
such obligation in the hands of the holder immediately after its acquisition.
Under a de minimis exception, there is no market discount if the excess of the
stated redemption price at maturity of the obligation over the holder's tax
basis in the obligation is less than 0.25% of the stated redemption price at
maturity multiplied by the number of complete years after the acquisition date
to the obligation's maturity date.
Unless the holder elects otherwise, the accrued market discount generally
will be the amount calculated by multiplying the market discount by a fraction,
the numerator of which is the number of days the obligation has been held by the
holder and the denominator of which is the number of days after the holder's
acquisition of the obligation up to and including its maturity date. Accrued
market discount generally will be required to be recognized upon the sale,
exchange or other taxable disposition (including a gift) of the Debenture. A
holder of a Debenture having market discount also may be required to defer a
portion of the interest deductions attributable to any indebtedness incurred to
purchase or carry the Debenture.
As an alternative to the inclusion of market discount in income on the
foregoing basis, a holder of a Debenture may elect to include market discount in
income currently as it accrues on all market discount obligations acquired by
such Debenture holder in that taxable year or thereafter, in which case the
interest deferral rule also will not apply. The election would apply to all
market discount obligations acquired by the electing Debenture holder on or
after the first day of the first taxable year to which the election applies. The
election may be revoked only with the consent of the IRS.
110
<PAGE> 112
BOND PREMIUM
A holder who purchases a Debenture at a cost greater than its stated
redemption price at maturity generally will be considered to have purchased the
Debenture with bond premium, which it may elect to amortize as an offset to
interest income on such Debenture (and not as a separate deduction item) on a
constant yield method. A Debenture holder who elects to deduct bond premium must
reduce such holder's tax basis in the related obligation by the amount of
deductions allowable for amortizable bond premium.
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.
111
<PAGE> 113
SELLING SECURITY HOLDERS
The Debentures were issued by the Company on May 7, 1996, in a private
placement pursuant to Rule 144A, Regulation D and Regulation S under the
Securities Act. The following table sets forth, as of April 2, 1997, 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>
PERCENTAGE OF PERCENTAGE OF
OUTSTANDING OUTSTANDING
PRINCIPAL AMOUNT OF DEBENTURES PRINCIPAL AMOUNT OF DEBENTURES
PRINCIPAL AMOUNT OF DEBENTURES THAT PRIOR TO DEBENTURES OWNED AFTER
NAME DEBENTURES OWNED MAY BE SOLD OFFERING(1) AFTER OFFERING(2) OFFERING(1)(2)
- -------------------------------------------- ------------------- ------------- ------------------- --------------
<S> <C> <C> <C> <C> <C>
Arnhold & S.
Bleichroeder, Inc...... $ 1,000,000 $ 1,000,000 * $ 1,000,000 *
Bank of New York......... 3,025,000 3,025,000 2.1% 3,025,000 2.1%
Bankers Trust
Company................ 6,005,000 6,005,000 4.2 6,005,000 4.2
Bear, Stearns Inc........ 9,688,000 9,688,000 6.7 9,688,000 6.7
Boston & Co.............. 200,000 200,000 * 200,000 *
Boston Safe Deposit &
Trust Co............... 2,285,000 2,285,000 1.6 2,285,000 1.6
Brown Brothers
Harriman & Co.......... 2,350,000 2,350,000 1.6 2,350,000 1.6
Chase Manhattan
Bank/Chemical.......... 7,250,000 7,250,000 5.0 7,250,000 5.0
Citibank, N.A............ 740,000 740,000 * 740,000 *
Crestar Bank............. 187,000 187,000 * 187,000 *
First Trust National
Association............ 300,000 300,000 * 300,000 *
Firstar Trust Company.... 823,000 823,000 * 823,000 *
Forbank & Co............. 200,000 200,000 * 200,000 *
Goldman Sachs & Co....... 2,090,000 2,090,000 1.5 2,090,000 1.5
Investors Fiduciary Trust
Company/SSB............ 800,000 800,000 * 800,000 *
Keybank National
Association............ 1,140,000 1,140,000 * 1,140,000 *
Lehman Brothers
International
(Europe) -- Prime
Broker (LBI)........... 1,250,000 1,250,000 * 1,250,000 *
Mercantile Bank of St.
Louis National
Association............ 500,000 500,000 * 500,000 *
Mercantile, Safe Deposit
and Trust Company...... 1,225,000 1,225,000 * 1,225,000 *
Merrill, Lynch, Pierce,
Fenner & Smith
Safekeeping............ 170,000 170,000 * 170,000 *
Merrill Lynch
Professional Clearing
Corp................... 1,000,000 1,000,000 * 1,000,000 *
Morgan Stanley & Co.,
Inc./Prime Dealer
Services Corp.......... 90,000 90,000 * 90,000 *
NatWest Securities
Corporation............ 2,610,000 2,610,000 1.8 2,610,000 1.8
NatWest Securities
Corporation #2......... 862,000 862,000 * 862,000 *
Northern Trust
Co. -- Trust........... 1,000,000 1,000,000 * 1,000,000 *
PaineWebber, Inc......... 275,000 275,000 * 275,000 *
PNC National
Association............ 100,000 100,000 * 100,000 *
Pondwave & Co............ 2,100,000 2,100,000 1.5 2,100,000 1.5
Smith Barney, Inc........ 7,500,000 7,500,000 5.2 7,500,000 5.2
SSB -- Custodian......... 18,555,000 18,555,000 12.9 18,555,000 12.9
Sun Trust Bank........... 60,000 60,000 * 60,000 *
Swiss American
Securities, Inc. ...... 500,000 500,000 * 500,000 *
Wells Fargo Bank,
National Association... 3,500,000 3,500,000 2.4 3,500,000 2.4
</TABLE>
- ------------------
* Less than one percent.
(1) Based on $143,750,000 of 6% Convertible Subordinated Debentures of which up
to $79,380,000 are offered hereby.
112
<PAGE> 114
(2) Assumes no sales of Offered Debentures. 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."
Except as otherwise described herein, none of the Selling Security Holders
has had a material relationship with the Company within the past three years.
NatWest Securities Corporation and NatWest Securities Corporation #2 (the
"NatWest Holders") are affiliates 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 the NatWest Holders, National
Westminster Bank PLC, has acquired all of the outstanding capital stock of
Greenwich Capital Holdings, Inc., an affiliate of Greenwich. In addition to
providing credit facilities to the Company, Greenwich has acted as underwriter
in connection with the Company's securitizations since March 1996. 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.
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.
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, with limited exceptions, simultaneously bid for
purchase, or induce others to bid for or purchase either the Debentures or the
Common Stock at any time such person is a participant in the distribution.
Certain persons engaged in the distribution
113
<PAGE> 115
of the securities may engage in stabilizing transactions in accordance with
Regulation M under the Exchange Act. Stabilizing transactions permit bids for
and purchases of securities so long as the stabilizing bids do not exceed a
specified maximum. Such stabilizing transactions may cause the price of the
securities to be higher than they would otherwise be in the absence of such
transactions. These transactions, if commenced, may be discontinued at any time.
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 the Company for the year ended
December 31, 1994 and as of and for the year ended December 31, 1996 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 consolidated financial statements of Heritable Finance Limited
(referred to herein as Greyfriars) as of December 31, 1994 and 1995 and for each
of the years in the three-year period ended December 31, 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.
114
<PAGE> 116
INDEX TO FINANCIAL STATEMENTS
(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, Registered Auditors............... F-3
Consolidated Statements of Financial Condition at December 31, 1995 and 1996.......... F-4
Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and
1996................................................................................ F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994,
1995 and 1996....................................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and
1996................................................................................ F-7
Notes to Consolidated Financial Statements............................................ F-8
J&J SECURITIES LIMITED FINANCIAL STATEMENTS:
Report of Independent Auditors by BDO Stoy Hayward, Registered Auditors............... F-31
Statements of Financial Condition at September 30, 1994 and 1995 and March 31, 1996
(unaudited)......................................................................... F-32
Statements of Operations for the years ended September 30, 1993, 1994 and 1995 and for
the six months ended March 31, 1995 (unaudited) and 1996 (unaudited)................ F-33
Statements of Stockholders' Equity for the years ended September 30, 1993, 1994 and
1995 and for the six months ended March 31, 1996 (unaudited)........................ F-34
Statements of Cash Flows for the years ended September 30, 1993, 1994 and 1995 and for
the six months ended March 31, 1995 (unaudited) and 1996 (unaudited)................ F-35
Notes to Financial Statements......................................................... F-36
HERITABLE FINANCE LIMITED FINANCIAL STATEMENTS:
(REFERRED TO HEREIN AS GREYFRIARS)
Report of Independent Auditors by KPMG, Registered Auditors........................... F-40
Statements of Financial Condition at December 31, 1994 and 1995 and March 31, 1996
(unaudited)......................................................................... F-41
Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and for
the three months ended March 31, 1995 (unaudited) and 1996 (unaudited).............. F-42
Statements of Stockholders' Equity for the years ended December 31, 1993, 1994 and
1995 and for the three months ended March 31, 1996 (unaudited)...................... F-43
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and for
the three months ended March 31, 1995 (unaudited) and 1996 (unaudited).............. F-44
Notes to Financial Statements......................................................... F-45
</TABLE>
F-1
<PAGE> 117
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cityscape Financial Corp.:
We have audited the accompanying consolidated statements of financial
condition of Cityscape Financial Corp. and Subsidiary (the "Company") as of
December 31, 1995 and 1996 and the related consolidated statements of
operations, stockholder's equity and cash flows for each of the years in the
three-year period ended December 31, 1996. 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 1995 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 of the related consolidated totals as of and for the
year ended December 31, 1995. 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, 1995
and 1996, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1996 in conformity with
generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
New York, New York
February 28, 1997
F-2
<PAGE> 118
CITY MORTGAGE CORPORATION LIMITED
REPORT OF THE AUDITORS
To the shareholders of City Mortgage Corporation Limited
We have audited the 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.
/s/ BDO STOY HAYWARD
BDO STOY HAYWARD
Chartered Accountants
and Registered Auditors
London
27 March 1996
F-3
<PAGE> 119
CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents..................................... $ 3,598,549 $ 2,107,285
Cash held in escrow........................................... 5,920,118 15,038,729
Securities purchased under agreements to resell............... -- 154,176,608
Available-for-sale securities................................. -- 14,618,194
Mortgage servicing receivables................................ 24,561,161 242,895,313
Trading securities............................................ 15,571,455 103,199,936
Accrued interest receivable................................... 555,031 1,353,274
Accounts receivable........................................... 604,577 4,387,388
Prepaid commitment fees....................................... -- 35,917,000
Mortgage loans held for sale, net............................. 73,852,293 102,222,184
Mortgage loans held for investment, net....................... 1,024,204 8,270,618
Real estate owned, net........................................ 141,266 220,782
Credit enhancement deposits................................... -- 35,082,000
Equipment and leasehold improvements, net..................... 2,380,571 13,947,037
Investment in partnership..................................... 758,315 --
Goodwill...................................................... 19,258,011 47,466,835
Other assets.................................................. 4,293,430 29,299,176
------------ ------------
Total assets.......................................... $152,518,981 $810,202,359
============ ============
LIABILITIES
Warehouse financing facilities................................ $ 74,901,975 $ 89,434,291
Securities sold but not yet purchased......................... -- 152,862,526
Accounts payable and other liabilities........................ 16,410,833 50,244,387
Allowance for losses.......................................... 2,130,954 33,715,614
Income taxes payable.......................................... 1,204,803 56,896,337
Standby financing facility.................................... 771,361 7,966,292
Notes and loans payable....................................... -- 136,520,719
Convertible subordinated debentures........................... -- 143,730,000
------------ ------------
Total liabilities..................................... 95,419,926 671,370,166
------------ ------------
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;
28,900,732 and 29,649,133 issued and outstanding at
December 31, 1995 and 1996, respectively................... 289,007 296,491
Additional paid-in capital.................................... 44,838,143 57,782,609
Foreign currency translation adjustment, net of taxes......... (6,219) 9,765,137
Unrealized gain on available-for-sale securities, net of
taxes...................................................... -- 8,328,950
Retained earnings............................................. 11,978,124 62,659,006
------------ ------------
Total stockholders' equity............................ 57,099,055 138,832,193
------------ ------------
COMMITMENTS AND CONTINGENCIES
Total liabilities and stockholders' equity............ $152,518,981 $810,202,359
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 120
CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------------------
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
REVENUES
Gain on sale of loans............................ $ 5,691,165 $38,198,121 $156,252,290
Mortgage origination income...................... 2,551,679 2,963,444 2,791,534
Interest......................................... 1,899,684 6,705,675 29,303,781
Servicing income................................. 414,173 777,066 3,750,348
Earnings from partnership interest............... 391,000 481,789 753,663
Other............................................ 226,758 384,543 6,363,927
----------- ----------- ------------
Total revenues.............................. 11,174,459 49,510,638 199,215,543
----------- ----------- ------------
EXPENSES
Salaries and employee benefits................... 4,279,823 12,165,225 40,851,642
Interest expense................................. 1,563,428 4,610,186 20,223,755
Selling expenses................................. 588,029 2,895,113 23,889,544
Other operating expenses......................... 2,889,720 6,581,244 25,367,110
Amortization of goodwill......................... -- 493,794 3,775,176
----------- ----------- ------------
Total expenses.............................. 9,321,000 26,745,562 114,107,227
----------- ----------- ------------
Earnings before minority interest, income taxes
and extraordinary item........................ 1,853,459 22,765,076 85,108,316
Minority interest................................ -- 2,379,235 --
----------- ----------- ------------
Earnings before income taxes and extraordinary
item.......................................... 1,853,459 20,385,841 85,108,316
Provision for income taxes....................... 1,450,000 8,515,233 34,427,434
----------- ----------- ------------
Earnings before extraordinary item............... 403,459 11,870,608 50,680,882
Loss from extinguishment of debt, net of taxes... -- 295,943 --
----------- ----------- ------------
Net earnings..................................... $ 403,459 $11,574,665 $ 50,680,882
=========== =========== ============
PRIMARY EARNINGS PER SHARE OF COMMON STOCK(1):
Before extraordinary item................... $ 0.02 $ 0.50 $ 1.66
Extraordinary item.......................... -- (0.01) --
----------- ----------- ------------
Net earnings per share........................... $ 0.02 $ 0.49 $ 1.66
=========== =========== ============
Fully diluted earnings per share of common
stock......................................... N/A N/A $ 1.59
=========== =========== ============
Weighted average number of shares outstanding and
common stock equivalents(1):
Primary..................................... 20,560,944 23,838,000 30,537,539
=========== =========== ============
Fully diluted............................... N/A N/A 34,152,924
=========== =========== ============
</TABLE>
- ---------------
(1) All amounts have been restated to reflect the 100% stock dividends paid in
September 1995 and July 1996.
