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As filed with the Securities and Exchange Commission on June 4, 1997
Registration No. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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CITYSCAPE FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 11-2994671
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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565 Taxter Road
Elmsford, New York 10523-5200
(914) 592-6677
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)
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Jonah L. Goldstein, Esq.
General Counsel
Cityscape Financial Corp.
565 Taxter Road
Elmsford, New York 10523-5200
(914) 592-6677
(Name, address, including zip code and telephone number,
including area code, of agent for service)
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COPIES TO:
Sean P. Griffiths, Esq. J. Eric Maki, Esq.
Gibson, Dunn & Crutcher LLP Dorsey & Whitney LLP
200 Park Avenue 250 Park Avenue
New York, New York 10166 New York, New York 10177
(212) 351-4000 (212) 415-9200
(Facsimile) (212) 351-4035 (Facsimile) (212) 953-7201
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE
TO THE PUBLIC: FROM TIME TO TIME AFTER THE EFFECTIVE
DATE OF THIS REGISTRATION STATEMENT.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box.[ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box.[X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement from the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.[ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box.[ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE REGISTERED PROPOSED MAXIMUM PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TO BE REGISTERED OFFERING PRICE PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock ($0.01 par value). . . 4,500,000 shares $14.375 $64,687,500 $19,602
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</TABLE>
(1) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(c) of Regulation C under the Securities Act of 1933.
Calculated on the basis of the average of the high and low sales prices of the
registrant's Common Stock as reported on the NASDAQ National Market on June 2,
1997.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
DATED JUNE 4, 1997
CITYSCAPE FINANCIAL CORP.
4,500,000 SHARES OF COMMON STOCK
This Prospectus relates to up to 4,500,000 shares (the "Securities") of
common stock, par value $0.01 per share (the "Common Stock"), of Cityscape
Financial Corp., a Delaware corporation (the "Company"), which may be
offered for sale from time to time by certain stockholders of the Company named
in this Prospectus (the "Selling Security Holders"). The Common Stock is
traded on the Nasdaq National Market ("Nasdaq") under the symbol "CTYS." The
closing price of the Common Stock as reported on Nasdaq on June 3, 1997 was
$14.375 per share.
The shares of Common Stock offered hereby by the Selling Security
Holders relate to a private placement completed by the Company on April 9, 1997
and consist of (i) a presently indeterminable number of shares of Common Stock
(the "Conversion Shares") issued or issuable upon conversion of 5,000 shares of
the Company's 6% Convertible Preferred Stock, Series A (the "Series A Preferred
Stock") with a liquidation preference of $10,000 per share (subject to
adjustment in accordance with the terms of the Series A Preferred Stock),
(ii) up to 500,000 shares of Common Stock (the "Warrant Shares") issuable upon
the exercise of related five-year stock purchase warrants (the "Warrants") and
(iii) a presently indeterminable number of shares of Common Stock (the "Dividend
Shares") which may be issued by the Company to the Selling Security Holders as
payment of accrued dividends in accordance with the terms of the Series A
Preferred Stock. The maximum aggregate number of Dividend Shares and Conversion
Shares covered by this Prospectus is 4,000,000 shares of Common Stock. See "Risk
Factors -- Common Stock Eligible for Future Sale."
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION REVIEWED
OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Company will not receive any proceeds from this offering. The
aggregate proceeds to the Selling Security Holders from the sale of the
Securities owned by the Selling Security Holders will be the offering price of
such Securities sold, less applicable agents' commissions and underwriters'
discounts, if any. The Company will pay all expenses incident to the preparation
and filing of this registration statement for the Securities under federal and
state securities laws. The Company and the Selling Security Holders have each
agreed to indemnify each other against certain liabilities, including
liabilities arising under the Securities Act. The Selling Security Holders may
sell all or a portion of the Securities which they own from time to time on
terms to be determined at the time of sale, either directly or through agents
designated from time to time or through brokers, dealers or underwriters
designated from time to time. To the extent required, the number of shares of
Common Stock to be sold, the offering price thereof, the name of each Selling
Security Holder and each agent, broker, dealer and underwriter, if any, and any
applicable brokerage fees, commissions or discounts and expenses with respect to
a particular offering will be set forth in an accompanying Prospectus
Supplement. See "Plan of Distribution."
SEE "RISK FACTORS" BEGINNING ON PAGE __ HEREOF FOR A DISCUSSION OF
CERTAIN INFORMATION THAT SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE SECURITIES.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFERING DESCRIBED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY SELLING SECURITY HOLDER OR THEIR RESPECTIVE AGENTS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES BY ANY PERSON IN ANY JURISDICTION IN WHICH
IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH OFFER, SOLICITATION OR SALE OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
THE DATE OF THIS PROSPECTUS IS JUNE , 1997
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3 (referred to herein, together
with all amendments and exhibits, as the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission.
Statements contained in this Prospectus such as contents of any contract or any
document referred to are not necessarily complete and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference. For further information relating to the Securities and to the
Company, reference is made to the Registration Statement.
The Company is subject to the periodic reporting and other
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith, files reports, proxy
statements and other information with the Commission. For further information
with respect to the Company, reference is hereby made to such reports and other
information which can be inspected and copied (at prescribed rates) at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Room 1025, Washington, D.C. 20549 and at the Commission's regional offices
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and at
500 West Madison, Suite 1400, Chicago, Illinois 60661. Copies may also be
obtained at prescribed rates from the Public Reference Section of the Commission
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
also maintains a Web site that contains reports, proxy and information
statements and other information regarding the Company at (http://www.sec.gov).
In addition, the Common Stock is listed on the Nasdaq National Market and
reports and other information concerning the Company may be inspected at the
offices of the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, DC 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed with the Commission and are
hereby incorporated by reference:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996;
2. The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1997,
3. The Company's Reports on Form 8-K filed on April 11, 1997, April 30,
1997 and May 20, 1997, and
4. The Company's description of the Common Stock contained in the
Company's Registration Statement on Form 8-A filed on December 1, 1995.
All reports and other documents filed by the Company pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of the
filing of the Registration Statement of which this Prospectus forms a part and
prior to the termination of the offering of the Securities covered by this
Prospectus shall be deemed to be incorporated by reference herein and to be part
hereof from the date of filing such reports and documents. Any statement
contained herein or in a report or document, all or a portion of which is
incorporated or deemed to be incorporated by reference herein, shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent that
a statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company hereby undertakes to provide without charge to each person
to whom a copy of this Prospectus has been delivered, upon the oral or written
request of any such person, a copy of any or all of the documents incorporated
herein by reference (other than exhibits to such documents, unless such exhibits
are expressly incorporated by reference into such documents). Requests for such
copies should be directed to the Company's Secretary at 565 Taxter Road,
Elmsford, New York 10523. The Company's telephone number at that location is
(914) 592-6677.
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This Prospectus contains forward-looking statements which involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus.
THE COMPANY
Cityscape Financial Corp., a Delaware corporation ("Cityscape" or the
"Company"), is a consumer finance company engaged in the business of
originating, purchasing, selling and servicing mortgage loans secured primarily
by one- to four-family residences. The Company originates and purchases loans in
the US through its subsidiary Cityscape Corp., a New York corporation ("CSC"),
using a network of independent mortgage brokers and loan correspondents, and in
the United Kingdom (excluding Northern Ireland, the "UK") through its indirect
subsidiary City Mortgage Corporation Limited ("CSC-UK") also using a network of
independent mortgage brokers. The majority of the Company's loans are made to
owners of single family residences who use the loan proceeds for such purposes
as debt consolidation, financing of home improvements and educational
expenditures. The Company focuses on lending to individuals who have impaired or
unsubstantiated credit histories and/or unverifiable income and require or seek
a high degree of personalized service and prompt response to their loan
applications. As a result, the Company's customers generally are not averse to
paying the higher interest rates that the Company charges for its loan programs
as compared to the interest rates charged by conventional mortgage sources.
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.
For a more detailed discussion of the business of the Company, see the
Company's Annual Report or Form 10-K for the year ended December 31, 1996, which
is incorporated by reference herein.
RECENT DEVELOPMENT
SENIOR NOTES
On May 14, 1997, the Company issued $300.0 million aggregate principal
amount of 12.75% Senior Notes due June 1, 2004 (the "Senior Notes") pursuant to
an Indenture (the "Senior Note Indenture"), between the Company and The Chase
Manhattan Bank, as trustee (the "Trustee"). The Senior Notes are senior
obligations of the Company that are guaranteed by CSC and secured by a pledge by
CSC of a promissory note from CSC-UK having a minimum principal amount equal to
$115.0 million that represents certain advances made by CSC to CSC-UK. As of May
30, 1997, such promissory note had a principal amount of $129.5 million.
The Senior Notes will not be redeemable prior to maturity, provided
that, at any time and from time to time prior to June 1, 2000, the Company may
redeem in the aggregate up to $100.0 million of the original principal amount of
the Senior Notes with the proceeds of one or more equity offerings at a
redemption price (expressed as a percentage of principal amount) of 112.75% plus
accrued interest to the redemption date.
The Senior Note Indenture contains various restrictive covenants that,
among other things, limit: (i) the incurrence of certain additional indebtedness
by the Company; (ii) the creation of senior liens on assets of the Company;
(iii) the sale of assets of the Company; (iv) mergers and consolidations; (v)
the sale of assets of the Company and (vi) the making of certain investments and
the payment of dividends on capital stock of the Company. See "Risk
Factors -- Absence of Dividends".
Each holder of Senior Notes will have the right to require the Company
to repurchase all or any part of such holder's Senior Notes at a purchase price
in cash equal to 101% of the principal amount thereof plus accrued and unpaid
interest, if any, to the date of purchase upon the occurrence of a change in
control, which is deemed to occur (i) if any person (other than persons that
held such voting power as of the issue date of the Senior Notes and certain of
their transferees) directly or indirectly acquires 50% or more of the total
voting power of the Common Stock of the Company (or the successor company to the
Company under the Senior Notes upon a merger or sale of substantially all of the
assets of the Company), or (ii) if, during any 12-month period, individuals who
at the beginning of such period constituted the board of directors of the
Company (together with any new directors whose election by such board or whose
nomination for election by the stockholders of the Company was approved by a
vote of a majority of directors of the Company then still in
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office who were either directors at the beginning of such period or whose
election or nomination for election was so previously approved) cease to
constitute a majority of the directors of the Company then in office.
An Event of Default is defined in the Senior Note Indenture as, among
other things, (i) a default in any payment of interest when due, continued for
30 days, (ii) a default in the payment of principal when due, (iii) the failure
to comply with certain covenants, (iv) a cross-default of other indebtedness in
excess of $5.0 million, (v) bankruptcy, insolvency or reorganization of the
Company or a significant subsidiary, or (vi) a judgment in excess of $5.0
million.
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RISK FACTORS
In addition to the other information in this Prospectus, the following
risk factors should be carefully considered before making an investment in the
Securities offered hereby. This Prospectus contains forward-looking statements
which involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in the following risk
factors and elsewhere in this Prospectus.
