<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
(AMENDMENT NO. 2)
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31,
1995
___ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
COMMISSION FILE NUMBER: 0-27314
CITYSCAPE FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 11-2994671
<S> <C>
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
</TABLE>
565 Taxter Road, Elmsford, New York 10523-5200
(Address of principal executive offices, including zip code)
(914) 592-6677
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common Stock, par
value $0.01 per share.
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
As of March 15, 1996, the aggregate market value of the registrant's Common
Stock held by nonaffiliates of the registrant was $128,911,623 based on the
closing sales price of the registrant's Common Stock as reported on the Nasdaq
National Market. For purposes of this calculation, shares owned by officers,
directors and 5% stockholders known to the registrant have been deemed to be
owned by affiliates. As of March 15, 1996, the number of shares of the
registrant's Common Stock outstanding was 14,472,128 and there were no shares of
the registrant's Preferred Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on June 12, 1996 (the "Proxy Statement"),
which will be filed with the Securities and Exchange Commission no later than
120 days after the close of the registrant's fiscal year ended December 31, 1995
("Fiscal 1995") are incorporated herein as provided in Part III.
<PAGE> 2
PART 1
ITEM 1. BUSINESS
GENERAL
Cityscape Financial Corp. (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 Cityscape Corp. ("CSC"), the Company is licensed or registered
to do business in 35 states and the District of Columbia. Through its indirect
wholly owned subsidiary City Mortgage Corporation Limited ("CSC-UK"), the
Company originates, sells and services mortgage loans in England, Scotland and
Wales.
The Company was incorporated under the laws of the State of Delaware in
December 1988 and was formerly named Mandi of Essex, Ltd. CSC, the Company's
principal operating subsidiary, was incorporated under the laws of the State of
New York in March 1985. 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. In
connection with the acquisition of CSC, the Company changed its name to
Cityscape Financial Corp. From the date of its formation through the date of the
acquisition of CSC, 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.
In January 1994, CSC acquired Astrum Funding Corp. ("Astrum") which had
operated as a mortgage banker in 11 states. In May 1995, the Company and three
principals of a privately held United Kingdom-based mortgage banker formed a
company organized under English law, CSC-UK. CSC-UK operates in the United
Kingdom (excluding Northern Ireland, the "UK"), and lends to individuals who are
generally unable to obtain mortgage financing from conventional mortgage sources
in the UK such as banks and building societies ("Conventional UK Lenders")
because of impaired or unsubstantiated credit histories and/or unverifiable
income (for example, because they are self-employed). On September 29, 1995, the
Company entered into an agreement with the three other shareholders of CSC-UK to
acquire the remaining 50% interest in CSC-UK not then owned by the Company
through the issuance of 1.8 million shares of the Company's Common Stock valued
at $21.6 million (the "UK Acquisition"). The UK Acquisition was completed as of
September 30, 1995 and CSC now holds 100% of the stock of CSC-UK. The Company
also owns a 9.1% limited partner interest in Industry Mortgage Company, LP, a
Delaware limited partnership ("IMC"). IMC originates, purchases, sells and
services mortgage loans that are secured primarily by one- to four-family
residences.
In March 1996, the Company and CSC-UK entered into a definitive agreement
pursuant to which CSC-UK will purchase all of the outstanding stock of J&J
Securities Limited ("J&J") in exchange for (pound)15.0 million and 274,000
shares of Common Stock (the "J&J Acquisition"). J&J is a mortgage banker engaged
in the same line of business as CSC-UK. The J&J Acquisition is scheduled to
close prior to May 30, 1996, but there can be no assurance that the transaction
will be consummated as of that date, if at all.
The Company's principal executive office and mailing address is 565 Taxter
Road, Elmsford, New York 10523-5200 and its telephone number is (914) 592-6677.
Unless otherwise specified, all references herein to "$" are to United States
dollars; all references to "(pound)" are to British Pounds Sterling. Unless
otherwise specified, translation of amounts from British Pounds Sterling to
United States dollars for the convenience of the reader has been made herein at
the noon buying rate in New York City for cable transfers in foreign currencies
as certified for customs purposes by the Federal Reserve Bank of New York (the
"Noon Buying Rate") on December 31, 1995 of (pound-sterling )1.00 = $1.55. No
representation is made that the British Pound Sterling amounts could have been,
or
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<PAGE> 3
could be, converted into United States dollars at that rate or at any other
rate. In the event of changes in the official rate, the amounts shown in the
convenience translations would change proportionately.
US Overview
In the US market, 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. In addition, the Company
also has a Wholesale Loan Acquisition Program whereby it purchases loans on a
wholesale basis from selected financial institutions and mortgage bankers.
The majority of the Company's loan origination and purchase volume is
currently originated through a network of approximately 500 independent mortgage
brokers located in 35 states and the District of Columbia. 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 of receipt of the loan
application. The Company also purchases loans under its Wholesale Loan
Acquisition Program from selected financial institutions and mortgage bankers,
also known as loan correspondents. Under the Wholesale Loan Acquisition Program,
loan correspondents originate loans 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.
During the year ended December 31, 1995, the Company increased its loan
origination and purchase volume in the US 170.7% to approximately $417.9
million, an increase of $263.5 million over the Company's 1994 loan origination
and purchase volume of $154.4 million. The Company's US loan originations and
purchases during 1995 had an average initial principal balance of $69,550, a
weighted average coupon of 11.9% and a weighted average initial loan-to-value
ratio of 66.4%.
The Company sells US loans primarily through securitizations and, to a lesser
extent, through whole loan sales. Through 1994, the Company sold virtually all
of its loan production in private placements to a variety of institutional
purchasers. In 1995, however, the Company sold a majority of its loan production
in private placements of mortgage-backed securities in securitizations. The
Company intends to continue to sell loans primarily through securitizations and,
subject to market conditions, through whole loan sales.
In March 1995, the Company completed its first securitization involving a
portfolio of approximately $50.0 million of loans secured by one- to four-family
residences and in August and December of 1995, the Company completed its second
and third securitizations involving portfolios of approximately $100.0 million
and $85.0 million (including $23.8 million under a pre-funding commitment which
had yet to be funded and has since been funded in full), respectively, of loans
secured by one- to four-family residences and small mixed-use and multi-family
properties. The Company also sold $209.0 million of its US loan production in
private transactions to institutional investors.
UK Overview
The Company commenced its UK operations in May 1995 with the formation of
CSC-UK. In the UK market, the Company focuses 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
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<PAGE> 4
unverifiable income. The Company believes that these borrowers are currently
underserved in the UK due to a lack of participation by Conventional UK Lenders
in this market segment. The withdrawal of Conventional UK Lenders was a function
of economic difficulties experienced in the UK in the late 1980s which, in
conjunction with poor underwriting practices, resulted in unacceptable losses
for Conventional UK Lenders who made loans to these borrowers during that
period. As a result of these losses and the negative effect on home prices that
resulted from significant reduction in the deductibility of mortgage interest
for UK personal income tax purposes (enacted in 1988), the regulatory
authorities responsible for overseeing Conventional UK Lenders imposed higher
capital adequacy ratios on Conventional UK Lenders as a condition to making
loans to borrowers with impaired or unsubstantiated credit histories and/or
unverifiable income irrespective of the actual income levels or the home equity
of these borrowers. Given the lack of participation by Conventional UK Lenders,
the Company believes that these borrowers currently obtain mortgage financing
from private investors through a number of small mortgage banking institutions,
if at all.
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 pay a reduced, or "concessionary" rate
(the "Concessionary Rate") to the extent that the borrower pays his loan when
due and is current on previous loan payments. With regard to prepayment terms,
if a UK borrower redeems his loan in full prior to the maturity date (whether
voluntarily or through a default), the equivalent of an early payment fee is
incurred as a result of the borrower's failure to fulfill his contractual
obligation to pay a stated amount of interest for the credit extended. The total
principal and interest due over the full term of the loan are calculated and
then the borrower is provided a rebate for the unexpired portion of the loan
term, resulting in the equivalent of an early payment fee.
The Company calculates the amount of interest payable on a mortgage loan over
its stated term to maturity by using a "flat" rate of interest on its original
loan balance assuming no amortization of the loan. The cost of credit is
determined by multiplying the Standard Rate times the original principal amount
of the loan times the original stated term of the loan. To determine the UK
borrower's monthly payment, the total cost of credit, 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 (pound)35,000 written
with a Concessionary Rate of 9.9% and an original term to stated maturity of 20
years would have a monthly payment of (pound)434.58 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
(pound)35,000 loan described above, the loan is amortized using its
Concessionary Rate APR.
Under the terms of some of the Company's loans in the UK, the amount due in
the case of a prepayment is based upon the amount of interest, at the Standard
Rate, that has been "earned" and calculated in accordance with the "Rule of 78s"
method with a six month deferment (i.e., for purposes of calculating the amount
of interest that has been earned, the redemption date is set at six months after
the date of actual redemption by the borrower). In the hypothetical
(pound-sterling)35,000 loan described above, the prepayment after the 18th
month would require the borrower to pay (pound-sterling)45,872, or 31.1% more
than the original principal balance.
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<PAGE> 5
UK loan origination volume from the commencement of operations through December
31, 1995 was $41.4 million. The Company's UK loan originations during this
period possessed an average principal balance of $43,120, a weighted average
coupon of 16.4 % and a weighted average initial loan-to-value ratio of 49.0%.
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 International Ltd.
("Greenwich") pursuant to the terms of its mortgage loan purchase agreement with
Greenwich (the "UK Purchase Facility"). The Company completed the first UK loan
sale through a securitization of (pound)32.0 million ($49.6 million) of loans in
a private placement in March 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 a
network of approximately 500 independent mortgage brokers and purchases loans
under its Wholesale Loan Acquisition Program from selected financial
institutions and mortgage bankers. Currently, the Company has approximately 350
independent mortgage brokers approved to submit applications in the UK. The
Company's goal is to continue to increase its loan origination and purchase
volume by pursuing the strategies discussed below.
Nationwide 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 35 states and the
District of Columbia 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.
Further Develop and Expand 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. Given the lack of
participation by Conventional UK lenders in this market segment, the Company
believes that these borrowers currently obtain mortgage financing from private
investors through a number of small, privately held mortgage bankers, if at all.
Since the formation of CSC-UK in May 1995, the Company has been actively
marketing its products and services to mortgage brokers in the UK. The Company
has developed proprietary on-line software to expedite the loan application
process for brokers, 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. Through the UK Purchase Facility, the Company has achieved a
substantial source of funding for loan originations in the UK. The Company
believes it is well positioned to expand in this underserved segment of the
overall UK mortgage loan market.
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Expansion of its 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 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.
Maximize 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 customers to
meet the needs of the diverse borrower market. The Company targets producers
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 and typically funds
loans within 15-25 days from receipt of the application. The Company believes
that it can achieve further penetration of its existing independent mortgage
broker network without incurring significant concentration risks.
Continuation of Growth in Loan Servicing Operations
With its acquisition of Astrum in January 1994, the Company became active in
loan servicing and currently services its own loans and acts as a master
servicer on loans serviced by another institution, as well as contract servicer
on loans that are held by other institutions. The Company intends to increase
its loan servicing operations by negotiating to retain servicing rights on a
greater percentage of the loan origination and purchase volume it sells in order
to diversify and stabilize its revenue stream and to take advantage of economies
of scale in its loan servicing business.
Product Extension and Expansion
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 are complementary to its current
products for the purpose of enhancing revenue by leveraging the Company's
existing systems and personnel. In furtherance of this strategy, the Company
expanded in March 1996 into the origination and purchase of Title I home
improvement loans partially insured by the US Department of Housing and Urban
Development and conventional home improvement loans.
LOANS
Overview
The Company's consumer finance activities primarily consist of originating,
purchasing, selling and servicing mortgage loans and, recently, Title I and
conventional home improvement loans. The vast majority of these loans are
secured by first or second mortgages on one- to four-family residences with the
balance secured by first mortgages on small multi-family residences and
mixed-use properties. Once a loan application has been received, the
underwriting process completed and the loan funded, 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 a majority of the loan origination and
purchases volume that it sells. The Company also acts as a contract loan
servicer for other financial institutions.
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Loan Originations and Purchases
The Company is licensed or registered to originate or purchase loans in 35
states and the District of Columbia through a network of approximately 500
independent mortgage brokers and through its six US branch offices. In addition,
the Company purchases loans on a wholesale basis from selected financial
institutions and mortgage bankers. In the UK, the Company originates loans
through a network of independent mortgage brokers. Currently, the Company has
approximately 350 independent mortgage brokers who are approved to submit
applications in the UK. 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
six offices, to maintain lower overhead expenses than competing companies
utilizing a more extensive branch office system.
CHANNELS OF LOAN ORIGINATIONS AND PURCHASES
<TABLE>
<CAPTION>
COMPANY CSC(1) CSC-UK
FORMATION
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993 1995(2)
--------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Independent Mortgage Brokers:
Principal Balance ........ $291,907 $149,724 $77,586 $41,395
Number of Loans .......... 4,161 1,947 1,052 960
Average Principal Balance per
Loan................... $70.2 $76.9 $73.8 $43.1
Wholesale Loan Acquisition
Program:
Principal Balance ........ $125,957 $4,686 -- --
Number of Loans .......... 1,847 60 -- --
Average Principal Balance per
Loan................... $68.2 $78.1 -- --
Total Loan Originations and
Purchases:
Principal Balance ........ $417,864 $154,410 $77,586 $41,395
Number of Loans .......... 6,008 2,007 1,052 960
Average Principal Balance per
Loan................... $69.6 $76.9 $73.8 $43.1
</TABLE>
- ----------
(1) Represents historical information of CSC prior to its acquisition by the
Company.
(2) Through December 31, 1995, CSC-UK had only originated, and not purchased,
loans.
Independent Mortgage Brokers. The majority of the Company's US loan
origination and purchase volume is currently derived from independent mortgage
brokers. During 1995, $291.9 million or 69.9% 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
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through independent mortgage brokers. During 1995, the single and ten highest
producing independent mortgage brokers accounted for 6.4% and 21.0%,
respectively, of the Company's US loan originations. The Company periodically
reviews the performance of the loans produced by each independent broker and any
pattern of higher than expected delinquency or documentation deficiencies will
result in the elimination of that broker from the Company's approved list.
Wholesale Loan Acquisition Program. In addition to originating loans through
its network of independent mortgage brokers, the Company purchases US loan
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 $126.0 million
(30.1%) and $4.7 million (3.0%) of the Company's total US loan origination and
purchase volume for 1995 and 1994, 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.
Under the Wholesale Loan Acquisition Program, loan correspondents originate
loans in accordance with the Company's underwriting guidelines. 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 that each loan correspondent 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 accounted for more than 14.4% of the loans purchased under
the Wholesale Loan Acquisition Program during 1995.
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.
Geographic Distribution of US Loans. Although the Company is licensed or
registered in 35 states and the District of Columbia, it has historically
concentrated its business in the eastern seaboard states and the midwest. While
this concentration has declined, New York and Illinois contributed 37.0% and
17.6%, respectively, of the Company's total US loan origination and purchase
volume for the year ended December 31, 1995. The Company intends to expand its
loan origination and purchase activities into new states 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, the
Company has received its license or has become registered to conduct mortgage
banking activities in 13 states.
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GEOGRAPHIC DISTRIBUTION OF US LOAN ORIGINATIONS AND PURCHASES
<TABLE>
<CAPTION>
COMPANY CSC(1)
YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
States
New York........... 37.0% 67.2% 89.7%
Illinois........... 17.6 12.2 1.3
Maryland........... 7.6 5.3 --
New Jersey......... 6.4 2.1 1.7
Pennsylvania....... 5.8 0.4 --
Indiana............ 4.1 5.0 --
Georgia............ 4.2 -- --
Virginia........... 2.5 1.7 --
Massachusetts...... 1.9 0.7 --
Connecticut........ 1.4 4.5 7.3
All other states(2) 11.5 0.9 --
----- ----- -----
Total:......... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
----------
(1) Represents historical information of CSC prior to its acquisition by the
Company.
(2) Other states representing at least 1.0% of total US loan origination and
purchases for the year ended December 31, 1995 include Ohio (2.3%), the
District of Columbia (1.8%), South Carolina (1.7%), North Carolina (1.6%)
and Michigan (1.1%).
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 are originated by
independent mortgage brokers throughout the UK. Mortgage brokers fund their
originated loans through private investors, selected financial institutions and,
since the recent formation of CSC-UK, the Company.
