<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-27314
CITYSCAPE FINANCIAL CORP.
-------------------------
DELAWARE 11-2994671
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
565 TAXTER ROAD, ELMSFORD, NEW YORK 10523-5200
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(914) 592-6677
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
--------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR IF CHANGED
SINCE LAST REPORT)
INDICATE BY CHECK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO
BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
31,865,551 SHARES $.01 PAR VALUE, OF
COMMON STOCK, AS OF AUGUST 7, 1997
----------------------------------
<PAGE> 2
CITYSCAPE FINANCIAL CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statement of Financial Condition at June 30,
1997 and December 31, 1996 2
Consolidated Statements of Operations for the six months
and three months ended June 30, 1997 and 1996 3
Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1996 4
Notes to Consolidated Financial Statements 5 - 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9 - 19
PART II - OTHER INFORMATION 20 - 22
<PAGE> 3
CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 47,959,185 $ 2,107,285
Cash held in escrow 14,782,052 15,038,729
Securities purchased under agreements to resell - 154,176,608
Due from broker for securities transactions 105,306,675 -
Available-for-sale securities 12,592,254 14,618,194
Mortgage servicing receivables 270,901,501 242,895,313
Trading securities 209,065,137 103,199,936
Prepaid commitment fees 33,957,000 35,917,000
Mortgage loans held for sale, net 93,374,648 102,222,184
Credit enhancement deposits 51,284,000 35,082,000
Equipment and leasehold improvements, net 16,341,787 13,947,037
Goodwill 54,338,247 47,466,835
Other assets 56,590,551 43,531,238
------------ ------------
Total assets $966,493,037 $810,202,359
============ ============
LIABILITIES
Warehouse financing facilities $ 51,788,722 $ 89,434,291
Securities sold but not yet purchased 105,306,675 152,862,526
Accounts payable and other liabilities 56,661,306 50,244,387
Allowance for losses 33,385,373 33,715,614
Income taxes payable 65,317,054 56,896,337
Standby financing facility - 7,966,292
Notes and loans payable 300,114,876 136,520,719
Convertible subordinated debentures 129,620,000 143,730,000
------------ ------------
Total liabilities 742,194,006 671,370,166
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 10,000,000 shares authorized;
3,730 issued and outstanding at June 30, 1997 37 -
Common stock, $.01 par value, 100,000,000 shares authorized;
31,712,545 and 29,649,133 issued and outstanding at
June 30, 1997 and December 31, 1996, respectively 317,125 296,491
Additional paid-in capital 127,545,651 57,782,609
Foreign currency translation adjustment, net of taxes 6,911,842 9,765,137
Unrealized gain on available-for-sale securities, net of taxes 7,125,976 8,328,950
Retained earnings 82,398,400 62,659,006
------------ ------------
Total stockholders' equity 224,299,031 138,832,193
------------ ------------
COMMITMENTS AND CONTINGENCIES
------------ ------------
Total liabilities and stockholders' equity $966,493,037 $810,202,359
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1997 1996 1997 1996
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUES
Gain on sale of loans $50,646,095 $29,216,968 $111,309,169 $53,309,706
Interest 16,312,254 6,460,688 35,733,721 9,478,371
Mortgage origination income 1,430,140 1,355,553 2,214,270 2,191,649
Servicing income 1,088,837 795,149 1,758,084 1,355,853
Other 5,692,049 624,343 8,690,242 896,190
----------- ----------- ------------ -----------
Total revenues 75,169,375 38,452,701 159,705,486 67,231,769
----------- ----------- ------------ -----------
EXPENSES
Salaries and employee benefits 16,562,513 9,170,243 31,945,757 14,552,588
Interest expense 20,250,564 4,683,682 36,706,076 6,381,727
Selling expenses 14,249,564 3,011,939 25,453,462 4,374,906
Other operating expenses 13,677,817 1,980,177 26,023,162 6,024,575
Amortization of goodwill 1,401,794 708,486 2,558,588 1,202,280
----------- ----------- ------------ -----------
Total expenses 66,142,252 19,554,527 122,687,045 32,536,076
----------- ----------- ------------ -----------
Earnings before income taxes and extraordinary item 9,027,123 18,898,174 37,018,441 34,695,693
Provision for income taxes 5,440,646 7,772,178 16,637,173 14,296,553
----------- ----------- ------------ -----------
Earnings before extraordinary item 3,586,477 11,125,996 20,381,268 20,399,140
Gain from extinguishment of debt, net of taxes 425,000 - 425,000 -
----------- ----------- ------------ -----------
Net earnings 4,011,477 11,125,996 20,806,268 20,399,140
Preferred stock dividends 1,066,874 - 1,066,874 -
----------- ----------- ------------ -----------
NET EARNINGS APPLICABLE TO COMMON STOCK $ 2,944,603 $11,125,996 $ 19,739,394 $20,399,140
=========== =========== ============ ===========
Earnings per share before extraordinary item: (1)
Primary $ 0.08 $ 0.37 $ 0.63 $ 0.68
----------- ----------- ------------ -----------
Fully diluted N/A (2) $ 0.35 $ 0.62 $ 0.66
----------- ----------- ------------ -----------
Extraordinary item per share $ 0.01 - $ 0.01 -
----------- ----------- ------------ -----------
Net earnings per share: (1)
Primary $ 0.09 $ 0.37 $ 0.63 $ 0.68
=========== =========== ============ ===========
Fully diluted N/A (2) $ 0.35 $ 0.62 $ 0.66
=========== =========== ============ ===========
Weighted average number of shares outstanding
and common stock equivalents: (1)
Primary 31,711,407 30,452,048 31,262,815 30,152,067
=========== =========== ============ ===========
Fully diluted N/A (2) 33,841,939 37,970,666 31,940,693
=========== =========== ============ ===========
</TABLE>
(1) The 1996 amounts have been restated to reflect the 100% stock dividend paid
in July 1996.