NEGATIVE CASH FLOWS
As a result of its increased volume of loan originations and purchases
and its growing use of securitizations, the Company has operated since March
1995, and expects to continue to operate, on a negative cash flow basis. Prior
to 1995, the Company sold loans primarily through whole loan sales which
generate immediate cash flow on the date of sale. The recognition of gain on
sale of loans through securitizations has a negative impact on the cash flow of
the Company because significant costs are incurred upon closing of the
transactions giving rise to such gain and the Company is required to pay income
taxes on the gain on sale in the period recognized, although the Company does
not expect to receive the cash representing the gain until later periods as the
related loans are repaid or otherwise collected.
The Company's principal cash requirements include the funding of loan
originations and purchases, payment of interest expenses (including, in the
future, interest expenses under the Senior Notes), funding the
overcollateralization requirements for securitizations, operating expenses,
income taxes and capital expenditures. The Company uses its cash flow from whole
loan sales, loans sold through securitizations, capital markets offerings,
pre-funding mechanisms through securitizations, loan origination fees, servicing
fees, net interest income and borrowings under its credit or warehouse
facilities to meet its working capital and other needs. For the years ended
December 31, 1995 and 1996, the Company had negative cash flow from operations
of $76.0 million and $165.5 million, respectively, due primarily to the
Company's sale of loans through securitizations. Also contributing to the
Company's negative cash flow is the increasing percentage of its loan volume
derived through the Wholesale Loan Acquisition Program and bulk purchases, which
have a greater negative impact on cash flows than loan volume derived from
independent mortgage brokers.
UNCERTAINTY AS TO AVAILABILITY OF FUNDING SOURCES
The Company funds substantially all of the loans which it originates
and purchases through borrowings under warehouse facilities secured by pledges
of its loans, loan purchase facilities under which the Company retains the
rights to repurchase loans sold, lines of credit secured by the residual and
interest-only interests in securitizations, a senior note issuance and
internally generated funds. These borrowings are in turn repaid with the
proceeds received by the Company from selling such loans either through
securitizations or whole loan sales. Any failure to renew or obtain adequate
funding under these credit or warehouse facilities, or other borrowings, or any
substantial reduction in the size of or pricing in the markets for the Company's
loans, could have a material adverse effect on the Company's operations. To the
extent that the Company is not successful in maintaining or replacing existing
financing, it would have to curtail its loan production activities or sell loans
earlier than is optimal, which would have a material adverse effect on the
Company's results of operations and financial condition.
The type, timing and terms of financing selected by the Company will be
dependent upon the Company's cash needs, the availability of financing sources
and the prevailing conditions in the financial markets. The Company anticipates
that funds currently available will be sufficient to fund the Company's
liquidity requirements into the fourth quarter of 1997. However, the Company has
substantial capital requirements and anticipates that it will need to raise
additional cash by such time through the issuance of additional debt or equity
securities or additional bank borrowings or a combination thereof. The Company
has no commitments for additional debt, equity or bank financings other than
those described in this Prospectus and there can be no assurance that any
sources will be available to the Company at any given time or as to the
favorability of the terms on which such sources may be available.
DEPENDENCE ON FUNDING SOURCE
The Company has funded substantially all of its loan origination and
purchase volume and working capital requirements in the US and the UK through
financing facilities and through loan sales pursuant to mortgage loan purchase
agreements that include working capital facilities with Greenwich Capital
Markets, Inc. (referred to herein, including its affiliates, as "Greenwich").
During 1995 and 1996, the Company sold 10.3% and 93.8%, respectively, of its
loan originations and purchases to Greenwich. The US facility (the "US Greenwich
Facility") was provided through Greenwich's affiliate, Greenwich Capital
Financial Products, Inc., and the UK facility (the "UK Greenwich Facility") is
provided through its affiliate, Greenwich International, Ltd. With certain
exceptions, the Company has been required to sell all of its loans directly or
indirectly to Greenwich. The loans are then resold through securitizations or
whole loan sales. These provisions of the US Greenwich Facility and the UK
Greenwich Facility may prevent the Company from taking advantage of other more
favorable financing sources that may become available to the Company.
Additionally, the Company expects to derive a substantial portion of its working
capital through the mortgage loan purchase agreements.
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The US Greenwich Facility provided for the purchase and sale of $1.0 billion of
loans. The Company and Greenwich continued to purchase and sell loans after the
facility amount was exceeded through December 1996. The Company has a commitment
from Greenwich to enter into agreements to provide a $3.0 billion mortgage loan
financing facility at a rate of LIBOR plus 150 basis points, a $25.0 million
residual financing facility at a rate of LIBOR plus 300 basis points and a $3.0
billion securitization facility, each for a term of one year, subject to
execution of definitive documents satisfactory to Greenwich as well as certain
other conditions. The Company and Greenwich, pending the completion of
definitive documents, are operating under the terms of the US Greenwich Facility
structured consistent with the new proposed arrangement, however, as a financing
facility. No definitive agreement exists with respect to the new arrangement nor
can any assurance be given that such an agreement will be reached. Because it is
structured as a financing facility and not as a purchase and sale facility, the
new arrangement with Greenwich could affect the timing of the Company's reported
gain on sale, adversely affecting gain on sale in a future period if the Company
fails to sell or securitize the loan origination and purchase volume for such
period. To the extent that the Company is not successful in maintaining with
Greenwich or replacing existing financing, it would have to curtail its loan
production activities or sell loans earlier than is optimal, thereby adversely
affecting the Company's results of operations and financial condition. CSC-UK
paid a fee to Greenwich in connection with the UK Greenwich Facility in the
aggregate amount of $38.0 million. The Company is amortizing this fee over the
20-year life of the facility. If the facility were to be terminated prior to its
scheduled expiration in 2015, the Company would have to write-off the fee
earlier than anticipated, resulting in a charge to earnings in the period of
such write-off of the unamortized amount of the fee at that time, which would
have an adverse effect on the Company's results of operations.
Additionally, the agreement governing the UK Greenwich Facility
prohibits the payment of dividends by CSC-UK to CSC prior to the repayment of
all outstanding balances under the working capital facility of the UK Greenwich
Facility.
DEPENDENCE ON SECURITIZATIONS
General
Since March 1995, the Company has pooled and sold through
securitizations an increasing percentage of the loans which it originates or
purchases. The Company derives a significant portion of its income by
recognizing gains upon the sale of loans through securitizations representing
the fair value of the interest-only and residual certificates received in the US
and the fair value of excess mortgage servicing receivables retained through UK
securitizations and on sales into the UK purchase facility. In determining
excess mortgage servicing receivables recognized through UK securitizations, the
Company excludes normal servicing and other ancillary fees and includes any
prepayment interest due. In loan sales through US securitizations, the Company
sells loans that it has originated or purchased to a real estate mortgage
investment conduit ("REMIC") trust for a cash purchase price and interests in
such REMIC trust consisting of interest-only regular interests and the residual
interest which are represented by the interest-only and residual certificates.
The cash purchase price is raised through an offering by the REMIC trust of
pass-through certificates representing regular interests in the REMIC trust.
Following the securitization, the purchasers of the pass-through certificates
receive the principal collected and the investor pass-through interest rate on
the principal balance, while the Company recognizes as current revenue the fair
value of the interest-only and residual certificates.
Reliance on Securitization Market
Adverse changes in the US or UK securitization market for home equity
and home improvement loans could impair the Company's ability to originate,
purchase and sell loans through securitizations on a favorable or timely basis.
Any such impairment could have a material adverse effect upon the Company's
results of operations and financial condition. Furthermore, the Company's
quarterly operating results can fluctuate significantly as a result of the
timing and level of securitizations. If securitizations do not close when
expected, the Company's results of operations may be adversely affected for that
period.
Reliance on Credit Enhancements
In addition, in order to gain access to the securitization market, the
Company has relied on credit enhancements provided by monoline insurance
carriers on the majority of the Company's US securitizations to guarantee
outstanding senior interests in the related REMIC trusts to enable it to obtain
an "AAA/Aaa" rating for such interests. The cost of such credit enhancement
results in a reduction in the gain on sale of loans sold in such securitization.
Any substantial reductions in the size or availability of the securitization
market for the Company's loans, or the unwillingness of insurance companies to
guarantee the senior interests in the Company's loan pools, could have a
material adverse effect on the Company's results of operations and financial
condition.
The documents governing the Company's securitizations require the
Company to build over-collateralization levels through retention of excess
servicing distributions and application thereof to reduce the principal balances
of the senior interests issued by the related trust or to create reserve funds.
This application causes the aggregate principal amount of the loans and cash in
the related pool to exceed the aggregate principal balance of the outstanding
investor
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certificates. Such excess amounts serve as credit enhancement for the related
trust and therefore fund losses realized on loans held by such trust. The
Company continues to be subject to the risks of default and foreclosure
following the sale of loans through securitizations to the extent excess
servicing distributions are required to be retained or applied to reduce
principal from time to time. Such retained amounts are pre-determined by the
entity issuing the guarantee of the related senior interests and are a condition
to obtaining an "AAA/Aaa" rating thereon. In addition, such retention diverts
cash which would otherwise flow to the Company through its retained interest in
the transaction represented by the interest-only and residual certificates and
excess mortgage servicing receivables the Company receives upon loan sales
through securitizations, thereby slowing, and in some circumstances, reducing
over the life of the related securitization, the flow of cash to the Company.
Availability and Cost of Pre-Funding Mechanism
In connection with the Company's pre-funding commitments in its
securitization transactions, investors deposit in cash a pre-funded amount into
the related trust to purchase loans the Company commits to sell on a forward
basis. This pre-funded amount is invested pending subsequent transfers of loans
to the trusts in short term obligations which pay a lower interest rate than the
interest rate the trust is obligated to pay the certificate investors on the
outstanding balance of the pre-funded amount. The Company is required to deposit
at the closing of the related transaction an amount sufficient to make up the
difference between these rates. The portion of the deposit that is not recovered
by the Company is recorded as an expense of the securitization transaction which
results in a reduction in the gain on sale of the loans sold in such
securitization. If the Company were unable to make such deposits, it would be
unable to access the pre-funding mechanism that allows it to sell relatively
greater volume through each securitization, which could result in an adverse
effect upon the Company's results of operations and financial condition.
POTENTIAL CHANGE IN VALUATION OF INTEREST-ONLY AND
RESIDUAL CERTIFICATES AND MORTGAGE SERVICING RECEIVABLES
The Company sells over 90% of the loans that it originates or purchases
through securitizations or into loan purchase facilities with servicing
retained. The Company derives a substantial portion of its income by recording a
gain on sale when loans are sold in such a manner. In the case of a US
securitization, the Company receives as an investment the interest-only and
residual certificates the Company receives as a result of such securitization.
In the case of a UK securitization, or the sale of loans into a loan purchase
facility, the Company retains a mortgage servicing receivable. In addition,
since it adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights" in
October 1995, the Company also recognizes as an asset the capitalized value of
mortgage servicing rights (including normal servicing and other ancillary fees)
as a mortgage servicing receivable. The Company calculates the value of its
interest-only and residual certificates and mortgage servicing receivables based
upon their fair values. The fair value of these assets is determined based on
various economic factors, including loan types, balances, interest rates, dates
of origination, terms and geographic locations. The Company also uses other
available information applicable to the types of loans the Company originates
and purchases, such as reports on prepayment rates, interest rates, collateral
value, economic forecasts and historical default and prepayment rates of the
portfolio under review. The Company estimates the expected cash flows that it
will receive over the life of a portfolio of loans. These expected cash flows
constitute the excess of the interest rate payable by the obligors of loans over
the interest rate passed through to the purchasers of the related securities,
less applicable recurring fees and credit losses. The Company discounts the
expected cash flows at a discount rate that it believes is consistent with the
required risk-adjusted rate of return to an independent third party purchaser of
the interest-only and residual certificates or mortgage servicing receivables.