The Company is licensed to originate loans throughout England, Scotland and
Wales. The Company is currently originating loans through a network of
independent mortgage brokers. The Company will only originate loans through
Company-approved independent mortgage brokers that are accredited and licensed
under the CCA. Currently, the Company has approximately 350 independent mortgage
brokers who are approved to submit applications in the UK. Unlike in the US, the
Company pays these brokers a commission on loans they originate through CSC-UK.
The following table highlights certain selected information relating to the
origination and purchase of loans by the Company during the periods shown.
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LOAN ORIGINATIONS AND PURCHASES
<TABLE>
<CAPTION>
COMPANY CSC(1) CSC-UK
FOR THE FOR THE FROM FORMATION
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Type of property securing loan:
One- to four-family ......... 97.2% 98.3% 100.0% 96.3%
Multi-family/Mixed-use ....... 2.8 1.7 0.0 3.7
Type of mortgage securing
loan:
First mortgage .............. 89.0 87.0 64.0 92.0
Second mortgage ............. 11.0 13.0 36.0 8.0
Weighted average interest
rate ........................ 11.9 11.1 10.7 16.4
Weighted average initial
loan-to-value ratio(2) ...... 66.4 59.7 52.5 49.0
</TABLE>
- ----------
(1) Represents historical information of CSC prior to its acquisition by the
Company.
(2) 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
The Company's underwriting guidelines are provided to all mortgage brokers and
loan correspondents from whom applications are received. Loan applications are
classified according to certain characteristics including collateral, loan size,
debt ratio, loan-to-value ratio, credit history of the applicant and term of the
loan. Loan applicants with less favorable credit ratings generally are offered
loans with higher interest rates and lower loan-to-value ratios than applicants
with more favorable credit ratings.
The Company's loan application and approval process generally is conducted
over the telephone by the Company's sales consultants and loan processors.
Applications from brokers are usually received by facsimile transmission. A
rating underwriter then reviews the applicant's credit history, based on the
information contained in the application as well as reports available from
credit reporting bureaus, to see if the credit history meets the Company's
underwriting guidelines and, based on this review, assigns a preliminary
"rating" to the application. The proposed terms of the loan are then
communicated to the broker responsible for the application who in turn discusses
the proposal with the loan applicant. The Company endeavors to respond, and in
most cases, does respond, to the broker on the same day the application is
received. If the applicant accepts the proposed terms, a sales consultant will
directly contact the broker, or in some cases the loan applicant, to gather
additional information necessary for the closing and funding of the loan.
All loan applications require an appraisal of the collateral property prior to
closing the loan. Only Company approved independent licensed appraisers are used
for appraisals. The Company selects appraisers based upon a review of sample
appraisals, professional experience, education, membership in related
professional organizations, and by contacting clients of the appraiser and
reviewing the appraiser's experience with the particular types of properties
that secure the Company's loans.
In the case of loans purchased under the Wholesale Loan Acquisition Program,
if the original appraisal was performed by an appraiser that is not Company
approved, the Company obtains an additional appraisal from an approved
appraiser.
10
<PAGE> 11
Each loan application is required to pass two different types of loan
underwriters--a rating underwriter who establishes the credit history of the
applicant and assigns a rating and a final underwriter who approves the decision
to provide the loan. These underwriters determine if a loan complies with the
Company's loan underwriting guidelines. The Company will originate loans outside
of these guidelines in certain circumstances where originating the loan is
warranted.
The decision to provide a loan to a loan applicant is based upon the value of
the offered collateral, the applicant's creditworthiness and the Company's
perception of the applicant's ability to repay the loan. A number of factors
determine a loan applicant's creditworthiness including debt ratios (the
borrower's average monthly expenses for debts, including fixed monthly expenses
for housing, taxes and installment debt, as a percentage of gross monthly
income), payment history on existing indebtedness and the combined loan-to-value
ratio (combined loan amounts as a percentage of collateral value) for all
existing mortgages on a property. Generally, first mortgages are limited to a
maximum of 90% loan-to-value ratio and second mortgages are limited to a
combined loan-to-value ratio of 85%.
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. Title
insurance, insuring the Company's interest as mortgagee, is required on all
loans as is evidence of adequate homeowner's insurance naming the Company as an
additional insured.
The Company has established classifications with respect to the credit
profiles of loans based on certain of the borrower's credit characteristics.
Each loan applicant is placed into one of four letter ratings ("A" through "D,"
with subratings within those categories), depending upon a number of factors
including the applicant's credit history, based on credit bureau reports and
employment status. Terms of loans made by the Company, as well as the maximum
loan-to-value ratio and debt service to income coverage (calculated by dividing
fixed monthly debt payments by gross monthly income), vary depending upon the
classification of the borrower. Borrowers with lower credit ratings generally
pay higher interest rates and loan origination fees. The criteria currently used
by the Company in classifying loan applicants 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.
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<PAGE> 12
"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 two (or three
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% for a
loan secured by a non-owner-occupied one- to four-family
residence.
- 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: not required to be current at the
time the application is submitted; loan applicant is allowed
a maximum of four 30-day late payments and one 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 paid as
agreed may offset some delinquency; all delinquent credit
must be current or paid off.
- Bankruptcy filings: must have been discharged more than one
year prior to closing with two years credit re-established.
- Maximum loan-to-value ratio: up to 75% (or 80% on an
exception basis for first liens only) is permitted for a loan
secured by an owner-occupied one- to four-family residence;
and 65% (or up to 70% on an exception basis) for a loan
secured by either an owner-occupied condominium or 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 paid current from loan
proceeds and no more than 150 days at closing; an explanation
for such delinquency is required.
- Non-mortgage credit: significant prior defaults may have
occurred, but the loan 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: must be discharged prior to closing.
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<PAGE> 13
- Maximum loan-to-value ratio: up to 70% is permitted for a
loan secured by an owner-occupied one- to four-family
residence; and 60% for a loan secured by either an
owner-occupied condominium or a non-owner-occupied one- to
four-family residence.
- Debt service-to-income ratio: generally 50% or less.
The Company uses the foregoing categories and characteristics as
guidelines only. On a case-by-case basis, the Company may determine that the
prospective borrower 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, an
"Exception"). An 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 Exception may also be allowed if the loan applicant places a down
payment through escrow of at least 20% of the purchase price of the mortgaged
property, or if the new loan reduces the loan 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.
The following table sets forth certain information with respect to the
Company's US originations by borrower classification, along with weighted
average coupons, during the year ended December 31, 1995.
US LOAN ORIGINATIONS FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
TOTAL
BORROWER (DOLLARS IN % OF WEIGHTED
CLASSIFICATION MILLIONS) TOTAL AVERAGE COUPON
-------------- --------- ----- --------------
<S> <C> <C> <C> <C>
"A" Risk ...... $188.8 45.2% 11.3%
"B" Risk ...... 156.0 37.3 12.1
"C" Risk ...... 46.0 11.0 13.2
"D" Risk ...... 27.1 6.5 14.2
------ ----- ----
Total ... $417.9 100.0% 11.9%
====== ===== ====
</TABLE>
Loan Underwriting--UK
In the UK, the Company has implemented an underwriting process to assist
mortgage brokers in the loan screening process which is similar to that of the
Company's US operations. Independent mortgage brokers 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 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, 1995, the
Company's experience has been that up to 70% of offers are ultimately rejected
by the Company upon completion of the underwriting process even though the
initial loan application complied with the Company's UK underwriting criteria.
These loans are typically 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.
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 by requiring conservative loan-to-value ratios and full
disclosure to borrowers. Specifically, the Company does not lend at
loan-to-
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<PAGE> 14
value levels in excess of 60%, in order to provide significant collateral
coverage for home value deflation and/or disposal expenses before any losses are
incurred.
As part of the underwriting process, each loan application requires an
appraisal of the collateral property prior to loan approval. The Company
supplies its mortgage brokers with a pre-approved list of appraisers that are
professionally licensed. 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 supplies the loan applicant
at the time of application with a Customer Care Booklet that highlights, among
other things, (i) the loan's relatively high Standard Rate, (ii) the
Concessionary Rate, (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 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, 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 1995 and 1994, the Company sold
$359.0 million and $138.0 million of loans, representing 85.9% and 89.4% of
total US originations and purchases during these periods, respectively.
Securitizations. During 1995, the Company sold $235.0 million of its US loan
origination and purchase volume in securitizations (including $23.8 million
under a pre-funding commitment which had yet to be funded and has since been
funded in full). 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 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
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<PAGE> 15
entitles the holder to receive interest payments that are either fixed or
derived from a formula. A residual certificate represents the interest in the
REMIC trust which has no principal amount and does not unconditionally entitle
the holder to receive payments. A holder of the residual certificate is entitled
only to the remainder, if any, of the interest cash flow from the mortgage loans
sold to the REMIC trust after payment of all other interests in such trust 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 approximately $50.0 million of
principal amount of loans secured by one- to four-family residences. In August
and December 1995, the Company completed its second and third securitizations in
private placements involving portfolios of approximately $100.0 million and
$85.0 million (of which $23.8 million was pre-funded at December 31, 1995),
respectively, of principal amount of loans secured by one- to four-family
residences and small multi-family residences and mixed-use properties. 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, size, interest rate, date of origination, term and
geographic location. The Company also uses other available information such as
reports on prepayment rates, collateral value, economic forecasts and historical
default and prepayment rates of the portfolio under review. The Company
estimates the expected cash flows that it will receive over the life of a
portfolio of loans. These expected cash flows constitute the excess of the
interest rate payable by the obligors of loans over the interest rate paid on
the related securities, less applicable fees and credit loans. The Company
discounts the expected cash flows at a discount rate which it believes to be
consistent with the required risk-adjusted rate of return to an independent
third party purchaser of the interest-only and residual certificates. Gain on
securitization on these transactions aggregated $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 54.4% of the total US
gain on sale of loans for 1995.
In these securitizations, the Company purchased credit enhancements to the
senior interest in the related REMIC trusts in the form of insurance policies
provided by insurance companies. The pooling and servicing agreements that
govern the distribution of cash flows from the loans included in the REMIC
trusts require either (i) the establishment of a reserve that may be funded with
an initial cash deposit by the Company or (ii) the overcollateralization of the
REMIC trust intended to result in receipts and collections on the loans that
exceed the amounts required to be distributed to holders of senior interests. To
the extent that borrowers default on the payment of principal or interest on the
loans, losses will be paid out of the reserve account or will reduce the
overcollateralization to the extent that funds are available and 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 overcollateralization, as applicable, the insurance policy maintained
by the Company will pay any further losses experienced by holders of the senior
interests in the related REMIC trust.
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.
For 1995, loan sales through securitizations accounted for 37.4% ($14.3
million) of the Company's total (US and UK) gain on sale of loans. The Company
intends to continue to conduct loan sales through securitizations, either in
private placements or in public offerings, when market conditions are attractive
for such loan sales.
15
<PAGE> 16
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 58.2% of all US loan sales in the year ended
December 31, 1995. 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. The Company invites prospective
institutional purchasers to review its loan portfolios as part of the whole loan
sale process . During 1995 and 1994, the Company sold US loans to seven and 13
institutional purchasers, respectively. Loans generally are 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 24.0% of the Company's total revenues in 1995 and 50.9%
of the Company's total revenues in 1994. The Company maximizes its premium on
whole loan sale revenue by closely monitoring institutional purchasers'
requirements and focusing on originating the types of loans that meet those
requirements and for which institutional purchasers tend to pay higher rates.
During 1995, ContiTrade Services Corporation ("ContiTrade"), The First
National Bank of Boston (the "Bank of Boston") and NationsCredit Commercial
Corp. represented 17.3%, 15.6% and 11.4%, respectively, of all US loans sold by
the Company. During 1994, however, the three institutions listed above were the
principal institutional purchasers of the Company's whole loan sales, accounting
for 30.1%, 21.6% and 10.5%, respectively, of all loans sold by the Company.
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 representation
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 no
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 fraudulent misrepresentations made
by the borrower. During 1995, the Company repurchased seven loans for $623,300
and gave premium rebates totaling $247,651. In 1994, the Company repurchased one
loan for $95,550 and gave premium rebates totaling $72,393.
For 1995 and 1994, premiums from whole loan sales accounted for 45.6% ($12.0
million) and 100% ($5.7 million), respectively, of the Company's total US gain
on sale of loans.
Loans originated by the Company in the UK are immediately sold to Greenwich
and 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 securitization of (pound)32.0 million ($49.6 million) of loans in
a private placement in March 1996.
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. 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
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<PAGE> 17
illustrate this strategy, the Company retained the servicing rights to 74.2% of
the $359.0 million in US loans it sold during 1995.
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.
As of December 31, 1995, the Company was servicing 5,863 US loans representing
an aggregate of $386.7 million, including $59.7 million of loans as master
servicer for other servicers, $15.4 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% of total
revenues for the year ended December 31, 1995. The Company anticipates that loan
servicing will contribute a larger portion of total revenues in future periods.
The Company has developed loan servicing software which enables it to
implement servicing and collection procedures and to provide a series of
adaptable custom designed reports including a trial balance, a remittance
report, a paid-off report and a delinquency report. The collections function is
fully automated. Delinquent accounts are automatically placed in the appropriate
collector's queue ten days after the due date of the payment. Company collectors
have computer access to telephone numbers, payment histories, loan information
and all past collection notes. The Company has a specific policy which sets
forth actions to be taken at various stages of delinquency beginning on the
tenth and extending to the ninetieth day after the payment due date. Between
90-105 days of delinquency, the Company decides whether to foreclose or to take
other action. All collection activity, including the date collection letters
were sent and detailed notes on the substance of each collection telephone call,
is entered into a permanent collection history for each account. Additional
guidance with the collection process is derived through the Loan Performance
Monitoring Committee, a group comprised of members of the Company's senior
management.
The Company's loan servicing software also 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 act swiftly to address collection
problems 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 a charge off may be
necessary. Loan foreclosures are the responsibility of the Company's loan
servicing operations. Prior to a foreclosure sale, 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 analysis includes (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
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<PAGE> 18
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.
All foreclosures are assigned to outside counsel located in the same state as
the secured property. Bankruptcies filed by borrowers are also assigned to
appropriate local counsel who are required to provide monthly reports on each
loan file.
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).
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1995 1994
DOLLARS % OF DOLLARS % OF
IN SERVICED IN SERVICED
THOUSANDS PORTFOLIO THOUSANDS PORTFOLIO
<S> <C> <C> <C> <C>
US serviced portfolio....... $311,649 100.0% $23,904 100.0%
-------- ------ ------- ------
30-59 days delinquent ... 5,479 1.8 -- --
60-89 days delinquent ... 1,580 .5 142 0.6
90 days or more delinquent 4,968 1.6 679 2.8
------- ---- ---- ----
Total US delinquencies .. $12,027 3.9% $821 3.4%
======= ==== ==== ====
US REO property.......... $141 - $130 0.5%
==== === ==== ====
</TABLE>
The following table provides data on the loan loss experience on the Company's
US mortgage loans held for sale and held for investment.
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Average balance outstanding(1)............. $38,396,633 $10,521,362
Gross loan losses.......................... -- 282,210
Charge-offs................................ 51,816 --
Total credit losses as a percent of average balance
outstanding.............................. -- 2.68%
</TABLE>
- ----------
(1) Represents the average of the principal balances of the loans outstanding on
the last business day of each month during the period.
The Company made no provision for loan losses for mortgages held for sale for
the years ended December 31, 1995 and 1994 respectively, and, as of December 31,
1995, the Company had no reserve for losses on mortgages held for sale. The
Company establishes a reserve for losses on loans held for investment based upon
delinquency trends, collateral value and economic conditions and trends. A loan
is charged-off against the reserve account when such loan is deemed
uncollectable or to the extent the loan balance exceeds the fair market value of
the collateral acquired through foreclosure. During 1995, the Company made no
additional provision for losses on mortgages held for investment and recorded
charge-off of $51,816 through the reserve for losses on mortgages held for
investment. As of December 31, 1995, the Company had $198,394 reserved for
losses on mortgages held for investment. During 1994, the Company recorded a
loan loss provision of $250,210 for mortgages held for investment.
Foreclosure--US. Regulation and practices in the US regarding the liquidation
of properties (e.g., foreclosure) and the rights of the mortgagor in default
vary greatly from state to state. Loans originated or purchased by the Company
are secured by mortgages, deeds of trust, trust deeds, security deeds,
leaseholds or deeds to secure debt, depending upon the prevailing practice in
the state in which the property securing the loan is located. Depending on local
law, foreclosure is effected by judicial action and/or non-judicial
18
<PAGE> 19
sale, and is subject to various notice and filing requirements. If foreclosure
is effected by judicial action, as in New York and Illinois for example, the
foreclosure proceedings may take several months.