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 121
CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<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,
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
Foreign currency translation
adjustment, net of
taxes..................... -- -- -- (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
available-for-sale
securities, net of
taxes..................... -- -- -- -- 8,328,950 -- 8,328,950
Issuance of common stock.... 101,039 1,010 672,246 -- -- -- 673,256
J&J Acquisition............. 548,000 5,480 9,789,164 -- -- -- 9,794,644
Greyfriars Acquisition...... 99,362 994 2,483,056 -- -- -- 2,484,050
Foreign currency translation
adjustment, net of
taxes..................... -- -- -- 9,771,356 -- -- 9,771,356
Net earnings................ -- -- -- -- -- 50,680,882 50,680,882
---------- -------- ----------- ---------- ---------- ----------- ------------
Balance at December 31,
1996........................ 26,649,133 $296,491 $57,782,609 $ 9,765,137 $8,328,950 $62,659,006 $138,832,193
========== ======== =========== ========== ========== =========== ============
</TABLE>
- ---------------
(1) All amounts have been restated to reflect the 100% stock dividends paid in
September 1995 and July 1996.
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 122
CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------
1994 1995 1996
------------- ------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings................................................. $ 403,459 $ 11,574,665 $ 50,680,882
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization............................ 126,195 801,780 9,463,244
Income taxes payable..................................... 1,205,000 (23,197) 19,122,922
Earnings from partnership interest....................... (391,000) (481,789) (753,663)
Unrealized gain on securities............................ -- -- (429,688)
Increase in mortgage servicing receivables............... -- (24,561,161) (166,865,152)
Increase in trading securities........................... -- (15,571,455) (87,628,481)
Provision for losses..................................... 282,210 2,130,954 31,584,660
Net purchases of securities under agreement to resell.... -- -- (153,796,920)
Proceeds from securities sold but not yet purchased...... -- -- 152,862,526
Increase in accrued interest receivable.................. (113,423) (206,124) (798,243)
Proceeds from sale of mortgages.......................... 147,999,989 401,716,611 1,528,266,000
Mortgage origination funds disbursed..................... (154,410,000) (459,258,490) (1,510,507,760)
Increase in credit enhancement deposits.................. -- -- (35,082,000)
Other, net............................................... (484,891) 7,857,401 (1,657,660)
----------- ------------ ------------
Net cash used in operating activities................. (5,382,461) (76,020,805) (165,539,305)
----------- ------------ ------------
Cash flows from investing activities:
Acquisition of J&J and Greyfriars............................ -- -- (89,143,306)
Purchases of equipment....................................... (226,244) (1,941,417) (12,341,647)
Net (advances to) distributions from partnership............. (114,000) 428,474 1,099,488
Increase in real estate owned................................ (130,000) (11,266) (79,516)
Proceeds from sale of acquired J&J and Greyfriars
portfolios................................................. -- -- 201,141,000
----------- ------------ ------------
Net cash provided by (used in) investing activities.......... (470,244) (1,524,209) 100,676,019
----------- ------------ ------------
Cash flows from financing activities:
Increase in warehouse facility............................... 4,715,157 60,221,540 14,532,316
Increase in standby financing facility....................... -- 771,361 7,194,931
Proceeds from notes and loan payable......................... -- -- 144,520,719
Repayment of notes and loans payable......................... -- -- (46,000,000)
Proceeds from issuance of convertible subordinated
debentures................................................. -- -- 136,060,800
Proceeds (redemption) of subordinated debentures............. 1,800,000 (2,000,000) --
Net proceeds from issuance of common stock in CSC-UK......... -- 500,000 --
Net proceeds from issuance of common stock................... 150,000 20,731,371 653,256
Repayment of acquisition debt................................ -- -- (193,590,000)
----------- ------------ ------------
Net cash provided by financing activities............. 6,665,157 80,224,272 63,372,022
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents........... 812,452 2,679,258 (1,491,264)
Cash and cash equivalents at beginning of year............... 106,839 919,291 3,598,549
----------- ------------ ------------
Cash and cash equivalents at end of year..................... $ 919,291 $ 3,598,549 2,107,285
=========== ============ ============
Supplemental disclosure of cash flow information:
Income taxes paid during the year............................ $ 245,000 $ 9,049,002 $ 19,711,577
=========== ============ ============
Interest paid during the year................................ $ 1,439,075 $ 6,705,675 $ 12,856,958
=========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 123
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
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 42 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, the Company 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 the Company's Common Stock (the "CSC Acquisition").
In connection with the CSC Acquisition, the Company changed its name to
Cityscape Financial Corp. From the date of its formation 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 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 year ended December 31, 1994 include the results of
both the Company and CSC for the full year.
In January 1994, CSC acquired Astrum Funding Corp. ("Astrum") in exchange
for 6.3% 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 lender 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 ("Conventional UK Lenders") because of impaired or unsubstantiated
credit histories and/or unverifiable income. On 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
F-8
<PAGE> 124
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 which is being amortized using the straight-line method over
a life of ten years. 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.
In April 1996, CSC-UK acquired all the outstanding capital stock of J&J
Securities Limited, a London-based mortgage lender ("J&J"), in exchange for
L15.3 million ($23.3 million based on the Noon Buying Rate on the date of such
acquisition) in cash and 548,000 shares of Common Stock valued at $9.8 million
based upon the closing price of the Common Stock on the date of such acquisition
less a discount for restrictions on the resale of such stock and incurred
closing costs of $788,000 (the "J&J Acquisition"). 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
Leaders. Pursuant to the J&J Acquisition, the Company acquired assets with a
fair value of $73.8 million consisting primarily of mortgage loans of $73.0
million (inclusive of the value assigned to the acquired mortgage servicing
rights), and assumed liabilities with a fair value of $45.1 million. Additional
fair market value of $21.8 million, representing the value of the mortgage
servicing receivables, was assigned to the net assets acquired. The J&J
Acquisition resulted in the recognition of $5.2 million of goodwill, which is
being amortized using the straight-line method over a life of ten years.
Restructuring charges of $250,000 were recorded in connection with the J&J
Acquisition and have been included as a component of the fair value of the
liabilities assumed in such acquisition. These charges represent the costs to
integrate J&J's operations into CSC-UK's operations, consisting primarily of (i)
costs incurred to relocate J&J's operations to CSC-UK's headquarters and (ii)
employee severance costs. The integration and relocation of J&J's operations are
intended to provide greater efficiencies due to the consolidation of the
operations. From the inception of the restructuring plan to December 31, 1996,
there have been staff reductions of approximately 20 former J&J employees at a
cost of approximately $96,000. Additionally, approximately $89,000 of costs
related to vacated properties under lease have been incurred through December
31, 1996.
In June 1996, CSC-UK acquired all of the outstanding capital stock of
Greyfriars Group Limited, a mortgage lender based in Reading, England (formerly
known as Heritable Finance Limited and referred to herein as "Greyfriars"), in
exchange for L41.8 million ($64.1 million based on the Noon Buying Rate on the
date of such acquisition) in cash and 99,362 shares of Common Stock valued at
$2.5 million based upon the closing price of the Common Stock on the date of
such acquisition and incurred closing costs of $2.3 million (the "Greyfriars
Acquisition"). Greyfriars provides mortgage loans to borrowers that generally
have higher quality credit profiles than the Company's typical UK borrowers.
Pursuant to the Greyfriars Acquisition, the Company acquired assets with a fair
value of $225.4 million, consisting primarily of mortgage loans of $221.2
million (inclusive of the $29.2 million value assigned to the acquired mortgage
servicing rights), and assumed liabilities with a fair value of $181.9 million.
The Greyfriars Acquisition resulted in the recognition of $25.4 million of
goodwill, which is being amortized using the straight-line method over a life of
ten years. Restructuring charges of $4.8 million were recorded in connection
with the Greyfriars Acquisition and have been included as a component of the
fair value of the liabilities assumed in such acquisition. These charges
represent the costs to integrate Greyfriars' operations into CSC-UK's
operations, consisting primarily of (i) costs incurred to relocate Greyfriars'
operations to CSC-UK's headquarters including establishing reserves for leases
on premises to be vacated as part of this relocation and (ii) employee severance
costs. The integration and relocation of Greyfriars' operations are intended to
provide greater efficiencies due to the consolidation of the operations. From
the inception of the restructuring plan to December 31, 1996, there have been
staff reductions of approximately 43 former Greyfriars employees at a cost of
approximately $383,000. Additionally, approximately $139,000 of costs related to
vacated properties under lease have been incurred
F-9
<PAGE> 125
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
through December 31, 1996. Relocation costs of approximately $589,000 have also
been incurred through December 31, 1996.
The following unaudited pro forma information illustrates the estimated
effects of the CSC-UK Acquisition, as if such transactions were consummated at
May 2, 1995, and the J&J Acquisition and the Greyfriars Acquisition as if such
transactions were consummated at January 1, 1995:
<TABLE>
<CAPTION>
1995 1996
------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Total revenues As reported $49,511 $199,215
Pro forma 61,451 203,753
Earnings before As reported $11,871 $ 50,681
extraordinary item Pro forma 7,855 47,528
Primary earnings As reported $ 0.49 $ 1.66
per share Pro forma 0.29 1.52
Fully diluted earnings As reported N/A $ 1.59
per share Pro forma N/A 1.47
</TABLE>
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. 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, the UK Acquisition, the J&J Acquisition and the Greyfriars
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 the
costs of credit enhancements and trustee fees and, 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. In the case of a UK
securitization, or sale into a loan purchase facility, the Company records a
mortgage servicing receivable.
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 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. The amount of the deposit which is not recovered
by the Company is recorded as an expense of the transaction and a reduction of
the gain recognized.
Included in the gain on sale of loans is gain on US securitization
representing the fair value of the interest-only and residual certificates
received by the Company which are reflected as trading securities. Gains
F-10
<PAGE> 126
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 carrying 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 pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 115.
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 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, calculated using the interest
method and 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.
Interest Rate Risk Management
From time to time, to manage interest rate risk on loan originations, the
Company sells short United States Treasury securities which approximately match
the duration of the mortgage loans held for sale and invests the proceeds in
securities purchased under agreements to resell.
Securities sold but not yet purchased are recorded at trade date and are
initially carried at their sale amount. At the financial statement date, the
securities are marked to market, and any resultant gain or loss is recognized in
income as a component of the gain on sale of loans. Interest expense on the
securities sold but not yet purchased is recorded as incurred.
Securities purchased under agreements to resell are recorded at trade date
and are carried at the amounts at which the securities will be resold, plus
accrued interest income.
Available-for-Sale Securities
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.
F-11
<PAGE> 127
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Mortgage Servicing Rights
Effective October 1, 1995, the Company adopted SFAS No. 122, "Accounting
for Mortgage Servicing Rights." The Statement amends SFAS No. 65, "Accounting
for Certain Mortgage Banking Activities," 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.
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, 1995 and 1996,
respectively.
Mortgage Loans Held for Investment, Net
In May 1993, the Financial Accounting Standards Board ("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 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.
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.
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.
Deferred Debt Issuance Costs
The Company capitalizes costs incurred related to the issuance of long-term
debt. These costs are deferred and amortized on a straight-line basis over the
life of the related debt and recognized as a component of interest expense.
F-12
<PAGE> 128
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company accounts 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 laws. Deferred tax liabilities and
assets are adjusted for the effect of a change in tax laws or rates.
Foreign Currency Translation, Net of Taxes
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 net of taxes as a separate component of stockholders'
equity.
Goodwill Amortization
The Company recognizes goodwill for the purchase price in excess of the
fair market value of net assets acquired in a business combination accounted for
as a purchase transaction. 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.
Earnings Per Share
Primary earnings per share are based on the net earnings applicable to
Common Stock divided by the weighted average number of Common Stock and Common
Stock equivalents outstanding during the period, after giving effect to a 100%
stock dividends effected in September 1995 and July 1996 (see Note 19). Fully
diluted earnings per share are based on the net earnings applicable to Common
Stock adjusted for the after-tax interest expense on the Convertible Debentures,
divided by the weighted average number of Common Stock and Common Stock
equivalents outstanding during the period increased by the assumed conversion of
the Convertible Debentures into shares of Common Stock.
Reclassifications
Certain amounts in the statements have been reclassified to conform with
the 1996 classifications.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
New Accounting Pronouncement
On January 1, 1997, the Company adopted SFAS No. 125, "Accounting for
Transfer and Servicing of Financial Assets and Extinguishment of Liabilities."