As of March 31, 1997, the Company's balance sheet reflected the fair value of
interest-only and residual certificates and mortgage servicing receivables of
$155.0 million and $220.8 million (net of reserves of $31.4 million),
respectively.
Realization of the value of these interest-only and residual
certificates and mortgage servicing receivables in cash is subject to the
prepayment and loss characteristics of the underlying loans and to the timing
and ultimate realization of the stream of cash flows associated with such loans.
If actual experience differs from the assumptions used in the determination of
the asset value, future cash flows and earnings could be negatively impacted and
the Company could be required to write down the value of its interest-only and
residual certificates and mortgage servicing receivables. For example, in the
fourth quarter of 1996 the Company determined that the value of the
interest-only and residual certificates from its August 1995 securitization had
been impaired in the amount of $1.4 million and accordingly wrote down the value
of such certificates by that amount. The impairment was primarily attributable
to a change in the loss assumptions with respect to such securitization to be
consistent with those of the Company's subsequent securitizations. No assurance
can be given as to whether, and in what amounts, the Company in the future will
have to write down the value of the interest-only and residual certificates from
this or its other securitizations. In addition, if prevailing interest rates
rose, the required discount rate might also rise, resulting in impairment of the
value of the interest-only and residual certificates and mortgage servicing
receivables. The Company believes that there is no active market for the sale of
its interest-only and residual certificates or its mortgage servicing
receivables. No assurance can be given that these assets could be sold at their
stated value on the balance sheet, if at all.
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CONSEQUENCES OF EXCEEDING PERMITTED DELINQUENCY AND DEFAULT LIMITS
The pooling and servicing agreements relating to the Company's
securitization transactions contain provisions with respect to the maximum
permitted loan delinquency rates and loan default rates, which, if exceeded,
would require amounts otherwise payable to the Company to be retained by the
related securitization trusts and would allow the termination of the Company's
right to service the related loans. The default rates on the pools of loans sold
in the March 1995 and August 1995 securitization transactions, the Company's
first two securitization transactions, have exceeded the permitted limits set
forth in the related pooling and servicing agreements. Accordingly,
overcollateralization requirements for these two securitizations have been
increased and cash otherwise payable to the Company from such securitizations is
being retained by the related trusts. No assurance can be given when, if ever,
such amounts will be released to the Company. In addition, this condition could
result in the termination of the Company's servicing rights with respect to the
securitizations' pools of loans by the trustee or the insurance company
providing credit enhancement for those transactions. For 1996, the revenues to
the Company from mortgage servicing rights on these pools of loans were
approximately $625,000. Although none of the parties to these transactions has
indicated its intention to terminate the Company's servicing rights and the
Company has no current expectation that they will do so, no assurance can be
given that any of such parties will not exercise its right to terminate. To
date, the permitted delinquency and default rates relating to the Company's
other securitizations have not been exceeded. However, such securitizations'
loan pools are less seasoned and no assurance can be given that such limits will
not be exceeded in the future. The retention of cash by securitization trusts or
the termination of the Company's servicing rights would have a material adverse
effect on the Company's results of operations and financial condition and could
affect the Company's ability to effect securitizations in the capital markets.
RISK OF ADVERSE ECONOMIC CONDITIONS
The Company's business may be adversely affected by periods of economic
slowdown or recession which may be accompanied by decreased demand for consumer
credit and declining real estate values. Any material decline in real estate
values reduces the ability of borrowers to use home equity to support borrowings
and increases the loan-to-value ratios of loans previously made by the Company,
thereby weakening collateral coverage and increasing the possibility of a loss
in the event of default. Further, delinquencies, foreclosures and losses
generally increase during economic slowdowns or recessions. Because of the
Company's focus on borrowers who are unable or unwilling to obtain mortgage
financing from conventional mortgage sources, the actual rates of delinquencies,
foreclosures and losses on such loans could be higher under adverse economic
conditions than those currently experienced in the conventional mortgage lending
industry. Any sustained period of such increased delinquencies, foreclosures or
losses could adversely affect the pricing of the Company's loan sales whether
through securitizations or whole loan sales.
HIGH-RISK BORROWERS
Loans made to borrowers who are unable or unwilling to obtain mortgage
financing from conventional mortgage sources may entail a higher risk of
delinquency and higher losses than loans made to borrowers who utilize
conventional mortgage sources. While the Company believes that the underwriting
criteria and collection methods it employs enable it to mitigate the higher
risks inherent in loans made to these borrowers, no assurance can be given that
such criteria or methods will afford adequate protection against such risks. In
the event that pools of loans sold and serviced by the Company experience higher
delinquencies, foreclosures or losses than anticipated, the Company's results of
operations or financial condition could be adversely affected.
LOAN DELINQUENCIES AND DEFAULTS
The Company is exposed to the risk of loan delinquencies and defaults
upon the closing of the loan. After a loan has been originated or purchased by
the Company, the loan is held as part of a portfolio of loans subject to sale
either through a securitization or on a whole loan basis. During the period a
loan is so held, the Company is at risk for loan delinquencies and defaults.
Following the sale of the loan through a securitization, the Company's direct
risk with respect to loan delinquency or default on such loan is limited to
those circumstances in which it is required to repurchase such loan due to a
breach of a representation or warranty in connection with the securitization.
This risk also exists for loans sold on a whole loan basis. On loans sold
through securitizations, the Company is also at risk of loan delinquency or
default from a first payment default and thereafter to the extent that losses
are paid out of a reserve account, or reduce the over-collateralization to the
extent that funds are available, and will result in a reduction in the value of
the interest-only and residual certificates and mortgage servicing receivables
held by the Company.
RISKS FROM INTEREST RATE FLUCTUATIONS
Profitability may be directly affected by the level of and fluctuations
in interest rates which affect the Company's ability to earn a spread between
interest received on its loans and the costs of borrowings. The profitability of
the Company is likely to be adversely affected during any period of unexpected
or rapid changes in interest rates. A substantial and sustained increase in
interest rates could adversely affect the ability of the Company to originate
and purchase loans and could reduce the gain on sale recognized by the Company
when loans are sold through securitizations. A significant decline in interest
rates could decrease the size of the Company's loan servicing portfolio by
increasing the
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level of loan prepayments. Additionally, to the extent servicing spread has been
capitalized on the books of the Company or the Company holds interest-only and
residual certificates received upon loan sales through securitizations, higher
than anticipated rates of loan prepayments or losses would reduce the aggregate
amount of payments received by the REMIC trusts pursuant to the Company's
securitizations which would require the Company as holder of the residual
interests in such securitizations to write down the value of such servicing
spread or the fair value of such interest-only and residual certificates,
adversely impacting earnings and the value of the Common Stock. Fluctuating
interest rates also may affect the net interest income earned by the Company
resulting from the difference between the yield to the Company on loans held
pending sale and the interest paid by the Company for funds borrowed under the
Company's warehouse facility. In addition, inverse or flattened interest yield
curves could have an adverse impact on the profitability of the Company because
the loans pooled and sold by the Company generally have long-term rates, while
the senior interests in the related REMIC trusts are priced on the basis of
intermediate rates in the US.
RISKS RELATING TO RECENT EXPANSION AND PRODUCT EXTENSION
Since January 1, 1994, the Company has originated and purchased a
significantly greater number of loans than it had in previous years. In light of
this growth, the historical performance of the Company's earnings may be of
limited relevance in predicting future performance. Any credit or other problems
associated with the larger number of loans originated and purchased in the
recent past will not become apparent until sometime in the future.
The Company's significant growth and expansion have placed substantial
new and increased pressures on the Company's personnel and systems. In order to
support the growth of its business, the Company has added a significant number
of new operating procedures, facilities and personnel. There can be no assurance
that the addition of these new operating procedures and personnel will be
sufficient to enable the Company to meet its growing operating needs. Failure by
the Company to manage its growth effectively, or to sustain its historical
levels of performance in credit analysis and transaction structuring with
respect to the increased loan origination and purchase volume, could have a
material adverse effect on the Company's results of operations and financial
condition.
In addition, the Company has recently expanded its product offerings to
include conventional home improvement loans (commencing May 1996),
"Sav*-A-Loans(R)" (commencing May 1996), adjustable rate loans (commencing
October 1996), loans for occupants of government-owned residential properties
in the UK (commencing November 1996), conventional loans (commencing February
1997) and, to a lesser extent, Title I loans (commencing December 1995), with
which the Company has relatively little experience. The Sav*-A-Loan(R) product,
for example, is offered to homeowners with little or no equity in their
property but who possess a favorable credit profile and debt-to-income ratio.
The Sav*-A-Loan(R) product has contributed and is expected to continue to
contribute an increasing percentage of the Company's US originations. The
Company has incurred certain expenses in connection with the development of
these new product offerings. No assurance can be given that the Company will be
able to develop these new product offerings successfully, or that the Company's
extension of its product offerings will not have a material adverse effect on
the Company's results of operations and financial condition.
CREDIT RISK ASSOCIATED WITH HIGH LTV LOANS
Certain of the Company's loan products have high loan-to-value ratios
("LTV") and, although secured by real property, the collateral of such loans
often will not be sufficient to cover the principal amount of the loans in the
event of default. The principal balance of such a loan, such as the Company's
"Sav*-A-Loan(R)" product, inclusive of other loans secured by the same property
often exceeds the value of the underlying property by as much as 25%.
Consequently, the Company is less likely to use foreclosure as a means to
mitigate its losses upon the default of such loans or to recover any meaningful
amounts in the event of a foreclosure. With respect to these loans, LTV
determinations are based on a value of the underlying property, which is set by
a full appraisal, a drive-by appraisal or, if owned less than 12 months, the
sale price. Accordingly, there can be no assurance that such values accurately
reflect prevailing market prices of such properties, either when made or upon a
default on the related loan. For such loans, the Company relies primarily on the
creditworthiness of the borrower and, with respect to Title I loans, also relies
on FHA co-insurance for repayment. Losses not covered by the underlying
properties, if in excess of the Company's allowance for such losses included in
the calculation of the gain on sale, could have a material adverse effect on the
Company's results of operations and financial condition.
ABILITY OF THE COMPANY TO IMPLEMENT ITS GROWTH STRATEGY
The Company's growth strategy is dependent upon its ability to increase
its loan origination and purchase volume while maintaining its customary
origination fees, interest rate spreads and underwriting criteria with respect
to such increased loan origination and purchase volume. Implementation of this
strategy will depend in large part on the Company's ability to: (i) expand its
broker network in markets with a sufficient concentration of borrowers meeting
the Company's underwriting criteria; (ii) obtain adequate financing on favorable
terms; (iii) securitize loans profitably in the secondary market on a regular
basis; (iv) hire, train and retain skilled employees; and (v) continue to expand
in the face of increasing competition from other mortgage lenders. The Company's
failure with respect to any or all of these factors could impair its ability to
successfully implement its growth strategy which could have a material adverse
effect on the
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Company's results of operations and financial condition. The Company will also
incur start-up costs in connection with entering new markets including costs
associated with establishing new regional infrastructures. Such additional costs
could have a material adverse effect on the Company's results of operations and
financial condition. In addition, the Company's results of operations will be
adversely affected if revenues do not increase sufficiently to compensate for
the increase in operating expenses resulting from past, current and future
growth and expansion and there can be no assurance that any expansion will be
profitable or that it will not adversely affect the Company's results of
operations.