In general, the borrower, or any person having a junior encumbrance on the
real estate, may cure a monetary default by paying the entire amount in arrears
plus other designated costs and expenses incurred in enforcing the obligation
during a statutorily prescribed reinstatement period. Generally, state law
controls the amount of foreclosure expenses and costs, including attorneys'
fees, which may be recovered by a lender.
After the reinstatement period has expired without the default having been
cured, in certain states the borrower or junior lienholder has the right of
redemption of the property by paying the loan in full to prevent the scheduled
foreclosure sale. For example, in Illinois the right of redemption exists for 90
days from the date of foreclosure judgment; New York law does not recognize a
right of redemption.
There are a number of restrictions that may limit the Company's ability to
foreclose on a property. A lender may not foreclose on the property securing a
second mortgage loan unless it forecloses subject to each senior mortgage, in
which case the junior lender or purchaser at such a foreclosure sale will take
title to the property subject to the lien securing the amount due on the senior
mortgage. Moreover, if a borrower has filed for bankruptcy protection, a lender
may be stayed from exercising its foreclosure rights. Also, certain states
provide a homestead exemption which may restrict the ability of a lender to
foreclose on residential property. In such states, the Company requires the
borrower to waive his or her right of homestead. While such waivers are
generally enforceable in Illinois, waivers of homestead rights may not be
enforceable in other states.
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.
19
<PAGE> 20
Loan Servicing and Collections--UK
In the UK, the Company's loan collection and servicing process 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 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 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
% OF
DOLLARS IN SERVICED
THOUSANDS PORTFOLIO
--------- ---------
<S> <C> <C>
UK serviced portfolio.......... $40,299 100.0%
------- -----
30-59 days delinquent.......... 1,087 2.7
60-89 days delinquent.......... 423 1.1
90 days or more delinquent..... 1,926 4.8
------- -----
Total UK delinquencies...... 3,436 8.6
===== =====
</TABLE>
The Company believes that its UK underwriting policies, specifically its
maximum loan-to-value ratio of 60%, 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, 1995
on the CSC-UK loan servicing portfolio. During this period, the average balance
of loans serviced for the period totaled $20.0 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.
20
<PAGE> 21
At the hearing, generally the only dispute that will arise will be the terms
under which the court will suspend an order for possession. The court will
consider a number of factors in determining if a suspension of a possession
order is warranted such as the reasons for the default, the prospects of the
mortgagor paying off the arrears in installments in addition to the normal
scheduled payments as due and the adequacy of the security. Although it is
difficult to predict how long a court may be willing to suspend a possession
order, if at all, suspensions of possession orders generally last less than six
months.
If a possession order is not suspended or was suspended for a specified period
and such period expired without satisfaction to the lender, or the borrower
fails to honor the possession order, a lender is entitled, in most instances, to
apply to the court for a bailiff's appointment under which the bailiff will take
physical possession of the mortgage property (typically four to six weeks after
the application). Borrowers are entitled to apply for the suspension of the
bailiff's appointment subject to production of evidence of the borrower's
ability to discharge the original possession order.
After the bailiff takes physical possession of the mortgaged property the
lender will exercise its power of sale and will typically either auction the
mortgaged property or market the same. At the time of sale, the lender is
required to realize the best price reasonably obtainable in the open market.
In addition, in the case of mortgage loans regulated under the CCA, borrowers
are able to apply to a court to alter the rate of interest due on the unpaid
installments under the loan. Mortgages securing regulated loans are by statute
only enforceable by court order which order can be suspended at the discretion
of the court.
In the case of a loan secured by a second mortgage, the junior lienholder may
institute proceedings and take possession of the property only after notice of
such proceedings have been given to the senior lienholder. Junior lienholders
are obligated upon a sale of the mortgaged property to repay the debt owed to
the senior lienholder.
An application for bankruptcy by the borrower or any third party does not stop
or adjourn proceedings, nor does the UK have the equivalent of homestead rights.
Since commencing operations in the UK, the Company has 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 asset managers are 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 48 business development
representatives and seven 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, financial institutions, including
commercial banks and thrifts, and other mortgage bankers. 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.
21
<PAGE> 22
The business development representatives provide various levels of information
and/or assistance to the Company's sources of loan originations depending on the
sophistication and resources of the particular customer and are primarily
responsible for maintaining the Company's relationships with its sources of loan
originations. The business development representatives endeavor to increase the
volume of loan originations from independent mortgage brokers, financial
institutions and other mortgage bankers located within the 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 half-day seminar
for brokers in that region. This seminar introduces the brokers to the Company's
products, services, underwriting process and funding resources, and has helped
the Company penetrate new markets.
In the UK, the Company also does not engage in any form of direct marketing to
potential borrowers. Independent mortgage brokers advertise their services to
borrowers through several means, including advertisements in national UK
newspapers. The Company markets to these independent mortgage brokers through
business development representatives who visit mortgage brokers to familiarize
them with the Company's products and competitive distinctions. The business
development representatives stress the advantages of the Company's proprietary
on-line loan application software and its unique loan programs. The Company
anticipates that future marketing efforts will be directed toward UK realtors
and insurance agents, who the Company believes will prove to be effective
referral sources and who are typically unaware of mortgage financing available
to borrowers with impaired or unsubstantiated credit histories and/or
unverifiable income.
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. Competition can take many forms including convenience in obtaining a
loan, customer service, marketing and distribution channels, amount and term of
the loan, and interest rates. In addition, the current level of gains realized
by the Company and its existing competitors on the sale of loans could attract
additional competitors into this market with the possible effect of lowering
gains on future loan sales owing to increased loan origination competition.
The Company believes that it is able to compete on the basis of providing
prompt and responsive service, consistent underwriting and competitive loan
programs to borrowers whose needs are not met by traditional financial
institutions.
In the UK, banks, building societies and other finance companies generally
make mortgage loans to borrowers. The Company believes, however, that these
Conventional UK Lenders are not currently participating in the market for loans
to borrowers with impaired or unsubstantiated credit histories and/or
unverifiable income due to the higher capital adequacy ratios that they must
maintain to participate in this market as required by applicable banking
regulations. Therefore, the Company's most significant present competition is
from private investors who are currently funding the origination volume of
independent mortgage brokers. Due to the relative lack of competition for the
type of loans the Company originates in
22
<PAGE> 23
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, however, 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 INDUSTRY MORTGAGE COMPANY, L.P.
In July 1993, the Company acquired a limited partnership interest in IMC of
which it now holds a 9.1% interest. IMC originates, purchases, sells and
services mortgage loans that are primarily secured by one- to four-family
residences. Pursuant to the terms of IMC's limited partnership agreement, the
Company is obligated to offer to sell an average of $1.0 million of loans per
month to IMC at market prices. The Company entered into an agreement with IMC
whereby, in return for the payment of a fee, such monthly obligation has been
eliminated for the period from November 1, 1995 through December 31, 1996. For
the year ended December 31, 1995, IMC contributed approximately $480,000 to the
Company's pre-tax income.
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 and the Federal Debt Collection Practices Act, as well
as other federal and state statutes and regulations affecting the Company's
activities. The Company is also subject to the rules and regulations of, and
examinations by, HUD and state regulatory authorities with respect to
originating, processing, underwriting, selling, securitizing and servicing
loans. These rules and regulations, among other things, impose licensing
obligations on the Company, establish eligibility criteria for mortgage loans,
prohibit discrimination, provide for inspections and appraisals of properties,
require credit reports on loan applicants, regulate assessment, collection,
foreclosure and claims handling, investment and interest payments on escrow
balances and payment features, mandate certain disclosures and notices to
borrowers and, in some cases, fix maximum interest rates, fees and mortgage loan
amounts. Failure to comply with these requirements can lead to loss of approved
status, termination or suspension of servicing contracts without compensation to
the servicer, demands for indemnifications or mortgage loan repurchases, certain
rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement actions.
The Company believes that it is in compliance in all material respects with
applicable federal and state laws and regulations.
UK
A portion of the Company's mortgage banking business in the UK is subject to
regulations promulgated under the United Kingdom Consumer Credit Act 1974 (the
"CCA") applicable to loans made to individuals or partnerships with principal
balances of (pound)15,000 or less. Loans with principal balances in excess of
(pound)15,000 are not currently regulated within the UK. 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, require 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
"extortionate credit bargains." A license is required to service loans in the UK
irrespective of
23
<PAGE> 24
the size of the loan. Failure to comply with the requirements of these rules and
regulations can result in the revocation or suspension of the license to do
business and render the mortgage unenforceable in the absence of a court order.
Approximately 2.8% (as a percentage of aggregate principal balances) of the
Company's UK loans were subject to the CCA and the regulations promulgated
thereunder at December 31, 1995.
The Company believes that CSC-UK is in compliance in all material respects
with applicable laws and regulations in the UK.
ENVIRONMENTAL MATTERS
To date, the Company has not been required to perform any investigation or
clean up activities, nor has it been subject to any environmental claims. There
can be no assurance, however, that this will remain the case in the future.
US
In the course of its business, the Company has acquired and may acquire in the
future properties securing loans which are in default. Although the Company
primarily lends to owners of residential properties, there is a risk that the
Company could be required to investigate and clean up hazardous or toxic
substances or chemical releases at such properties after acquisition by the
Company, and may be held liable to a governmental entity or to third parties for
property damage, personal injury and investigation and cleanup costs incurred by
such parties in connection with the contamination. In addition, the owner or
former owners of a contaminated site may be subject to common law claims by
third parties based on damages and costs resulting from environmental
contamination emanating from such property. On all loan applications for
properties exceeding seven units or on loan applications where the Company
believes there may exist or an appraisal may indicate a possible environmental
problem, the Company requires a Phase I Environmental Report.
UK
"Owners" or "occupiers" of contaminated land in the UK are potentially liable
under UK environmental laws. Such persons can be required to clean up affected
land, cease polluting activities, obtain licenses in respect of waste
management, reimburse for clean up costs of land and controlled waters and pay
fines for non-compliance with relevant laws and regulations. A lender may be
deemed to be an "owner" upon enforcement of its interest in the mortgaged
property following default by the borrower and depending on the method of
enforcement employed.
In April 1996, a new UK statute (The Environmental Act 1995) will become
effective and require local authorities to inspect and identify contaminated
land in their jurisdiction and to require the person who caused or knowingly
permitted the environmental harm to continue (or if no such person can be
identified, the owner) to clean up such land.
There are no registers which identify contaminated land. In order to identify
such land prior to making a loan, the Company relies on its appraisers to
identify potential environmental problems. There can be no assurance that a
previous or current owner or occupier of a mortgaged property complied with
environmental laws or that in the future lenders will not be subject to
additional environmental liabilities.
EMPLOYEES
As of December 31, 1995, the Company had a total of 264 US employees, four of
whom were part-time employees and 260 of whom were full-time employees, and 71
UK employees. The Company has 207 employees working at its New York
headquarters. None of the Company employees is covered by a collective
bargaining agreement. The Company considers its relations with its employees to
be good.
24
<PAGE> 25
ITEM 2. 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 35,000 square feet of office space
at an aggregate annual rent of approximately $540,000. The leases provide for
certain scheduled increases and expire on December 31, 1999, as to a portion of
the leased space, and on August 31, 2000 for the remainder. The Company's UK
offices are located at Sherbourne House, Croxley Business Park, Watford,
Hertfordshire, where the Company leases approximately 10,500 square feet of
office space at an aggregate annual rent of approximately $236,000. The lease
provides for certain scheduled increases and expires on June 24, 2005. The
Company is currently in discussions with a landlord owning rental property
nearby the US executive and administrative offices and also with the landlord of
the UK offices regarding additional space and believes such discussions will be
successfully concluded.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various routine legal proceedings arising out of the
ordinary course of its business. Management believes that none of these actions,
individually or in the aggregate, will have a material adverse affect on the
results of operations or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS
The following table sets forth the name, age and position with the Company of
each person who is an executive officer of the Company or its subsidiaries.
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY
---- --- --------------------------
<S> <C> <C>
Robert Grosser .......... 38 Chairman of the Board, Chief Executive
Officer, President; President of CSC
Robert C. Patent ........ 45 Vice Chairman of the Board, Executive Vice
President, Treasurer ; Executive Vice President,
Treasurer and Assistant Secretary of CSC
Jonah L. Goldstein ...... 60 General Counsel; Secretary of CSC-UK
Robert M. Stata ......... 38 Vice President/Originations
Cheryl P. Carl .......... 43 Secretary; Vice President/Operations and
Secretary of CSC
Steven P. Weiss ......... 39 Vice President/Sales of CSC
Eric S. Goldstein ....... 34 Vice President/Loan Servicing of CSC
Tim S. Ledwick .......... 38 Chief Financial Officer; Vice President,
Chief Financial Officer of CSC
CSC-UK:
David A. Steene ......... 36 Managing Director of CSC-UK
Martin H.S. Brand ....... 59 Lending Director of CSC-UK
Gerald Epstein .......... 46 Financial Director of CSC-UK
</TABLE>
Officer positions of the Company, CSC and CSC-UK are currently for a term of
one year. 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 executive officer of the Company are described
below.
25
<PAGE> 26
Robert Grosser has been Chief Executive Officer and President 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 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 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 of CSC
since October 1990 and as Treasurer since January 1994. 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.
Jonah L. Goldstein has been General Counsel of the Company since September
1995 . Mr. Goldstein served as a consultant to CSC from December 1993 through
June 1995. Effective July 1, 1995, Mr. Goldstein entered into an employment
agreement with the Company. 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.
Robert M. Stata has been Vice President of CSC, responsible for lending
originations, since November 1992 and Vice President/Originations of CSC since
January 1994. Mr. Stata was the President/Founder of Suburban Equity Corp., a
mortgage banker specializing in non-conventional loans, from 1987 to 1992.
Cheryl P. Carl has been Secretary of the Company since June 1994. Ms. Carl
also has served as Vice President/Operations since January 1994, Secretary of
CSC since June 1994 and as Assistant Treasurer of CSC since January 1995. 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 is also 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. 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. From 1987 to 1993, Mr. Goldstein was Vice President of Astrum, a mortgage
banker specializing in non-conventional loans. Mr. Goldstein is the son of Jonah
L. Goldstein.
Tim S. Ledwick has been Chief Financial Officer of the Company since March
1995. Mr. Ledwick has also served as Vice President, Chief Financial Officer of
CSC since September 1994. From 1992 until 1994, Mr. Ledwick was Vice
President/Controller -- Subsidiaries and from 1989 until 1992 was Controller --
Subsidiaries for River Bank America.
CSC-UK:
David A. Steene has been Managing 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.
26
<PAGE> 27
Martin H.S. Brand has been Lending 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 its
formation in 1958 until September 1994.
Gerald Epstein has been Financial 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.
27
<PAGE> 28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 15, 1996, the approximate number of holders of record of the
Company's Common Stock was 231.
The Company's Common Stock began to trade on the Nasdaq National Market
("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. Since its
initial listing, there has been only limited trading in the Common Stock. As a
result, prices reported for the Common Stock 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 as reported by Nasdaq from December 20, 1995, and reflects a 100% stock
dividend announced by the Company on September 28, 1995, payable on September
29, 1995 to stockholders of record on September 28, 1995.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Year ended December 31, 1994
Fourth quarter (from December 1, 1994).............. $ 1.81 $ 1.63
Year ended December 31, 1995
First quarter....................................... 2.75 1.81
Second quarter...................................... 6.00 2.75
Third quarter....................................... 15.50 5.50
Fourth quarter (through December 19, 1995).......... 26.00 15.00
Fourth quarter (from December 20, 1995)............. 21.50 19.25
</TABLE>
The Company has never paid any cash dividends on its Common Stock. The Company
intends to retain all of its future earnings to finance its operations and does
not anticipate paying cash dividends in the foreseeable future. Any decision
made by the Company's Board of Directors to declare dividends in the future will
depend upon the Company's future earnings, capital requirements, financial
condition and other factors deemed relevant by the Company's Board of Directors.
In addition, certain agreements to which the Company is a party restrict the
Company's ability to pay dividends on common equity.