SFAS No. 125 addresses the accounting for all types of securitization
transactions, securities lending and repurchase agreements, collateralized
borrowing arrangements and other transactions involving the transfer of
financial assets. SFAS No. 125 distinguishes the transfers of financial assets
that are sales from transfers that are secured borrowings. SFAS No. 125 is
generally effective for transactions that occur after December 31, 1996, and it
is applied prospectively. SFAS
F-13
<PAGE> 129
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No. 125 will require the Company to allocate the total cost of mortgage loans
sold to the mortgage loans sold (servicing released), retained certificates and
servicing rights based on their relative values. The pronouncement also will
require the Company to provide additional disclosure about the retained
certificates in its securitizations and to account for these assets at fair
value in accordance with SFAS No. 115. The Company does not believe that SFAS
No. 125 will have a material effect on the Company securitization as currently
structured; however, there can be no assurance SFAS No. 125 will not have a
material adverse effect on future securitization structures the Company may
employ, reduce the Company's gain on sale of loans in the future or otherwise
adversely affect the Company's results of operations or financial condition.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" which
simplifies the standards for computing earnings per share previously found in
Accounting Principles Board ("APB") Opinion No. 15, "Earnings per Share" and
makes them comparable to international earnings per share standards. SFAS No.
128 is effective for historical statements issued for periods ending after
December 15, 1997. The Company has not completed its analysis of this 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.
The activity in the mortgage servicing receivables is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER YEAR ENDED
31, DECEMBER 31,
1995 1996
----------- ------------
<S> <C> <C>
Balance, beginning of year............................... $ -- $ 24,561,161
Additions from operations................................ 24,877,622 187,032,033
Additions from acquisitions.............................. -- 50,927,000
Amortization............................................. (316,461) (19,624,881)
----------- ------------
Balance, end of year..................................... $24,561,161 $242,895,313
=========== ============
</TABLE>
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
rates used to discount the cash flows for the periods ended December 31, 1995
and 1996 were approximately 10.1% and 11.0%, respectively. 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
predominant risk characteristic of the portfolio and discounts the asset's
estimated future cash flow using a current market rate. The Company has
determined the predominant risk characteristics to be interest rate risk and
prepayment risk. On a quarterly basis, the Company reviews the mortgage
servicing receivables for impairment.
At December 31, 1995 and 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. The fair value was determined
by estimating the present value of future cash flows related to the mortgage
servicing receivables. In using this valuation method, the Company incorporated
assumptions that market participants would use in estimating future cash flows
which included estimates of the cost of servicing per loan, the discount rate,
an inflation rate, ancillary income per loan, prepayment speeds and default
rates.
F-14
<PAGE> 130
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. TRADING SECURITIES
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 trading securities.
In conjunction with loans sold through these securitizations, the Company
held interest-only and residual certificates totaling $15.6 million and $103.2
million which approximates their fair value at December 31, 1995 and 1996,
respectively.
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 years ended December 31, 1995 and 1996, the Company sold $235.0
million and $993.6 million 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 real estate mortgage investment conduit
("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. INTEREST RATE RISK MANAGEMENT
From time to time, to manage interest rate risk on loan originations, the
Company sells short United States Treasury securities which approximately match
the duration of the mortgage loans held for sale and invests the proceeds in
securities purchased under agreements to resell.
At December 31, 1996, the carrying amount of securities purchased under
agreements to resell was $154,176,608, consisting of principal of $152,980,010
and accrued interest receivable of $1,196,598. During the year ended December
31, 1996, the Company recognized interest income on securities purchased under
agreements to resell of $1,528,797.
At December 31, 1996, securities sold but not yet purchased had a market
value of $152,862,526, consisting of principal of $150,085,938 and accrued
interest payable of $2,776,588. During the year ended December 31, 1996, the
Company recognized interest expense on securities sold but not yet purchased of
$1,844,403.
The Company also recognized gain on these transactions of $429,688,
resulting when a Treasury position was settled and when the remaining
instruments were marked to market at December 31, 1996. This amount was included
in gain on sale of loans.
7. CREDIT ENHANCEMENT DEPOSITS
Pursuant to the terms of certain of the UK securitizations and sales into
the UK purchase and sales facilities, the Company is required to establish an
initial reserve fund as a form of an additional credit enhancement. Such
reserves are generally funded with an initial cash deposit by the Company and
earn interest at the prevailing overnight rate, which approximated 5.0% during
1996. These deposits will be returned to the Company in accordance with the
over-collateralization and credit enhancement provisions of the agreements.
F-15
<PAGE> 131
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
Equipment and leasehold improvements, net, at cost, are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Office equipment.......................................... $2,473,365 $ 17,684,375
Leasehold improvements.................................... 37,076 349,347
Capitalized leases........................................ 337,415 673,535
----------- -----------
2,847,856 18,707,257
Accumulated depreciation.................................. (467,285) (4,760,220)
Balance, end of year...................................... $2,380,571 $ 13,947,037
=========== ===========
</TABLE>
9. AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities represent the fair value of the 1,090,910
shares (after giving effect to a February 1997 100% stock dividend) of IMC
Mortgage Company, including its predecessor Industry Mortgage Company, L.P.
("IMC") Common Stock owned by the Company at December 31, 1996. IMC originates,
purchases, sells and services mortgage loans that are secured primarily by one-
to four-family residences.
The Company held a limited partnership interest in Industry Mortgage
Company, L.P., a Delaware limited partnership (the predecessor company to IMC),
which was formed in 1993. In June 1996, Industry Mortgage Company, L.P.
converted into corporate form and effected a public offering of Common Stock. In
connection with this conversion, the Company's limited partnership interest
(which had been accounted for using the equity method) was converted into IMC
Common Stock, and accounted for as available-for-sale securities in accordance
with SFAS No. 115. Such securities were marked to market at December 31, 1996,
resulting in an unrealized gain of $8.3 million (net of deferred taxes) which,
in accordance with SFAS No. 115, was reflected as a component of stockholders'
equity.
Pursuant to the terms of IMC's limited partnership agreement, the Company
was obligated to offer to sell $1.0 million of loans per month through June 30,
2001 to IMC at market prices. During 1995, the Company entered into an agreement
with IMC whereby, in return for the payment of a $420,000 fee (which was
amortized using the straight-line method over a life of 14 months), such monthly
obligation was eliminated for the period November 1, 1995, through December 31,
1996. During 1996, the Company entered into an agreement with IMC whereby in
return for annual payments of $360,000 each on January 1, 1997, through January
1, 2000, and a payment of $180,000 on January 1, 2001, such obligation would be
canceled. The Company has recorded the present value of such required payments
($1.3 million) as an expense in 1996.
Prior to IMC's conversion to corporate form, the Company recorded its
investment under the equity method of accounting and as such recognized equity
earnings of $753,663 for the period ended June 25, 1996 (the date IMC converted
to corporate form) and $391,000 and $481,789 of equity earnings for the years
ended December 31, 1994 and 1995, respectively.
F-16
<PAGE> 132
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. OTHER ASSETS
Other assets at December 31, 1995 and 1996 consist of the following:
<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Notes and loans receivable................................. $ 232,813 $ 2,305,252
Prepaid expenses........................................... 421,839 5,864,238
Deferred expenses.......................................... 244,335 5,336,923
Loan receivables -- subwarehousing......................... 1,602,632 14,888,497
Long-term receivables...................................... 588,778 425,750
Other...................................................... 1,203,033 478,516
---------- -----------
Total............................................ $4,293,430 $29,299,176
========== ===========
</TABLE>
Included in notes receivable above, are notes receivable from directors and
officers totaling $79,952 and $40,252 at December 31, 1995 and 1996,
respectively. These loans are at fixed rates of interest between six percent and
nine percent 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, 1996, there were applications pending for an additional
$19.3 million of such loans.
In June 1996, the Company acquired an equity interest in an entity
subsequently acquired by City Auto Resource Services, Inc. ("City Auto"), a
newly formed entity that recently began originating, purchasing and servicing
sub-prime automobile loans. The Company owns 5,000,000 shares of Common Stock of
City Auto (a 34.0% equity interest at December 31, 1996). The Company records
its investment under the equity method of accounting and as such recognized
$62,500 of losses during 1996, representing a full write-down of the Company's
initial investment. City Auto's Common Stock has experienced limited trading on
the National Quotation Bureau, Inc. OTC Bulletin Board.
11. FINANCING FACILITIES AND LOAN PURCHASE AGREEMENTS
Warehouse Financing Facility
As of December 31, 1996, the Company had available a warehouse line of
credit with a group of banks for which CoreStates Bank, N.A. ("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 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"). 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 Line portion of the Warehouse
Facility extends through June 1997. The balance outstanding at December 31, 1995
and 1996 totaled $72.1 million and $66.3 million, respectively. In addition, the
Warehouse Facility provided 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 operated as
a revolving facility. The Working Capital Credit Line bore 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. The Working Capital Credit Line was
terminated on November 12, 1996.
The Warehouse Facility also permits the Company to use up to 20.0% of the
Revolving Credit Line to provide a subwarehouse line 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
F-17
<PAGE> 133
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 December 31, 1995 and 1996, the aggregate
balance of loans outstanding under this program was $1.6 million and $14.9
million (including self-funded loans), with applications pending for an
additional $4.1 million and $19.3 million of loans.
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 (8.5% at December 31, 1996) and are due upon
demand. The agreement terminates on June 30, 1997. The outstanding balance under
the loan and security agreement was $5.9 million at December 31, 1996.
Loan Purchase Agreements
The Company has a $50.0 million loan purchase agreement (the "US Purchase
Facility") with ContiTrade Services Corporation ("ContiTrade") 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. The US Purchase Facility extends through June
1999. The aggregate principal balance of loans sold to and retained by
ContiTrade at December 31, 1995 and 1996 under the US Purchase Facility was
$48.7 million and $3.6 million, respectively.
In June 1996, the Company entered into a purchase and sale agreement with
Greenwich (defined below), effective as of February 2, 1996 (the "US Greenwich
Facility"), 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 (7.3% at December 31,
1996). The US Greenwich Facility provided for the purchase and sale of $1.0
billion of loans. When such amount was exceeded, Greenwich and the Company
continued to purchase and sell loans through December 1996. The Company has a
commitment from Greenwich to enter into agreements to provide a $3.0 billion
mortgage loan financing facility at a rate of LIBOR plus 150 basis points, a
$25.0 million residual financing facility at a rate of LIBOR plus 300 basis
points and a $3.0 billion securitization facility, each for a term of one year,
subject to execution of definitive documents satisfactory to Greenwich as well
as certain other conditions; however, no definitive agreement exists nor can any
assurance be given that such an agreement will be reached. The Company retains
servicing rights on all loans sold into the US Greenwich Facility.
In May 1995, CSC-UK and Greenwich International Ltd., a subsidiary of
Greenwich Capital Markets, Inc. (referred to herein, including any subsidiaries
as "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 (9.1% 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,
F-18
<PAGE> 134
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. The balance outstanding
under the working capital facility portion of the UK Greenwich Facility was
L10.0 million ($17.1 million) at December 31, 1996. This agreement expires as to
the working capital facility on December 31, 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 $38.0 million evidenced by two notes bearing interest
at a rate of 6.2%, $13.0 million of which was paid on December 15, 1996 and
$25.0 million of which is payable on December 15, 1997. Such fee is amortized
over the life of the New Greenwich Facility.
Standby Financing Facilities
The Company also has a standby financing arrangement with ContiTrade (the
"Standby Facility") whereby ContiTrade provides the Company a $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 December 31,
1995 and 1996, this line had an outstanding balance of $771,361 and $8.0
million, respectively. The Standby Facility bears interest at a variable rate
based on LIBOR plus 200 basis points (7.5% at December 31, 1996) and the
agreement extends through June 1999. 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.
Notes and Loans Payable
In June 1996, the Company entered into a $30.0 million term loan with the
First National Bank of Boston ("Bank of Boston") to fund loan originations and
purchases and working capital needs, secured by the first and second liens on
the interest-only and residual certificates the Company receives upon loan sales
through securitizations. The term loan bore interest at a rate of 11.0% per
annum. In October 1996, the Company terminated the agreement and repaid all
amounts outstanding under this loan with proceeds from the Senior Secured
Facility (as defined below).
In October 1996, the Company entered into a $100.0 million Senior Secured
Credit Agreement ("Senior Secured Facility") with a group of lenders for which
CIBC Wood Gundy Securities Corp. ("CIBC") serves as agent. In January 1997, the
Senior Secured Facility was increased to $150.0 million. The Senior Secured
Facility terminates on October 30, 1998, and carries an initial interest rate of
11.0%, increasing 0.5% on the first day of each quarter commencing July 1, 1997
up to a maximum of 15.0%. Pursuant to the Senior Secured Facility, the Company
paid a 1.0% commitment fee and is required to pay (i) a 1.0% funding fee on the
amount of each borrowing, (ii) extension fees of 1.0% on June 30, 1997 and 0.5%
on the last day of each fiscal quarter thereafter on the amount outstanding on
such dates and (iii) commitment cancellation and prepayment fees of 1.0% of the
amount canceled or prepaid if terminated on or before July 1, 1997, 2.0% of the
amount canceled or prepaid if terminated after July 1, 1997 but on or before
April 1, 1998 and 3.0% of the amount canceled or prepaid if terminated
thereafter. The Company initially drew down $50.0 million which was used to
repay an outstanding $30.0 million term loan with the Bank of Boston, fund loan
originations and for general corporate purposes. Through December 31, 1996, the
Company had additional draws totaling $50.0 million (bringing the total amount
outstanding under this facility to $100.0 million as of year end). These
F-19
<PAGE> 135
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
funds were used primarily to fund additional loan originations and to pay to
Greenwich $13.0 million pursuant to a note in connection with the UK Credit
Facility.
In October 1996, the Company entered into a $5.0 million unsecured
revolving credit facility with the Bank of Boston. Advances under the line of
credit are due on October 24, 1997 and bear interest at the Bank of Boston's
Base Rate plus 50 basis points (8.75% at December 31, 1996). As of December 31,
1996, the outstanding balance of the unsecured credit facility was $5.0 million.