RISKS RELATED TO ACQUISITIONS
In September 1995, the Company acquired the remaining 50% of CSC-UK not
then owned by the Company in exchange for 3.6 million shares of Common Stock. In
April 1996, CSC-UK acquired all of the outstanding capital stock of J&J in
exchange for pound sterling 15.3 million ($23.3 million based on the Noon Buying
Rate on the date of such acquisition) and 548,000 shares of Common Stock valued
at $9.8 million. J&J's business is substantially similar to that of CSC-UK but
with a primary focus of making loans generally secured by second liens. In June
1996, CSC-UK acquired all of the outstanding capital stock of Greyfriars Group
Limited (formerly known as Heritable Group Limited and referred to herein as
"Greyfriars") in exchange for pound sterling 41.8 million ($64.1 million based
on the Noon Buying Rate on the date of such acquisition) and 99,362 shares of
Common Stock valued at $2.5 million. Greyfriars' business differs from that of
CSC-UK in that its loans are made primarily to borrowers with higher quality
credit characteristics, are generally secured by second liens and generally have
higher loan-to-value ratios and lower interest rates than those made by CSC-UK.
An important part of the Company's growth strategy is the acquisition
of consumer finance companies that complement or supplement the Company's
existing business in the US and in the UK, such as J&J and Greyfriars. Any
acquisition involves inherent uncertainties and risks, such as the effect on the
acquired business of integration into the Company, the availability of
management resources to oversee the operations of the acquired business, the
risks of entering markets in which the Company has no or limited direct prior
experience, operating in different geographical locations with different
competitive conditions, different demographic characteristics and different
corporate cultures and the potential loss of key employees of the acquired
company. Integrating acquired products and operations requires a significant
amount of management's time and skill and may place significant demands on the
Company's operations and financial resources. Although an acquired business may
have enjoyed profitability and growth prior to the acquisition, there can be no
assurance that such profitability or growth would continue thereafter. There can
be no assurance that the Company will be able to locate appropriate acquisition
candidates, that any identified candidates will be acquired or that acquired
operations will be effectively integrated or prove profitable. There can be no
assurance that the financing necessary to complete such acquisitions can be
obtained by the Company on favorable terms, if at all.
In addition, in connection with its acquisitions of CSC-UK, J&J and
Greyfriars, the Company has recognized $19.7 million, $5.2 million and $25.4
million, respectively, of goodwill and, as a result of a recent acquisition in
the UK of a retail mortgage broker, will recognize additional goodwill of
approximately $12.0 million. The Company may also recognize significant amounts
of goodwill in connection with future acquisitions. The Company is amortizing
goodwill recognized in its recent acquisitions over ten years, and the
relatively large amortization charge recognized in each such year may
significantly reduce earnings recorded in such period. In addition, in the event
that the Company determines that the carrying value of goodwill is impaired, it
would write down such carrying value which would result in a charge to earnings
in the period such determination is made. Any such charge could have a material
adverse effect on the Company's financial results. In connection with its
acquisitions, the Company accounted for as a cost of acquisition restructuring
charges in the aggregate amount of $5.0 million for items including charges for
terminated leases and severance payments, and may have to make similar
provisions with respect to future acquisitions. In the event that the actual
charges exceed the provisions made by the Company, such changes will have an
adverse effect on the Company's results of operations.
Future acquisitions by the Company could result in potentially dilutive
issuances of equity securities, the incurrence of debt and contingent
liabilities and amortization expenses of additional goodwill and other
intangible assets, which could materially affect the Company's results of
operations or financial condition.
RISKS RELATED TO OPERATIONS IN THE UK
General
Since the Company commenced operations in the UK in May 1995, the
Company's UK operations have become an increasingly important contributor to the
Company's overall operating results. For the three months ended March 31, 1997,
20.4% of the Company's total loan origination and purchase volume (as compared
to 14.0% for the prior year's period) and 50.4% of the Company's total revenues
(as compared to 46.3% for the prior year's period) were attributable to the
Company's UK operations.
The Company's operations in the UK market are subject to most of the
same risks faced by the Company's US operations as well as the additional risks
customarily associated with US corporations conducting foreign activities,
including fluctuations in foreign currency exchange rates. To the extent that
unfavorable fluctuations in foreign currency
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exchange rates occur, the Company's results of operations will be adversely
affected. Although the Company is exploring possible programs for hedging this
risk, the Company is not aware of any such program currently available that is
suited to the Company's risk. There can be no assurance that the Company will
adopt a program to hedge this risk. Additional risks in the UK include
fluctuations in foreign currency controls, expropriation, nationalization and
other economic, tax and regulatory policies of the UK government as well as the
laws and policies of the US affecting foreign trade and investment. A general
election was held in the UK on May 1, 1997 in which the Labour Party was elected
and it is anticipated that some shift in fiscal and social policy will result.
The Company's UK operations may be adversely affected by any such changes.
Business Prospects Risks
The Company believes that the market in the UK for borrowers who are
unable or unwilling to obtain mortgage financing from conventional mortgage
sources at competitive rates, if at all, is underserved as a result of
regulatory policies imposed on banks and building societies ("Conventional UK
Lenders") in the late 1980s. Currently many of such borrowers obtain mortgage
financing through independent mortgage brokers predominantly funded by private
investors. Since commencing operations in the UK, the Company has derived its UK
loan originations primarily from mortgage brokers (with the exception of the
loan portfolios purchased as a result of the acquisitions of J&J and Greyfriars)
and, to a lesser extent, recently through direct marketing to occupants of
government-owned residential properties in the UK. Approximately 60.5% and 30.7%
of the Company's UK loans were originated through three mortgage brokers in 1995
and 1996, respectively. Although the Company believes that its products and
services will attract a consistent flow of loan origination volume from
independent mortgage brokers, there can be no assurance the Company will be able
to obtain similar levels of loan origination volume from brokers in the future.
Further, there can be no assurance that the Company, due to competition or other
factors, will be able to obtain similar terms and pricing for such loan
originations. In particular, the Company has agreed to pay increased commissions
to brokers on loans originated in connection with right of first refusal
agreements.
Legal and Regulatory Risks
The Company's mortgage lending business in the UK is subject to
regulations promulgated under the United Kingdom Consumer Credit Act 1974 (the
"CCA") applicable to loans made to individuals or partnerships with principal
balances of pound sterling 15,000 or less. Loans with principal balances in
excess of pound sterling 15,000 are not currently regulated within the UK,
except in limited circumstances. The government has announced its intention to
bring before Parliament regulations that would increase this amount. The CCA
and regulations promulgated thereunder, among other things, impose licensing
obligations on CSC-UK and its subsidiaries, define certain requirements
relating to the form, content, legibility, execution and delivery to the
borrower of loan documents, restrict communication with the borrower prior to
completion of a transaction, require information and notice of enforcement to
be given to the borrower, generally limit a lender to a one-month deferment
with any calculations of prepayment interest under the Rule of 78s method,
require rebates to the borrower on early settlement and create a cause of
action for an "extortionate credit bargain." A license is required to service
loans in the UK irrespective of the size of the loan. Failure to comply with
the requirements of these rules and regulations can result in the revocation or
suspension of the license to do business and/or render the mortgage
unenforceable in the absence of a court order.
Although the Company believes that CSC-UK has systems and procedures to
facilitate compliance with the requirements under the CCA and is in compliance
in all material respects with applicable laws and regulations, there can be no
assurance that more restrictive laws and regulations will not be adopted in the
future that could make compliance more difficult or expensive (see discussion
regarding the Office of Fair Trading (the "OFT") initiative below).
Approximately 36.9% (as a percentage of aggregate principal balances) of the
Company's UK loans were subject to the CCA and the regulations promulgated
thereunder at December 31, 1996. Of this 36.9%, 7.5% were loans originated by
CSC-UK, 25.7% by J&J and 66.8% by Greyfriars. By way of example, if regulations
were enacted to increase the regulated amount to pound sterling 25,000, an
additional 28.1% of the Company's UK loans at December 31, 1996 would have been
regulated. The Company cannot predict the likelihood of the enactment of these
regulations or the extent of such increase or any other change to the CCA or any
other legislation. The announced OFT regulatory initiative or other future
regulation, if enacted, could limit the Company's ability to impose fees and
charges and could have a material adverse effect on the Company's results of
operations and financial condition.
With regard to prepayment terms, if a UK borrower redeems his loan in
full prior to the maturity date (whether voluntarily or through a default), the
equivalent of an early payment fee is incurred as result of the borrower's
contractual obligation to pay a stated amount of interest for the credit
extended. The Company's UK loans provide for prepayment fees to be determined in
one of two ways. For some of the Company's UK loans, the prepayment fee is based
on an amount equal to a certain number of months' interest; however, for the
majority of the Company's UK loans, the total principal and interest due over
the full term of the loan is calculated and then the borrower is provided a
rebate for the unexpired portion of the loan term, resulting in the equivalent
of an early payment fee. The amount due on a majority of the Company's UK loans
in the case of prepayment is based on the amount of interest, at the Standard
Rate (as defined herein) or the Concessionary Rate (as defined herein)
(whichever is in effect on the date of prepayment), that has been
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"earned" and calculated in accordance with the "Rule of 78s" method. Using this
method, the prepayment of a loan will often result in the Company receiving
substantially more than such loan's original principal balance.
There can be no assurance that regulatory developments in the UK,
including those that might be brought about by a change in the political party
whose members constitute a majority of Parliament as a result of the May 1, 1997
elections, will not result in significant changes relating to certain provisions
of many CSC-UK loans, most notably the calculation of prepayments using the Rule
of 78s and the use of the standard/concessionary rate structure. The Company
believes that these provisions are enforceable under English law and do not
violate common law prohibitions on penalty interest. The enforceability of these
provisions, however, has not been tested in English courts. In the event an
appropriate English court were to address these issues, no assurance can be
given that such a court will not reach a holding that negatively affects the
terms of such loans, which holding could have a material adverse effect on the
Company's results of operations and financial condition.
In addition, CSC-UK received a letter in March 1997 from the OFT, the
Director General of which has responsibility, under the CCA, for the granting of
consumer credit licenses to mortgage lenders and for the subsequent monitoring
of their activities to ensure continued fitness to hold such licenses. The
Company believes the letter was also sent to other lenders, as well as
intermediaries and other entities involved directly or indirectly in the
non-status lending market. The letter states that, when determining the fitness
of licensees, the OFT will consider whether the licensee or its associates have
engaged in business practices which appear to be inappropriate, regardless of
their legality. The letter specifically sets forth certain practices deemed by
the OFT to fall within such categories.
The majority of the stated business practices are either (i) not
applicable to CSC-UK's operations or (ii) practices in which CSC-UK engages and
believes itself to be in compliance or easily able to modify its operations in
order to comply with the OFT letter. The OFT letter, however, questions the
appropriateness of standard/concessionary rate structures, as well as the
calculation of prepayments using the Rule of 78s method. The Company is
reviewing and evaluating its practices with respect to each issue raised in the
letter and is in discussion with the OFT regarding its concerns raised in the
letter. The Company does not believe regulatory initiatives set forth in the
letter will have a material adverse effect on any of its existing mortgage loans
or to the continuance of its licenses, although no assurances to that effect can
be given at this time. In partial response to the OFT letter and after
preliminary discussions with OFT, the Company volunteered to discontinue
originating unregulated loans that utilize the Rule of 78s method commencing in
the early part of the second half of 1997.