28
<PAGE> 29
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<TABLE>
<CAPTION>
Company CSC(1)
------- ------
Year Ended December 31, Year Ended December 31,
------------------------------ --------------------------------------
1995 1994 (2) 1993 1992 1991
------- ----------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Gain on sale of loans .................... $ 38,198 $ 5,691 $ 2,088 $ 1,005 $ 792
Net mortgage origination
income ................................. 2,963 2,551 1,455 1,251 1,389
Interest income ............................ 6,706 1,900 536 612 718
Servicing income ........................... 777 414 -- -- --
Earnings from partnership
interest ............................... 482 391 -- -- --
Other ...................................... 385 227 378 131 317
-------- -------- -------- -------- --------
Total revenues ............................. 49,511 11,174 4,457 2,999 3,216
Costs and expenses:
Salaries and benefits .................... 12,165 4,280 1,939 1,188 1,276
Other costs and expenses ................. 14,581 5,041 2,195 1,718 1,737
-------- -------- -------- -------- --------
Total costs and expenses ................... 26,746 9,321 4,134 2,906 3,013
Earnings before minority interest,
income taxes and extraordinary item ...... 22,765 1,853 323 93 203
Minority interest .......................... 2,379 -- -- -- --
-------- -------- -------- -------- --------
Earnings before income taxes and
extraordinary item ....................... 20,386 1,853 323 93 203
Income taxes ............................... 8,515 1,450(3) 8 3 5
-------- -------- -------- -------- --------
Earnings before extraordinary item ......... 11,871 403 315 90 198
Extraordinary item: ........................ (296)(4) -- -- -- --
-------- -------- -------- -------- --------
Net earnings ............................... $ 11,575 $ 403 $ 315 $ 90 $ 198
======== ======== ======== ======== ========
Earnings per share before extraordinary item $ 1.00 $ 0.04 $ 0.03 $ 0.01 $ 0.02
Extraordinary item ......................... (0.03) -- -- -- --
-------- -------- -------- -------- --------
Net earnings per share ..................... $ 0.97 $ 0.04 $ 0.03 $ 0.01 $ 0.02
======== ======== ======== ======== ========
Weighted average number of
shares outstanding ..................... 11,919 10,280 10,000 10,000 10,000
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Company
At December 31, CSC (1)
---------------------------- At December 31,
1995 1994 1993
--------- --------- --------------
<S> <C> <C> <C>
Balance Sheet Data:
Total assets ................................................. $ 152,519 $ 21,816 $ 13,605
Mortgage servicing receivables ............................... 24,561 -- --
Trading securities(5) ........................................ 15,571 -- --
Goodwill and other intangibles ............................... 19,258 -- --
Total debt(6) ................................................ 75,673 16,100 10,165
Total liabilities ............................................ 95,420 18,030 11,207
Common stock warrants, with put option ....................... -- 609 --
Total stockholders' equity ................................... 57,099 3,177 2,398
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
COMPANY CSC(1)
------- ------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
----------------------- -----------------------
1995 1994(2) 1993 1992 1991
---- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Statistics:
Loan originations and purchases:
US ........................................ $417,864 $154,410 $ 77,586 $ 43,353 $ 37,820
UK ........................................ 41,395 -- -- -- --
-------- -------- -------- -------- --------
Total loan originations and
purchases ................................. $459,259 $154,410 $ 77,586 $ 43,353 $ 37,820
Average principal balance per loan
originated and purchased:
US ........................................ 70 77 74 56 50
UK ........................................ 43 -- -- -- --
Weighted average initial loan-to-value ratio:
US ........................................ 66.4% 59.7% -- -- --
UK ........................................ 49.0% -- -- -- --
US loan sales:
Whole loan sales .......................... $208,997 $138,041 $ 61,293 $ 40,975 $ 40,305
Loans sold through
securitizations ......................... 150,000(7) -- -- -- --
-------- -------- -------- -------- --------
Total US loan sales ......................... $358,997 $138,041 $ 61,293 $ 40,975 $ 40,305
-------- -------- -------- -------- --------
UK loan sales:
Whole loan sales .......................... $ 41,395 -- -- -- --
Loans sold through
securitizations ......................... -- -- -- -- --
-------- -------- -------- -------- --------
Total UK loan sales ......................... $ 41,395 -- -- -- --
-------- -------- -------- -------- --------
Total US and UK loan sales .................. $400,392 $138,041 $ 61,293 $ 40,975 $ 40,305
======== ======== ======== ======== ========
Loans serviced:
US(8) ..................................... 386,720 56,340 -- -- --
UK ........................................ 40,299 -- -- -- --
-------- -------- -------- -------- --------
Total loans serviced ........................ $427,019 $ 56,340 $-- $-- $--
======== ======== ======== ======== ========
</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.
(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.
(6) Includes short-term borrowings due under a warehouse facility and a US
standby facility.
(7) Represents the Company's portion of completed securitizations and as
such excludes the pre-funding on the December 1995 transaction.
(8) Includes master servicing and contract servicing operations by the
Company.
30
<PAGE> 31
ITEM 7. 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, 1995, 1994 and 1993.
GENERAL
Overview
The Company is a consumer finance company engaged in the business of
originating, purchasing, selling and servicing mortgage loans secured primarily
by one- to four-family residences. The Company primarily generates income from
gain on sales from securitizations, gains recognized from premiums on loans sold
through whole loan sales to institutional purchasers, interest earned on loans
held for sale, 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 received by the Company which are reflected as trading securities.
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 loans sold by CSC-UK prior to January 1, 1996, a third
party investment bank's significant participation in the cash flows associated
with such loans. Through September 30, 1995 applicable recurring fees included
the Company's normal servicing fees. Gain on sale of loans, which represents (i)
gain on securitization and (ii) the sales price in excess of loan acquisition
and related costs from whole loan sales and mortgage servicing constituted
approximately 77.2% of total revenues in 1995 and 50.9% of total revenues in
1994. The Company completed its first US securitization of $50.0 million in
loans in the first quarter of 1995, its second US securitization of $100.0
million in loans in the third quarter of 1995 and its third US securitization of
$85.0 million in loans in the fourth quarter of 1995 (including $23.8 million
which has yet to be funded). The Company anticipates that it will continue to
sell loans through securitizations in addition to whole loan sales to
institutional purchasers.
Recent Growth
The Company has experienced significant growth in the past few years,
particularly during the period from January 1, 1994 through December 31, 1995.
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 31 states as of
December 31, 1995; (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 financing through its $50.0 million loan
purchase agreement and $10.0 million standby agreement entered into in June
1994, which enabled the Company to commence the accumulation of larger pools of
loans for sales through securitizations or whole loan sales, and its five year
$2.0 million subordinated note financing agreement entered into in July 1994,
which provided the Company with additional working capital to conduct its
expansion efforts; and (v) the formation in May 1995 of CSC-UK and its access to
financing through a loan purchase facility entered into in May 1995 for the
origination, sale and servicing of mortgage loans in the UK.
In connection with the Company's geographic expansion, the Company has
continued to focus its resources on the development of loan originations from
independent mortgage brokers and other mortgage bankers. The Company has
employed business development representatives, under the supervision of
experienced regional managers, to increase the volume of loan originations from
these sources.
The Company has attempted to manage its growth by employing experienced senior
management, adhering to consistent underwriting guidelines and implementing
quality control procedures.
31
<PAGE> 32
Although there can be no assurance that the Company will be able to sustain its
historical growth rate, management believes that the Company will continue to
grow significantly over the next 12 months. Any future growth of the Company
will be limited by, among other things, the Company's need for continued funding
sources, sensitivity to economic slowdown and fluctuation in interest rates,
accounting of mortgage servicing receivables and interest-only and residual
certificates, dependence on securitizations, the effects of the Company's recent
expansion, contingent risks on loans, concentration of US operations,
competition and legislative and regulatory risks.
Loan Originations and Purchases
The Company increased its US loan originations and purchases in 1995 to $417.9
million from $154.4 million in 1994, representing an annual growth rate of
170.7% over the 12 month period.
LOAN ORIGINATIONS AND PURCHASES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMPANY CSC (1) CSC - UK
------- ------- --------
FOR THE YEAR ENDED FOR THE YEAR FROM FORMATION TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------ ------------ ------------
1995 1994 1993 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Loan originations and purchases:
Principal balance ................. $ 417,864 $ 154,410 $ 77,586 $ 41,395
Number of loans ................... 6,008 2,007 1,052 960
Average principal balance per
loan ............................ $ 69.6 $ 76.9 $ 73.8 $ 43.1
Weighted average interest rate(2) ... 11.9% 11.1% 10.7% 16.4%
Weighted average initial loan-to-
value ratio(3) .................... 66.4 59.7 52.5 49.0
Percentage of loans secured by:
One- to four-family residences .... 97.2 98.3 100.0 96.2
First mortgages ................... 89.0 87.0 64.0 92.0
</TABLE>
- ----------
(1) Represents historical information of CSC prior to its acquisition by
the Company.
(2) The UK weighted average interest rate represents the weighted average
blended rate. The weighted average flat rate was 17.4% and the
weighted average concessionary rate was 10.6% as of December 31, 1995.
(3) The loan-to-value ratio of a loan secured by a first mortgage is
determined by dividing the amount of the loan by the appraised value
of the mortgaged property at origination. The loan-to-value ratio of a
loan secured by a second mortgage is determined by taking the sum of
the loans secured by the first and second mortgages and dividing by
the appraised value of the mortgaged property at origination.
Loan Sales
The Company sells, without recourse, virtually all of the loans it originates
or purchases, both in whole loan sales and, since the beginning of March 1995,
in loan sales through securitizations. During 1995, 1994 and 1993, the Company
sold $359.0 million, $138.0 million and $61.3 million of loans, respectively.
During 1995, the Company sold $235.0 million in loans, or 65.5% of total 1995
loan sales (including the pre-funded level of $23.8 million for the December
1995 securitization), in three securitizations.
The Company uses pre-funding mechanisms in 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
32
<PAGE> 33
"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 movement in the
mortgage loan purchase market 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's loan sales had typically included servicing
rights. Since the beginning of 1995, however, the Company has retained the
servicing or master servicing rights for approximately 80.9% of the loans it has
sold. As of December 31, 1995, the Company was servicing 5,863 US loans with an
aggregate principal balance of $386.7 million, including $59.7 million of loans
as master servicer and $15.4 million as contract servicer, representing a 586.9%
increase over an aggregate principal balance of $56.3 million serviced as of
December 31, 1994. Revenue generated from loan servicing amounted to 1.6% of
total revenues for 1995. 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 summarizes certain components of the Company's statement
of operations set forth as a percentage of total revenue for the periods
indicated.
<TABLE>
<CAPTION>
COMPANY CSC(1)
------- ------
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
<S> <C> <C> <C>
Revenues: 1995 1994 1993
---- ---- ----
Premium on whole loan sales(2) .............. 48.4% 50.9% 46.9%
Gain on securitization ...................... 28.8 -- --
----- ----- -----
Gain on sale of loans ................ 77.2 50.9 46.9
Net mortgage origination income ...... 5.9 22.8 32.7
Interest income ...................... 13.5 17.0 12.0
Servicing income ..................... 1.6 3.7 --
Earnings from partnership interest ... 1.0 3.5 --
Other ................................ .8 2.1 8.4
----- ----- -----
Total revenues ................... 100.0% 100.0% 100.0%
----- ----- -----
Expenses:
Salaries and employee benefits ......... 24.6 38.3 43.5
Interest expense ....................... 9.3 14.0 15.2
Selling expense ........................ 5.8 5.3 7.7
Other operating expenses(3) ............ 14.3 25.8 26.3
----- ----- -----
Total expenses ................... 54.0% 83.4% 92.7%
----- ----- -----
Earnings before minority interest,
income taxes and extraordinary item ...... 46.0% 16.6% 7.3%
Minority interest ........................ 4.8 -- --
----- ----- -----
Earnings before income taxes and
extraordinary item ....................... 41.2 16.6 7.3
Earnings before extraordinary item ....... 24.0 3.6 7.1
Net Earnings ............................. 23.4% 3.6% 7.1%
</TABLE>
(1) Represents historical information of CSC prior to its acquisition by
the Company.
(2) Premium on whole loan sales represents the revenue recognized by the
Company when loans are sold other than through securitizations.
(3) Other operating expenses for 1995 includes 1.0% of amortization expense
related to goodwill recorded in connection with the UK Acquisition.
33
<PAGE> 34
RESULTS OF OPERATIONS
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 is 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,
34
<PAGE> 35
1995 from 114 employees at December 31, 1994 in connection with the Company's
growth in loan origination and purchase volume and geographic expansion, as well
as an increase in loans serviced.
Interest expenses increased $3.0 million or 187.5%, to $4.6 million in 1995 from
$1.6 million in 1994. The increase was attributable to the interest costs
associated with a larger balance of loans held pending sale during 1995
resulting from the increased loan origination and purchase volume during the
year.
Other expenses increased $6.0 million or 171.4% to $9.5 million in 1995 from
$3.5 million in 1994 primarily as 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 originations and purchase volume.
Minority interest was $2.4 million for 1995. There was no minority interest
for the comparable period in 1994. The minority interest was recognized during
1995 due to the inclusion of the consolidated operating results of CSC-UK,
although CSC-UK was only 50% owned by the Company prior to September 30, 1995.
Earnings before extraordinary item increased $11.5 million or 2,850.3% to
$11.9 million in 1995 from $403,459 in 1994. This growth was due primarily to
increased revenues resulting from an increase in loan origination and purchase
volume and volume of loans sold during 1995 as the Company expanded its
geographic base to 31 states and the District of Columbia and further penetrated
existing markets. Additionally, the inclusion of CSC-UK's earnings, since its
formation in May 1995, contributed $5.2 million, after taxes, to net income
during 1995.
An extraordinary loss of $295,943, net of taxes, was recorded due to early
extinguishment of subordinated debentures in December 1995. The Company
recognized as a loss the unamortized portion of the discount which was initially
recorded as a result of the detachable warrants received by the lender in
connection with the debt. After giving effect to the extraordinary loss, net
earnings increased $11.2 million or 2,800.0% to $11.6 million in 1995 from
$403,459 in 1994.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Total revenues increased $6.7 million or 148.9% to $11.2 million in 1994 from
$4.5 million in 1993. This increase was due to a combination of increased gains
on loans sold, increased net mortgage origination income resulting from the
increased loan origination and purchase volume and volume of loans sold compared
to the prior period, as well as the addition of income from servicing loans from
outside portfolios.
Gain on sale of loans, all of which was derived from premium on whole loan
sales, increased $3.6 million or 171.4% to $5.7 million in 1994 from $2.1
million in 1993. This increase was due primarily to the volume of loans sold
during 1994 of approximately $138.0 million as compared to approximately $61.3
million in 1993, an increase of 125.1%. The average premium earned on loan sales
was approximately 4.1% in 1994 as compared to 3.4% in 1993.
Net mortgage origination income increased $1.1 million or 73.3% to $2.6
million in 1994 from $1.5 million in 1993. This increase was a result of the
increase in loan origination and purchase volume to $154.4 million in 1994 from
$77.6 million in 1993, partially offset by lower average origination fees
earned.
35
<PAGE> 36
Interest income increased $1.4 million or 254.6% to $1.9 million in 1994 from
$535,812 in 1993. This increase was due primarily to the increased balance of
loans held for sale during the year resulting from the increased loan
origination and purchase volume in excess of loans sold during the period.
Servicing income increased to $414,173 in 1994 as a result of the January
1994 acquisition of Astrum. At December 31, 1994, the Company serviced $56.3
million of loan balances comprised of 401 loans. Prior to the Astrum
acquisition, the Company did not provide loan servicing.
Earnings from partnership interest increased to $391,000 in 1994 due to
improved results of the operations of IMC which commenced operations in 1994.
The Company did not have any earnings from partnership interest in the
comparable period of the prior year. For the year ended December 31, 1994, IMC
recorded revenues of approximately $11.8 million and net income of $4.7 million.
Partnership revenues were primarily comprised of $8.1 million from gain on sale
of loans and $2.0 million from net interest margin.
Total expenses increased $5.2 million or 126.8% to $9.3 million in 1994 from
$4.1 million in 1993 as additional selling expenses were incurred and new
employees were added to develop and manage the increased loan origination volume
and loan servicing volume. Total expenses as a percentage of total revenues
decreased to 83.4% during 1994 from 92.7% during 1993.
Salaries and benefits increased $2.4 million or 126.3% to $4.3 million in
1994 from $1.9 million in 1993. This was the result of increased staffing levels
to 114 employees at December 31, 1994 from 35 employees at December 31, 1993 and
related costs in connection with the Company's growth in loan origination and
purchase volume to $154.4 million in 1994 from $77.6 million in 1993 and
expansion into 17 states and the District of Columbia by December 31, 1994 from
five states at December 31, 1993.