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. ALLOWANCE FOR LOSSES
During 1995 and 1996, the Company sold $235.0 million and $993.6 million 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 interest in such REMIC
trust consisting of interest-only regular interests and the residual interest
which are represented by the interest-only and residual certificates which are
classified as trading securities in accordance with SFAS No. 115. In the case of
a UK securitization, or a sale into a loan purchase facility, the Company
records a mortgage servicing receivable.
In initially valuing its trading securities and mortgage servicing
receivables, the Company establishes an allowance for expected losses and
calculates that allowance on the basis of historical experience and management's
best estimate of future credit losses likely to be incurred. In the case where
the securtization of loans results in the retention by the Company of
interest-only and/or residual certificates, such allowance is embodied in the
fair value of such certificates. In the case where the securitization, or sale
into a loan purchase facility, results in the retention of mortgage servicing
rights, such allowance is reported in the liability section of the statement of
financial condition. The trading securities are presented in the Consolidated
Statements of Financial Condition net of allowance for losses. The amount of
this provision is reviewed quarterly and adjustments are made if actual
experience or other factors indicate management's estimate of losses should be
revised. While the Company retains a substantial amount of risk of default on
the loan portfolios that it sells, such risk has been substantially reduced
through the sales of loans through securitization.
Through the Company's loan sales through securitizations and loan purchase
facilities, the Company has provided investors with a variety of additional
forms of credit enhancements. In a securitization, the Company purchases credit
enhancements to the senior interest in the related securitization 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 securitization 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 securitization 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.
F-20
<PAGE> 136
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
An analysis of the allowance for losses at December 31 1995 and 1996 is
presented below:
<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Allowance attributable to:
Interest-only and residual certificates...... $1,528,874 $17,624,117
Mortgage servicing rights.................... 2,130,954 33,715,614
--------- ----------
Total................................... $3,659,828 $51,339,731
========= ==========
</TABLE>
Such allowances represented 1.0% and 2.6% of mortgages serviced for others
at December 31, 1995 and 1996 respectively.
13. EXTRAORDINARY ITEM
During 1994, the Company issued senior subordinated debentures in the
principal amount of $2.0 million which bore interest at a fixed rate of 8% with
an original maturity date of July 21, 1999. In connection with this financing,
the lender received detachable warrants with a put option feature to purchase
1,600,000 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. In December
1995, the Company extinguished this debt with proceeds from the public offering
of its Common Stock (as more fully described in Note 19). As a result of this
early extinguishment of debt, the Company recorded an extraordinary loss of
$295,943, net of taxes.
14. CONVERTIBLE SUBORDINATED DEBENTURES
In May 1996, the Company issued $143.8 million of 6% Convertible
Subordinated Debentures due 2006 (the "Convertible 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 Convertible 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 which commenced November 1, 1996. The terms of the indenture
governing the Convertible 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. During 1996, $20,000 of the Convertible Debentures
were converted into shares of Common Stock.
F-21
<PAGE> 137
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. OTHER OPERATING EXPENSES
Other operating expenses include the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
ACCOUNT DESCRIPTION 1994 1995 1996
---------------------------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
Professional fees............................. $ 745,105 $1,541,448 $ 6,911,908
Travel and entertainment...................... 365,200 1,093,426 3,148,164
Telephone..................................... 305,020 679,765 1,746,232
Foreclosure costs............................. 283,909 34,388 161,490
Insurance..................................... 199,396 318,567 1,600,638
Occupancy..................................... 139,170 626,354 1,806,309
Office supplies............................... 185,087 588,902 2,417,768
Other......................................... 666,833 1,698,394 7,574,598
----------- ---------- ----------
Total............................... $2,889,720 $6,581,244 $25,367,107
=========== ========== ==========
</TABLE>
16. 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.
Earnings before income taxes from foreign sources for the years ended
December 31, 1995 and 1996 are $6.3 million and $43.9 million. There were no
sources of foreign earnings in the year ended 1994 as the Company did not
commence foreign operations until May 1995.
The provision for income taxes for the years ended December 31, 1994, 1995
and 1996 are comprised of the following:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
Current
Federal..................................... $ 814,020 $5,295,717 $13,436,306
State....................................... 159,980 1,388,288 3,638,803
Foreign..................................... -- 2,105,155 15,102,974
---------- ---------- ----------
974,000 8,789,160 32,178,083
Deferred
Federal..................................... 397,817 (224,620) 1,999,996
State....................................... 78,183 (49,307) 249,355
---------- ---------- ----------
476,000 (273,927) $ 2,249,351
---------- ---------- ----------
Provision for income taxes.................... $1,450,000 $8,515,233 $34,427,434
========== ========== ==========
</TABLE>
F-22
<PAGE> 138
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Federal income tax at statutory rate......................... 35.0% 35.0% 35.0%
State and local taxes, net of federal tax benefit............ 6.5 4.2 2.7
Difference in effective tax rate on foreign earnings......... -- 0.2 (0.6)
Deferred income taxes resulting from change in tax status.... 36.7 -- --
Other, net................................................... -- 2.4 3.4
---- ---- ----
78.2% 41.8% 40.5%
==== ==== ====
</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.
Deferred taxes as of December 31, 1994, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- --------- -----------
<S> <C> <C> <C>
Gross deferred tax assets....................... $148,884 $ 868,406 $10,293,342
Less valuation allowance........................ -- (284,779) --
-------- --------- -----------
Net deferred assets............................. 148,884 583,627 10,293,342
Deferred tax liabilities........................ 624,884 785,702 14,111,508
-------- --------- -----------
Net deferred tax liabilities.................... $476,000 $ 202,075 $ 3,818,166
======== ========= ===========
</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.
17. 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 $11,000, $25,319
and $87,126 for the year ended December 31, 1994, 1995 and 1996, respectively.
Certain employees of CSC-UK are members of a non-contributory pension plan.
The Company's contribution to the plan amounted to $258,000 for the year ended
December 31, 1996.
The Stock Purchase Plan
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 base salary, 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
F-23
<PAGE> 139
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. For the plan periods ending June 30, 1996 and December 31, 1996,
employees purchased 13,034 and 8,921 shares at a price of $8.82 and $22.31 per
share, respectively. In accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees", the Stock Purchase Plan is deemed to be
non-compensatory and results in no expense.
The Directors Plan
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. 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. Additional options
generally vest upon the first anniversary of the grant date. 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.
The Stock Option Plan
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. Options granted under the
Stock Option Plan vest over a period of six years. 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. Options may be granted under the
Stock Option Plan until June 1, 2005.
SFAS No. 123, "Accounting for Stock-Based Compensation" was issued by the
FASB in October 1995. SFAS No. 123 encourages the adoption of a new fair-value
based accounting method for employee stock-based compensation plans. SFAS No.
123 also permits companies to continue accounting for stock-based compensation
plans as prescribed by APB Opinion No. 25. However, companies electing to
continue accounting for stock-based compensation plans under the APB Opinion No.
25, must make pro forma disclosures as if the company adopted the cost
recognition requirements under SFAS No. 123. The Company has continued to
account for stock-based compensation under the APB Opinion No. 25 and therefore,
pro forma disclosure is provided below.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1995 and 1996, respectively: (1) dividend yield
of zero; (2) expected volatility of 50% and 51%; (3) risk-free interest rates of
6.0% and 6.1% and (4) expected lives of 4.8 and 5.2 years.
F-24
<PAGE> 140
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's two stock option plans as of
December 31, 1995 and 1996, and changes during the years ending on these dates
is presented below:
<TABLE>
<CAPTION>
1995 1996
-------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year.... -- $ -- 940,000 $ 2.52
Granted............................. 940,000 2.52 1,104,000 16.40
Exercised........................... -- -- (54,800) 4.50
Canceled............................ -- -- (1,000) 10.00
------- ---------
Outstanding at end of year.......... 940,000 2.52 1,988,200 10.17
======= =========
Options exercisable at year-end..... 180,000 540,200
Weighted average fair value of
options granted during the year... $1.26 $9.21
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -------------------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AT AVERAGE WEIGHTED EXERCISABLE AT WEIGHTED
RANGE OF DECEMBER 31, REMAINING AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 1996 CONTRACTUAL LIFE EXERCISE PRICE 1996 EXERCISE PRICE
----------------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$2.50 to $2.63......... 900,000 7.5 $ 2.52 480,000 $ 2.52
$9.88 to $10.88........ 440,200 4.5 10.04 60,200 10.15
$20.50 to $23.13....... 648,000 6.7 20.88 -- --
--------- -------
$2.50 to $23.13........ 1,988,200 6.6 10.17 540,200 3.37
========= =======
</TABLE>
Had compensation costs for the Company's 1995 and 1996 grants for its
stock-based compensation plans been determined consistent with SFAS No. 123, the
Company's net earnings and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
------- -------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net earnings....................................... As reported $11,575 $50,681
Pro forma 11,404 49,255
Primary earnings per share......................... As reported $ 0.49 $ 1.66
Pro forma 0.48 1.61
Fully diluted earnings per share................... As reported N/A $ 1.59
Pro forma N/A 1.55
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. There were no awards prior to 1995, and additional
awards in future years are anticipated.
F-25
<PAGE> 141
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases premises and equipment under operating leases with
various expiration dates. Minimum annual rental payments at December 31, 1996
are as follows:
<TABLE>
<S> <C>
1997.................................................................... $ 4,039,075
1998.................................................................... 4,184,414
1999.................................................................... 4,198,813
2000.................................................................... 4,120,226
2001.................................................................... 3,277,524
Thereafter.............................................................. 30,202,071
-----------
Total......................................................... $50,022,123
===========
</TABLE>
Rent expense for office space amounted to $110,000, $576,884, and $1.8
million for the years ended December 31, 1994, 1995 and 1996, respectively.
Obligations under capital leases total $4.9 million and represent leases
for office furniture, equipment, motor vehicles, and computer hardware and
software. Minimum annual capital lease payments at December 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997..................................................................... $1,277,968
1998..................................................................... 1,237,507
1999..................................................................... 1,160,345
2000..................................................................... 843,672
2001..................................................................... 352,817
----------
Total.......................................................... $4,872,309
==========
</TABLE>
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.
Other
The Securities and Exchange Commission has requested additional information
from the Company in connection with the accounting for the J&J and Greyfriars
Acquisitions. The Company is supplying such requested information.
Employee agreements
The Company has employment agreements with 12 officers of the Company. The
Company guarantees annual compensation ranging from $150,000 to $275,000 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.
F-26
<PAGE> 142
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. STOCKHOLDERS' EQUITY
In April 1994, the Company effected a 12 for 1 forward stock split of the
existing 30,010 (120,040 after giving effect to the 1995 Dividend and 1996
Dividend as discussed below) Common Stock shares of the Company and then issued
4,140,000 (16,560,000 after giving effect to the 1995 Dividend and 1996 Dividend
as discussed below) 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 (2,000,000 after giving effect to the 1995 Dividend and
1996 Dividend as discussed below) 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 (900,000
after giving effect to the 1995 Dividend and 1996 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
(214,500 after giving effect to the 1995 Dividend and 1996 Dividend as discussed
below) 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 1995, the Company issued 21,438 shares (85,752 after giving effect
to the 1995 Dividend and 1996 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 fully described in Note
2 in conjunction with the UK Acquisition, the Company issued an additional
1,800,000 (3,600,000 after giving effect to the 1996 Dividend as discussed
below) 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 (2,500,000 after giving effect to the
1996 Dividend as discussed below) shares of Common Stock at a public offering
price of $18.00 ($9.00 after giving effect to the 1996 Dividend as discussed
below) per share and the former warrant holders (as more fully described above)
sold 1,250,000 (2,500,000 after giving effect to the 1996 Dividend as discussed
below) shares at the same price resulting in net proceeds of approximately $20.7
million to the Company.
During April and June 1996, the Company issued 274,000 (548,000 after
giving effect to the 1996 Dividend as discussed below) and 49,681 (99,362 after
giving effect to the 1996 Dividend as discussed below) shares of Common Stock,
respectively, in exchange for all of the capital stock of J&J and Greyfriars
(see Note 2) resulting in an increase of $12.3 million to Stockholders' equity.
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").
During 1996, the Company issued 101,039 shares of Common Stock resulting in
an increase to Stockholders' equity of $673,256.
20. FAIR VALUE 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
F-27
<PAGE> 143
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 estimated 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.
Securities purchased under agreements to resell: The carrying amount of
securities purchased under agreements to resell is considered to be a reasonable
estimate of fair value.
Available-for-sale securities: The fair value was determined based upon
the market value of the securities less a discount for restrictions on the
resale of such securities.
Mortgage servicing receivables: The fair value was determined by using
estimated discounted future cash flows taking into consideration the current
interest rate environment, current prepayment rates and default experience. The
carrying amount is considered to be a reasonable estimate of fair market value.
Trading securities: The fair value was determined by using estimated
discounted future cash flows taking into consideration the current interest rate
environment, current prepayment rates and default experience. Such securities
are carried at fair 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 $79.4 million and $108.4 million at
December 31, 1995 and 1996, respectively.
Mortgage loans held for investment, net: The 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 15.1% and 16.7% at
December 31, 1995 and 1996, 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.
Securities sold but not yet purchased: The carrying amount of securities
purchased under agreements to resell is considered to be a reasonable estimate
of fair value.
Standby financing facilities: The carrying amount of standby financing
facilities is considered to be a reasonable estimate of fair market value.
Notes and loans payable: The carrying amount of notes and loans payable is
considered to be a reasonable estimate of fair market value.
Convertible subordinated debentures: Fair value was estimated based on
rates currently available for debt with similar terms and remaining maturities.
As of December 31, 1996, the estimated fair value of the Convertible Debentures
(see Note 14) based on a quoted market price exceeded the carrying value by $6.5
million.