The Company commenced broadening its UK product offerings with products
that calculate payments without using the Rule of 78s in anticipation of
potential regulatory initiatives like those set forth in the OFT letter. The
elimination of the Rule of 78s loan products could have a material adverse
effect in future periods on the Company's results of operations and financial
condition, especially if the Company is unsuccessful in its product broadening
efforts. In future periods, the OFT's regulatory initiatives could also result
in the Company's elimination or modification of regulated loan products
utilizing the Rule of 78s. Such elimination or modification could also have a
material adverse effect in future periods on the Company's results of operations
and financial condition, especially if the Company is unsuccessful in its
product broadening efforts. In addition, the Company believes that it may be
required to modify aspects of its standard/concessionary rate structure in
response to the regulatory initiatives set forth in the OFT letter. No assurance
can be given as to the effect of such modifications or that the OFT will not
require the elimination of its standard/concessionary rate structure, either of
which could have a material adverse effect in future periods on the Company's
results of operations and financial condition.
Dependence on Secondary Market
Since March 1996, CSC-UK has pooled and sold through securitizations an
increasing percentage of the loans which it originates. Although the Company
believes that a UK secondary market exists for the type of mortgage loans it
originates in the UK, the UK secondary market for such loans is less developed
than the US secondary market for such loans. The Company believes that its March
1996 sale was the first publicly offered, London Stock Exchange listed
securitization of loans of the type originated by the Company sold in the UK
secondary market in several years. No assurances can be given that CSC-UK will
be successful in structuring, marketing and completing loan securitizations in
the UK in the future or that a viable and liquid market for whole loan sales
will develop similar to that in the US. Failure to securitize or sell mortgage
loans in the UK would have a material adverse effect on CSC-UK's, and therefore
the Company's, results of operations and financial condition.
Unseasoned Loan Portfolio
The Company has been servicing loans in the UK only since May 1995 and,
accordingly, the UK loan serviced portfolio is unseasoned. The Company has
experienced an increase in delinquency rates in connection with its UK serviced
portfolio. Further, J&J's historical delinquency experience has been higher than
that of CSC-UK, totaling 43.3% at December 31, 1996.
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Potential Change in Valuation of Mortgage Servicing Receivables
Due to the relatively brief period the Company has operated in the UK
and because the UK market for the types of loans sold by the Company has been
very fragmented and underserved, the Company has limited data on which to base
certain of the assumptions, including prepayment assumptions, necessary to
determine the gain on sale recognized when the Company sells UK loans through
securitizations. A component of such gain on sale, which is capitalized on the
Company's balance sheet as mortgage servicing receivables, results from two
attributes of the Company's UK loans that are not shared by the Company's US
loans. Unlike the Company's US loans, certain UK loans have significant
prepayment fees and/or provide the borrower with an opportunity to pay a reduced
interest rate (the "Concessionary Rate") to the extent the borrower pays the
loan when due (as opposed to the standard interest rate (the "Standard Rate")
that would apply at any time during which any payment arrears exist). In its UK
securitizations, the Company acquires an uncertificated residual interest,
carried on the Company's balance sheet as mortgage servicing receivables, in the
excess cash flows generated by such securitizations. Following the sale of UK
loans into securitizations, the Company retains no control over the loans sold
and has no control over the borrowers' performance under such loans and no
control over the ability to realize prepayments calculated using the Rule of 78s
or interest rates in excess of the Concessionary Rate. Accordingly, even though
under the terms of the Company's UK securitizations, the Company is entitled to
such prepayments and interest in excess of the Concessionary Rate, there can be
no assurance that such prepayments or excess interest can be achieved. In
addition, in the event of a forced sale, any proceeds would be distributed first
to pay related enforcement expenses, then to pay any aggregate outstanding
concessionary interest and then to pay the holders of the senior interests,
before any proceeds were available to pay the holder of the residual interest.
To the extent that actual prepayments occur at a slower rate than assumed on UK
loans, the Company may realize lower prepayment calculations, or realize the
prepayments at a later time, than assumed at the time the gain on sale was
originally determined resulting in impairment to mortgage servicing receivables.
If more borrowers than were initially assumed earned the opportunity to pay the
Concessionary Rate, the Company will realize a lower than expected yield on such
borrowers' loans also resulting in impairment to mortgage servicing receivables.
Although the Company believes that its assumptions with respect to UK
prepayments and borrowers who will be eligible to pay the Concessionary Rate are
reasonable, no assurance can be given that actual results will not differ
substantially. In addition, no assurance can be given that the regulatory
environment will not adversely change or competitors entering the UK market will
not offer to borrowers better prepayment and interest terms than those currently
offered by the Company. Either of such developments could impair the Company's
mortgage servicing receivables and would have a negative impact on the Company's
financial condition and results of operations.
Mortgage servicing receivables may also be impaired as a result of
certain adjustments in interest rates affecting UK loans. The interest rates on
the majority of the Company's UK loans may be adjusted upward by the Company
based upon a UK base borrowing rate. The Company's UK loans have generally been
less sensitive to fluctuations in interest rates than is typically the case for
US adjustable rate loans. The Company's UK securitizations and loan sales into
the UK Greenwich Facility have variable pass-through rates based on LIBOR,
requiring an increase in the rate upon a specified increase in LIBOR. To the
extent that the Company's UK loan interest rates are not adjusted upward in a
timely manner in response to increases in the variable pass-through rate
relating to the securitization, mortgage servicing receivables will be impaired.
In addition, if such interest rates are adjusted upward and borrowers are unable
to make the resulting higher payments, the Company's UK loans may experience
greater delinquencies and losses which could cause the mortgage servicing
receivables to be impaired.
CONTINGENT RISKS
Although the Company sells substantially all loans which it originates
and purchases on a nonrecourse basis, the Company retains some degree of credit
risk on substantially all loans sold. During the period of time that loans are
held pending sale, the Company is subject to the various business risks
associated with the lending business including the risk of borrower default, the
risk of foreclosure and the risk that a rapid increase in interest rates would
result in a decline in the value of loans to potential purchasers. In addition,
documents governing the UK Greenwich Facility and the Company's securitizations
require the Company to commit to repurchase or replace loans which do not
conform to the representations and warranties made by the Company at the time of
sale. When borrowers are delinquent in making monthly payments on loans included
in a REMIC trust, the Company is required to advance interest payments with
respect to such delinquent loans to the extent that the Company deems such
advances ultimately recoverable. These advances require funding from the
Company's capital resources but have priority of repayment from the succeeding
month's collections.
In the ordinary course of its business, the Company is subject to
claims made against it by borrowers and private investors arising from, among
other things, losses that are claimed to have been incurred as a result of
alleged breaches of fiduciary obligations, misrepresentations, errors and
omissions of employees, officers and agents of the Company (including its
appraisers), incomplete documentation and failures by the Company to comply with
various laws and regulations applicable to its business. The Company believes
that liability with respect to any currently asserted claims or legal actions is
not likely to be material to the Company's consolidated results of operations or
financial condition; however, any claims asserted in the future may result in
legal expenses or liabilities which could have a material adverse effect on the
Company's results of operations and financial condition.
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<PAGE> 15
GEOGRAPHIC CONCENTRATION OF US OPERATIONS
Approximately 18.0% of the Company's US loan origination and purchase
volume for 1996 was derived from the state of New York. Although the Company is
licensed or registered in 42 states and the District of Columbia and intends to
continue to expand into other markets, it is expected that the state of New York
will continue to provide a substantial portion of its loan origination and
purchase activity. Consequently, the Company's results of operations and
financial condition are affected by general trends in the New York economy and
the residential real estate market. Should a downturn occur in the New York
economy or its residential real estate market, the Company's equity position or
portfolio performance relating to existing New York loans would be adversely
affected. In particular, the economy and the residential real estate market in
and around New York City, where a significant portion of the Company's New York
loans have been originated, has historically been affected by fluctuations in
the financial markets.
COMPETITION
As a consumer finance company specializing in mortgage loans, the
Company faces intense competition, primarily from mortgage banking companies,
commercial banks, credit unions, thrift institutions, credit card issuers,
finance companies and, additionally in the UK, building societies and new market
entrants who are affiliated with some of the Company's US competitors. Many of
these competitors in the financial services business are substantially larger
and have more capital and other resources than the Company. Furthermore, certain
large national finance companies and conforming mortgage originators in the US
have announced their intention to adapt their conforming origination programs
and allocate resources to the origination of non-conforming loans. In addition,
certain of these larger mortgage companies and commercial banks have begun to
offer products similar to those offered by the Company, targeting customers
similar to those of the Company. The entrance of these competitors into the
Company's market could have a material adverse effect on the Company's financial
condition and results of operations.
The UK market for the type of loans the Company originates is highly
fragmented and, for a variety of reasons, underserved by conventional lenders as
compared to the US market. The Company anticipates that it will face additional
competition in the UK in the future which will likely have a negative impact on
the average gain on sale realized upon the sale of UK loans and could have a
material adverse effect on the Company's results of operations and financial
condition.
Competition can take many forms, including convenience in obtaining a
loan, customer service, marketing and distribution channels and interest rates.
Competition may be affected by fluctuations in interest rates and general
economic conditions. During periods of rising rates, competitors that have
"locked in" low borrowing costs may have a competitive advantage. During periods
of declining rates, competitors may solicit the Company's customers to refinance
their loans. During economic slowdowns or recessions, the Company's borrowers
may have new financial difficulties and may be receptive to offers by the
Company's competitors. The current level of gains realized by the Company and
its competitors on the sale of the type of loans they originate and purchase is
attracting additional competitors into this market with the possible effect of
lowering gains that may be realized on the Company's future loan sales. During
1996, the Company experienced an increase in the weighted average loan-to-value
ratio on its Core Products and in the premiums it paid under its Wholesale Loan
Acquisition Program to its correspondents, and experienced a slower rate of
growth in originations from its independent mortgage brokers. The Company is
unable at this time to determine whether such increases and slowing will
continue in 1997. Furthermore, as the Company expands into the market of
borrowers with higher quality credit and loan products that require more
significant capital, the Company will face additional competition with the
possible effect of lowering gains realized by the Company.
The Company depends largely on independent mortgage brokers and
financial institutions and other mortgage bankers for its originations and
purchases of new loans. The Company's competitors also seek to establish
relationships with the Company's independent mortgage brokers and financial
institutions and other mortgage bankers. In addition, the Company expects the
volume of wholesale loans purchased by the Company to increase and the relative
proportion of wholesale loans to total loans originated and purchased by the
Company to expand. The Company's future results may become more exposed to
fluctuations in the volume and cost of its wholesale loans resulting from
competition from other purchasers of such loans, market conditions and other
factors.
US LEGISLATIVE AND REGULATORY RISKS
Members of Congress and government officials have from time to time
suggested the elimination of the mortgage interest deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. Because many of the Company's loans are made to borrowers
for the purpose of consolidating consumer debt or financing other consumer
needs, the competitive advantages of tax deductible interest, when compared with
alternative sources of financing, could be eliminated or seriously impaired by
such government action. Accordingly, the reduction or elimination of these tax
benefits could have a material adverse effect on the demand for loans of the
kind offered by the Company.