(2) Because the effect of the convertible preferred stock and convertible
subordinated debentures was antidilutive, fully diluted earnings per
share is not applicable.
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1997 1996
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 20,806,268 $ 20,399,140
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization 8,163,658 2,692,300
Income taxes payable 6,463,117 37,624,584
Increase in accounts receivable and due from broker
for securities transactions (107,809,096) (10,472,041)
Increase in mortgage servicing receivables (28,006,188) (56,275,808)
Increase in trading securities (105,865,201) (29,843,162)
Net purchases of securities under agreements to resell 154,176,608 -
Proceeds from securities sold but not yet purchased (47,555,851) -
Proceeds from sale of mortgages 947,562,572 731,322,184
Mortgage origination funds disbursed (938,541,331) (730,999,857)
Increase in credit enhancement deposits (16,202,000) -
Other, net 13,803,573 (5,608,808)
------------- -------------
Net cash used in operating activities (93,003,871) (41,161,468)
------------- -------------
Cash flows from investing activities:
Acquisitions (15,496,961) (89,102,097)
Purchases of equipment (5,918,309) (3,389,575)
Proceeds from equipment sale and lease-back financing 1,516,983 908,315
Proceeds from sale of available-for-sale securities 838,622 -
------------- -------------
Net cash used in investing activities (19,059,665) (91,583,357)
------------- -------------
Cash flows from financing activities:
Decrease in warehouse financings (37,645,569) (2,104,760)
Decrease in standby financing facility (7,966,292) (1,138,261)
Proceeds from notes and loans payable 49,000,000 139,134,125
Repayment of notes and loans payable (185,702,843) -
Net proceeds from issuance of common stock 221,280 115,355
Net proceeds from issuance of preferred stock 49,249,950 -
Net proceeds from issuance of Notes 290,758,908 -
------------- -------------
Net cash provided by financing activities 157,915,434 136,006,459
------------- -------------
Net increase in cash and cash equivalents 45,851,898 3,261,634
Cash and cash equivalents at beginning of period 2,107,285 3,598,549
============= =============
Cash and cash equivalents at end of period $ 47,959,183 $ 6,860,183
============= =============
Supplemental disclosure of cash flow information:
Income taxes paid during the period $ 4,783,796 $ 2,925,028
============= =============
Interest paid during the period $ 23,208,810 $ 2,357,385
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. Organization
Cityscape Financial Corp. ("Cityscape" or the "Company") is a consumer
finance company that, through its wholly-owned subsidiary, Cityscape Corp.
("CSC"), engages in the business of originating, purchasing, selling and
servicing mortgage loans secured primarily by one- to four-family residences.
The majority of the Company's loans are made to owners of single family
residences who use the loan proceeds for such purposes as debt consolidation,
financing of home improvements and educational expenditures, among others. In
the US, the Company is licensed or registered to do business in 46 states and
the District of Columbia. The Company commenced operations in the United Kingdom
in May 1995 with the formation of City Mortgage Corporation Limited ("CSC-UK"),
an English corporation that originates, sells and services loans in England,
Scotland and Wales in which the Company initially held a 50% interest and
subsequently purchased the remaining 50% (see Note 3). CSC-UK had no operations
and no predecessor operations prior to May 1995.
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and do not include all
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments consisting of normal recurring accruals considered necessary for a
fair presentation of the results for the interim period have been included.
Operating results for the six months ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997. The accompanying consolidated financial statements and the information
included under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations" should be read in conjunction with the
consolidated financial statements and related notes of the Company for the year
ended December 31, 1996.
The consolidated financial statements of the Company include the
accounts of CSC and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation. The CSC
Acquisition, the UK Acquisition, the J&J Acquisition, the Greyfriars Acquisition
and the M&G Acquisition (as such terms are defined below) have been accounted
for under the purchase method of accounting and with respect to the CSC
Acquisition as a "reverse acquisition" as described in Note 3 below.
Certain amounts in the financial statements have been reclassified to
conform with the 1997 classifications.
3. Acquisitions
In April 1994, the Company acquired all of the capital stock of CSC in
an acquisition in which the shareholders of CSC acquired beneficial ownership of
16,560,000 shares or 92% of the Company's Common Stock (the "CSC Acquisition").
In connection with the CSC Acquisition, the Company changed its name to
Cityscape Financial Corp. From the date of its formation through the date of the
CSC Acquisition, the Company's activities were limited to (i) the sale of
initial shares in connection with its organization, (ii) a registered public
offering of securities and (iii) the pursuit of a combination, by merger or
acquisition. The CSC Acquisition was effective as of January 1, 1994, for
financial reporting purposes.
The CSC Acquisition and the issuance of Common Stock to the former CSC
shareholders resulted in the former shareholders of CSC obtaining a majority
voting interest in the Company. Generally accepted accounting principles require
that the company whose shareholders retain the majority interest in a combined
business be treated as the acquirer for accounting purposes. As a consequence,
the CSC
5
<PAGE> 7
Acquisition has been accounted for as a "reverse acquisition" for financial
reporting purposes, and CSC is deemed to have acquired a 100% interest in the
Company.