Interest expense increased $887,681 or 131.4% to $1.6 million during the year
ended December 31, 1994 from $675,747 during the year ended December 31, 1993.
The increase is attributable to the interest costs associated with a larger
balance of loans held pending sale during 1994 resulting from the increased loan
origination and purchase volume during the year.
Other expenses increased $2.0 million or 133.3% to $3.5 million in 1994 from
$1.5 million in 1993 primarily as a result of increased selling costs of
$242,592 or 70.2% to $588,029 in 1994 from $345,437 in 1993; increased
professional fees of $479,370 or 180.4% to $745,105 in 1994 from $265,735 in
1993; and increased other operating costs of $1.2 million or 131.1% to $2.1
million in 1994 from $908,654 in 1993 incurred to support the increased loan
origination and purchase volume. As a percentage of total revenues, however,
other expenses remained relatively constant, increasing only slightly to 31.1%
in 1994 from 34.0% in 1993.
Net income increased $88,256 or 28.0% to $403,459 in 1994 from $315,203
during 1993. Excluding a one time charge of $680,000 related to the change in
tax status in 1994 from an "S" corporation to a "C" corporation, however, 1994
net income increased 249.0% from 1993 to $1.1 million. Earnings before Taxes
increased $1.6 million or 487.9% to $1.9 million in 1994 from $323,203 for 1993.
This growth was due primarily to increased revenues resulting from an increase
in loan origination and purchase volume and the volume of loans sold during 1994
as the Company expanded its geographic base and further penetrated existing
markets.
36
<PAGE> 37
FINANCIAL CONDITION
December 31, 1995 Compared to December 31, 1994
Cash and cash equivalents increased $2.7 million or 293.7% to $3.6 million at
December 31, 1995 from $919,291 at December 31, 1994 primarily as a result of
excess proceeds from the December 1995 stock offering.
Mortgage servicing receivables of $22.1 million were recorded as an asset at
December 31, 1995 as a result of the initiation of loan sales with servicing
retained partially offset by amortization expenses. There was no corresponding
asset at December 31, 1994 due to the fact that prior to January 1995 the
Company did not sell loans with servicing retained.
Trading securities, which consist of interest-only and residual certificates,
of $15.6 million were recorded as an asset at December 31, 1995 as a result of
the initiation of loan sales through securitizations. There was no corresponding
asset at December 31, 1994 due to the fact that prior to March 1995 the Company
did not sell loans through securitizations.
Mortgage loans held for sale increased $57.5 million or 344.3% to $74.2
million at December 31, 1995 from $16.7 million at December 31, 1994 due
primarily to increased loan origination and purchase volume in excess of loan
sale volume during the first nine months of 1995 as the Company expanded
geographically into new states as well as increased its origination and purchase
efforts in states in which the Company has an existing market presence.
Mortgage loans held for investment, net increased $507,621 or 98.3% to $1.0
million at December 31, 1995 from $516,583 at December 31, 1994. This increase
was a result of the Company's increased loan origination and purchase volume. As
a percentage of total assets, mortgage loans held for investment decreased to
0.7% at December 31, 1995 from 2.4% at December 31, 1994.
Goodwill and other intangibles net of amortization increased to $19.3 million
at December 31, 1995 as a result of the UK Acquisition. Prior to 1995, the
Company did not recognize any goodwill or other intangible assets.
Warehouse financing outstanding increased $60.2 million or 409.5% to $74.9
million at December 31, 1995 from $14.7 million at December 31, 1994 primarily
as a result of increased loan origination and purchase volume in excess of the
volume of loans sold as reflected in the increase in mortgages held for sale,
net.
Accounts payable and other liabilities increased $15.7 million or 2,235.8% to
$16.4 million at December 31, 1995 from $702,214 at December 31, 1994. This was
primarily the result of the UK Acquisition and increased escrow balances
associated with the increased loan servicing portfolio.
Stockholders' equity increased $53.9 million or 1,684.4% to $57.1 million at
December 31, 1995 from $3.2 million at December 31, 1994 primarily as a result
of net income of $11.6 million for the year, the $21.6 million of Common Stock
issued in the UK Acquisition, and the $20.7 million from the December Common
Stock offering.
LIQUIDITY AND CAPITAL RESOURCES
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 facility, standby facility
and UK purchase facility to meet its working capital needs. The Company's cash
requirements include the
37
<PAGE> 38
funding of loan originations and purchases, payment of interest expenses,
funding the over-collateralization requirements for securitizations, operating
expenses, income taxes and capital expenditures.
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 1995, 1994 and 1993, the Company used cash of approximately $75.5
million, $5.3 million and $3.7 million, respectively. The Company's sale of
loans through securitizations has resulted in a gain on sale of loans through
securitizations recognized by the Company. The recognition of this gain on sale
has a negative impact on the cash flow of the Company because significant costs
are incurred upon closing of the transactions giving rise to such gain and the
Company is required to pay state and federal income taxes on the gain on
securitization 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 of $80.2 million, $6.7 million and $4.4 million, respectively.
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 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 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 (8.26%
at December 31, 1995) 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 $70.6 million at December 31, 1995.
The Revolving Credit Line extends through June 1997. In addition, the Warehouse
Facility provides for a secured revolving working capital credit line of up to
$3.0 million to be used by the Company for general corporate purposes (the
"Working Capital Credit Line"). The Working Capital Credit Line operates as a
revolving facility until January 1, 1997 at which time any outstanding balance
under the Working Capital Credit Line converts to a term loan. The Working
Capital Credit Line bears interest at a variable rate (9.75% at December 31,
1995) based on 100 basis points over the higher of either the prime rate or the
federal funds rate plus 50 basis points. There was no outstanding balance of the
Working Capital Credit Line at December 31, 1995. The Working Capital Credit
Line terminates on December 31, 1998.
The Warehouse Facility also permits the Company to use up to $10.0 million of
the Revolving Credit Line to provide subwarehouse lines of credit to certain
loan correspondents from whom the Company purchases loans. In July 1995, the
Company began lending funds on a short-term basis to assist in the funding of
loans originated by certain of the Company's loan correspondents. Each borrowing
under these subwarehouse credit lines has a term of not more than 30 days. The
Company requires personal guarantees of the credit line from the principals of
the related loan correspondents. At December 31, 1995, the aggregate balance of
loans outstanding under this program was $1.6 million, with applications pending
for an additional $4.1 million of loans.
The Company has a $50.0 million loan purchase agreement (the "US Purchase
Facility") with 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. This agreement
extends through June 1999. The aggregate principal balance of loans sold to and
retained by ContiTrade at December 31, 1995 under the US Purchase Facility was
$48.7 million. The Company also has a standby financing arrangement with
ContiTrade (the "Standby Facility") whereby ContiTrade provides the Company up
to $10.0 million line of credit which is secured by the interest-only and
residual
38
<PAGE> 39
certificates the Company receives upon loan sales through
securitizations. As of December 31, 1995, the Company had $9.2 million available
under the Standby Facility. The Standby Facility bears interest at a variable
rate based on LIBOR plus 200 basis points (7.625% at December 31, 1995) and the
agreement extends through June 1999.
In May 1995, CSC-UK and Greenwich entered into a mortgage loan purchase
agreement that included a working capital facility with respect to the funding
of fixed and variable rate, residential mortgage loans originated or purchased
by CSC-UK in the UK (the "Old UK Facility"). Pursuant to the Old UK 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 UK 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 UK Facility was $41.4 million. Outstanding
amounts under the working capital facility portion of the Old UK Facility
accrued interest at a rate of LIBOR plus 250 basis points during 1995 (9.11% at
December 31, 1995). The outstanding balance under this working capital facility
was (pound)1.8 million ($2.8 million) at December 31, 1995.
In March 1996, CSC-UK and Greenwich entered into a new mortgage loan purchase
agreement effective as of January 1, 1996 that includes a working capital
facility with respect to the funding of variable rate, residential mortgage
loans originated or purchased by CSC-UK in the UK (the "UK Purchase Facility")
and terminated the Old UK Facility. Pursuant to the UK Purchase 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 Purchase
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 (pound)10.0 million in the aggregate outstanding at any time. Outstanding
amounts under this working capital facility bear interest at a rate of LIBOR
plus 255 basis points. This agreement expires as to the working capital facility
on 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 Purchase Facility in the aggregate amount of $38.0
million, evidenced by two notes bearing interest at a rate of 6.2%, payable in
amounts of $13.0 million on December 15, 1996 and $25.0 million on December 15,
1997. Such fee will be amortized over the life of the UK Purchase Facility.
The Company is required to comply with various operating and financial
covenants as defined in the agreements described above, 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 ratio
of subordinated debt to tangible net worth of not greater than 1:2. In addition,
CSC-UK may not pay dividends to the Company. The continued availability of funds
provided to the Company under these agreements is subject to the Company's
continued compliance with these covenants.
The Company's business requires continual access to short- and long-term
sources of debt and equity capital. While management believes that it has
sufficient funds to finance its operations and will be able to refinance or
otherwise repay its debt in the normal course of business, there can be no
assurance that existing lines can be extended or refinanced or that funds
generated from operations will be sufficient to satisfy such obligations. Future
financing may involve the issuance of additional debt or equity securities.
The Company's cash requirements may be significantly influenced by possible
acquisitions or strategic alliances, although no particular acquisition or
strategic alliance has been agreed upon or become the subject of any letter of
intent or agreement in principle other than the J&J Acquisition.
39
<PAGE> 40
The Company anticipates that it will need to arrange for additional cash
resources prior to the end of 1996 through the issuance of additional debt or
equity securities or additional bank borrowings or a combination thereof. The
Company has no commitments for additional bank borrowings or additional debt or
equity financing and there can be no assurance that the Company will be
successful in consummating any such financing transaction in the future on terms
the Company would consider to be favorable.
ACCOUNTING CONSIDERATIONS
The Company derives a significant portion of its income by recognizing gains
upon the sale of loans through securitizations based on the fair value of the
interest-only and residual certificates that the Company receives upon the sale
of loans through securitizations. In loan sales through securitizations, the
Company sells loans that it has originated or purchased to a REMIC trust for a
cash purchase price and interests in such REMIC trust consisting of
interest-only regular interests and the residual interest which are represented
by the interest-only and residual certificates. The cash purchase price is
raised through an offering by the REMIC trust of pass-through certificates
representing regular interests in the REMIC trust. Following the securitization,
the purchasers of the pass-through certificates receive the principal collected
and the investor pass- through interest rate on the principal balance, while the
Company recognizes as current revenue the fair value of the interest-only and
residual certificates.
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.
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.
Prior to the Company's adoption of SFAS No. 122 (as defined below), the
Company derived a significant portion of its income by realizing gains upon the
sale of loans due to the excess servicing spread associated with such loans
recorded at the time of sale. Excess servicing spread represents the excess of
the interest rate payable by an obligor on a loan over the interest rate passed
through to the purchaser acquiring an interest in such loan, less the Company's
normal servicing fee and other applicable recurring fees. The Company recognized
as current revenue the present value of the excess servicing spread expected to
be realized over the anticipated average life of loans sold. These capitalized
excess servicing receivables were computed using prepayment, loss, delinquency
and discount rate assumptions that the Company believed were reasonable. The
Company periodically reviews these assumptions in relation to actual experience
and, if necessary, adjusts the remaining asset to the net present value of the
estimated remaining future excess servicing receivables.
In the fourth quarter of 1995, the Company adopted the Statement of Financial
Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing
Rights," which the Financial Accounting Standards Board issued in May 1995. SFAS
No. 122 applies prospectively in fiscal years beginning after December 15, 1995
(with early application encouraged), to transactions in which a mortgage banking
40
<PAGE> 41
enterprise sells or securitizes mortgage loans with servicing rights retained
and to impairment evaluations of all amounts capitalized as servicing rights,
including those purchased before the adoption of such statement. This statement
requires that a mortgage banking enterprise recognize rights to service mortgage
loans for others as separate assets, regardless of how those servicing rights
are acquired, and that a mortgage banking enterprise assess its capitalized
servicing rights for impairment based on the fair value of the underlying
servicing rights. The Company recognizes these rights and classifies them as
mortgage servicing receivables. For the purpose of evaluating and measuring
impairment of capitalized mortgage servicing receivables, the Company must
categorize those mortgage servicing receivables based on one or more of the
predominant risk characteristics of the underlying loans. The Company has
determined the predominant risk characteristics to be interest rate risk and
prepayment risk. Impairment shall be recognized through a valuation allowance
for an individual category. The amount of impairment recognized shall be the
amount by which the capitalized mortgage servicing receivables for a category
exceed their fair value. Subsequent to the initial measurement of impairment,
the Company shall adjust the valuation allowance to reflect changes in the
measurement of impairment. Fair value in excess of the amount capitalized as
mortgage servicing receivables (net of amortization), however, shall not be
recognized. As a result of its adoption of SFAS No. 122 during the fourth
quarter of 1995, the Company recognized net additional excess servicing
receivables of approximately $460,000 during 1995.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock Based Compensation," which is effective for fiscal years
beginning after December 15, 1995. SFAS No. 123 encourages the adoption of a new
fair value-based accounting method for employee stock-based compensation plans
and appplies to all arrangements whereby an employee receives stock or other
equity instruments of an employer based on the price of an employer's stock.
Those arrangements include restricted stock options and stock appreciation
rights. SFAS No. 123 also permits the retention of the Company's current method
of accounting for these plans under Accounting Principles Board Opinion No. 25.
The Company has not completed its analysis of the statement, nor has it decided
upon the expense recognition or disclosure provisions of the statement.
------------------------------
The above management's discussion and analysis contains certain
forward-looking statements that are subject to risk and uncertainty. Many
factors could cause actual results to differ from these statements, including
the Company's need for continued funding sources, sensitivity to economic
slowdown and fluctuation in interest rates, accounting of mortgage servicing
receivables and interest-only and residual certificates, dependence on
securitizations, the effects of the Company's recent expansion, contingent risks
on loans, concentration of US operations, competition and legislative and
regulatory risks.
41
<PAGE> 42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CITYSCAPE FINANCIAL CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
<TABLE>
<S> <C>
Report of Independent Auditors by KPMG Peat Marwick LLP....................................... 43
Report of Independent Auditors by BDO Stoy Hayward, Registered Auditors....................... 44
Report of Independent Auditors by Shane Yurman & Company...................................... 45
Financial Statements:
Consolidated Statements of Financial Condition at December 31, 1995 and 1994 ................. 46
Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and 1993.... 47
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 48
1994 and 1993............................................................................
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993.... 49
Notes to Consolidated Financial Statements............................................... 50-64
</TABLE>
42
<PAGE> 43
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cityscape Financial Corp.:
We have audited the accompanying consolidated financial statements of Cityscape
Financial Corp. and Subsidiary (the "Company") as of and for the years ended
December 31, 1995 and 1994, as listed in the accompanying index. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of City Mortgage Corporation Limited, a wholly-owned subsidiary,
which statements reflect total assets constituting 12 percent and total revenues
constituting 26 percent in 1995 of the related consolidated totals. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for City Mortgage
Corporation Limited, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 1995
and 1994, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
March 27, 1996
43
<PAGE> 44
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.
BDO STOY HAYWARD
Chartered Accountants
and Registered Auditors
London
27 March 1996
44
<PAGE> 45
Independent Auditors' Report
March 20, 1994
To The Board of Directors and Shareholders
Cityscape Financial Corp.
We have audited the accompanying Statements of Operations,
Stockholders' Equity and Cash Flows of Cityscape Corp. for the year ended
December 31, 1993. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Cityscape Corp., for the year ended December 31, 1993, in conformity with
generally accepted accounting principles.