The Company's US business is subject to extensive regulation,
supervision and licensing by federal, state and local governmental authorities
and is subject to various laws and judicial and administrative decisions
imposing
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<PAGE> 16
requirements and restrictions on part or all of its operations. The Company's
consumer lending activities are subject to the Federal Truth-in-Lending Act and
Regulation Z (including the Home Ownership and Equity Protection Act of 1994),
the Federal Equal Credit Opportunity Act and Regulation B, as amended ("ECOA"),
the Fair Credit Reporting Act of 1970, as amended, the Federal Real Estate
Settlement Procedures Act ("RESPA") and Regulation X, the Home Mortgage
Disclosure Act, the Federal Debt Collection Practices Act and the National
Housing Act of 1934, as well as other federal and state statutes and regulations
affecting the Company's activities. The Company is also subject to the rules and
regulations of, and examinations by, the Department of Housing and Urban
Development ("HUD") and state regulatory authorities with respect to
originating, processing, underwriting, selling, securitizing and servicing
loans. These rules and regulations, among other things, impose licensing
obligations on the Company, establish eligibility criteria for mortgage loans,
prohibit discrimination, provide for inspections and appraisals of properties,
require credit reports on loan applicants, regulate assessment, collection,
foreclosure and claims handling, investment and interest payments on escrow
balances and payment features, mandate certain disclosures and notices to
borrowers and, in some cases, fix maximum interest rates, fees and mortgage loan
amounts. Failure to comply with these requirements can lead to loss of approved
status, termination or suspension of servicing contracts without compensation to
the servicer, demands for indemnifications or mortgage loan repurchases, certain
rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement actions.
Although the Company believes that it has systems and procedures to
facilitate compliance with these requirements and believes that it is in
compliance in all material respects with applicable local, state and federal
laws, rules and regulations, there can be no assurance that more restrictive
laws, rules and regulations will not be adopted in the future that could make
compliance more difficult or expensive.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 1997, the Company adopted the Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 125, "Accounting for Transfer and Servicing of Financial Assets and
Extinguishment of Liabilities." SFAS No. 125 addresses the accounting for all
types of securitization transactions, securities lending and repurchase
agreements, collateralized borrowing arrangements and other transactions
involving the transfer of financial assets. SFAS No. 125 distinguishes transfers
of financial assets that are sales from transfers that are secured borrowings.
SFAS No. 125 is generally effective for transactions that occur after December
31, 1996, and it is to be applied prospectively. SFAS No. 125 requires the
Company to allocate the total cost of mortgage loans sold to the mortgage loans
sold (servicing released), retained certificates and servicing rights based on
their relative values. The pronouncement also requires the Company to provide
additional disclosure about the retained certificates in its securitizations and
to account for these assets at fair value in accordance with SFAS No. 115. The
Company does not believe that SFAS No. 125 will have a material effect on the
Company's securitizations as currently structured; however, there can be no
assurance that SFAS No. 125 will not have a material adverse effect on future
securitization structures the Company may employ, reduce the Company's gain on
sale of loans in the future or otherwise adversely affect the Company's results
of operations or financial condition.
POSSIBLE ENVIRONMENTAL LIABILITIES
US
In the course of its business, the Company has acquired, and may
acquire in the future, properties securing loans which are in default. Under
various federal, state and local environmental laws, ordinances and regulations,
a current or previous owner or operator of real estate may be required to
investigate and clean up hazardous or toxic substances or chemical releases at
such property, and may be held liable to a governmental entity or to third
parties for property damage, personal injury and investigation and cleanup costs
incurred by such parties in connection with the contamination. Such laws
typically impose cleanup responsibility and liability which, under such laws,
has been interpreted to be joint and several unless the harm is divisible and
there is a reasonable basis for allocation of responsibility. The costs of
investigation, remediation or removal of such substances may be substantial, and
the presence of such substances, or the failure to properly remediate such
property, may adversely affect the owner's ability to sell or rent such property
or to borrow using such property as collateral. Persons who arrange for the
disposal or treatment of hazardous or toxic substances also may be liable for
the costs of removal or remediation of such substances at the disposal or
treatment facility, whether or not the facility is owned or operated by such
person. In addition, the owner or former owners of a contaminated site may be
subject to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from such property.
UK
"Owners" or "occupiers" of contaminated land in the UK are potentially
liable under UK environmental laws. Such persons can be required to clean up
affected land, cease polluting activities, obtain licenses in connection with
disposal of waste, reimburse relevant enforcement authorities for clean-up costs
related to land and controlled waters and pay fines for non-compliance with
relevant laws and regulations. The potential liability of such persons may be
substantial and the presence of any polluting substances or the failure to
properly remediate such land may adversely affect the
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<PAGE> 17
owner's or occupier's ability to sell or rent the property on such land or to
borrow using such property as security. In addition to liability under statute,
such persons may be liable to third parties at common law for property damage,
economic loss and personal injury.
A lender may be deemed to be an "owner" upon enforcement of its
interest in a mortgaged property following default by a borrower depending on
the method of enforcement employed. A lender may also, depending on the degree
of control it has, be liable as a person who has caused or knowingly permitted
pollution to occur. A new statutory framework providing for the identification
and allocation of responsibility for costs associated with the investigation and
clean-up of contaminated land is set out in the Environmental Protection Act
1990, as amended, and is expected to be implemented during 1997. Under this
framework, local authorities will have a duty to inspect land within their
jurisdiction for the purpose of identifying contamination.
No assurance can be given in either the US or the UK that any prior
owner or tenant of a property did not create any material environmental
condition not known to the Company, that future laws, ordinances or regulations
will not impose any material environmental liability, or that a material
environmental condition does not otherwise exist as to any one or more of the
properties now owned or acquired in the future by the Company, any of which
could result in a material adverse effect on the Company's results of operations
and financial condition.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock may experience fluctuations that
are unrelated to the operating performance of the Company. In particular, the
price of the Common Stock may be affected by general market price movements as
well as developments specifically related to the consumer finance industry such
as, among other things, interest rate movements, loss and delinquency rates and
the Company's access to and the overall performance of the securitization
market. In addition, the Company's operating income on a quarterly basis is
significantly dependent upon the successful completion of the Company's loan
sales in the market, and the inability of the Company to complete significant
loan sale transactions in a particular quarter may have a material adverse
impact on the Company's results of operations for that quarter and could,
therefore, negatively impact the price of the Common Stock.
COMMON STOCK ELIGIBLE FOR FUTURE SALE
As of June 2, 1997, 30,940,119 shares of Common Stock were issued and
outstanding. Of these shares, 8,496,655 shares of Common Stock were available
for resale in the public market without restriction or further registration
under the Securities Act, except for shares held by affiliates of the Company,
which shares were subject to the resale limitations of Rule 144 promulgated
under the Securities Act. 22,443,464 of the shares of Common Stock outstanding
were deemed to be "restricted securities" as the term is defined in Rule 144,
all of which are eligible for sale in the public market in compliance with Rule
144. In addition, as of May 27, 1997, the Company had granted options to
purchase up to 3,578,450 shares of Common Stock, of which 3,431,650 were
outstanding, 145,800 had been exercised and 1,000 had expired.
In May 1996, the Company issued $143.8 million of 6% Convertible
Debentures due 2006 (the "Convertible Debentures") convertible at any time into
shares of Common Stock, currently at a conversion price of $26.25 per share,
subject to adjustment. The Company may also issue up to 800,000 shares of Common
Stock from time to time as additional consideration for conversion of
debentures. Through May 27, 1997, an aggregate of $14,130,000 principal amount
of Convertible Debentures has been converted into Common Stock, including the
induced conversion by the Company of $14.0 million aggregate principal amount in
April, 1997 resulting in the issuance by the Company of 538,281 shares of Common
Stock for the conversion and an additional 342,708 shares of Common Stock to
induce conversion and the payment of $420,000 in cash (equal to accrued but
unpaid interest) to the converting holders.
On April 9, 1997, the Company completed a private placement of 5,000
shares of Series A Preferred Stock and Warrants to purchase 500,000 shares of
Common Stock with an exercise price of $20.625 per share. The Series A Preferred
Stock is convertible into shares of Common Stock, subject to certain redemption
rights and restrictions, including volume restrictions limiting the number of
shares of Series A Preferred Stock which may be converted by each holder thereof
to no more than 25% of such shares during the 90 calendar days following the
original issuance date and an additional 25% for each successive 90 day period
(with each such holder being able to convert 100% of such shares at any time on
or after the 271st calendar day following the original issuance date), at a
conversion price equal to the lowest daily sales price of the Common Stock
during the four consecutive trading days immediately preceding such conversion
(the "Low Sales Price"), discounted over time up to 4% and subject to certain
adjustments. The number of shares of Common Stock issuable upon conversion of a
share of Series A Preferred Stock is equal to the quotient of the liquidation
preference for such share of Series A Preferred Stock (initially $10,000 subject
to increase for accrued but unpaid dividends and certain other payments the
Company may be required to make pursuant to the terms of the Series A Preferred
Stock) divided by the Low Sales Price on the date of conversion. To date, 385
shares of Series A Preferred Stock have been converted into an aggregate of 319,
757 shares of Common Stock. Pursuant to the terms of the Series A Preferred
Stock,
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<PAGE> 18
as of June 3, 1997 and based on a Low Sales Price as of such date of $14.00 per
share of Common Stock and 55 days of accrued dividends, an additional 865 shares
of Series A Preferred Stock (representing the conversion of 17.3% of the initial
5,000 shares of Series A Preferred Stock) could immediately be converted into an
aggregate of 623,521 shares of Common Stock and sold under this Registration
Statement.
No prediction can be made as to the effect, if any, that future sales
of shares of Common Stock or the availability of shares of Common Stock for
future sale would have on the market price of the Common Stock prevailing from
time to time. Sales of substantial amounts of Common Stock, or the perception
that such sales could occur, could have an adverse effect on the prevailing
market prices for the Common Stock. See "Shares Eligible for Future Sale."
DEPENDENCE ON KEY PERSONNEL
The Company's growth and development to date have been largely
dependent upon the services of Robert Grosser, Chairman of the Board, Chief
Executive Officer and President of the Company, and Robert C. Patent, Vice
Chairman of the Board and Executive Vice President of the Company. Although the
Company has been able to hire and retain other qualified and experienced
management personnel, the loss of Mr. Grosser's or Mr. Patent's services for any
reason could have a material adverse effect on the Company. The Company has
entered into employment agreements with Messrs. Grosser and Patent and maintains
key man life insurance in the amount of $2.0 million on Mr. Grosser.
In the UK, David A. Steene, the Managing Director of CSC-UK, has played
an important role in the development of CSC-UK and the loss of his services
could have a material adverse effect on CSC-UK and therefore on the Company.
CSC-UK has entered into an employment agreement with Mr. Steene.
CONTROL BY CERTAIN STOCKHOLDERS
As of June 2, 1997, certain members of the Company's senior management
and Board of Directors beneficially owned an aggregate of 56.5% of the
outstanding shares of Common Stock. Such persons, if they were to act in
concert, have majority control of the Company, with the ability to approve
certain fundamental corporate transactions (including mergers, consolidations
and sales of assets) and to elect all members of the Board of Directors without
further vote of the minority stockholders.