In January 1994, CSC acquired Astrum Funding Corp. ("Astrum") in
exchange for 6.3% of the outstanding shares of the Company. This transaction was
accounted for using the purchase method of accounting. The Astrum acquisition
resulted in the Company acquiring net assets of $1,185 and obtaining licenses to
act as a mortgage banker in 11 states in which it had not previously been
licensed. No additional fair market value was assigned to the net assets
received. Although the Company acquired the new licenses earlier than if it had
applied for licensing on its own, the Company assigned no value to such licenses
because they could have been obtained independently. Further, the Company
determined that due to the illiquidity of the Company's stock as well as the
relatively minimal interest granted to the Astrum shareholders, the Company's
stock had no fair value in excess of the net assets received in the acquisition.
In May 1995, the Company and three principals of a privately held
UK-based mortgage lender formed CSC-UK. CSC-UK operates in the United Kingdom
(excluding Northern Ireland, the "UK"), and lends to individuals who are unable
to obtain mortgage financing from conventional mortgage sources such as banks
and building societies ("Conventional UK Lenders") because of impaired or
unsubstantiated credit histories and/or unverifiable income. In September 1995,
the Company entered into an agreement with the three other shareholders of
CSC-UK and acquired 50% interest in CSC-UK not then owned by the Company through
the issuance of 3,600,000 shares of the Company's Common Stock valued at $21.6
million (the "UK Acquisition"). The UK Acquisition resulted in the recognition
of $19.7 million of goodwill which is being amortized using the straight-line
method over a life of ten years. In addition to the goodwill, the Company
acquired assets of $9.0 million, consisting primarily of mortgage servicing
receivables and assumed $4.1 million of liabilities. The UK Acquisition was
accounted for as a purchase transaction. No additional fair market value was
assigned to the net assets received in the UK Acquisition.
In April 1996, CSC-UK acquired all the outstanding capital stock of J&J
Securities Limited, a London-based mortgage lender ("J&J"), in exchange for
(pound sterling) 15.3 million ($23.3 million based on the Noon Buying Rate on
the date of such acquisition) in cash and 548,000 shares of Common Stock valued
at $9.8 million based upon the closing price of the Common Stock on the date of
such acquisition less a discount for restrictions on the resale of such stock
and incurred closing costs of $788,000 (the "J&J Acquisition"). J&J provides
primarily second lien mortgage loans to UK borrowers who, similar to the
Company's UK borrowers, are unable or unwilling to obtain mortgage financing
from Conventional UK Lenders. Pursuant to the J&J Acquisition, the Company
acquired assets with a fair value of $73.8 million consisting primarily of
mortgage loans of $73.0 million (inclusive of $21.8 million of value assigned to
the acquired mortgage servicing rights), and assumed liabilities with a fair
value of $45.1 million. The J&J Acquisition resulted in the recognition of $5.2
million of goodwill, which is being amortized using the straight-line method
over a life of ten years.
In June 1996, CSC-UK acquired all of the outstanding capital stock of
Greyfriars Group Limited, a mortgage lender based in Reading, England (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) in cash and 99,362 shares of Common
Stock valued at $2.5 million based upon the closing price of the Common Stock on
the date of such acquisition and incurred closing costs of $2.3 million (the
"Greyfriars Acquisition"). Greyfriars provides mortgage loans to borrowers that
generally have higher quality credit profiles than the Company's typical UK
borrowers. Pursuant to the Greyfriars Acquisition, the Company acquired assets
with a fair value of $225.4 million, consisting primarily of mortgage loans of
$221.2 million (inclusive of $29.2 million of value assigned to the acquired
mortgage servicing rights), and assumed liabilities with a fair value of $181.9
million. The Greyfriars Acquisition resulted in the recognition of $25.4 million
of goodwill, which is being amortized using the straight-line method over a life
of ten years.
In May 1997, CSC-UK acquired the assets of Midland & General PLC, a
London-based mortgage broker ("M&G"), in exchange for (pound sterling) 6.5
million ($10.6 million based on the Noon Buying Rate on the date of such
acquisition) (the "M&G Acquisition"). Pursuant to the M&G Acquisition, the
Company acquired assets with a fair value of approximately $764,000 consisting
primarily of property, plant & equipment. The M&G Acquisition
6
<PAGE> 8
resulted in the recognition of $10.2 million of goodwill, which is being
amortized using the straight-line method over a life of ten years. In connection
with the M&G Acquisition, the Company entered into a five-year non-compete
agreement with the former principals of M&G for (pound sterling) 3.0 million
($4.9 million), which is being amortized using the straight-line method over a
life of five years.
4. New Accounting Pronouncements
On January 1, 1997, the Company adopted 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.
The adoption of SFAS No. 125 has not had a material impact on the Company's gain
on sale from securitizations as they are currently structured.
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share" which simplifies the standards for computing
earnings per share previously found in Accounting Principles Board Opinion No.
15, "Earnings per Share" and makes them comparable to international earnings per
share standards. SFAS No. 128 is effective for historical statements issued for
periods ending after December 15, 1997. The Company has not completed its
analysis of this statement.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting on Comprehensive Income" which establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. SFAS No. 130 is effective for historical statements
issued for periods begining after December 15, 1997. The Company has not
completed its analysis of this statement.
Additionally, in June 1997, the Financial Accounting Standards Board
issued SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. This statement requires that a public business enterprise report
a measure of segment profit or loss, certain specific revenue and expense
items and segment assets. SFAS No. 131 is effective for historical statements
issued for periods begining after December 15, 1997. The Company has not
completed its analysis of this statement.