F-28
<PAGE> 144
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The notes included above reflect fair values where appropriate for the
financial instruments of the Company, utilizing the assumptions and
methodologies as defined.
21. SEGMENTAL REPORTING
For the years ended December 31, 1994, 1995 and 1996, revenues from loan
sales and servicing constituted the primary source 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 years ended December 31, 1995 and 1996,
there was one institutional purchaser who acted as a conduit to securitize the
Company's loan originations that accounted for 10% or more of the total
revenues. For the years ended December 31, 1995 and 1996, this institutional
purchaser accounted for 23.5% and 70.5% of total revenues, respectively.
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 region for the years ended December 31, 1995 and 1996.
<TABLE>
<CAPTION>
US UK CONSOLIDATED
------------ ------------ ------------
<S> <C> <C> <C>
1995
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 $ 21,255,447 $133,260,970
Goodwill..................................... 19,258,011
------------
Total assets............................ $152,518,981
============
1996
Revenues..................................... $100,283,543 $ 98,932,000 $199,215,543
============ =========== ============
Operating profit............................. $ 52,922,447 $ 56,192,000 $109,114,447
Interest expense............................. (20,223,755)
Amortization of goodwill..................... (3,775,176)
Corporate and other expenses................. (7,200)
------------
Earnings before income taxes............ $ 85,108,316
============
Identifiable assets.......................... $461,270,825 $296,579,000 $757,849,825
Corporate assets............................. 4,885,699
Goodwill..................................... 47,466,835
------------
Total assets............................ $810,202,359
============
</TABLE>
F-29
<PAGE> 145
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
22. SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
The following is a summary of the significant noncash and financing
activities during the year ended 1996:
<TABLE>
<S> <C>
Commitment fee financed by lender.............................. $38,000,000
Available-for-sale securities received......................... 14,618,194
Reclassification of mortgages held for sale to mortgages held
for investment............................................... 4,182,414
Conversion of convertible subordinated debentures into common
stock........................................................ 20,000
</TABLE>
23. SELECTED QUARTERLY DATA (UNAUDITED)
The following represents selected quarterly financial data for the Company:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
SEPTEMBER DECEMBER
MARCH 31, JUNE 30, 30, 31,
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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 $38,452,701 $58,269,931 $73,713,843
Net earnings...................... 9,273,144 11,125,996 14,414,837 15,866,908
Primary net earnings per share.... 0.31 0.37 0.47 0.51
</TABLE>
F-30
<PAGE> 146
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 United States generally accepted accounting principles.
/s/ BDO STOY HAYWARD
BDO STOY HAYWARD
Chartered Accountants
and Registered Auditors
London
November 30, 1995
F-31
<PAGE> 147
J & J SECURITIES LIMITED
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------- MARCH 31,
NOTE 1994 1995 1996
---- ------------ ----------- -----------
(AUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Cash at bank and in hand......................... $ 3,778,941 $ 1,401,175 $ 7,343
Mortgage loans held for investment, net.......... 5 48,950,652 46,657,205 48,839,093
Fixed assets net of accumulated depreciation..... 4 177,563 332,414 318,613
Other assets..................................... 72,047 106,870 108,421
------------ ----------- -----------
Total assets........................... $ 52,979,203 $48,497,664 $49,273,470
============ =========== ===========
LIABILITIES
Bank loans and overdrafts........................ $ 12,300,600 $12,345,060 $ 5,461,951
Other creditors and accrued expenses............. 649,224 781,243 809,547
Deferred taxation................................ -- -- 2,808,873
Income taxes..................................... -- -- 619,915
Obligations under hire purchase agreements....... 15,398 100,047 167,761
Bank loan........................................ 8 51,358,135 43,804,708 27,477,000
------------ ----------- -----------
Total liabilities...................... 64,323,357 57,031,058 $37,345,047
------------ ----------- -----------
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) 11,118,060
Cumulative translation adjustment................ 923,232 869,434 808,867
------------ ----------- -----------
Total stockholders' equity.................. (11,344,154) (8,533,394) 11,928,423
------------ ----------- -----------
Total liabilities and stockholders'
equity............................... $ 52,979,203 $48,497,664 $49,273,470
============ =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE> 148
J & J SECURITIES LIMITED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
FOR THE YEAR ENDED SEPTEMBER 30, -------------------------
--------------------------------------- MARCH 31, MARCH 31,
NOTE 1993 1994 1995 1995 1996
---- ----------- ----------- ----------- ----------- -----------
(AUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
INTEREST
Interest income.................... $12,505,268 $13,695,765 $13,022,053 $ 6,395,581 $ 5,568,832
Interest expense................... (5,603,931) (4,851,944) (4,641,334) (2,383,791) (1,029,034)
----------- ----------- ----------- ----------- -----------
Net interest income................ 6,901,337 8,843,821 8,380,719 4,011,790 4,539,798
Provision for loan losses.......... 3,140,497 1,766,313 1,046,700 624,468 27,226
----------- ----------- ----------- ----------- -----------
Net interest income after provision
for loan losses.................. 3,760,840 7,077,508 7,334,019 3,387,322 4,512,572
Other income....................... 490,958 235,846 336,597 318,030 215,586
----------- ----------- ----------- ----------- -----------
4,251,798 7,313,354 7,670,616 3,705,352 4,728,158
----------- ----------- ----------- ----------- -----------
OTHER EXPENSES
Salaries and employees benefits.... 927,531 876,916 941,969 462,183 493,835
Directors' emoluments.............. 449,649 643,539 759,940 383,318 565,546
Other operating expenses........... 2,374,377 2,605,759 3,104,149 1,496,893 1,897,445
----------- ----------- ----------- ----------- -----------
Total other expenses............... 3,751,557 4,126,214 4,806,058 2,342,394 2,956,826
----------- ----------- ----------- ----------- -----------
Earnings before income taxes and
extraordinary item............... 500,241 3,187,140 2,864,558 1,362,958 1,771,332
(Provision)/credit for income
taxes............................ 6 -- 140,948 -- -- (624,625)
----------- ----------- ----------- ----------- -----------
Earnings before extraordinary
item............................. 500,241 3,328,088 2,864,558 1,362,958 1,146,707
Extraordinary gain from
extinguishment of debt, net of
taxes............................ 7 -- -- -- -- 19,375,677
----------- ----------- ----------- -----------
NET EARNINGS......................... $ 500,241 $ 3,328,088 $ 2,864,558 $ 1,362,958 $20,522,384
=========== =========== =========== ===========
Earnings per share before
extraordinary item............... $ 500.24 $ 3,328.09 $ 2,864.56 $ 1,362.96 $ 1,146.70
Extraordinary item................. -- -- -- -- 19,375.68
----------- ----------- ----------- -----------
Earnings per share................. $ 500.24 $ 3,328.09 $ 2,864.56 $ 1,362.96 $ 20,522.38
=========== =========== =========== =========== ===========
Weighted average number of shares
outstanding...................... 1,000 1,000 1,000 1,000 1,000
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE> 149
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...... -- -- (60,567) -- (60,567)
Net earnings................ -- -- -- 20,522,384 20,522,384
------ ------ ----------- ------------------ ------------
Balance at March 31, 1996... 1,000 $1,496 $ 808,867 $ 11,118,060 $ 11,928,423
===== ====== ========== ============= ===========
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE> 150
J & J SECURITIES LIMITED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEAR ENDED SEPTEMBER 30, ENDED MARCH 31,
----------------------------------------- ---------------------------
NOTE 1993 1994 1995 1995 1996
---- ----------- ------------ ------------ ------------ ------------
(AUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings................... $ 500,241 $ 3,328,088 $ 2,864,558 $ 1,362,958 $ 20,522,384
ADJUSTMENTS TO RECONCILE NET
EARNINGS TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Depreciation charges........... 156,106 114,109 172,441 76,060 70,130
Income taxes payable........... 128,728 402,666 -- -- 624,625
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) (763,966) (2,937,829)
NET CHANGES IN OPERATING ASSETS
AND LIABILITIES:
Increase in accrued interest
payable...................... 1,339,379 4,848,573 4,626,663 2,383,791 1,003,278
Decrease/(increase) in
receivables.................. (20,034) (35,719) (34,718) (43,697) (5,386)
Other, net..................... 52,933 61,105 215,227 (78,108) 128,279
----------- ------------ ------------ ------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES..................... 2,355,942 5,498,404 6,191,878 2,937,038 29,804
----------- ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Mortgage originations.......... (13,732,146) (9,358,388) (11,900,423) (5,294,700) (9,167,751)
Mortgage repayments............ 12,618,654 17,539,489 15,967,974 8,166,294 8,241,281
Net purchase of equipment...... (60,408) (101,608) (269,520) (172,942) (67,859)
----------- ------------ ------------ ------------ ------------
NET CASH PROVIDED BY/(USED IN)
INVESTING ACTIVITIES........... (1,173,900) 8,079,493 3,798,031 2,698,652 (994,329)
----------- ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Bank loan repayments........... 217,075 (11,792,820) (12,400,440) (6,211,920) (386,003)
----------- ------------ ------------ ------------ ------------
NET CASH PROVIDED BY/(USED IN)
FINANCING ACTIVITIES........... 217,075 (11,792,820) (12,400,440) (6,211,920) (386,003)
----------- ------------ ------------ ------------ ------------
Net (decrease)/increase in cash
and cash equivalents........... 1,399,117 1,785,077 (2,410,531) (576,230) (1,350,528)
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 80,267 (43,304)
----------- ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD...................... $ 1,987,280 $ 3,778,941 $ 1,401,175 $ 3,282,978 $ 7,343
=========== ============ ============ ============ ============
SUPPLEMENTED DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid during the
period....................... -- -- -- -- 158,900
=========== ============ ============ ============ ============
Income taxes (received)/paid
during the period............ $ (127,500) $ 402,666 -- -- --
=========== ============ ============ ============ ============
</TABLE>
F-35
<PAGE> 151
J & J SECURITIES LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1993, 1994 AND 1995
AND MARCH 31, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
1. ORGANIZATION
J & J Securities Limited ("J&J") is a UK based company, incorporated in
England in 1977, that originates and services mortgage loans for investment
purposes secured by 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. UNAUDITED INFORMATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and do not include all
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments consisting of normal recurring accruals, considered necessary for a
fair presentation of the results for the interim period have been included.
Operating results for the six months ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the fiscal year ended
September 30, 1996.
3. 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 held for investment, net
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. The adoption of these standards had no material
impact on the financial statements.
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.
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.
F-36
<PAGE> 152
J & J SECURITIES LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
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 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 laws. Deferred tax liabilities and
assets are adjusted for the effect of a change in tax laws or rates.
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.
4. FIXED ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1994 1995
------------ -----------
<S> <C> <C>
Cost
Office equipment....................................... $ 293,404 $ 376,080
Motor vehicles......................................... 342,668 365,522
------------ -----------
636,072 741,602
Less:
Accumulated depreciation............................ 458,509 409,188
------------ -----------
Balance at end of period............................ $ 177,563 $ 332,414
============ ===========
</TABLE>
5. MORTGAGE LOANS HELD FOR INVESTMENT, NET
The mortgage loan balance is summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1994 1995
------------ -----------
<S> <C> <C>
Mortgage loans held for investment, net.................. $ 59,304,209 $55,460,242
Provisions for losses.................................. (10,353,557) (8,803,037)
----------- -----------
Balance, end of year................................... $ 48,950,652 $46,657,205
=========== ===========
</TABLE>
F-37
<PAGE> 153
J & J SECURITIES LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
The activity in the reserve for mortgage loans is summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER
30,
----------------------------
1993 1994
------------ -----------
<S> <C> <C>
Balance, beginning of year............................... $ 12,824,868 $13,000,982
Provision for losses................................... 3,140,497 1,766,313
Charge-offs............................................ (2,963,312) (4,979,321)
Effects of foreign exchange............................ (1,071) 565,583
----------- -----------
Balance, end of year................................ $ 13,000,982 $10,353,557
=========== ===========
</TABLE>
6. 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>
7. EXTRAORDINARY GAIN
On November 20, 1995, J&J entered into an agreement with its bankers to
extinguish the long-term loan (see Note 8). 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).
8. 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 11), 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 7). 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.
9. 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.
F-38
<PAGE> 154
J & J SECURITIES LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
A J&J director is a beneficial shareholder in Latchglen Limited trading as
London Trust Securities which received introductory commissions of $47,698,
$138,922 and $136,209 for the years ended September 30, 1993, 1994 and 1995,
respectively.
10. 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.
11. 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-39
<PAGE> 155
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, 1994
and 1995 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 United States 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, 1994 and 1995, 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 United States
generally accepted accounting principles.