ABSENCE OF DIVIDENDS
The Company has not paid any cash dividends on its Common Stock since
its inception and does not currently anticipate paying dividends on its Common
Stock in the foreseeable future. In addition, certain agreements to which the
Company is a party restrict the Company's ability to pay dividends on its Common
Stock. The Company conducts substantially all of its operations through its
subsidiaries. Accordingly, the Company's ability to pay dividends is also
dependent upon the ability of its subsidiaries to make cash distributions to the
Company. The payment of dividends to the Company by its subsidiaries is and will
continue to be restricted by or subject to, among other limitations, the terms
of the Senior Note Indenture, applicable provisions of laws of national or state
governments, contractual provisions, the earnings of such subsidiaries and
various business considerations.
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SELLING SECURITY HOLDERS
The Selling Security Holders are the holders of Common Stock issued or
issuable upon conversion of the Series A Preferred Stock or upon exercise of the
Warrants. The Securities covered by this Prospectus are being registered for
resale from time to time by the Selling Security Holders. See "Plan of
Distribution." Except as set forth below, none of the Selling Security Holders
has had a material relationship with the Company within the past three years
other than as a result of the ownership of the Series A Preferred Stock and the
Warrants and other securities of the Company.
The following table sets forth the names of the Selling Security
Holders, the number of shares of Series A Preferred Stock, Warrants and shares
of Common Stock owned by the Selling Security Holders as of June 3, 1997 and the
number of Securities which may be offered for resale by the Selling Security
Holders pursuant to this Prospectus. Because (i) the Selling Security Holders
may offer all or a portion of the Securities which they hold pursuant to the
offering contemplated hereby, (ii) there are currently no agreements,
arrangements or understandings with respect to the sale of any of the Securities
and (iii) the number of Securities changes from day to day as different Low
Sales Prices are generated by trading activity in the Common Stock, no estimate
can be given as to the amount of Securities that will be held by the Selling
Security Holders after completion of this offering. See "Plan of Distribution".
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF NUMBER OF SECURITIES
SHARES OF SERIES NUMBER OF SHARES OF OWNED AND
A PREFERRED WARRANTS COMMON STOCK OFFERED
NAME STOCK OWNED OWNED OWNED(1) HEREBY(1)
<S> <C> <C> <C> <C>
Credit Suisse First Boston Corporation 300 30,000 246,650 246,250
CIBC Wood Gundy Securities Corp.(2) 450 60,000 512,396 512,396
Continental Casualty Company(3) 375 50,000 806,659 426,996
Bear, Stearns Securities Corp.(4) 225 30,000 616,843 250,177
Paloma Securities L.L.C. 1,050 105,000 1,052,352 861,876
Soundshore Partners, L.P. 50 5,000 41,041 41,041
Halifax Fund L.P.(5) 965 100,000 822,667 822,667
Galileo Capital LLC 150 15,000 123,125 123,125
HOW&CO(6) 20 2,000 16,416 16,416
Catamaran & Co.(6) 130 13,000 116,041 106,708
Westcoast & Co.(6) 350 35,000 316,808 287,292
Colonial Penn Insurance Co. 50 5,000 41,041 41,041
The Gleneagles Fund Company 150 15,000 123,125 123,125
Hick Investment Ltd. (BVI) 50 5,000 41,041 41,041
Samyang Merchant Bank(7) 250 25,000 205,208 205,208
TOTALS 4,615 500,000 5,122,454 4,146,400
</TABLE>
(1) For purposes of calculating the number of shares of Common Stock owned
by each Selling Security Holder related to future Conversion Shares,
shares of Series A Preferred Stock were deemed converted into Common
Stock based on a conversion price of $14.00 per share (the Low Sales
Price as of June 3, 1997) and 55 days of accrued dividends. In
addition, the restrictions on each holder's ability to convert Series A
Preferred Stock into Common Stock have been ignored. Also includes a
presently indeterminable number of Dividend Shares. See "Risk Factors
-- Common Stock Eligible for Future Sale."
(2) As of June 2, 1997, CIBC Wood Gundy Securities Corp. had converted 150
shares of Series A Preferred Stock for 128,021 shares of Common Stock.
Within the past three years, CIBC Wood Gundy Securities Corp. or one of
its affiliates has acted as manager, co-manager and placement agent of
various securities offerings. For the performance of such services,
CIBC Wood Gundy Securities Corp. or one of its affiliates received fees
from the Company.
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<PAGE> 20
(3) As of June 2, 1997, Continental Casualty Company had converted 75
shares of Series A Preferred Stock for 106,684 shares of Common Stock.
(4) As of June 2, 1997, Bear Stearns Securities Corp. had converted 75
shares of Series A Preferred Stock for 57,990 shares of Common Stock.
Within the past three years, Bear, Stearns & Co. Inc. or one of its
affiliates served as co-manager of securities offerings by the Company.
For the performance of such services Bear, Stearns & Co. Inc. or one of
its affiliates received fees from the Company.
(5) As of June 2, 1997, Halifax Fund L.P. had converted 35 shares of Series
A Preferred Stock for 27,062 shares of Common Stock.
(6) Froley Revy Investment Company Inc., as investment advisor, has voting
and investment control over these shares of Series A Preferred Stock
and related Warrants.
(7) Promethean Investment Group, L.L.C. acts as the investment manager and
has voting and investment control over these shares of Series A
Preferred Stock and Warrants.
USE OF PROCEEDS
All of the Conversion Shares, Warrant Shares and Dividend Shares
covered by this Prospectus may be offered from time to time by one or all of the
Selling Security Holders. All of the Dividend Shares covered by this Prospectus
may be offered by the Company to the Selling Security Holders as payment for
accrued dividends in accordance with the terms and conditions of the Series A
Preferred Stock. Accordingly, the Company will not receive any proceeds from the
offering of the Securities by or to the Selling Security Holders hereunder.
PLAN OF DISTRIBUTION
The Conversion Shares, Warrant Shares and Dividend Shares offered
hereby are being offered directly by the Selling Security Holders. The Company
will not receive any proceeds from the issuance of Dividend Shares to or the
sale of Conversion Shares, Warrant Shares or Dividend Shares by the Selling
Security Holders. The sale of the Conversion Shares, Warrant Shares and
Dividend Shares may be effected by the Selling Security Holders or permitted
transferees from time to time in transactions in the over-the-counter market,
on the Nasdaq National Market, in negotiated transactions, or a combination of
such methods of sale, at fixed prices which may be changed, at market prices
prevailing at the time of sale, at prices related to prevailing market prices
or at negotiated prices. The Selling Security Holders or permitted transferees
may effect such transactions by selling such Securities from time to time
acting as principals for their own account directly, though an agent designated
from time to time or through brokers, dealers, agents or underwriters and such
brokers, dealers, agents or underwriters may receive compensation in the form
of discounts, concessions or commissions from the Selling Security Holders or
permitted transferees and/or the purchasers of such Securities for whom such
brokers, dealers, agents or underwriters may act as agents or to whom they sell
as principals (which compensation as to a particular broker-dealer might be in
excess of customary commissions).
At the time a particular offer of Securities is made, to the extent
required, a supplemental prospectus will be distributed which will set forth the
number of Securities being offered and the terms of the offering including the
name or names of any underwriters, dealers or agents, the purchase price paid by
any underwriter for the Securities purchased from the Selling Security Holders,
any discounts, commissions and other items constituting compensation from the
Selling Security Holders and any discounts, commissions or concessions allowed
or reallowed or paid to dealers.
In order to comply with the securities laws of certain states, if
applicable, the Securities will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Securities may not be sold unless they have been registered or qualified for
sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with by the Company and
the Selling Security Holders.
The Selling Security Holders and any broker-dealers, agents or
underwriters that participate with the Selling Security Holders in the
distribution of the Securities may be deemed to be "underwriters" within the
meaning the Section 2(11) of the Securities Act, and any commissions received by
them and any profit on the resale of the Securities purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
Under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the Securities may not simultaneously
engage in market making activities with respect to the Common Stock of the
Company
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<PAGE> 21
for a period of two business days prior to the commencement of such
distribution. In addition and without limiting the foregoing, each Selling
Security Holder will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including, without limitation, Regulation
M, which provisions may limit the timing of purchases and sales of shares of the
Company's Common Stock by the Selling Security Holders.
The Company has agreed to register the Securities under the Securities
Act and bear certain expenses (other than selling commissions) in connection
with such registration and to indemnify and hold the Selling Security Holders
harmless against certain liabilities under the Securities Act that could arise
in connection with the sale by the Selling Security Holders of the Securities.
There can be no assurance that the Selling Security Holders will sell
all or any of the shares of Common Stock offered hereunder.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for
the Company by Gibson, Dunn & Crutcher LLP, New York, New York.
EXPERTS
The consolidated financial statements of the Company as of and for the
year ended December 31, 1994 and as of and for the year ended December 31, 1996
have been incorporated by reference herein and in the registration statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing. The consolidated financial
statements of the Company as of and for the year ended December 31, 1995 have
been incorporated by reference herein and in the registration statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing, and upon the report of BDO Stoy
Hayward, Registered Auditors, incorporated by reference herein.
The financial statements of J&J as of and for the years ended September
30, 1993, 1994 and 1995 have been incorporated by reference herein and in the
registration statement in reliance upon the report of BDO Stoy Hayward,
Registered Auditors, as stated in its report incorporated by reference herein.
The consolidated financial statements of Heritable Finance Limited
(referred to herein as Greyfriars) as of December 31, 1994 and 1995 and for each
of the years in the three-year period ended December 31, 1995 have been
incorporated by reference herein and in the registration statement in reliance
upon the report of KPMG, Registered Auditors, incorporated by reference herein,
and upon the authority of said firm as experts in accounting and auditing.
20
<PAGE> 22
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Registrant estimates that expenses in connection with the offering
described in this registration statement will be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.................................................. $ 19,602
Printing expenses.................................................................................... $ 10,000
Accounting fees and expenses......................................................................... $ 7,500
Legal fees and expenses.............................................................................. $ 20,000
Listing fees......................................................................................... $ 17,500
Fees and expenses for qualifications under state securities laws..................................... *
Transfer agent's fees and expenses................................................................... $ 2,000
Miscellaneous........................................................................................ $ 4,700
----------
Total............................................................................................ $ 81,302
==========
</TABLE>
- ----------------------
* Not applicable or none.
All amounts except the Securities and Exchange Commission registration
fee are estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145(a) of the Delaware General Corporation Law (the "GCL")
provides that a Delaware corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding if he or she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had no cause to believe his
or her conduct was unlawful.
Section 145(b) of the GCL provides that a Delaware corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses actually
and reasonably incurred by such person in connection with the defense or
settlement of such action or suit if he or she acted under similar standards,
except that no indemnification may be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of his or her duty to the
corporation unless and only to the extent that the court in which such action or
suit was brought shall determine that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to be indemnified for such expenses as the court shall deem
proper.