Shane Yurman & Company
Certified Public Accountants
Monsey, New York
45
<PAGE> 46
CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- -----------------
<S> <C> <C>
Assets
Cash and cash equivalents ........................... $ 3,598,549 $ 919,291
Cash held in escrow ................................. 5,920,118 31,162
Accrued interest receivable ......................... 555,031 348,907
Accounts receivable ................................. 604,577 612,408
Mortgage servicing receivables ...................... 24,561,161 --
Trading securities .................................. 15,571,455 --
Mortgage loans held for sale, net ................... 73,852,293 16,681,514
Mortgage loans held for investment, net ............. 1,024,204 516,583
Real estate owned, net .............................. 141,266 130,000
Long-term receivable ................................ 588,778 869,482
Equipment and leasehold improvements, net ........... 2,380,571 412,482
Investment in partnership ........................... 758,315 705,000
Goodwill ............................................ 19,258,011 --
Other assets ........................................ 3,704,652 588,919
--------- -------
Total assets ................................... $ 152,518,981 $ 21,815,748
============= =============
LIABILITIES
Warehouse financing facilities ...................... $ 74,901,975 $ 14,680,435
Accounts payable and other liabilities .............. 16,410,833 702,214
Allowance for losses ................................ 2,130,954 --
Income taxes payable ................................ 1,204,803 1,228,000
Standby financing facility .......................... 771,361 --
Subordinated debentures, net of discount ............ -- 1,419,156
--------- -------
Total liabilities .............................. 95,419,926 18,029,805
---------- ----------
COMMON STOCK WARRANTS .................................... -- 609,205
--------- -------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 5,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock, $.01 par value, 50,000,000 shares
authorized; 14,450,366 and 10,107,490
issued and outstanding in 1995 and
1994, respectively ................................ 144,503 101,074
Additional paid-in capital .......................... 44,982,647 2,672,205
Foreign currency translation adjustment ............. (6,219) --
Retained earnings ................................... 11,978,124 403,459
---------- -------
Total stockholders' equity ..................... 57,099,055 3,176,738
---------- ---------
COMMITMENTS AND CONTINGENCIES
Total liabilities and stockholders' equity ..... $ 152,518,981 $ 21,815,748
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
46
<PAGE> 47
CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues
Gain on sale of
loans ........................ $ 38,198,121 $ 5,691,165 $ 2,088,502
Mortgage origination
income ....................... 2,963,444 2,551,679 1,455,521
Interest ....................... 6,705,675 1,899,684 535,812
Servicing income ............... 777,066 414,173 --
Earnings from
partnership interest ......... 481,789 391,000 --
Other .......................... 384,543 226,758 377,548
------------ ------------ ------------
Total revenues ......... 49,510,638 11,174,459 4,457,383
EXPENSES
Salaries and employee
benefits ..................... 12,165,225 4,279,823 1,938,607
Interest expense ............... 4,610,186 1,563,428 675,747
Selling expenses ............... 2,895,113 588,029 345,437
Other operating
expenses ..................... 6,581,244 2,889,720 1,174,389
Amortization of goodwill ........ 493,794 -- --
------------ ------------ ------------
Total expenses .......... 26,745,562 9,321,000 4,134,180
------------ ------------ ------------
Earnings before
minority interest,
income taxes and
extraordinary item ........... 22,765,076 1,853,459 323,203
Minority interest .............. 2,379,235 -- --
------------ ----------- ------------
Earnings before income taxes
and extraordinary item ....... 20,385,841 1,853,459 323,203
Provision for income
taxes ........................ 8,515,233 1,450,000 8,000
------------ ------------ ------------
Earnings before
extraordinary item ........... 11,870,608 403,459 315,203
Loss from extinguishment
of debt, net of taxes ........ 295,943 -- --
------------ ------------ ------------
NET EARNINGS ........................ $ 11,574,665 $ 403,459 $ 315,203
============ ============ ============
Earnings per share of
common stock before
extraordinary item ........... $ 1.00 $ 0.04 $ 0.03
Extraordinary item ............. (0.03) -- --
------------ ------------ ------------
Earnings per share
of common stock .............. $ 0.97 $ 0.04 $ 0.03
============ ============ ============
Weighted average number
of shares outstanding and
common stock equivalents ..... 11,919,000 10,280,472 10,000,240
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
47
<PAGE> 48
CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON PAID-IN TRANSLATION RETAINED
SHARES(1) AMOUNT(1) CAPITAL(1) ADJUSTMENT EARNINGS TOTAL
-------- --------- ---------- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 ... 10,000,240 $ 100,002 $ 925,402 -- $ 1,057,672 $ 2,083,076
Net earnings ............. -- -- -- -- 315,203 315,203
---------- ------------ ------------ ----------- ------------ ------------
Balance at December 31, 1993 ... 10,000,240 100,002 925,402 -- 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 ................. 107,250 1,072 148,928 -- 150,000
Net earnings ............ -- -- -- -- 403,459 403,459
---------- ------------ ------------ ----------- ------------ ------------
Balance at December 31, 1994 ... 10,107,490 101,074 2,672,205 -- 403,459 3,176,738
Issuance of common
stock ................. 2,542,876 25,429 20,705,942 -- -- 20,731,371
UK Acquisition .......... 1,800,000 18,000 21,604,500 -- -- 21,622,500
Translation adjustment .. -- -- -- (6,219) -- (6,219)
Net earnings ............ -- -- -- -- 11,574,665 11,574,665
---------- ------------ ------------ ----------- ------------ ------------
Balance at December 31, 1995... 14,450,366 $ 144,503 $ 44,982,647 $ (6,219) $ 11,978,124 $ 57,099,055
========== ============ ============ ============ ============ ============
</TABLE>
- ----------
(1) All amounts have been restated to reflect the 4,999,820 shares issued in
connection with the CSC Acquisition and the 100% stock dividend paid in
September 1995.
See accompanying notes to consolidated financial statements.
48
<PAGE> 49
CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings ........................................... $ 11,574,665 $ 403,459 $ 315,203
Adjustments to reconcile net earnings to net
cash used in operating activities:
Depreciation and amortization ..................... 801,780 126,195 26,563
Income taxes payable .............................. (23,197) 1,205,000 8,000
Earnings from partnership interest ................ (481,789) (391,000) --
Increase in mortgage servicing receivables ........ (24,561,161) -- --
Increase in trading securities .................... (15,571,455) -- --
Provision for losses .............................. 2,130,954 282,210 --
Increase in accrued interest
receivable ...................................... (206,124) (113,423) (75,188)
Proceeds from sale of mortgages ................... 401,716,611 147,999,989 73,744,463
Mortgage origination funds disbursed .............. (459,258,490) (154,410,000) (77,586,000)
Other, net ........................................ 8,365,022 (451,472) (135,154)
------------- ------------- -------------
Net cash used in operating
activities ................................. (75,513,184) (5,349,042) (3,702,113)
------------- ------------- -------------
Cash flows from investing activities:
Net purchases of equipment ............................. (1,941,417) (226,244) (241,013)
Net (advances) distributions from
partnership .......................................... 428,474 (114,000) (200,000)
Increase in mortgages held for investment .............. (507,621) (33,419) (483,164)
Increase in real estate owned .......................... (11,266) (130,000) --
------------- ------------- -------------
Net cash used in investing activities ........ (2,031,830) (503,663) (924,177)
------------- ------------- -------------
Cash flows from financing activities:
Increase in warehouse facility and notes
payable .............................................. 60,221,540 4,715,157 4,915,318
Increase in standby financing facility ................. 771,361 -- --
Issuance of subordinated debentures .................... -- 2,000,000 --
Net proceeds from issuance of common stock in CSC-UK ... 500,000
Net proceeds from issuance of common
stock ................................................ 20,731,371 150,000 --
Redemption of subordinated debentures .................. (2,000,000) (200,000) (500,000)
------------- ------------- -------------
Net cash provided by financing
activities ................................. 80,224,272 6,665,157 4,415,318
------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents ............................................... 2,679,258 812,452 (210,972)
Cash and cash equivalents at beginning of
year ................................................. 919,291 106,839 317,811
------------- ------------- -------------
Cash and cash equivalents at end of ....................
year ................................................. $ 3,598,549 $ 919,291 $ 106,839
============= ============= =============
Supplemental disclosure of cash flow information:
Income taxes paid during the year ...................... $ 9,049,002 $ 245,000 $ 1,402
============= ============= =============
Interest paid during the year .......................... $ 6,705,675 $ 1,439,075 $ 603,507
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE> 50
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
1. ORGANIZATION
Cityscape Financial Corp. ("Cityscape" or the "Company") is a consumer finance
company that, through its wholly owned subsidiary, Cityscape Corp. ("CSC"),
engages in the business of originating, purchasing, selling and servicing
mortgage loans secured primarily by one- to four-family residences. The majority
of the Company's loans are made to owners of single family residences who use
the loan proceeds for such purposes as debt consolidation, financing of home
improvements and educational expenditures, among others. In the US, the Company
is licensed or registered to do business in 35 states and the District of
Columbia. The Company commenced operations in the United Kingdom in May 1995
with the formation of City Mortgage Corporation Limited ("CSC-UK"), an English
corporation that originates, sells and services loans in England, Scotland and
Wales in which the Company initially held a 50% interest and subsequently
purchased the remaining 50% (see Note 2). CSC-UK had no operations and no
predecessor operations prior to May 1995.
2. ACQUISITIONS
On April 27, 1994, the Company acquired all of the capital stock of CSC in an
acquisition in which the shareholders of CSC acquired beneficial ownership of
8,280,000 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 years ended December 31, 1994 and 1993 include the results
of both the Company and CSC for the full years.
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 banker formed CSC-UK. CSC-UK operates in the United Kingdom (excluding
Northern Ireland, the "UK"), and lends to
50
<PAGE> 51
individuals who are unable to obtain mortgage financing from conventional
mortgage sources such as banks and building societies because of impaired or
unsubstantiated credit histories and/or unverifiable income. On September 29,
1995, the Company entered into an agreement with the three other shareholders of
CSC-UK to acquire their 50% interest in CSC-UK not then owned by the Company
through the issuance of 1,800,000 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.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts of
CSC and its wholly owned subsidiaries. As a result of the acquisition of the
remaining 50% of CSC-UK at September 30, 1995, the consolidated statements of
financial condition include the accounts of CSC-UK. The consolidated statements
of operations include the accounts of CSC-UK with a corresponding minority
interest for the earnings from May 2, 1995 to September 29, 1995, representing
the 50% interest not held by the Company during this period. All significant
intercompany balances and transactions have been eliminated in consolidation.
The CSC Acquisition and the UK Acquisition have been accounted for under the
purchase method of accounting and, more specifically with respect to the CSC
Acquisition only, a "reverse acquisition" as described in Note 2 above.
REVENUE RECOGNITION
Gains and losses on sale of mortgage loans are recognized when mortgage loans
are sold to investors. The Company primarily sells loans on a non-recourse
basis, at a price above the face value of the loan. Gain on the sale of loans is
recorded on the settlement date. Included in gain on sale of loans is the
present value of the differential between the interest rate payable by an
obligor on a loan over the interest rate passed through to the purchaser
acquiring an interest in such loan, less applicable recurring fees including the
costs of credit enhancements and trustee fees and, in the case of CSC-UK loans,
a third party investment bank's significant participation in the cash flows
associated with such loans.
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 securitization representing
the fair value of the interest-only and residual certificates received by the
Company which are reflected as trading securities. Gains on sales from
securitization represents the difference between the proceeds received from the
trust plus the fair value of the interest-only and residual certificates less
the carry value of the loans sold. Fair value of these certificates is
determined based on various economic factors, including loan types, sizes,
interest rates, dates of origination, terms and geographic locations. The
Company also uses other available information such as reports on prepayment
rates, collateral value, economic forecasts and historical default and
prepayment rates of the portfolio under review. The Company reviews these
factors and, if necessary, adjusts the remaining asset to the fair value of the
interest-only and residual certificates.
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<PAGE> 52
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.
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 betterment's are capitalized. Cost of
assets sold or retired and the related amounts of accumulated depreciation are
eliminated from the accounts in the year of sale or retirement. Any resulting
profit or loss is reflected in the statement of earnings.
MORTGAGE LOANS HELD FOR SALE, NET
Mortgage loans held for sale, net, are reported at the lower of cost or market
value, determined on an aggregate basis. Market value is determined by current
investor yield requirements in accordance with SFAS No. 65 "Accounting for
Certain Mortgage Banking Activities." There was no allowance for market losses
on mortgage loans held for sale at December 31, 1995 and 1994, respectively.
MORTGAGE LOANS HELD FOR INVESTMENT, NET
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." SFAS No. 114 requires lenders to measure the impairment
based on the present value of expected future cash flows discounted at the
loan's effective interest rate. As an alternative approach, SFAS No. 114 permits
recognition of 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.
52
<PAGE> 53
SFAS No. 114 was amended by SFAS No. 118 which allows for existing income
recognition practices to continue. As required, the Company adopted these
standards effective January 1, 1995, with no material impact on the financial
statements.
MORTGAGE SERVICING RIGHTS
Effective October 1, 1995, the Company adopted SFAS No. 122 "Accounting for
Mortgage Servicing Rights." The Statement amends SFAS No. 65 to require that a
mortgage banking enterprise recognize as separate assets the rights to service
mortgage loans for others, however those servicing rights are acquired. The
Statement requires the assessment of capitalized mortgage servicing rights for
impairment to be based on the current fair value of those rights. Mortgage
servicing rights are amortized in proportion to and over the period of the
estimated net servicing income.
As a result of its adoption of SFAS No. 122 during the fourth quarter of 1995,
the Company recognized net additional excess servicing assets of approximately
$460,000.
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.
FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition, for which it
is practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based upon estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and the estimated future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. SFAS No. 107 excludes certain
financial instruments and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts does not represent
the underlying value of the Company.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and cash equivalents: The carrying amount of cash on hand and money
market funds is considered to be a reasonable estimate of fair market value.
Mortgage servicing receivables: The fair value was determined by using
estimated discounted future cash flows taking into consideration the current
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 rate
environment, current prepayment rates and default experience. The carrying
amount is considered to be a reasonable estimate of fair market value.
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<PAGE> 54
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 $17.7 million at
December 31, 1995 and 1994, 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 15.7% at
December 31, 1995 and 1994, respectively, and since additional credit risk
adjustments have been provided through reserves for loan losses, the carrying
value is a reasonable estimate of fair value.
Warehouse financing facilities: This facility has an original maturity of less
than 120 days and, therefore, the carrying value is a reasonable estimate of
fair value.
Subordinated debentures, net of discount: Fair value was estimated based on
rates currently available for debt with similar terms and remaining maturities.
Standby financing facilities: The carrying amount of standby financing
facilities is considered to be a reasonable estimate of fair market value.
The notes that follow reflect fair values where appropriate for the financial
instruments of the Company, utilizing the assumptions and methodologies as
defined above.
GOODWILL AMORTIZATION
The Company recognizes goodwill for the purchase price in excess of the fair
market value of net assets acquired. Goodwill is amortized as an expense on a
straight line basis over a period of ten years. The carrying value of goodwill
is analyzed quarterly by the Company based upon the expected revenue and
profitability levels of the acquired enterprise to determine whether the value
and future benefit may indicate a decline in value. If the Company determines
that there has been a decline in the value of the acquired enterprise, the
Company writes down the value of the goodwill to the revised fair value.
REAL ESTATE OWNED, NET
Real estate owned consists of real estate acquired through foreclosure or
deed-in-lieu of foreclosure on defaulted loan receivables. These properties are
carried at the lower of fair values less estimated selling costs or the
acquisition cost of the property.
EARNINGS PER SHARE
Earnings per share are based on the net earnings applicable to common stock
divided by the weighted average number of common shares and common share
equivalents outstanding during the year, after giving retroactive effect to a
100% stock dividend paid in September 1995 (see Note 17).
FOREIGN CURRENCY TRANSLATION
The Company reflects the results of CSC-UK in accordance with SFAS No. 52,
"Foreign Currency Translation." To the extent there are foreign currency
translation gains or losses, such gains or losses are considered unrealized and
are recorded and reported as a separate component of stockholders' equity.
RECLASSIFICATIONS
Certain amounts in the statements have been reclassified to conform with the
1995 classifications.
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<PAGE> 55
NEW ACCOUNTING PRONOUNCEMENT
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" which is effective for fiscal
years beginning after December 15, 1995. SFAS No. 123 establishes financial
accounting and reporting standards for stock-based employee compensation plans,
and allows either expensing the value of stock-based compensation over the
period earned, or disclosing in the notes to the consolidated financial
statements the pro forma impact to net income and earnings per share as if the
fair value of the awards had been charged to compensation expense. The Company
has not completed its analysis of the statement, nor has it decided upon the
expense recognition or disclosure provisions of the statement.
4. MORTGAGE SERVICING RECEIVABLES
This represents the unamortized net present value of the mortgage servicing
retained by the Company taking into account several factors including industry
practices. The amount is amortized over the estimated lives of the underlying
receivables sold.