5. Earnings Per Share
Primary earnings per share are based on the net earnings applicable to
Common Stock divided by the weighted average number of Common Stock and Common
Stock equivalents outstanding during the period, after giving effect to a 100%
stock dividend effected in July 1996. Fully diluted earnings per share are based
on the net earnings applicable to Common Stock adjusted for the preferred
dividends paid on the Series A Preferred Stock (as defined below) and after-tax
interest expense on the Convertible Debentures (as defined below), divided by
the weighted average number of Common Stock and Common Stock equivalents
outstanding during the period increased by the assumed conversion of the
Convertible Debentures and Series A Preferred Stock into shares of Common Stock.
6. 6% Convertible Preferred Stock, Series A
In April 1997, the Company completed the private placement of 5,000
shares of its 6% Convertible Preferred Stock, Series A (the "Series A Preferred
Stock"), with a liquidation preference (the "Liquidation Preference") of $10,000
per share, and related five-year warrants to purchase 500,000 shares of Common
Stock (the "Warrants"). The Series A Preferred Stock is redeemable at the option
of the Company at a redemption price equal to 120% of the Liquidation Preference
under certain circumstances. The Series A Preferred Stock is convertible into
shares of Common Stock, subject to certain restrictions and redemption rights,
at a conversion price equal to the lowest daily sales price of the Common Stock
during the four consecutive trading days immediately preceding such conversion,
discounted by up to 4% and subject to certain adjustments. As of July 31, 1997,
an aggregate of 1,689 shares of Series A Preferred Stock had been converted
into an aggregate of 1,310,909 shares of Common Stock. In June 1997, a
preferred stock dividend of $509,698 was paid to the holders of the Series A
Preferred Stock in the form of 26,307 shares of the Company's Common Stock.
Additionally, there was recognition of the effect of a beneficial conversion
feature related to the Series A Preferred Stock of $557,176.
7
<PAGE> 9
7. Conversion Transactions
In April 1997, the Company induced the conversion of $14.0 million
aggregate principal amount of its 6% Convertible Subordinated Debentures due
2006 (the "Convertible Debentures") resulting in the issuance upon conversion of
533,332 shares of Common Stock (at a conversion price of $26.25 per share)
pursuant to the terms of the Convertible Debentures. To induce conversion, the
Company issued an additional 342,708 shares of Common Stock and paid the holders
of the induced Convertible Debentures $420,000 in cash. In the second quarter of
1997, these transactions resulted in the reduction of Convertible Debentures by
$14.0 million, a charge to interest expense of $4.7 million related to the fair
market value of the 342,708 inducement shares ($4.3 million) and the cash
payment and an increase in stockholders' equity of $18.3 million due to the
issuance of the conversion shares and the inducement shares. The net effect of
these transactions was an increase of $13.6 million to stockholders' equity in
the second quarter of 1997. As of July 31, 1997, an aggregate of $14.1 million
of Convertible Debentures had been converted into Common Stock, including the
induced conversion described above.
8. Senior Notes
In May 1997, the Company issued $300.0 million aggregate principal
amount of 12 3/4% Senior Notes due June 1, 2004 (the "Notes") in a private
placement. The Notes are not redeemable prior to maturity except in limited
circumstances. The Company has an effective registration statement pursuant to
which it is offering to exchange all outstanding Notes for a like principal
amount of 12 3/4% Series A Senior Notes due 2004 (the "New Notes"). The New
Notes will have the same terms as the Notes in all material respects, except for
certain transfer restrictions and registration rights relating to the Notes.
8
<PAGE> 10
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements. The
Company undertakes no obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of anticipated or unanticipated events.
GENERAL
OVERVIEW
The Company is a consumer finance company engaged in the business of
originating, purchasing, selling and servicing mortgage loans secured primarily
by one- to four-family residences. The Company primarily generates income from
gain on sale of loans sold through securitizations, gains recognized from
premiums on loans sold through whole loan sales to institutional purchasers,
interest earned on loans held for sale, excess mortgage servicing receivables,
origination fees received as part of the loan application process and fees
earned on loans serviced. Gain on sale of loans includes gain on securitization
representing the fair value of the interest-only and residual certificates that
the Company receives upon the sale of loans through securitizations in the US,
which are reflected as trading securities, and the value of mortgage servicing
receivables that it recognizes through UK securitizations. Included in gain on
sale of loans is the present value of the differential between the interest rate
payable by an obligor on a loan over the interest rate passed through to the
purchaser acquiring an interest in such loan, less applicable recurring fees,
including the costs of credit enhancements and trustee fees. Gain on sale of
loans constituted approximately 69.7% and 79.3% of total revenues for the six
months ended June 30, 1997 and 1996, respectively. The Company completed its
first US securitization in the first quarter of 1995 and its first UK
securitization in the first quarter of 1996. The Company anticipates that it
will continue to sell a substantial portion of its loans through securitizations
and into loan purchase facilities, with the balance sold in whole loan sales to
institutional purchasers.