Section 145 of the GCL further provides that to the extent a director
or officer of a corporation has been successful in the defense of any action,
suit or proceeding referred to in subsection (a) and (b) or in the defense of
any claim, issue or matter therein, such officer or director shall be
indemnified against expenses actually and reasonably incurred by him or her in
connection therewith; that indemnification provided for by Section 145 shall not
be deemed exclusive of any other rights to which the indemnified party may be
entitled, and that the corporation may purchase and maintain insurance on behalf
of a director or officer of the corporation against any liability asserted
against such officer or director and incurred by him or her in any such capacity
or arising out of his or her status as such, whether or not the corporation
would have the power to indemnify him or her against such liabilities under
Section 145 of the GCL.
As permitted by Section 102(b)(7) of the GCL, the Company's Certificate
of Incorporation provides that a director shall not be liable to the Company or
its stockholders for monetary damages for breach of fiduciary duty as a
director. However, such provision does not eliminate or limit the liability of a
director for acts or omissions not in good faith or for breaching his or her
duty of loyalty, engaging in intentional misconduct or knowingly violating a
law, paying a dividend or approving a stock repurchase which was illegal, or
obtaining an improper personal benefit. A provision of this type has no effect
on the availability of equitable remedies, such as injunction or rescission, for
breach of fiduciary duty.
The Company's Bylaws require the Company to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the Company) by
reason of the fact that he is or was a director,
II-1
<PAGE> 23
officer, employee or agent of the Company, or is or was serving at the request
of the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Company, and with respect to
any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, does not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, that he had reasonable cause to believe that his
conduct was unlawful.
In addition, the Company's Bylaws require the Company to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Company to procure a judgment in its favor by reason of the fact that he is or
was a director, officer, employee or agent of the Company, or is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company, except that no indemnification may
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable for negligence or misconduct in the performance
of his duty to the Company unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Any indemnification (unless ordered by a court) made by the Company may
be only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct as set forth
above. Such determination must be made (i) by the Board by a majority vote of a
quorum consisting of directors who were not parties to such action, suit or
proceeding, or (ii) if such a quorum is not obtainable, or, even if obtainable,
a quorum of disinterested directors so directs, by independent legal counsel in
a written opinion, or (iii) by the stockholders.
To the extent that a director, officer, employee or agent of the
Company has been successful on the merits or otherwise in defense of any covered
action, suit or proceeding, or in defense of any covered claim, issue or matter
therein, he will be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith.
Expenses incurred by an officer or director in defending a civil or
criminal action, suit or proceeding may be paid by the Company in advance of the
final disposition of such action, suit or proceeding as authorized by the Board
in the specific case upon receipt of an undertaking by or on behalf of the
director or officer to repay such amount unless it shall ultimately be
determined that he is entitled to be indemnified by the Company as authorized in
this Article. Such expenses incurred by other employees and agents may be so
paid upon such terms and conditions, if any, as the Board deems appropriate.
The Company presently maintains policies of directors' and officers'
liability insurance in the amount of $10.0 million.
ITEM 16. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
4.1 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.
4.2 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.
5.1 Opinion of Gibson, Dunn & Crutcher LLP.
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of KPMG, Registered Auditors
23.3 Consent of BDO Stoy Hayward
II-2
<PAGE> 24
23.4 Consent of BDO Stoy Hayward
23.5 Consent of Gibson, Dunn & Crutcher LLP (contained in Exhibit
5.1)
24.1 Power of Attorney (included on signature page of Registration
Statement)
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement: (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933; (ii) to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement;
and (iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(d) The undersigned registrant hereby undertakes to deliver or cause to
be delivered with the prospectus, to each person to whom the prospectus is sent
or given, the latest annual report, to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
II-3
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing a Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Village of Elmsford, State of New York, on June 3, 1997.
CITYSCAPE FINANCIAL CORP.
By: /s/ Robert C. Patent
-------------------------
Robert C. Patent
Executive Vice President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints, jointly and severally, Robert C.
Patent and Jonah L. Goldstein, and each of them, individually and without any
other, his or her attorney-in-fact, each with full power of substitution, for
him or her in any and all capacities, to sign any and all amendments to this
Registration Statement (including post-effective amendments), and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the capacity
indicated on June 3, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<S> <C>
/s/ Robert Grosser Chairman of the Board, Chief Executive Officer,
- ------------------------- President and Director (Principal Executive Officer)
Robert Grosser
/S/ Robert C. Patent
- -------------------------
Robert C. Patent Vice Chairman of the Board, Executive Vice President and Director
/s/ Asher Fensterheim
- -------------------------
Asher Fensterheim Director
/s/ Jonah L. Goldstein
- -------------------------
Jonah L. Goldstein Director
/s/ Arthur P. Gould
- -------------------------
Arthur P. Gould Director
/s/ Hollis W. Rademacher
- -------------------------
Hollis W. Rademacher Director
/s/ Robert M. Stata
- -------------------------
Robert M. Stata Director
/s/ David A. Steene
- -------------------------
David A. Steene Director
/s/ Tim S. Ledwick
- -------------------------
Tim S. Ledwick Chief Financial Officer (Principal Financial
and Accounting Officer)
</TABLE>
II-4
<PAGE> 26
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
4.1 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.
4.2 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.
5.1 Opinion of Gibson, Dunn & Crutcher LLP
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of KPMG, Registered Auditors
23.3 Consent of BDO Stoy Hayward
23.4 Consent of BDO Stoy Hayward
23.5 Consent of Gibson, Dunn & Crutcher LLP
(contained in Exhibit 5.1)
24.1 Power of Attorney (included on signature
page of Registration Statement)
II-5
<PAGE> 1
EXHIBIT 5.1
June 3, 1997
(212) 351-4000 C 15566-00021
Cityscape Financial Corp.
565 Taxter Road
Elmsford, NY 10523
Re: Proposed Offering of up to 4,500,000 Shares
of Common Stock
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-3 (the
"Registration Statement"), File No. 333- , of Cityscape Financial
Corp., a Delaware corporation (the "Company"), filed with the
Securities and Exchange Commission (the "Commission") pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), in
connection with (i) the public offering from time to time by certain
selling security holders (the "Selling Security Holders") of up to
4,000,000 shares (the "Conversion Shares") of common stock of the
Company, par value $0.01 per share (the "Common Stock"), issued or
issuable upon the conversion of the Company's 6% Convertible Preferred
Stock, Series A, par value $0.01 per share (the "Preferred Stock"), in
accordance with the Certificate of Designations of the Preferred Stock
(the "Certificate of Designations"), (ii) the public offering from time
to time by the Selling Security Holders of up to 500,000 shares (the
"Warrant Shares") of Common Stock issuable upon exercise of the related
five-year Common Stock Purchase Warrants of the Company (the
"Warrants") in accordance with the Warrant agreements and (iii) a
presently indeterminable number of shares (the "Dividend Shares") of
Common Stock which may be issued by the Company to the Selling Security
Holders in lieu of cash dividends on the
<PAGE> 2
Cityscape Financial Corp.
June 3, 1997
Page 2
shares of Preferred Stock in accordance with the Certificate of
Designations.
For the purposes of the opinions set forth below, we have
examined and are familiar with the proceedings taken and proposed to be
taken by the Company in connection with the issuance and sale of Common
Stock. In arriving at the following opinions, we have relied, among
other things, upon our examination of such corporate records of the
Company and certificates of officers of the Company and of public
officials and such other documents as we have deemed appropriate. In
such examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as
certified or photostatic copies and the authenticity of the originals
of such copies.
Based upon the foregoing examination and in reliance thereon,
and subject to the assumptions stated and relying on statements of fact
contained in the documents that we have examined and subject to the
receipt from the Commission of an order declaring the Registration
Statement Effective, it is our opinion that:
1. The Conversion Shares issued or issuable upon conversion of
the Preferred Stock, as or when issued in accordance with the terms and
conditions of the Certificate of Designations, are or will be validly
issued, fully paid and non-assessable.
2. The Warrant Shares issuable upon exercise of the Warrants,
when issued in accordance with the terms and conditions of the Warrant
agreements, will be validly issued, fully paid and non-assessable.
3. The Dividend Shares issuable in lieu of payment of cash
dividends on the Preferred Stock by a declaration of the board of
directors of the Company (the "Board"), assuming full compliance with
the General Corporation Law of the State of Delaware (the "DGCL"),
including the requirements of Sections 170 and 173 thereof, when issued
in accordance the Certificate of Designations, will be validly issued,
fully paid and non-assessable.
<PAGE> 3
Cityscape Financial Corp.
June 3, 1997
Page 3
Our opinion is subject to (i) the effect of applicable
bankruptcy, insolvency, reorganization, moratorium, arrangement and
other laws affecting creditor's rights, including, without limitation,
the effect of statutory or other laws regarding fraudulent conveyances,
fraudulent transfers and preferential transfers and (ii) the
limitations imposed by general principles of equity (regardless of
whether such enforceability is considered in a proceeding at law or in
equity).
We render no opinion herein as to matters involving the laws
of any jurisdiction other than the laws of the United States of
America, the laws of the State of New York and the DGCL, all as in
effect as of the date hereof. In rendering this opinion, we assume no
obligation to revise or supplement this opinion should current laws, or
the interpretations thereof, be changed.
We consent to the filing of this opinion as an exhibit to the
Registration Statement, and we further consent to the use of our name
under the caption "Legal Matters" in the Registration Statement and the
Prospectus which forms a part thereof. In giving these consents, we do
not thereby admit that we are within the category of persons whose
consent is required under Section 7 of the Securities Act or the Rules
and Regulations of the Commission.
Very truly yours,
/s/ Gibson, Dunn & Crutcher LLP
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Cityscape Financial Corp.:
We consent to the incorporation by reference in the Registration
Statement on Form S-3 of Cityscape Financial Corp. of our report dated February
28, 1997, which report makes reference to the report of other auditors, relating
to the consolidated statements of financial condition of Cityscape Financial
Corp. and its subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period then ended, which report appears in
the December 31, 1996 annual report on Form 10-K of Cityscape Financial Corp,
and to the reference to our firm under the heading "Experts" in the registration
statement.
/s/ KPMG Peat Marwick LLP
New York, New York
June 3, 1997
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Cityscape Financial Corp.:
We consent to the incorporation by reference in the Registration
Statement on Form S-3 of Cityscape Financial Corp. of our report dated April 2,
1996, relating to the consolidated statements of financial condition of
Heritable Finance Limited as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period then ended, which report appears in
the December 31, 1996 annual report on Form 10-K of Cityscape Financial Corp,
and to the reference to our firm under the heading "Experts" in the registration
statement.
/s/ KPMG
Chartered Accountants
Registered Auditors
London, United Kingdom
June 3, 1997
<PAGE> 1
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Cityscape Financial Corp.:
We consent to the incorporation by reference in the Registration
Statement on Form S-3 of Cityscape Financial Corp. of our report dated November
30, 1995 for the three years ended September 30, 1995 relating to J&J Securities
Limited, which report appears in the December 31, 1996 annual report on Form
10-K of Cityscape Financial Corp, and to the reference to our firm under the
heading "Experts" in the prospectus.
/s/ BDO STOY HAYWARD
London, England
June 3, 1997
<PAGE> 1
Exhibit 23.4
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Cityscape Financial Corp.:
We consent to the incorporation by reference in the Registration
Statement on Form S-3 of Cityscape Financial Corp. of our report dated March 27,
1996, which report appears in the December 31, 1996 annual report on Form 10-K
of Cityscape Financial Corp, and to the reference to our firm under the heading
"Experts" in the prospectus.
/s/ BDO STOY HAYWARD
London, England
June 3, 1997