The activity in the mortgage servicing receivables is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
-------------
<S> <C>
Balance, beginning of year ............ $ --
Additions ............................. $ 24,877,622
Amortization .......................... (316,461)
------------
Balance, end of year .................. $ 24,561,161
============
</TABLE>
For the year ended December 31, 1995, $307.9 million of loans were sold with
servicing retained by the Company. Such loans were generally sold at par with
the Company retaining a participation in future cash flows. The Company
discounts the cash flows on the underlying loans sold at a rate it believes a
purchaser would require as a rate of return. The weighted average rate used to
discount the cash flow for the period ended December 31, 1995 was approximately
10.1%. The mortgage servicing receivable is amortized using the same discount
rate used to determine the original servicing recorded.
Effective October 1, 1995, the Company adopted Financial Accounting
Standards Board Statement 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. The fair
value of the existing mortgage servicing rights as of December 31, 1995 was
approximately $23.1 million, which was in excess of book value and did not
require a valuation allowance to be established. The market valuation was based
upon the type of servicing, the level of servicing fee, current market
prepayment speeds based upon coupon rate and a blended discount rate of 10.2% on
the estimated future cash flows.
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
recorded interest-only and residual certificates totaling $15.6 million ($4.8
million of interest-only certificates and $10.8 million of residual
certificates) which approximates their fair value at December 31, 1995.
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<PAGE> 56
In accordance with SFAS No. 115, the Company values the interest-only and
residual certificates as "trading securities" and, as such, they are recorded at
their fair value. Fair value of these certificates is determined based on
various economic factors, including loan types, sizes, interest rates, dates of
origination, terms and geographic locations. The Company also uses other
available information such as reports on prepayment rates, interest rates,
collateral value, economic forecasts and historical default and prepayment rates
of the portfolio under review. If the fair value of the interest-only and
residual certificates is different from the recorded value, the unrealized gain
or loss will be reflected on the Consolidated Statements of Operations.
During the year ended December 31, 1995, the Company sold $235.0 million of
its US loan origination and purchase volume in securitizations ($50.0 million in
March; $100.0 million in August; $85.0 million in December including $23.8
million under a pre-funding commitment which was funded after December 31,
1995). In loan sales through securitizations, the Company sells loans that it
has originated or purchased to a REMIC trust for a cash purchase price and
interests in such REMIC trusts which are represented by the interest-only and
residual certificates. The cash purchase price is raised through an offering of
pass-through certificates by the REMIC trust.
6. RESERVE FOR LOSSES
The activity in the reserve for losses on mortgage loans held for
investment, and real estate owned is summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Mortgages Held for
Investment:
Balance, beginning of year ........... $250,210 -- --
Provision for losses ................. -- $ 40,000 $ 250,210
Charge-offs .......................... 51,816 -- (40,000)
-------- -------- ---------
Balance, end of year ................. $198,394 $250,210 --
======== ======== =========
Real Estate Owned:
Balance, beginning of year ........... $ 32,000 -- --
Provision for losses ................. -- $ 32,000 --
Charge-offs .......................... -- -- --
-------- -------- ---------
Balance, end of year ................. $ 32,000 $ 32,000 --
======== ======== =========
</TABLE>
7. LONG-TERM RECEIVABLES
Pursuant to certain loan placement agreements, the Company receives yield
differential payments (interest override payments) on various loans. The present
value of these earnings to be realized in the future are recognized at the time
of sale (net of imputed interest) which contemplate substantially all loans
being prepaid within a five to seven year period.
8. EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
Equipment and leasehold improvements, net, at cost, is summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Office equipment ................. $2,473,365 $565,684
Leasehold improvements ........... 37,076 16,000
Capitalized leases ............... 337,415 --
---------- --------
2,847,856 581,684
Accumulated depreciation ......... 467,285 169,202
---------- --------
Balance, end of year ............. $2,380,571 $412,482
========== ========
</TABLE>
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<PAGE> 57
9. EARNINGS FROM PARTNERSHIP INTEREST
The earnings from partnership interest represents the Company's 9.1% limited
partnership interest (at December 31, 1995) in Industry Mortgage Company, L.P.,
a Delaware limited partnership formed in 1993 ("IMC"). IMC originates purchases,
sells and services mortgage loans that are secured primarily by one- to
four-family residences. Pursuant to the terms of IMC's limited partnership
agreement, the Company is obligated to offer to sell $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 $420,000 fee (which has been capitalized
and is being amortized using the straight-line method over a life of 14 months),
such monthly obligation has been eliminated for the period from November 1,
1995, through December 31, 1996. The Company records its investment under the
equity method of accounting and as such recognized $481,789 and $391,000 of
equity earnings during the year ended December 31, 1995 and 1994, respectively.
No capital contributions were made during the year ended December 31, 1995;
capital contributions made to the partnership totaled $180,000 for the year
ended December 31, 1994. The Company received partnership distributions totaling
$428,474 and $66,000 for the years ended December 31, 1995 and 1994,
respectively.
10. OTHER ASSETS
Other assets at December 31, 1995 and 1994 consist of the following:
<TABLE>
<CAPTION>
1995 1994
---------- --------
<S> <C> <C>
Notes receivable ........................ $ 232,813 $415,450
Prepaid expenses ........................ 421,839 129,590
Deferred expenses ....................... 244,335 --
Loan receivables subwarehousing ......... 1,602,632 --
Other ................................... 1,203,033 43,879
---------- --------
Total .............................. $3,704,652 $588,919
========== ========
</TABLE>
Included in notes receivable above, are notes receivable from directors and
officers totaling $79,952, $205,000 at December 31, 1995 and 1994, respectively.
These loans are at fixed rates of interest between 6% and 9% and are for terms
between one and three years. Loan receivables-subwarehousing represent funds
lent on a short term basis to assist in the funding of loans by certain of the
Company's loan correspondents. Each borrowing under these subwarehouse credit
lines has a term of not more than 30 days. At December 31, 1995, there were
applications pending for an additional $4.1 million of such loans.
11. FINANCING FACILITIES AND LOAN PURCHASE AGREEMENTS
As of December 31, 1995, the Company had available a warehouse line of
credit with a group of banks (the "Warehouse Facility"). Pursuant to the
Warehouse Facility, the Company has available a secured revolving credit line of
$72.0 million in order to finance the Company's origination or purchase of
loans, pending sale to investors or for holding certain loans in its own
portfolio. The revolving credit line is settled on a revolving basis in
conjunction with ongoing loan sales and bears interest at a variable rate based
on (i) 25 basis points over the higher of either the prime rate or the federal
funds rate plus 50 basis points, or (ii) LIBOR (A) divided by the result of one
minus the stated maximum rate at which reserves are required to be maintained by
Federal Reserve System member banks, (B) plus 175 basis points, as periodically
elected by the Company. The revolving credit portion of the Warehouse Facility
extends through June 1997. The balance outstanding at December 31, 1995 totaled
$72.1 million. In addition, the Warehouse Facility provides for a secured
revolving working capital credit line of up to $3.0 million to be used by the
Company for general corporate purposes. The working capital credit line operates
as a revolving facility until January 1, 1997 at which time any outstanding
balance under the working capital credit line converts to a term loan. The
working capital credit line bears interest at a variable rate based on 100 basis
points over the higher of the prime rate or the federal funds rate plus 50 basis
points. As of December 31, 1995, there was no balance outstanding against the
facility. The working capital portion of
57
<PAGE> 58
the Warehouse Facility terminates on December 31, 1998. The Warehouse Facility
also permits the Company to use up to $10.0 million of the revolving credit line
to provide a subwarehouse line of credit to certain loan correspondents from
whom the Company purchases loans.
The Company has a $50.0 million loan purchase agreement whereby the Company
originates and then sells loans and retains the right of first refusal to
repurchase loans at a future date for whole loan sales to institutional
investors or for sales through securitizations. This agreement extends through
June 1999.
The Company also has available an additional line of credit of $10.0 million
as of December 31, 1995. Amounts borrowed under this facility are to be
collateralized by the interest-only and residual certificates the Company
receives upon loan sales through securitizations. As of December 31, 1995, this
line had an outstanding balance of $771,361. In connection with this standby
facility, the Company issued 450,000 Common Stock warrants in 1994 which were
exercised at $0.875 per share in connection with the Company's December 1995
stock offering.
In May 1995, CSC-UK and Greenwich entered into a mortgage loan purchase
agreement that included a working capital facility with respect to the funding
of fixed and variable rate, residential mortgage loans originated or purchased
by CSC-UK in the UK (the "Old UK Facility"). Pursuant to the Old UK 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 UK 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 UK Facility was $41.4 million. Outstanding
amounts under the working capital facility portion of the Old UK Facility
accrued interest at a rate of LIBOR plus 250 basis points during 1995 (9.11% at
December 31, 1995). The outstanding balance under this working capital facility
was (pound-sterling)1.8 million ($2.8 million) at December 31, 1995.
In March 1996, CSC-UK and Greenwich entered into a new mortgage loan
purchase agreement effective as of January 1, 1996 that includes a working
capital facility with respect to the funding of variable rate, residential
mortgage loans originated or purchased by CSC-UK in the UK (the "UK Purchase
Facility") and terminated the Old UK Facility. Pursuant to the UK Purchase
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 Purchase 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 (pound)10.0 million in the aggregate outstanding at any time.
Outstanding amounts under this working capital facility bear interest at a rate
of LIBOR plus 255 basis points. This agreement expires as to the working capital
facility on 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 Purchase 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 is payable on December 15, 1996 and $25 million of which is payable on
December 15, 1997. Such fee will be amortized over the life of the UK Purchase
Facility.
The Company is required to comply with various operating and financial
covenants as defined in the agreements described above. The continued
availability of funds provided to the Company under these agreements is subject
to the Company's continued compliance with these covenants.
The carrying amount of the financing facilities is considered to be a
reasonable estimate of fair value.
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<PAGE> 59
12. SUBORDINATED DEBENTURES AND COMMON STOCK WARRANTS WITH PUT OPTIONS
The Company had senior subordinated debentures in the principal amount of
$2.0 million which bore interest at a fixed rate of 8% and required four
mandatory principal repayments of $500,000 at six month intervals beginning on
January 31, 1998 and ending on July 21, 1999, the maturity date. In connection
with this financing in 1994, the lender received detachable warrants with a put
option feature to purchase 800,000 shares of Common Stock. The put option
feature permitted the warrant holder to require the Company to retire the
warrants at any time after July 21, 1999. These warrants were initially valued
at $609,205 based upon the terms of the agreement and were subsequently
exercised in connection with the Company's December 1995 stock offering. The
valuation of these warrants resulted in an original issue discount on the debt,
which was being amortized over the term of the put option (five years) using the
effective interest method. The debt is shown on the accompanying consolidated
financial statements net of the remaining original issue discount of $580,844 at
December 31, 1994. In December 1995, the Company extinguished this debt with
proceeds from the public offering of its Common Stock (as more fully described
in Note 17). As a result of this early extinguishment of debt, the Company
recorded an extraordinary loss of $295,943, net of taxes.
The carrying value of the subordinated debentures is considered to be a
reasonable estimate of fair value.
13. OTHER OPERATING EXPENSES
Other operating expenses include the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------------------------------------
ACCOUNT DESCRIPTION 1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Professional fees ................ $1,541,448 $ 745,105 $ 265,735
Travel and entertainment ......... 1,093,426 365,200 54,319
Telephone ........................ 679,765 305,020 126,501
Foreclosure costs ................ 34,388 283,909 192,499
Insurance ........................ 318,567 199,396 112,961
Occupancy ........................ 626,354 139,170 105,461
Office supplies .................. 588,902 185,087 71,818
Other ............................ 1,698,394 666,833 245,095
---------- ---------- ----------
Total .................. $6,581,244 $2,889,720 $1,174,389
========== ========== ==========
</TABLE>
14. INCOME TAXES
For years ending December 31, 1993 and prior, CSC had elected to be treated
as a subchapter S Corporation for federal and, where permitted, state income tax
purposes. As an S Corporation, CSC was not responsible for the payment of
federal income taxes. On January 1, 1994, CSC terminated its S Corporation
status and, accordingly, has been subject to federal and state income taxes as a
C Corporation since that date. As a result of the termination of the S
Corporation status, net deferred tax liabilities totaling $680,000 were
reinstated as of January 1, 1994 and were included as an income tax provision in
1994.
The sources of earnings before income taxes for the years ended December 31,
1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
US ................................... $14,036,665 $1,853,459
Foreign .............................. 6,349,176 --
----------- ----------
Earnings before income taxes ......... $20,385,841 $1,853,459
=========== ==========
</TABLE>
59
<PAGE> 60
The provision for income taxes for the years ended December 31, 1995 and
1994 are comprised of the following:
<TABLE>
<CAPTION>
1995 1994
---------- --------
<S> <C> <C>
Current
Federal ......... $5,295,717 $814,020
State ........... 1,388,288 159,980
Foreign ......... 2,105,155 --
---------- --------
8,789,160 974,000
========== ========
</TABLE>
<TABLE>
<S> <C> <C>
Deferred
Federal ................... $ (224,620) $ 397,817
State ..................... (49,307) 78,183
(273,927) 476,000
----------- ----------
Provision for income taxes ..... $ 8,515,233 $1,450,000
=========== ==========
</TABLE>
Deferred income taxes included in the statements of financial condition
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for tax reporting purposes primarily resulting from the use of the
cash basis for tax reporting purposes. A schedule of the temporary differences
and the related tax effect for the years ended December 31, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
Reserves .................. $(242,752) $112,884
Investment in partnership.. (89,255) 36,000
Change from cash to
accrual.................. 6,593 327,116
Other ..................... 51,487 --
--------- --------
$(273,927) $476,000
========= ========
</TABLE>
The reconciliation of income tax computed at the US federal statutory tax
rate to the effective income tax rate for the years ended December 31, 1995 and
1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Federal income tax at statutory rate .................. 35.0% 35.0%
State and local taxes, net of federal tax benefit ..... 4.2 6.5
Difference in effective tax rate on foreign earnings .. 0.2 --
Deferred income taxes resulting from change in tax
status............................................... -- 36.7
Other, net ............................................. 2.4 --
---- ----
41.8% 78.2%
==== ====
</TABLE>
Deferred taxes as of December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Gross deferred tax assets ..... $ 868,406 $148,884
Less: valuation allowance ..... (284,779) --
-------- -------
Net deferred assets ........... 583,627 148,884
-------- -------
Deferred tax
liabilities:
Current .................. 332,974 264,814
Non-current .............. 452,728 360,070
--------- --------
Total ......................... 785,702 624,884
--------- --------
Net deferred tax liabilities .. $ 202,075 $476,000
========= ========
</TABLE>
The net change in the total valuation allowance for the year ended December
31, 1995 was an increase of $284,779 representing a 100% valuation allowance
taken against the excess foreign tax credits from UK source income.
15. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution plan (401(k)) for all eligible
employees. Contributions to the plan are in the form of employee salary
deferrals which may be subject to an employer matching
60
<PAGE> 61
contribution up to a specified limit at the discretion of the Company. In
addition, the Company may make a discretionary annual profit sharing
contribution on behalf of its employees. The Company's contribution to the plan
amounted to approximately $25,319 and $11,000 for the year ended December 31,
1995 and 1994, respectively.
Effective June 1, 1995, the Board of Directors adopted, and the stockholders
of the Company approved, the 1995 Stock Option Plan (the "Stock Option Plan").
No more than 1,800,000 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 300,000 shares of Common Stock during any calendar
year, subject to adjustment to reflect stock splits, stock dividends and similar
capital stock transactions. As of December 31, 1995, there were 410,000 options
granted under the Stock Option Plan at an exercise price of $5.00 per share, of
which 90,000 options were exercisable and none of which had been exercised.
Effective December 1994, the Board of Directors adopted, and the
stockholders of the Company approved, the Company's 1995 Employee Stock Purchase
Plan (the "Stock Purchase Plan"). The Stock Purchase Plan permits eligible
employees of the Company to purchase Common Stock through payroll deductions of
up to ten percent of their compensation (including base salary or hourly
compensation and cash bonuses), up to a maximum of $25,000 for all purchase
periods ending within any calendar year. The price of Common Stock purchased
under the Stock Purchase Plan will be 85% of the lower of the fair market value
of a share of Common Stock on the commencement date or the termination date of
the relevant offering period as determined by the bid price listed on the
National Quotation Bureau, Inc. OTC Bulletin Board.
For the plan periods ending June 30, 1995, and December 31, 1995, employees
purchased 21,876 and 11,762 shares at a price of $1.54 and $4.68 per share
respectively. The Company recognizes as compensation expense the difference
between the fair market value and the purchase price of the stock.
16. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases premises and equipment under operating leases with
various expiration dates. Minimum annual rental payments at December 31, 1995
are as follows:
<TABLE>
<S> <C> <C>
1996 .................. $1,124,669
1997 .................. 1,066,020
1998 .................. 1,032,862
1999 .................. 917,584
2000 .................. 527,800
----------
Total ................. $4,668,935
==========
</TABLE>
Rent expense for office space amounted to $576,884, $110,000 and $102,000
for the years ended December 31, 1995 and 1994 and 1993, respectively.
LITIGATION
In the normal course of business, the Company is subject to various legal
proceedings and claims, the resolution of which, in management's opinion, will
not have a material adverse effect on the consolidated financial position or the
results of operations of the Company.
EMPLOYEE AGREEMENTS
The Company has employment agreements with 11 officers of the Company. The
Company guarantees annual compensation ranging from approximately $150,000 to
$260,000 per year, plus bonuses (where
61
<PAGE> 62
applicable) in amounts as defined in the agreements. The officers' compensation
will be increased each year by an amount approved by the Board of Directors. The
agreements terminate upon the occurrence of certain events as defined by the
respective agreements.
17. STOCKHOLDERS' EQUITY
In April 1994, the Company effected a 12 for 1 forward stock split of the
existing 30,010 (60,020 after giving effect to the 1995 Dividend as discussed
below) Common Stock shares of the Company and then issued 4,140,000 (8,180,000
after giving effect to the 1995 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 (1,000,000 after
giving effect to the 1995 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 (450,000 after
giving effect to the 1995 Dividend discussed below) shares of Common Stock in
connection with obtaining a standby facility (see Note 12). These warrants were
recorded as an increase to additional paid in capital for the excess of the fair
value over the exercise price at the time of issuance.
During the fourth quarter of 1994, the Company issued an additional 53,625
(107,250 after giving effect to the 1995 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 the first nine months of 1995, the Company issued 21,438 shares,
(42,876 after giving effect to the 1995 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 shares of Common Stock resulting in an increase of $21.6 million to
Stockholders' equity.
In December 1995, the Company completed a public offering of its Common
Stock in which the Company sold 1,250,000 shares of Common Stock at a public
offering price of $18 per share and the former warrant holders (as more fully
described above and in Note 12) sold 1,250,000 shares at the same price
resulting in net proceeds of approximately $20.7 million to the Company.
Directors who are not employees of the Company receive stock options
pursuant to the Company's Directors Plan. The Directors Plan provides for
automatic grants of an option to purchase 20,000 shares of Common Stock to the
Company's eligible non-employee directors upon their election to the Board of
Directors of the Company. Each eligible non-employee director is granted an
additional option, subject to certain restrictions, to purchase 3,000 shares of
Common Stock on each anniversary of his or her election so long as he or she
remains an eligible non-employee director of the Company. Initial options
granted under the Directors Plan generally vest 50% upon the first anniversary
of the grant date and 50% upon the second anniversary of the grant date. As of
December 31, 1995, 60,000 options at an average exercise price of $5.25 per
share had been granted under the Directors Plan, none of which had been
exercised.
62
<PAGE> 63
18. SEGMENTAL REPORTING
For the years ended December 31, 1995 and December 31, 1994, revenues from
loan sales and servicing constituted the only line of the Company's revenues.
For the year ended December 31, 1995, there was one institutional purchaser who
accounted for 10% or more of the total revenues (23.5%). 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).
Since May 1995, the Company's business activities have been conducted in the
US and the UK. Operating profit is total revenues less operating expenses. In
determining operating profit for each geographic area, the following items have
not been considered: interest expense, amortization of goodwill and income
taxes.
The following table summarizes the Company's business activities by
geographic regions for the year ended December 31, 1995.
<TABLE>
<CAPTION>
US UK Consolidated
-- -- ------------
<S> <C> <C> <C>
Revenues ............... $ 36,471,702 $13,038,936 $ 49,510,638
============= =========== ============
Operating profit ....... $ 19,036,352 $ 8,832,704 $ 27,869,056
Interest expense ....... (4,610,186)
Amortization of
goodwill ............ (493,794)
Minority interest
(UK) ................ (2,379,235)
------------
Earnings before
income taxes ........ $ 20,385,841
============
Identifiable assets .... $ 112,005,523 $21,255,447 $133,260,970
Goodwill ............... 19,258,011
------------
Total assets $152,518,981
============
</TABLE>
19. SUBSEQUENT EVENTS
In March 1996, the Company and CSC-UK entered into a definitive agreement
pursuant to which CSC-UK will purchase all of the outstanding stock of J&J
Securities Limited ("J&J") in exchange for (pound)15.0 million and 274,000
shares of Common Stock (the "J&J Acquisition"). J&J is a mortgage banker engaged
in the same line of business as CSC-UK. The J&J Acquisition is scheduled to
close prior to May 30, 1996.
63
<PAGE> 64
20. SELECTED QUARTERLY DATA (UNAUDITED)
The following represents selected quarterly financial data for the Company:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
1993
Revenues ................ $ 906,603 $ 1,232,639 $ 983,217 $ 1,334,924
Net earnings ............ 100,874 111,367 82,432 20,530
Net earnings per share .. 0.01 0.01 0.01 --
1994
Revenues ................ $ 1,803,455 $ 2,295,501 $ 2,304,948 $ 4,770,555
Net earnings ............ (482,878) 176,114 62,927 647,296
Net earnings per share .. (.05) .02 .01 .06
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 .................. .09 .21 .34 .36
Net earnings per share .. .09 .21 .34 .33
</TABLE>
64
<PAGE> 65
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In June 1994, the Company dismissed Shane & Company ("SY&Co.") as its
principal independent accountant and engaged KPMG Peat Marwick LLP as its
principal independent accountant. The decision to change accountants was
approved by the Company's Board of Directors. In connection with the audits of
the Company's financial statements for the two most recent completed fiscal
years prior to 1994 and during the interim period up until the date of the
change in accountants, there were no disagreements with SY&Co. on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure. SY&Co.'s report on the financial statements for such years
did not contain an adverse opinion or disclaimer of opinion, nor was it modified
as to uncertainty, audit scope or accounting principles.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Company's executive officers is included under
the caption "Executive Officers" following Part I, Item 4. Section 16(a) of the
Securities Exchange Act of 1934 (the "Exchange Act") requires the Company's
executive officers, directors and greater than 10% stockholders to file initial
reports of ownership (on Form 3) and periodic changes in ownership (on Forms 4
and 5) of the Company's securities with the Securities and Exchange Commission
(the "Commission"). Based solely on its review of copies of such forms and such
written representations regarding compliance with such filing requirements as
were received from its executive officers, directors and greater than 10%
stockholders, the Company believes that, other than as described in the
following two sentences, all such Section 16(a) filing requirements were
complied with during 1995. Each of Messrs. Robert Grosser, Robert C. Patent and
Asher Fensterheim failed to include in his report on Form 3 filed with the
Commission pursuant to Section 16(a) of the Exchange Act on December 20, 1995,
the fact that he had granted Mr. Jay L. Botchman an option to purchase 690,000
shares of Common Stock. Each of Messrs. Grosser, Patent and Fensterheim amended
his Form 3 to include this information by filing a Form 5 on February 13, 1996.
Other information required by this item is included in the section entitled
"Election of Directors" of the Company's Proxy Statement which will be filed
with the Securities and Exchange Commission no later than 120 days after the
close of the 1995 fiscal year and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The Company maintains certain employee benefit plans and programs in which
its executive officers are participants. Copies of these plans and programs are
incorporated by reference as Exhibits 10.20, 10.21 and 10.44 to this report. The
additional information required by this item is included in the section entitled
"Executive Compensation and Other Information" of the Company's Proxy Statement
which will be filed with the Securities and Exchange Commission no later than
120 days after the close of the 1995 fiscal year and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the sections entitled
"Security Ownership of Certain Beneficial Owners" and "Security Ownership of
Management" of the Company's Proxy Statement which will be filed with the
Securities and Exchange Commission no later than 120 days after the close of the
1995 fiscal year and is incorporated herein by reference
65
<PAGE> 66
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included in the section entitled
"Certain Relationships and Related Transactions" of the Company's Proxy
Statement which will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the 1995 fiscal year and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements: included in Item 8.
Consolidated Statements of Financial Condition
at December 31, 1993, 1994 and 1995
Consolidated Statements of Operations
for the three years ended December 31, 1995
Consolidated Statements of Stockholders' Equity
for the three years ended December 31, 1995
Consolidated Statements of Cash Flows
for the three years ended December 31, 1995
Notes to Consolidated Financial Statements
Report of Independent Auditors
2. Financial Statement Schedules: None
3. Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
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.
66
<PAGE> 67
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.
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 Letter agreement, dated as of August 18, 1994, between CSC and Tim
S. Ledwick, incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1 as declared effective
by the Commission on December 20, 1995.
10.10 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.
10.11 Agreement of Limited Partnership of Industry Mortgage Company,
L.P., dated as of July 1, 1993, between Industry Mortgage
Corporation and the Limited Partners of Industry Mortgage Company,
L.P., including CSC, as amended by the First Amended and Restated
Agreement of Limited Partnership of Industry Mortgage Company,
L.P., dated as of January 1, 1994, by the First Amendment to First
Amended and Restated Agreement of Limited Partnership of Industry
Mortgage Company, L.P., dated as of March, 1994, and the Second
Amendment to First Amended and Restated Agreement of Limited
Partnership of Industry Mortgage Company, L.P., dated as of July
1994, incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1 as declared effective by the
Commission on December 20, 1995.
67
<PAGE> 68
10.12 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.
10.13 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.
10.14 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.
10.15 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.
68
<PAGE> 69
10.16+ 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.
10.17+ 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.
10.18+ 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.
10.19 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.
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<PAGE> 70
10.20 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.
10.21 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.
10.22 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.
10.23 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.
10.24 Lease, dated as of August 2, 1995, among The Standard Life
Assurance Company, City Mortgage Servicing Limited and CSC-UK,
incorporated by reference to Exhibit 10.37 to the Company's
Registration Statement on Form S-1 as declared effective by the
Commission on December 20, 1995.
10.25 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.
70
<PAGE> 71
10.26 Asset Purchase Agreement, dated March 6, 1995, 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.
10.27+ 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, filed previously as Exhibit 10.46.
10.28 Letter Agreement, dated March 28, 1996, between Greenwich and
CSC-UK regarding termination of prior agreement, filed previously
as Exhibit 10.47.
16.1 Letter of change in certifying accountant, dated as of March 28,
1996, filed previously.
21.1 Subsidiaries of the Company, incorporated by reference to Exhibit
21.1 to the Company's Registration Statement on Form S-1 as
declared effective by the Commission on December 20, 1995, filed
previously.
23.1* Consent of Shane Yurman & Company
23.2* Consent of KPMG Peat Marwick LLP
23.3* Consent of BDO Stoy Hayward
27.1* Financial Data Schedule for the year ended December 31, 1995
- ---------------
* Filed herewith
+ Confidential treatment granted with respect to certain provisions
(b) Reports on Form 8-K:
1. Form 8-K dated October 3, 1995 reporting the acquisition by
the Company of the remaining 50% of the capital stock of City Mortgage
Corporation Limited in exchange for the issuance of 1,800,000 shares of
the Company's Common Stock.
71
<PAGE> 72
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
CITYSCAPE FINANCIAL CORP.
By: /s/ Tim S. Ledwick
______________________________________
Tim S. Ledwick
Chief Financial Officer
(as chief accounting officer and on
behalf of the registrant)
Date: January 30, 1997
<PAGE> 73
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT Consecutive
NUMBER DESCRIPTION OF EXHIBIT Page No.
------ ---------------------- --------
<S> <C> <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.
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>
<PAGE> 74
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 Letter agreement, dated as of August 18, 1994, between CSC and Tim
S. Ledwick, incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1 as declared effective
by the Commission on December 20, 1995.
10.10 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.
10.11 Agreement of Limited Partnership of Industry Mortgage Company,
L.P., dated as of July 1, 1993, between Industry Mortgage
Corporation and the Limited Partners of Industry Mortgage Company,
L.P., including CSC, as amended by the First Amended and Restated
Agreement of Limited Partnership of Industry Mortgage Company,
L.P., dated as of January 1, 1994, by the First Amendment to First
Amended and Restated Agreement of Limited Partnership of Industry
Mortgage Company, L.P., dated as of March, 1994, and the Second
Amendment to First Amended and Restated Agreement of Limited
Partnership of Industry Mortgage Company, L.P., dated as of July
1994, incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1 as declared effective by the
Commission on December 20, 1995.
<PAGE> 75
10.12 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.
10.13 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.
10.14 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.
10.15 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.
<PAGE> 76
10.16+ 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.
10.17+ 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.
10.18+ 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.
<PAGE> 77
10.19 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.
10.20 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.
10.21 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.
10.22 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.
10.23 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.
10.24 Lease, dated as of August 2, 1995, among The Standard Life
Assurance Company, City Mortgage Servicing Limited and CSC-UK,
incorporated by reference to Exhibit 10.37 to the Company's
Registration Statement on Form S-1 as declared effective by the
Commission on December 20, 1995.
<PAGE> 78
<TABLE>
<S> <C> <C>
10.25 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.
10.26 Asset Purchase Agreement, dated March 6, 1995, 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, filed previously as Exhibit
10.45.
10.27 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, filed previously as Exhibit 10.46.
10.28 Letter Agreement, dated March 28, 1996, between Greenwich and
CSC-UK regarding termination of prior agreement, filed previously
as Exhibit 47.
16.1 Letter of change in certifying accountant, dated as of March 28, 1996,
filed previously.
21.1 Subsidiaries of the Company, incorporated by reference to Exhibit
21.1 to the Company's Registration Statement on Form S-1 as
declared effective by the Commission on December 20, 1995.
23.1* Consent of Shane Yurman & Company ________
23.2* Consent of KPMG Peat Marwick LLP ________
23.3* Consent of BDO Stoy Hayward ________
27.1* Financial Data Schedule for the year ended December 31, 1995
</TABLE>
[/R]
- ---------------
* Filed herewith
+ Confidential treatment granted with respect to certain provisions
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration
Statement on Form S-8 and the Registration Statement on Form S-3 of our report,
dated March 20, 1994, which report appears in the Annual Report on Form 10-K/A
for the year ended December 31, 1995 relating to Cityscape Financial Corp. and
its subsidiaries.
Shane Yurman & Company
Monsey, New York
January 29, 1997
<PAGE> 1
Exhibit 23.2
The Board of Directors
Cityscape Financial Corp.:
We consent to incorporation by reference in the registration statement (No.
333-1348) on Form S-8 of our report dated March 27, 1996, which report makes
reference to the report of other auditors, relating to the consolidated
statements of financial condition of Cityscape Financial Corp. and Subsidiary
as of December 31, 1995 and 1994 and the related statements of operations,
stockholders' equity, and cash flows for the years ended December 31, 1995 and
1994, which report appears in the December 31, 1995 annual report on Form 10-K/A
of Cityscape Financial Corp.
KPMG Peat Marwick LLP
New York, New York
January 29, 1997
<PAGE> 1
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement on
Form S-8 and the Registration Statement on Form S-3 of our report, dated March
27, 1996, which report appears in the Annual Report on Form 10-K/A for the year
ended December 31, 1995 relating to Cityscape Financial Corp. and its
subsidiaries.
BDO STOY HAYWARD
London, England
January 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 3,598,549
<SECURITIES> 15,571,455
<RECEIVABLES> 24,561,161
<ALLOWANCES> 0
<INVENTORY> 73,852,293
<CURRENT-ASSETS> 0<F1>
<PP&E> 2,380,571
<DEPRECIATION> 0
<TOTAL-ASSETS> 152,518,981
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 144,503
<OTHER-SE> 56,954,552
<TOTAL-LIABILITY-AND-EQUITY> 152,518,981
<SALES> 0
<TOTAL-REVENUES> 49,510,638
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 22,135,376
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,610,186
<INCOME-PRETAX> 20,385,841
<INCOME-TAX> 8,515,233
<INCOME-CONTINUING> 11,870,608
<DISCONTINUED> 0
<EXTRAORDINARY> 295,943
<CHANGES> 0
<NET-INCOME> 11,574,665
<EPS-PRIMARY> 0.97
<EPS-DILUTED> 0
<FN>
<F1>The Company makes use of an unclassified balance sheet style due to the nature
of its business. Current Assets and Current Liabilities are therefore
reflected as zero in accordance with the instructions of Appendix E to the
Edgar Filer Manual.
</FN>
</TABLE>