The following table sets forth selected operating data for the Company
for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
1997 1996 1997 1996
--------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
ORIGINATION AND SALE DATA:
Loans originated and purchased:
US .......................... $ 452,959 $ 289,963 $ 841,029 $ 456,684
UK(1)........................ 117,237 41,373 216,420 68,795
---------- ---------- ---------- ----------
Total...................... $ 570,196 $ 331,336 $1,057,449 $ 525,479
========== ========== ========== ==========
Loans sold:
US .......................... $ 465,633 $ 270,932 $ 829,851 $ 446,724
UK(2)........................ 117,711 41,373 235,084 68,795
---------- ---------- ---------- ----------
Total...................... $ 583,344 $ 312,305 $1,064,935 $ 515,519
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
As of June 30, As of December 31,
1997 1996
---------------------- ----------------------
Dollars in % of Dollars in % of
Thousands Serviced Thousands Serviced
Portfolio Portfolio
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PORTFOLIO DATA:
US serviced portfolio(3)....... $2,116,316 100.0% $1,470,344 100.0%
========== ========== ========== ==========
30-59 days delinquent........ $ 36,142 1.7% $ 55,182 3.7%
60-89 days delinquent........ 20,226 1.0% 20,358 1.4%
90 days or more delinquent... 104,538 4.9% 55,684 3.8%
---------- ---------- ---------- ----------
Total US delinquencies......... $ 160,906 7.6% $ 131,224 8.9%
========== ========== ========== ==========
US REO property................ $ 1,583 0.1% $ 1,010 0.1%
========== ========== ========== ==========
UK serviced portfolio.......... $ 638,349 100.0% $ 511,140 100.0%
========== ========== ========== ==========
30-59 days delinquent........ $ 25,335 4.0% $ 24,142 4.7%
60-89 days delinquent........ 17,226 2.7% 10,667 2.1%
90 days or more delinquent... 63,103 9.9% 43,941 8.6%
---------- ---------- ---------- ----------
Total UK delinquencies......... $ 105,664 16.6% $ 78,750 15.4%
========== ========== ========== ==========
</TABLE>
(1) 1996 data excludes UK loan originations and purchases of $51.9 million and
$190.5 million due to loans acquired as a result of the J&J Acquisition and
the Greyfriars Acquisition, respectively.
(2) 1996 data excludes UK loan sales of $47.5 million and $153.7 million due to
loans acquired as a result of the J&J Acquisition and the Greyfriars
Acquisition, respectively.
(3) Excludes loans serviced pursuant to contract servicing and master servicing
agreements.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
Total revenues increased $36.7 million or 95.3% to $75.2 million for
the three months ended June 30, 1997 from $38.5 million for the comparable
period in 1996. This increase was due primarily to higher gains on sale of loans
resulting from increased combined US and UK loan origination and purchase volume
and volume of loans sold compared to the prior period and increased interest
income resulting from higher average balances of loans held for sale, as well as
increased discount accretion recognized on higher average balances of mortgage
servicing receivables.
Gain on sale of loans increased $21.4 million or 73.3% to $50.6 million
for the three months ended June 30, 1997 from $29.2 million for the comparable
period in 1996. This increase was due primarily to increased volume of US loan
sales at higher average gains ($465.6 million of loan sales at a weighted
average gain of 7.5% ($35.0 million) in the three months ended June 30, 1997 as
compared to $270.9 million of loan sales at a weighted average gain of 5.2%
($14.0 million) in the comparable period in 1996). Additionally, the increase
was due to CSC-UK's gain on sale of loans of $15.7 million representing a 13.3%
gain on the $117.7 million of loan sales in the three months ended June 30, 1997
compared to gain on sale of loans of $15.3 million representing a 37.0% gain on
the $41.4 million (excludes $201.2 million of loan sales for loans acquired as a
result of the J&J Acquisition and the Greyfriars Acquisition) of loan sales in
the comparable period in 1996. The decrease in the UK gain on sale margin was
a result of a $15.0 million valuation allowance taken against gain on sale to
increase existing reserves related to recorded mortgage servicing receivables
due to new Non-Status Guidelines in the UK (discussed below), as well as the
Company's introduction of new loan products that target higher credit quality
borrowers and new loan products that provide for lower prepayment fees. The
increase in the US gain on sale margin was primarily a result of higher average
gains recognized on the Company's sale of its
9
<PAGE> 11
Sav*-A-Loan(R) product (loans to homeowners with little or no equity in their
property but who possess a favorable credit profile and debt-to-income ratio) of
$192.9 million at an average net gain of 10.4%. The Sav*-A-Loan(R) product
represented 41.4% of the Company's US loan sales and 57.4% of the gain on sale
of loans during the second quarter of 1997. The increase was offset by higher
premiums paid on the Company's core home equity product correspondent
originations, increasing from an average of 5.1% for the second quarter of
1996 to 5.9% for the second quarter of 1997.
The Company anticipates that the UK gain on sale margin will continue
to decrease in the future as a result of the introduction of such new loan
products and as a result of the Company's discontinuance of loans that utilize
the Rule of 78s method commencing in August 1997. In March 1997, the Company
received a letter from the Office of Fair Trading (the "OFT") which has
responsibility 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, including
the appropriateness of standard/concessionary rate structures, as well as the
calculation of prepayments using the Rule of 78s method. Following the receipt
of the letter, the Company commenced a review and evaluation of its practices
with respect to each issue raised in the letter and entered into discussions
with the OFT regarding its concerns raised in the letter.
On July 18, 1997, the Director General of the OFT issued "Non-Status
Lending Guidelines for Lenders and Brokers" (the "Non-Status Guidelines") that
are applicable to mortgage lenders like CSC-UK that focus on lending to
individuals who are unable or unwilling to obtain mortgage financing from
conventional mortgage sources.