/s/ KPMG
KPMG
Chartered Accountants
Registered Auditors
London, United Kingdom
April 2, 1996
F-40
<PAGE> 156
HERITABLE FINANCE LIMITED
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31,
1996
DECEMBER 31, DECEMBER 31, -----------
1994 1995
------------ ------------ (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash.................................................... $ 58 $ 47 $ --
Accrued interest receivable............................. 1,583 1,699 1,755
Unamortized fees........................................ 2,982 3,962 4,279
Accounts receivable..................................... 799 379 217
Mortgage loans held for investment, net................. 159,806 172,702 176,001
Furniture, equipment and vehicles, net.................. 524 588 609
Other assets............................................ 2,142 2,125 1,916
-------- -------- --------
Total assets.................................... $167,894 $181,502 $ 184,777
======== ======== ========
LIABILITIES
Accounts payable and other liabilities.................. $ 1,588 $ 1,678 $ 2,383
Income taxes payable.................................... 1,095 2,127 3,045
Due to The Heritable and General Investment Bank
Limited.............................................. 163,037 171,028 171,415
Due to City Mortgage Corporation........................ -- -- --
Negative goodwill....................................... 2,116 1,882 1,797
-------- -------- --------
Total liabilities............................... 167,836 176,715 178,640
-------- -------- --------
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 (78)
Retained earnings(deficit).............................. (44) 4,764 6,199
-------- -------- --------
Total stockholders' equity.............................. 58 4,787 6,137
-------- -------- --------
Total liabilities and stockholders' equity...... $167,894 $181,502 $ 184,777
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-41
<PAGE> 157
HERITABLE FINANCE LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE THREE MONTHS ENDED
------------------------------------------ ---------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1993 1994 1995 1995 1996
------------ ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Interest income................. $ 16,608 $ 17,978 $ 25,842 $ 6,014 $ 6,256
Fee and commission income....... 2,355 3,846 4,530 1,133 1,506
------------ ------------ ------------ ----------- -----------
Total revenues............. 18,963 21,824 30,372 7,147 7,762
------------ ------------ ------------ ----------- -----------
EXPENSES
Salaries and employee
benefits..................... 1,903 2,980 4,017 1,155 1,193
Interest expense................ 11,339 7,644 12,278 2,843 2,859
Fee and commission expenses..... 1,209 2,776 4,456 950 1,306
Other operating expenses........ 4,881 4,071 2,455 788 294
Release of general provisions on
sale of loans................ -- -- -- -- --
------------ ------------ ------------ ----------- -----------
Total expenses............. 19,332 17,471 23,206 5,736 5,652
------------ ------------ ------------ ----------- -----------
EARNINGS (LOSS) BEFORE INCOME
TAXES........................... (369) 4,353 7,166 1,411 2,110
Provision (credit) for income
taxes........................ (84) 1,191 2,358 448 675
------------ ------------ ------------ ----------- -----------
NET EARNINGS (LOSS)............... $ (285) $ 3,162 $ 4,808 $ 963 $ 1,435
========== ========== ========== ========= =========
Earnings (loss) per share....... $ (28.50) $ 316.20 $ 480.80 $ 96.30 $143.50
========== ========== ========== ========= =========
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-42
<PAGE> 158
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).................................. -- 1,435 -- 1,435
Foreign currency translation adjustment(unaudited)........ -- -- (85) (85)
---------- ---------- ---------- ----------
BALANCE AT MARCH 31, 1996 (UNAUDITED)..................... $ 16 $ 6,199 $ (78) $6,137
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-43
<PAGE> 159
HERITABLE FINANCE LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED THREE MONTHS ENDED
------------------------------------------ ---------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1993 1994 1995 1995 1996
------------ ------------ ------------ --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)......................... $ (285) $ 3,162 $ 4,808 $ 963 $ 1,435
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities:
Depreciation and amortization....... 324 262 59 (14) (12)
Income taxes payable................ 27 301 1,071 242 918
Provision for losses................ (1,141) 2,236 797 1,483 548
(Gain) loss on disposal of fixed
assets............................ 49 (20) 13 (4) --
Net changes in operating assets and
liabilities:
Other............................... 328 (2,683) (566) 9,238 (234)
(Increase) decrease in accrued
interest receivable............... 193 (952) (115) (179) (57)
-----------
-
----------- ----------- ------------ -----------
Net cash provided by (used in)
operating activities........... (505) 2,306 6,067 11,729 2,598
-----------
-
----------- ----------- ------------ -----------
Cash flows from investing activities:
Payment for acquisition of former
associate................................ -- (912) -- -- --
Mortgage originations....................... -- (31,995) (47,145) (17,945) (13,277)
Mortgage repayments......................... 24,038 23,636 33,452 1,942 9,430
Net purchases of equipment.................. (249) (224) (376) (102) (95)
-----------
-
----------- ----------- ------------ -----------
Net cash (used in) provided by investing
activities............................... 23,789 (9,495) (14,069) (16,105) (3,942)
-----------
-
----------- ----------- ------------ -----------
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 3,663 387
-----------
-
----------- ----------- ------------ -----------
Net cash provided by (used in) financing
activities.................................. (23,265) 6,809 7,991 3,663 387
-----------
-
----------- ----------- ------------ -----------
Net increase (decrease) in cash............... 19 (380) (11) (713) (957)
Cash at the beginning of the period........... 419 438 58 58 47
-----------
-
----------- ----------- ------------ -----------
Cash at the end of the period................. $ 438 $ 58 $ 47 $ (655) $ (910)
=========== =========== ============ =========== ============
Supplemental disclosure of cash flow
information:
Income taxes paid (recovered)............... $ (951) $ 342 $ 1,479 -- --
=========== =========== ============ =========== ============
Interest paid............................... $ 11,339 $ 7,644 $ 12,278 $ 2,843 $ 2,859
=========== =========== ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-44
<PAGE> 160
HERITABLE FINANCE LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
AND MARCH 31, 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.
Unaudited information
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and do not include all
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments consisting of normal recurring accruals, considered necessary for a
fair presentation of the results for the interim period have been included.
Operating results for the three months ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1996. The interim period financial statements for the three months ended March
31, 1995 and 1996 have been presented to provide the latest comparative
financials available prior to the June 14, 1996 acquisition as described in Note
11, "Subsequent Events."
Combination
The Group financial statements consolidate those of the Company and its
subsidiary companies as at December 31, 1993, 1994 and 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
F-45
<PAGE> 161
HERITABLE FINANCE LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
Non-origination fees and commission income
Non-origination fees and commission income are recognized when earned and
have either been paid or are considered to be recoverable with reasonable
certainty.
Origination fees and costs
Origination fees and costs are recognized over the life of the loan to
yield a result which is not materially different from that arising from the
application of SFAS No. 91. 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
An allowance for bad and doubtful debts is recorded on loans which fall
more than four installments in arrears. Specific provisions are also provided 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 No.
114) as amended by SFAS No. 118 "Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosures"
F-46
<PAGE> 162
HERITABLE FINANCE LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(SFAS No. 118) 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. The adoption of these standards had no material impact
on the financial statements.
At December 31, 1995, the Group's net investment in impaired 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. Each investment in impaired loans is
provided an allowance for loan losses. These disclosures are based on the
Group's provisioning policy as described above.
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
No. 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 US dollars at 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 reported as a component of
shareholders' equity.
F-47
<PAGE> 163
HERITABLE FINANCE LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
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>
F-48
<PAGE> 164
HERITABLE FINANCE LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
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 $1,620,863, $2,562,669 and $3,649,561 for the years ended December 31, 1993,
1994 and 1995, respectively. However, except to the extent that each is
received, 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.
F-49
<PAGE> 165
HERITABLE FINANCE LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 years ended December 31, 1993, 1994 and 1995, respectively,
$394,242, $436,578 and $507,578 were 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
F-50
<PAGE> 166
HERITABLE FINANCE LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1994 and 1995, 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.
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 $316,962, $265,188 and $333,070
for the years ended December 31, 1993, 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 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, 1994 and 1995 there were no material undrawn loan
commitments.
F-51
<PAGE> 167
======================================================
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 SECURITY HOLDERS 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
Incorporation of Certain Documents by
Reference........................... 2
Summary............................... 3
Risk Factors.......................... 11
The Company........................... 29
Use of Proceeds....................... 30
Price Range of Common Stock and
Dividend Policy..................... 30
Capitalization........................ 31
Unaudited Pro Forma Consolidated
Financial Statements................ 32
Selected Consolidated Financial and
Other Data.......................... 35
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 38
Business.............................. 54
Management............................ 83
Certain Transactions.................. 89
Security Ownership of Certain
Beneficial Owners and Management.... 91
Description of Capital Stock.......... 92
Shares Eligible for Future Sale....... 95
Description of Debentures............. 96
US Federal Tax Considerations......... 109
Selling Security Holders.............. 112
Plan of Distribution.................. 113
Legal Matters......................... 114
Experts............................... 114
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
$79,380,000
6% CONVERTIBLE
SUBORDINATED DEBENTURES
DUE MAY 1, 2006
(INTEREST PAYABLE MAY 1
AND NOVEMBER 1)
AND
3,824,000
SHARES OF
COMMON STOCK
LOGO
----------------------------
PROSPECTUS
----------------------------
APRIL 18, 1997
======================================================
<PAGE> 168
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....................... $ 31,184
Printing expenses......................................................... 270,000
Accounting fees and expenses.............................................. 150,000
Legal fees and expenses................................................... 180,000
Listing fees.............................................................. *
Fees and expenses (including legal fees) for qualifications under state
securities laws......................................................... *
Transfer agent's fees and expenses........................................ *
Miscellaneous............................................................. *
--------
Total........................................................... $631,184
========
</TABLE>
- ---------------
* Not applicable or none.
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 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.
II-1
<PAGE> 169
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 such amount unless it shall ultimately be
determined that he is entitled to be indemnified by the Company as
II-2
<PAGE> 170
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.
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, incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form S-1 as declared
effective by the Commission on December 20, 1995.
3.2 Bylaws of the Company, as amended, incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1 as declared effective by the
Commission on December 20, 1995.
3.3 Certificate of Designation of 6% Convertible Preferred Stock, Series A of the
Company, incorporated by reference to Exhibit 4.1 to the Company's Current Report
on Form 8-K filed with the Commission on April 11, 1997.
4.1 Indenture, dated as of May 7, 1996, between the Company and The Chase Manhattan
Bank, N.A., incorporated by reference to Exhibit 4.2 to the Company's Quarterly
Report on Form 10-Q filed with the Commission on May 15, 1996.
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., incorporated by reference to
Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q filed with the
Commission on May 15, 1996.
5.1** Opinion of Gibson, Dunn & Crutcher LLP.
8.1** 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, incorporated by
reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 as
declared effective by the Commission on December 20, 1995.
10.2 Sublease Agreement between KLM Royal Dutch Airlines and CSC, dated as of December
5, 1994, incorporated by reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-1 as declared effective by the Commission on December 20, 1995.
10.3 Employment Agreement, dated as of January 1, 1995, between CSC and Robert Grosser,
incorporated by reference to Exhibit 10.3 to the Company's Registration Statement
on Form S-1 as declared effective by the Commission on December 20, 1995.
10.4 Employment Agreement, dated as of January 1, 1995, between CSC and Robert C.
Patent, incorporated by reference to Exhibit 10.4 to the Company's Registration
Statement on Form S-1 as declared effective by the Commission on December 20, 1995.
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,
incorporated by reference to Exhibit 10.5 to the Company's Registration Statement
on Form S-1 as declared effective by the Commission on December 20, 1995.
10.6 Employment Agreement, dated as of July 1, 1995, between CSC and Cheryl P. Carl,
incorporated by reference to Exhibit 10.6 to the Company's Registration Statement
on Form S-1 as declared effective by the Commission on December 20, 1995.
</TABLE>
II-3
<PAGE> 171
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- -----------------------------------------------------------------------------------
<C> <S>
10.7 Employment Agreement, dated as of July 1, 1995, between CSC and Eric S. Goldstein,
incorporated by reference to Exhibit 10.7 to the Company's Registration Statement
on Form S-1 as declared effective by the Commission on December 20, 1995.
10.8 Employment Agreement, dated as of July 1, 1995, between CSC and Steven Weiss,
incorporated by reference to Exhibit 10.8 to the Company's Registration Statement
on Form S-1 as declared effective by the Commission on December 20, 1995.
10.9 Employment Agreement, dated as of July 1, 1995, between CSC and Jonah L. Goldstein,
incorporated by reference to Exhibit 10.10 to the Company's Registration Statement
on Form S-1 as declared effective by the Commission on December 20, 1995.
10.10 Standby Financing and Investment Banking Services Agreement, dated as of June 24,
1994, between CSC and ContiTrade, incorporated by reference to Exhibit 10.15 to the
Company's Registration Statement on Form S-1 as declared effective by the
Commission on December 20, 1995.
10.11 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, incorporated by reference to Exhibit 10.19
to the Company's Registration Statement on Form S-1 as declared effective by the
Commission on December 20, 1995.
10.12 The Company's 1995 Stock Option Plan, incorporated by reference to Exhibit 10.20 to
the Company's Registration Statement on Form S-1 as declared effective by the
Commission on December 20, 1995.
10.13 The Company's 1995 Non-Employee Directors Stock Option Plan, incorporated by
reference to Exhibit 10.21 to the Company's Registration Statement on Form S-1 as
declared effective by the Commission on December 20, 1995.
10.14+ Mortgage Loan Purchase Agreement, dated as of May 26, 1995, between CSC-UK and
Greenwich, incorporated by reference to Exhibit 10.29 to the Company's Registration
Statement on Form S-1 as declared effective by the Commission on December 20, 1995.
10.15+ Letter, dated as of May 26, 1995, from Greenwich to CSC-UK regarding purchase
commitment with respect to first and second mortgage loans located in the United
Kingdom, incorporated by reference to Exhibit 10.30 to the Company's Registration
Statement on Form S-1 as declared effective by the Commission on December 20, 1995.
10.16+ Servicing Agreement, dated as of May 26, 1995, among CSC-UK, City Mortgage
Servicing Limited and Greenwich, incorporated by reference to Exhibit 10.31 to the
Company's Registration Statement on Form S-1 as declared effective by the
Commission on December 20, 1995.
10.17 Stock Purchase Agreement, dated as of September 29, 1995, among the Company, David
Steene, Martin Brand and Gerald Epstein, incorporated by reference to Exhibit 10.32
to the Company's Registration Statement on Form S-1 as declared effective by the
Commission on December 20, 1995.
10.18 Service Agreement, dated as of April 5, 1995, between CSC-UK and David Steene,
incorporated by reference to Exhibit 10.33 to the Company's Registration Statement
on Form S-1 as declared effective by the Commission on December 20, 1995.