The new Non-Status Guidelines highlight some of the main practices that
the OFT considers to be inappropriate, whether or not lawful. The OFT has stated
that if lenders and/or brokers continue these practices, the OFT will take
regulatory action against them. The majority of these practices are either (i)
not applicable to the Company's UK operations or (ii) practices in which the
Company believes itself to be in compliance or easily able to modify its
operations in order to comply with the new Non-Status Guidelines. In the new
Non-Status Guidelines, however, the OFT has announced that (i) dual interest
rate structures involving a large differential between the two interest rates
are inappropriate and should be discontinued and (ii) the Rule of 78s method of
calculating prepayments is inappropriate in the non-status lending market,
should be discontinued at the earliest opportunity and should not be applied to
existing loan agreements without some form of cap to ensure payments are not
excessive. Furthermore, the new Non-Status Guidelines stress that lenders who
wish to recoup administrative costs associated with defaults should do so in
accordance with a published scale of charges and with respect to prepayments,
charges for early redemption should do no more than cover the lender's
unrecovered administrative and other costs incurred to the date of prepayment.
Although the Company is still in the process of evaluating the new
Non-Status Guidelines and cannot at this time predict the impact of conforming
its operations to the Non-Status Guidelines, the Company has eliminated the
concessionary/standard rate in its new loan programs and replaced it with a
single rate. The Company anticipates that the average single rate that the
Company will charge will be higher than the average concessionary rate and lower
that the average standard rate that the Company had charged previously. Based on
prior discussions with the OFT, the Company had previously determined that it
would discontinue originating loans that calculate prepayments using the Rule of
78s method commencing in August 1997. In the future, the Company anticipates
that it will calculate prepayments using alternative methods in accordance with
the new Non-Status Guidelines. The Company plans to continue its discussions
with the OFT regarding the effect of the new Non-Status Guidelines on the
Company's existing loan agreements.
The Company commenced broadening its UK product offerings with products
that calculate prepayments without using the Rule of 78s in anticipation of
potential regulatory initiatives like those set
10
<PAGE> 12
forth in the Non-Status Guidelines. The elimination of the
concessionary/standard rate structure and Rule of 78s method could have a
negative impact on profit margins for the Company's UK loans which 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 addition, there can be no assurance as to the
outcome of discussions with the OFT regarding the new Non-Status Guidelines
relating to Rule of 78s calculations under the Company's existing loan
agreements or that the Company will not be required to revise the terms of such
loan agreements. Such revisions, if they occur, could have a material adverse
effect on the Company's results of operations and financial condition. In
response to the announcement of the new Non-Status Guidelines, the Company took
a $15.0 million valuation allowance against gain on sale to increase existing
reserves related to recorded mortgage servicing receivables in the second
quarter of 1997. There can be no assurance that such additional reserve will be
sufficient to offset any negative impact that changes resulting from the new
Non-Status Guidelines may have on the carrying value of the Company's recorded
mortgage servicing receivables.
Interest income increased $9.8 million or 150.8% to $16.3 million for the
three months ended June 30, 1997 from $6.5 million for the comparable period in
1996. This increase was due primarily to the increased balance of loans held for
sale during the three months ended June 30, 1997 resulting from the increased
loan origination and purchase volume during the period, as well as the accretion
of the discount recorded on higher average balances of mortgage servicing
receivables.
Mortgage origination income remained unchanged at $1.4 million for the
three months ended June 30, 1997 and for the comparable period in 1996. Mortgage
origination income as a percentage of domestic originations decreased to 0.3%
for the three months ended June 30, 1997 from 0.5% for the comparable period in
1996 due primarily to lower fees earned on the Company's domestic broker
originations. It is anticipated that the Company's domestic origination fees as
a percentage of loans originated will continue to decrease in the future.
Mortgage origination income as a percentage of revenues decreased to 1.9% for
the three months ended June 30, 1997 from 3.5% for the comparable period in
1996.
Servicing income increased $293,688 or 36.9% to $1.1 million for the three
months ended June 30, 1997 from $795,149 for the comparable period in 1996. This
increase was due primarily to an increase in the average balances of US loans
serviced to $1.9 billion for the three months ended June 30, 1997 from $587.9
million for the comparable period in 1996 and the increase in the average
balances of UK loans serviced to $602.9 million for the three months ended June
30, 1997 from $198.4 million for the comparable period in 1996.
Total expenses increased $46.5 million or 237.2% to $66.1 million for the
three months ended June 30, 1997 from $19.6 million for the comparable period in
1996. This increase was due primarily to increased salaries, interest expense,
selling expenses and operating expenses related to increased loan origination
and purchase volume during the three months ended June 30, 1997. Total expenses
as a percentage of total revenues increased to 87.9% for the three months ended
June 30, 1997 from 50.9% for the comparable period in 1996. Excluding the effect
of two one-time charges, total expenses as a percentage of total revenues would
have been 68.1%. This increase was due primarily to increased interest expense
during the three months ended June 30, 1997. During the second quarter of 1997,
amortization of goodwill related to the UK Acquisition, the J&J Acquisition, the
Greyfriars Acquisition and the M&G Acquisition totaled $1.4 million.
Salaries and employee benefits increased $7.4 million or 80.4% to $16.6
million for the three months ended June 30, 1997 from $9.2 million for the
comparable period in 1996. This increase was due primarily to increased staffing
levels to 924 US employees at June 30, 1997 compared to 367 US employees at June
30, 1996 and the increased staffing levels associated with the UK operations
(543 UK employees at June 30, 1997 compared to 248 UK employees at June 30,
1996) resulting from the growth in loan origination and purchase volume,
geographic expansion and increased loans serviced, as well as the J&J
Acquisition, the Greyfriars Acquisition and the M&G Acquisition.
Interest expense increased $15.6 million or 331.9% to $20.3 million for the
three months ended June 30, 1997 from $4.7 million for the comparable period in
1996. This increase was due primarily to the interest costs associated with the
$143.8 million of Convertible Debentures issued during the middle of the second
quarter of 1996 (as compared to a full quarter impact in the second quarter of
1997) and the $300.0
11
<PAGE> 13
million of Notes issued during the second quarter of 1997, as well as a one-time
charge of $4.7 million related to the induced conversion of $14.0 million of the
Convertible Debentures.
Selling and other expenses increased $22.9 million or 458.0% to $27.9
million for the three months ended June 30, 1997 from $5.0 million for the
comparable period in 1996. This increase was due primarily to increased selling
costs of $11.2 million or 373.3% to $14.2 million for the three months ended
June 30, 1997 from $3.0 million for the comparable period in 1996 as a result of
increased selling and commission costs for UK loan originations (primarily as a
result of the higher commissions paid to brokers who have entered into right of
first refusal agreements with the Company) and increased professional fees,
travel and entertainment and occupancy costs incurred to support the increased
loan origination and purchase volume.
An extraordinary gain of $425,000, net of taxes, was recorded as a result
of the early extinguishment of the $25.0 million note due December 1997. The
Company recognized as a gain the discount received from the lender as a result
of the early extinguishment.
Net earnings applicable to common stock decreased $8.2 million or 73.9% to
$2.9 million for the three months ended June 30, 1997 from $11.1 million for the
comparable period in 1996. This decrease in net earnings was due primarily to
two one-time charges. First, as discussed above, the Company incurred a non-tax
deductible charge of $4.7 million related to the induced conversion of $14.0
million of the Convertible Debentures. Second, the Company took an after-tax
valuation allowance against gain on sale of $9.1 million ($15.0 million pre-tax)
to increase reserves for recently announced UK regulatory guidelines. In
addition, preferred stock dividends of $1.1 million were paid to the holders of
the Series A Preferred Stock. This decrease was partially offset by increased
revenues resulting from an increase in US and UK loan origination and purchase
volume and volume of loans sold during the three months ended June 30, 1997 as
the Company expanded its geographic base and further penetrated existing
markets.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Total revenues increased $92.5 million or 137.6% to $159.7 million for the
six months ended June 30, 1997 from $67.2 million for the comparable period in
1996. This increase was due primarily to higher gains on sale of loans resulting
from increased combined US and UK loan origination and purchase volume and
volume of loans sold compared to the prior period and increased interest income
resulting from higher average balances of loans held for sale, as well as
increased discount accretion recognized on higher average balances of mortgage
servicing receivables.
Gain on sale of loans increased $58.0 million or 108.8% to $111.3 million
for the six months ended June 30, 1997 from $53.3 million for the comparable
period in 1996. This increase was due primarily to increased volume of US loan
sales at higher average gains ($829.8 million of loan sales at a weighted
average gain of 7.5% ($61.8 million) in the six months ended June 30, 1997 as
compared to $446.7 million of loan sales at a weighted average gain of 5.8%
($25.8 million) in the comparable period in 1996). Additionally, the increase
was due to CSC-UK's gain on sale of loans of $49.6 million representing a 21.1%
gain on the $235.1 million of loan sales in the six months ended June 30, 1997
compared to gain on sale of loans of $27.5 million representing a 40.0% gain on
the $68.8 million of loan sales (excludes $201.2 million of loan sales for loans
acquired as a result of the J&J Acquisition and the Greyfriars Acquisition) in
the comparable period in 1996. The decrease in the UK gain on sale margin was a
result of a $15.0 million valuation allowance taken against gain on sale to
increase existing reserves related to recorded mortgage servicing receivables
due to new Non-Status Guidelines in the UK, as well as the Company's
introduction of new loan products that target higher credit quality borrowers
and new loan products that provide for lower prepayment fees. The increase in
the US gain on sale margin was primarily a result of higher average gains
recognized on the Company's sale of its Sav*-A-Loan(R) product of $321.7 million
at an average net gain of 10.2%. The Sav*-A-Loan(R) product represented 38.8% of
the Company's US loan sales and 53.6% of the gain on sale of loans during the
first six months of 1997. The increase was offset by higher premiums paid on the
Company's core home equity product correspondent originations, increasing from
an average of 4.9% for the first six months of 1996 to 6.1% for the first six
months of 1997. The Company anticipates that the UK gain on sale margin will
continue to decrease in the future as a result of the introduction of new loan
products and as a result of the Company's discontinuance of loans that utilize
the Rule of 78s method commencing in August 1997.
Interest income increased $26.2 million or 275.8% to $35.7 million for the
six months ended June 30, 1997 from $9.5 million for the comparable period in
1996. This increase was due primarily to the increased balance of loans held for
sale during the six months ended June 30, 1997 resulting from the increased loan
origination and purchase volume during the period, as well as
12
<PAGE> 14
the accretion of the discount recorded on higher average balances of mortgage
servicing receivables.
Mortgage origination income remained unchanged at $2.2 million for the
six months ended June 30, 1997 and for the comparable period in 1996. Mortgage
origination income as a percentage of domestic originations decreased to 0.3%
for the six months ended June 30, 1997 from 0.5% for the comparable period in
1996 due primarily to lower fees earned on the Company's domestic broker
originations. It is anticipated that the Company's domestic origination fees as
a percentage of loans originated will continue to decrease in the future.
Mortgage origination income as a percentage of revenues decreased to 1.4% for
the six months ended June 30, 1997 from 3.3% for the comparable period in 1996.