10.19 Service Agreement, dated as of April 5, 1995, between CSC-UK and Martin Brand,
incorporated by reference to Exhibit 10.34 to the Company's Registration Statement
on Form S-1 as declared effective by the Commission on December 20, 1995.
</TABLE>
II-4
<PAGE> 172
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- -----------------------------------------------------------------------------------
<C> <S>
10.20 Service Agreement, dated as of April 5, 1995, between CSC-UK and Gerald Epstein,
incorporated by reference to Exhibit 10.35 to the Company's Registration Statement
on Form S-1 as declared effective by the Commission on December 20, 1995.
10.21 Agreement, dated as of May 1, 1995, between CSC-UK and J.L.B. Equities, Inc.,
incorporated by reference to Exhibit 10.36 to the Company's Registration Statement
on Form S-1 as declared effective by the Commission on December 20, 1995.
10.22 Stock Option Agreement, dated as of March 6, 1996, by and among the Company, CSC-UK
and Messrs. Jaye and Johnson, incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed with the Commission on March 14, 1996.
10.23 Asset Purchase Agreement, dated March 6, 1996, by and among CSC-UK, J&J, UK Credit
Corporation Limited ("UK Credit") and certain shareholders of UK Credit,
incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form
8-K filed with the Commission on March 14, 1996.
10.24+ Letter Agreement, dated as of March 28, 1996, from Greenwich International, Ltd. to
CSC-UK regarding purchase commitment with respect to first and second mortgage
loans located in the United Kingdom, incorporated by reference to Exhibit 10.46 to
the Company's Annual Report on Form 10-K/A filed with the Commission on November 4,
1996.
10.25 Letter Agreement, dated March 28, 1996, between Greenwich and CSC-UK regarding
termination of prior agreement, incorporated by reference to Exhibit 10.46 to the
Company's Annual Report on Form 10-K filed with the Commission on April 1, 1996.
10.26 Agreement for the Sale and Purchase of the Entire Issued Share Capital of Heritable
Group Limited, dated June 14, 1996, incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed with the Commission on June 28, 1996.
10.27 Third Amendment to Lease, dated as of April 17, 1996, between CSC and Taxter Park
Associates, incorporated by reference to Exhibit 10.53 to the Company's Quarterly
Report on Form 10-Q filed with the Commission on August 14, 1996.
10.28 Lease, dated as of April 18, 1996, among The Standard Life Assurance Company, City
Mortgage Servicing Limited and CSC-UK, incorporated by reference to Exhibit 10.54
to the Company's Quarterly Report on Form 10-Q filed with the Commission on August
14, 1996.
10.29 Purchase and Sale Agreement, dated June 20, 1996 and effective as of February 2,
1996, between CSC and Greenwich Capital Financial Products, Inc., incorporated by
reference to Exhibit 10.55 to the Company's Quarterly Report on Form 10-Q filed
with the Commission on August 14, 1996.
10.30 Lease Agreement, dated as of July 7, 1996, between CSC and Robert Martin Company,
incorporated by reference to Exhibit 10.56 to the Company's Quarterly Report on
Form 10-Q filed with the Commission on August 14, 1996.
10.31* Loan Agreement, dated as of August 6, 1996, between CSC and CoreStates.
10.32* Employment Agreement, dated as of January 1, 1996, between CSC and Tim S. Ledwick.
10.33* Employment Agreement, dated as of February 1, 1996, between CSC and Robert J.
Blackwell.
10.34 Amendment No. 1 dated as of August 30, 1996, to the Purchase and Sale Agreement,
dated as of February 2, 1996, between CSC and Greenwich Capital Financial Products,
Inc., incorporated by reference to Exhibit 10.63 to Amendment No. 1 to the
Company's Registration Statement on Form S-1 filed with the Commission on September
27, 1996.
10.35 Senior Secured Credit Agreement, dated October 30, 1996, among the Company and CIBC
Wood Gundy Securities Corp. and the lenders named therein, incorporated by
reference to Exhibit 10. 60 to the Company's Quarterly Report on Form 10-Q filed
with the Commission on November 19, 1996.
</TABLE>
II-5
<PAGE> 173
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- -----------------------------------------------------------------------------------
<C> <S>
10.36 Amendment No. 2, dated as of October 30, 1996, to the Purchase and Sale Agreement,
dated as of February 2, 1996, between CSC and Greenwich Capital Financial Products,
Inc., incorporated by reference to Exhibit 10.62 to the Company's Quarterly Report
on Form 10-Q filed with the Commission on November 19, 1996.
10.37* Registration Rights Agreement, dated as of November 22, 1996, among the Company,
Mutual Shares Fund, Mutual Qualified Fund, Mutual Beacon Fund, Mutual Discovery
Fund, Mutual European Fund, The Orion Fund Limited, Mutual Shares Securities Fund
and Mutual Discovery Securities Fund.
10.38* Amendment No. 3, dated as of December 30, 1996, to the Purchase and Sale Agreement,
dated as of February 2, 1996, between CSC and Greenwich Capital Financial Products,
Inc.
10.39* Amendment No. 4, dated as of December 31, 1996, to the Purchase and Sale Agreement,
dated as of February 2, 1996, between CSC and Greenwich Capital Financial Products,
Inc.
10.40* Amendment No. 1, dated as of January 13, 1997, to the Senior Secured Credit
Agreement, dated October 30, 1996, among the Company and CIBC Wood Gundy Securities
Corp. and the lenders named therein.
10.41 Lease, dated as of October 1, 1996, between CSC and Reckson Operating Partnership,
L.P., incorporated by reference to Exhibit 10.41 to the Company's Annual Report on
Form 10-K filed with the Commission on March 31, 1997.
10.42 Securities Purchase Agreement dated April 9, 1997 by and among the Company and the
purchasers named therein, incorporated by reference to Exhibit 4.2 to the Company's
Current Report on Form 8-K filed with the Commission on April 11, 1997.
10.43 Registration Rights Agreement dated April 9, 1997 by and among the Company and the
purchasers named therein, incorporated by reference to Exhibit 4.3 to the Company's
Current Report on Form 8-K filed with the Commission on April 11, 1997.
10.44 Form of Common Stock Purchase Warrant issued in conjunction with the 6% Convertible
Preferred Stock, Series A, incorporated by reference to Exhibit 4.4 to the
Company's Current Report on Form 8-K filed with the Commission on April 11, 1997.
11.1 Computation of Earnings Per Share, incorporated by reference to Exhibit 11.1 to the
Company's Annual Report on Form 10-K filed with the Commission on March 31, 1997.
21.1* Subsidiaries of the Company
23.1** Consent of KPMG Peat Marwick LLP
23.2** Consent of KPMG, Registered Auditors
23.3** Consent of BDO Stoy Hayward
23.4** 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 for the year ended December 31, 1995
27.2 Financial Data Schedule for the year ended December 31, 1996, incorporated by
reference to Exhibit 27.1 to the Company's Annual Report on Form 10-K filed with
the Commission on March 31, 1997.
</TABLE>
- ---------------
* Previously filed.
** Filed herewith.
+ Confidential treatment has been granted with respect to certain provisions,
the redacted portions of which are indicated by brackets. This Exhibit has
been filed in its entirety separately with the Commission pursuant to an
application for confidential treatment.
II-6
<PAGE> 174
(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.
(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.
(c) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(d) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report, to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
II-7
<PAGE> 175
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 5 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the Village of
Elmsford, State of New York, on April 17, 1997.
CITYSCAPE FINANCIAL CORP.
By: /s/ ROBERT C. PATENT
------------------------------------
Robert C. Patent
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 5 to the Registration Statement has been signed by the following persons in
the capacity indicated on April 17, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------ -------------------------------------------------
<C> <S>
* 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
* Director
- ------------------------------------------
Asher Fensterheim
* Director
- ------------------------------------------
Jonah L. Goldstein
* Director
- ------------------------------------------
Arthur P. Gould
* Director
- ------------------------------------------
Hollis W. Rademacher
* Director
- ------------------------------------------
Robert M. Stata
* Director
- ------------------------------------------
David A. Steene
* Chief Financial Officer (Principal Financial and
- ------------------------------------------ Accounting Officer)
Tim S. Ledwick
*By: /s/ ROBERT C. PATENT
- ------------------------------------------
Robert C. Patent
Attorney-in-Fact
</TABLE>
II-8
<PAGE> 176
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, incorporated
by reference to Exhibit 3.1 to the Company's Registration Statement
on Form S-1 as declared effective by the Commission on December 20,
1995.................................................................
3.2 Bylaws of the Company, as amended, incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-1 as
declared effective by the Commission on December 20, 1995............
3.3 Certificate of Designation of 6% Convertible Preferred Stock, Series
A of the Company, incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K filed with the Commission on
April 11, 1997.......................................................
4.1 Indenture, dated as of May 7, 1996, between the Company and The Chase
Manhattan Bank, N.A., incorporated by reference to Exhibit 4.2 to the
Company's Quarterly Report on Form 10-Q filed with the Commission on
May 15, 1996.........................................................
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.,
incorporated by reference to Exhibit 4.3 to the Company's Quarterly
Report on Form 10-Q filed with the Commission on May 15, 1996........
5.1** Opinion of Gibson, Dunn & Crutcher LLP...............................
8.1** 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, incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-1 as declared effective by
the Commission on December 20, 1995..................................
10.2 Sublease Agreement between KLM Royal Dutch Airlines and CSC, dated as
of December 5, 1994, incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-1 as declared effective by
the Commission on December 20, 1995..................................
10.3 Employment Agreement, dated as of January 1, 1995, between CSC and
Robert Grosser, incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1 as declared effective by
the Commission on December 20, 1995..................................
10.4 Employment Agreement, dated as of January 1, 1995, between CSC and
Robert C. Patent, incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1 as declared effective by
the Commission on December 20, 1995..................................
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, incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1 as declared effective by
the Commission on December 20, 1995..................................
</TABLE>
<PAGE> 177
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------- --------------------------------------------------------------------- ------------
<C> <S> <C>
10.6 Employment Agreement, dated as of July 1, 1995, between CSC and
Cheryl P. Carl, incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-1 as declared effective by
the Commission on December 20, 1995..................................
10.7 Employment Agreement, dated as of July 1, 1995, between CSC and Eric
S. Goldstein, incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-1 as declared effective by
the Commission on December 20, 1995..................................
10.8 Employment Agreement, dated as of July 1, 1995, between CSC and
Steven Weiss, incorporated by reference to Exhibit 10.8 to the
Company's Registration Statement on Form S-1 as declared effective by
the Commission on December 20, 1995..................................
10.9 Employment Agreement, dated as of July 1, 1995, between CSC and Jonah
L. Goldstein, incorporated by reference to Exhibit 10.10 to the
Company's Registration Statement on Form S-1 as declared effective by
the Commission on December 20, 1995..................................
10.10 Standby Financing and Investment Banking Services Agreement, dated as
of June 24, 1994, between CSC and ContiTrade, incorporated by
reference to Exhibit 10.15 to the Company's Registration Statement on
Form S-1 as declared effective by the Commission on December 20,
1995.................................................................
10.11 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, incorporated by reference to Exhibit 10.19 to the Company's
Registration Statement on Form S-1 as declared effective by the
Commission on December 20, 1995......................................
10.12 The Company's 1995 Stock Option Plan, incorporated by reference to
Exhibit 10.20 to the Company's Registration Statement on Form S-1 as
declared effective by the Commission on December 20, 1995............
10.13 The Company's 1995 Non-Employee Directors Stock Option Plan,
incorporated by reference to Exhibit 10.21 to the Company's
Registration Statement on Form S-1 as declared effective by the
Commission on December 20, 1995......................................
10.14+ Mortgage Loan Purchase Agreement, dated as of May 26, 1995, between
CSC-UK and Greenwich, incorporated by reference to Exhibit 10.29 to
the Company's Registration Statement on Form S-1 as declared
effective by the Commission on December 20, 1995.....................
10.15+ Letter, dated as of May 26, 1995, from Greenwich to CSC-UK regarding
purchase commitment with respect to first and second mortgage loans
located in the United Kingdom, incorporated by reference to Exhibit
10.30 to the Company's Registration Statement on Form S-1 as declared
effective by the Commission on December 20, 1995.....................
10.16+ Servicing Agreement, dated as of May 26, 1995, among CSC-UK, City
Mortgage Servicing Limited and Greenwich, incorporated by reference
to Exhibit 10.31 to the Company's Registration Statement on Form S-1
as declared effective by the Commission on December 20, 1995.........
</TABLE>
<PAGE> 178
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------- --------------------------------------------------------------------- ------------
<C> <S> <C>
10.17 Stock Purchase Agreement, dated as of September 29, 1995, among the
Company, David Steene, Martin Brand and Gerald Epstein, incorporated
by reference to Exhibit 10.32 to the Company's Registration Statement
on Form S-1 as declared effective by the Commission on December 20,
1995.................................................................
10.18 Service Agreement, dated as of April 5, 1995, between CSC-UK and
David Steene, incorporated by reference to Exhibit 10.33 to the
Company's Registration Statement on Form S-1 as declared effective by
the Commission on December 20, 1995..................................
10.19 Service Agreement, dated as of April 5, 1995, between CSC-UK and
Martin Brand, incorporated by reference to Exhibit 10.34 to the
Company's Registration Statement on Form S-1 as declared effective by
the Commission on December 20, 1995..................................
10.20 Service Agreement, dated as of April 5, 1995, between CSC-UK and
Gerald Epstein, incorporated by reference to Exhibit 10.35 to the
Company's Registration Statement on Form S-1 as declared effective by
the Commission on December 20, 1995..................................
10.21 Agreement, dated as of May 1, 1995, between CSC-UK and J.L.B.
Equities, Inc., incorporated by reference to Exhibit 10.36 to the
Company's Registration Statement on Form S-1 as declared effective by
the Commission on December 20, 1995..................................
10.22 Stock Option Agreement, dated as of March 6, 1996, by and among the
Company, CSC-UK and Messrs. Jaye and Johnson, incorporated by
reference to Exhibit 2.1 to the Company's Current Report on Form 8-K
filed with the Commission on March 14, 1996..........................
10.23 Asset Purchase Agreement, dated March 6, 1996, by and among CSC-UK,
J&J, UK Credit Corporation Limited ("UK Credit") and certain
shareholders of UK Credit, incorporated by reference to Exhibit 2.2
to the Company's Current Report on Form 8-K filed with the Commission
on March 14, 1996....................................................
10.24+ Letter Agreement, dated as of March 28, 1996, from Greenwich
International, Ltd. to CSC-UK regarding purchase commitment with
respect to first and second mortgage loans located in the United
Kingdom, incorporated by reference to Exhibit 10.46 to the Company's
Annual Report on Form 10-K/A filed with the Commission on November 4,
1996.................................................................
10.25 Letter Agreement, dated March 28, 1996, between Greenwich and CSC-UK
regarding termination of prior agreement, incorporated by reference
to Exhibit 10.46 to the Company's Annual Report on Form 10-K filed
with the Commission on April 1, 1996.................................
10.26 Agreement for the Sale and Purchase of the Entire Issued Share
Capital of Heritable Group Limited, dated June 14, 1996, incorporated
by reference to Exhibit 2.1 to the Company's Current Report on Form
8-K filed with the Commission on June 28, 1996.......................
10.27 Third Amendment to Lease, dated as of April 17, 1996, between CSC and
Taxter Park Associates, incorporated by reference to Exhibit 10.53 to
the Company's Quarterly Report on Form 10-Q filed with the Commission
on August 14, 1996...................................................
</TABLE>
<PAGE> 179
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------- --------------------------------------------------------------------- ------------
<C> <S> <C>
10.28 Lease, dated as of April 18, 1996, among The Standard Life Assurance
Company, City Mortgage Servicing Limited and CSC-UK, incorporated by
reference to Exhibit 10.54 to the Company's Quarterly Report on Form
10-Q filed with the Commission on August 14, 1996....................
10.29 Purchase and Sale Agreement, dated June 20, 1996 and effective as of
February 2, 1996, between CSC and Greenwich Capital Financial
Products, Inc., incorporated by reference to Exhibit 10.55 to the
Company's Quarterly Report on Form 10-Q filed with the Commission on
August 14, 1996......................................................
10.30 Lease Agreement, dated as of July 7, 1996, between CSC and Robert
Martin Company, incorporated by reference to Exhibit 10.56 to the
Company's Quarterly Report on Form 10-Q filed with the Commission on
August 14, 1996......................................................
10.31* Loan Agreement, dated as of August 6, 1996, between CSC and
CoreStates...........................................................
10.32* Employment Agreement, dated as of January 1, 1996, between CSC and
Tim S. Ledwick.......................................................
10.33* Employment Agreement, dated as of February 1, 1996, between CSC and
Robert J. Blackwell..................................................
10.34 Amendment No. 1 dated as of August 30, 1996, to the Purchase and Sale
Agreement, dated as of February 2, 1996, between CSC and Greenwich
Capital Financial Products, Inc., incorporated by reference to
Exhibit 10.63 to Amendment No. 1 to the Company's Registration
Statement on Form S-1 filed with the Commission on September 27,
1996.................................................................
10.35 Senior Secured Credit Agreement, dated October 30, 1996, among the
Company and CIBC Wood Gundy Securities Corp. and the lenders named
therein, incorporated by reference to Exhibit 10.60 to the Company's
Quarterly Report on Form 10-Q filed with the Commission on November
19, 1996.............................................................
10.36 Amendment No. 2, dated as of October 30, 1996, to the Purchase and
Sale Agreement, dated as of February 2, 1996, between CSC and
Greenwich Capital Financial Products, Inc., incorporated by reference
to Exhibit 10.62 to the Company's Quarterly Report on Form 10-Q filed
with the Commission on November 19, 1996.............................
10.37* Registration Rights Agreement, dated as of November 22, 1996, among
the Company, Mutual Shares Fund, Mutual Qualified Fund, Mutual Beacon
Fund, Mutual Discovery Fund, Mutual European Fund, The Orion Fund
Limited, Mutual Shares Securities Fund and Mutual Discovery
Securities Fund......................................................
10.38* Amendment No. 3, dated as of December 30, 1996, to the Purchase and
Sale Agreement, dated as of February 2, 1996, between CSC and
Greenwich Capital Financial Products, Inc............................
10.39* Amendment No. 4, dated as of December 31, 1996, to the Purchase and
Sale Agreement, dated as of February 2, 1996, between CSC and
Greenwich Capital Financial Products, Inc............................
10.40* Amendment No. 1, dated as of January 13, 1997, to the Senior Secured
Credit Agreement, dated October 30, 1996, among the Company and CIBC
Wood Gundy Securities Corp. and the lenders named therein............
10.41 Lease, dated as of October 1, 1996, between CSC and Reckson Operating
Partnership, L.P., incorporated by reference to Exhibit 10.41 to the
Company's Annual Report on Form 10-K filed with the Commission on
March 31, 1997.......................................................
</TABLE>
<PAGE> 180
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------- --------------------------------------------------------------------- ------------
<C> <S> <C>
10.42 Securities Purchase Agreement dated April 9, 1997 by and among the
Company and the purchasers named therein, incorporated by reference
to Exhibit 4.2 to the Company's Current Report on Form 8-K filed with
the Commission on April 11, 1997.....................................
10.43 Registration Rights Agreement dated April 9, 1997 by and among the
Company and the purchasers named therein, incorporated by reference
to Exhibit 4.3 to the Company's Current Report on Form 8-K filed with
the Commission on April 11, 1997.....................................
10.44 Form of Common Stock Purchase Warrant issued in conjunction with the
6% Convertible Preferred Stock, Series A, incorporated by reference
to Exhibit 4.4 to the Company's Current Report on Form 8-K filed with
the Commission on April 11, 1997.....................................
11.1 Computation of Earnings Per Share, incorporated by reference to
Exhibit 11.1 to the Company's Annual Report on Form 10-K filed with
the Commission on March 31, 1997.....................................
21.1* Subsidiaries of the Company..........................................
23.1** Consent of KPMG Peat Marwick LLP.....................................
23.2** Consent of KPMG, Registered Auditors.................................
23.3** Consent of BDO Stoy Hayward..........................................
23.4** 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 for the year ended December 31, 1995.........
27.2 Financial Data Schedule for the year ended December 31, 1996,
incorporated by reference to Exhibit 27.1 to the Company's Annual
Report on Form 10-K filed with the Commission on March 31, 1997......
</TABLE>
- ---------------
* Previously filed.
** Filed herewith.
+ Confidential treatment granted with respect to certain provisions, the
redacted portions of which are indicated by brackets. This Exhibit has been
filed in its entirety separately with the Commission pursuant to an application
for confidential treatment.
<PAGE> 1
EXHIBIT 5.1
April 17, 1997
(212) 351-4000 C 15566-00010
Cityscape Financial Corp.
565 Taxter Road
Elmsford, NY 10523
Re: REGISTRATION STATEMENT ON FORM S-3
Ladies and Gentlemen:
We have examined the Registration Statement on form S-3 (the "Registration
Statement"), File No. 333-11383, of Cityscape financial Corp., a Delaware
corporation (the "Company"), filed with the Securities and Exchange Commission
(the "Commission") pursuant to the Securities Act of 1933, as amended (the
"Securities Act"), in connection with (i) the public offering from time to time
by certain selling security holders of up to $79,380,000 aggregate principal
amount of 6% Convertible subordinated Debentures due May 1, 2006 of the Company
(the "Debentures") in an original aggregate principal amount of $143,750,000 and
the shares of common stock, par value $0.01 per share, of the Company (the
"Common Stock") that are issuable upon conversion of the Debentures and (ii) the
public offering by the Company of up to 800,000 shares of Common Stock that may
be issued from time to time by the Company as additional consideration to induce
conversion of the Debentures (the "Additional Stock").
For the purposes of the opinions set forth below, we have examined and are
familiar with the proceedings taken and proposed to be taken by the Company in
connection with the issuance and sale of the Debentures, as well as the issuance
of shares of Common Stock, including the Additional Stock, upon conversion of
the Debentures. In arriving at the following opinions, we have relied, among
other things, upon our examination of such corporate records of the Company and
certificates of officers of the Company and of public officials and such other
documents as we have deemed appropriate. In such examination, we have assumed
the genuineness of all signatures, the authenticity of all documents submitted
to
<PAGE> 2
us as originals, the conformity to original documents of all documents
submitted to us as certified or photostatic copies and the authenticity of the
originals of such copies.
Based upon the foregoing examination and in reliance thereon, and subject
to the assumptions stated and relying on statements of fact contained in the
documents that we have examined and subject to the receipt from the Commission
of an order declaring the Registration Statement Effective, it is our opinion
that:
1. The Debentures, assuming due execution and delivery of the Indenture
and authentication of the Debentures by the Trustee, are legally binding
obligations of the Company.
2. The shares of Common Stock issuable upon conversion of the Debentures,
when issued in accordance with the terms and conditions of the Debentures and
the Indenture, will be validly issued, fully paid and non-assessable.
3. The shares of Additional Stock, when issued in connection with the
induced conversion of the Debentures, will be validly issued, fully paid and
non-assessable.
Our opinion is subject to (i) the effect of applicable bankruptcy,
insolvency, reorganization, moratorium, arrangement and other laws affecting
creditor's rights, including, without limitation, the effect of statutory or
other laws regarding fraudulent conveyances, fraudulent transfers and
preferential transfers; (ii) the limitations imposed by general principles of
equity (regardless of whether such enforceability is considered in a proceeding
at law or in equity); and (iii) our assumption that there exist no agreements,
understandings or negotiations among the parties to the Indenture that would
modify the terms thereof or the respective rights or obligations of the parties
thereunder.
We render no opinion herein as to matters involving the laws of any
jurisdiction other than the laws of the United States of America, the laws of
the State of New York and, for the purposes of our opinion set forth in
paragraphs 2 and 3 above, the General Corporation Law of the State of Delaware,
all as in effect as of the date hereof. In rendering this opinion, we assume no
obligation to revise or supplement this opinion should current laws, or the
interpretations thereof, be changed.
We consent to the filing of this opinion as an exhibit to the Registration
Statement, and we further consent to the use of our name under the caption
"Legal Matters" in the Registration Statement and the prospectus which
forms a part thereof. In giving these consents, we do not thereby admit that we
are within the category of persons whose consent is required under Section 7 of
the Securities Act or the Rules and Regulations of the Commission.
Very truly yours,
/s/ Gibson, Dunn & Crutcher LLP
<PAGE> 1
EXHIBIT 8.1
April 17, 1997
(212) 351-3853 C 15566-00010
Cityscape Financial Corp.
565 Taxter Road
Elmsford, New York 10523-5200
Re: Registration Statement on Form S-3
----------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-3 (the
"Registration Statement"), File No. 333-11383, of Cityscape Financial Corp., a
Delaware corporation (the "Company"), filed with the Securities and Exchange
Commission (the "Commission") pursuant to the Securities Act of 1933, as
amended (the "Securities Act"), in connection with the public offering from
time to time by certain selling security holders of up to $79,380,000 aggregate
principal amount of 6% Convertible Subordinated Debentures due May 1, 2006 of
the Company (the "Debentures") in an original aggregate principal amount of
$143,750,000 which are convertible into shares of the Company's
Common Stock, par value $.01 per share (the "Common Stock") and the proposed
issuance by the Company of up to 800,000 shares of Common Stock.
We hereby confirm our opinions set forth in the Registration Statement
under the caption "US Federal Tax Considerations". Furthermore, it is our
opinion that, although the discussion presented in the Registration Statement
under the caption "US Federal Tax Considerations" is general in many respects
and does not purport to discuss all of the possible federal income tax
ramifications of the ownership, disposition and conversion of the Debentures and
the common stock into which the Debentures are convertible, such discussion, to
the extent it discusses matters of law or legal conclusions, is correct in all
material respects and fairly summarizes the material federal income tax
consequences of the ownership, disposition and conversion of the Debentures.
<PAGE> 2
Cityscape Financial Corp.
April 17, 1997
Page 2
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement, and we further consent to the use of our name under the
captions "Legal Matters" and "US Federal Tax Considerations". In giving this
consent, we do not thereby admit that we are within the category of persons
whose consent is required under Section 7 of the Securities Act or the rules
and regulations promulgated thereunder.
Very truly yours,
/s/ Gibson, Dunn & Crutcher LLP
GIBSON, DUNN & CRUTCHER LLP
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
Cityscape Financial Corp.:
We consent to the use of our report dated February 28, 1997 relating to the
consolidated financial statements of Cityscape Financial Corp. and Subsidiary as
of December 31, 1995 and 1996 and for each of the years in the three-year period
ended December 31, 1996, which report makes reference to the report of other
auditors, included herein and to the reference to our firm under the headings
"Selected Consolidated Financial and Other Data" and "Experts" in the
prospectus.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
New York, New York
April 18, 1997
<PAGE> 1
EXHIBIT 23.2
The Board of Directors
Cityscape Financial Corp.:
We consent to the use of our report dated April 2, 1996 on the consolidated
financial statements of Heritable Finance Limited as of December 31, 1994 and
1995 and for each of the years in the three-year period ended December 31, 1995
included herein and to the reference to our firm under the heading "Experts" in
the prospectus.
/s/ KPMG
KPMG
Chartered Accountants
Registered Auditors
London, United Kingdom
April 18, 1997
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion in the Registration Statement (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.
/s/ BDO STOY HAYWARD
BDO STOY HAYWARD
London, England
18 April, 1997