Servicing income increased $0.4 million or 28.6% to $1.8 million for
the six months ended June 30, 1997 from $1.4 million for the comparable period
in 1996. This increase was due primarily to an increase in the average balances
of US loans serviced to $1.8 billion for the six months ended June 30, 1997 from
$500.9 million for the comparable period in 1996 and the increase in the average
balances of UK loans serviced to $574.7 million for the six months ended June
30, 1997 from $128.2 million for the comparable period in 1996.
Total expenses increased $90.2 million or 277.5% to $122.7 million for
the six months ended June 30, 1997 from $32.5 million for the comparable period
in 1996. This increase was due primarily to increased salaries, interest
expense, selling expenses and operating expenses related to increased loan
origination and purchase volume during the six months ended June 30, 1997. Total
expenses as a percentage of total revenues increased to 76.8% for the six months
ended June 30, 1997 from 48.4% for the comparable period in 1996. Excluding the
effect of two one-time charges, total expenses as a percentage of total revenues
would have been 67.5%. This increase was due primarily to increased interest
expense during the six months ended June 30, 1997. During the first six months
of 1997, amortization of goodwill related to the UK Acquisition, the J&J
Acquisition, the Greyfriars Acquisition and the M&G Acquisition totaled $2.6
million.
Salaries and employee benefits increased $17.3 million or 118.5% to
$31.9 million for the six months ended June 30, 1997 from $14.6 million for the
comparable period in 1996. This increase was due primarily to increased staffing
levels to 924 US employees at June 30, 1997 compared to 367 US employees at June
30, 1996 and the increased staffing levels associated with the UK operations
(543 UK employees at June 30, 1997 compared to 248 UK employees at June 30,
1996) resulting from the growth in loan origination and purchase volume,
geographic expansion and increased loans serviced, as well as the J&J
Acquisition, the Greyfriars Acquisition and the M&G Acquisition.
Interest expense increased $30.3 million or 473.4% to $36.7 million for
the six months ended June 30, 1997 from $6.4 million for the comparable period
in 1996. This increase was due primarily to the interest costs associated with
the $143.8 million of Convertible Debentures issued during the second quarter of
1996 and the $300.0 million Notes issued during the second quarter of 1997, as
well as a one-time charge of $4.7 million related to the induced conversion of
$14.0 million of the Convertible Debentures.
Selling and other expenses increased $41.1 million or 395.2% to $51.5
million for the six months ended June 30, 1997 from $10.4 million for the
comparable period in 1996. This increase was due primarily to increased selling
costs of $21.1 million or 479.5% to $25.5 million for the six months ended June
30, 1997 from $4.4 million for the comparable period in 1996 as a result of
increased selling and commission costs for UK loan originations (primarily as a
result of the higher commissions paid to brokers who have entered into right of
first refusal agreements with the Company) and increased professional fees,
travel and entertainment and occupancy costs incurred to support the increased
loan origination and purchase volume.
An extraordinary gain of $425,000, net of taxes, was recorded as a
result of the early extinguishment of the $25.0 million note due December 1997.
The Company recognized as a gain the discount received from the lender as a
result of the early extinguishment.
Net earnings applicable to common stock decreased $0.7 million or 3.4%
to $19.7 million for the six months ended June 30, 1997 from $20.4 million for
the comparable period in 1996. This decrease was due primarily to the two
one-time charges and preferred stock dividends, as previously discussed,
13
<PAGE> 15
partially offset by increased revenues resulting from an increase in US and UK
loan origination and purchase volume and volume of loans sold during the three
months ended June 30, 1997 as the Company expanded its geographic base and
further penetrated existing markets.
FINANCIAL CONDITION
June 30, 1997 Compared to December 31, 1996
Cash and cash equivalents increased $45.9 million or 2,185.7% to $48.0
million at June 30, 1997 from $2.1 million at December 31, 1996. This increase
was due primarily to the issuance of the Series A Preferred Stock with net
proceeds of $49.3 million in April 1997 and the issuance of the $300.0 million
of Notes in May 1997. This increase in cash was offset by the repayment of
$150.0 million outstanding under the Senior Secured Facility (as defined below),
$25.0 million note related to the UK Greenwich Facility (as defined below), $6.4
million of premium advances under the US Greenwich Facility (as defined below),
and $16.0 million outstanding under the working capital portion of the UK
Greenwich Facility and $5.0 million under the Bank of Boston Facility (as
defined below).
There were no securities purchased under agreements to resell at June
30, 1997 as compared to $154.2 million at December 31, 1996. Securities
purchased under agreements to resell represent US Treasury securities borrowed
from the repo desk of a counterparty to facilitate the delivery of US Treasury
securities sold short as part of the Company's strategy to manage interest rate
risk on loan originations. This decrease was due to the closing of the Company's
open positions prior to June 30, 1997.
Due from broker for securities transactions was $105.3 million at June
30, 1997. Due from broker for securities transactions represent US Treasury
securities sold short on June 30, 1997, while the trade did not settle until
July 1, 1997. This transaction was part of the Company's strategy to manage
interest rate risk on loan originations. There was no corresponding balance at
December 31, 1996.
Available-for-sale securities represents the fair value less a discount
for the restrictions on the resale of such stock of the 946,786 shares of common
stock of IMC Mortgage Company ("IMC") owned by the Company at June 30, 1997.
Available-for-sale securities decreased $2.0 million or 13.7% to $12.6 million
at June 30, 1997 from $14.6 million at December 31, 1996 primarily due to the
Company selling 144,124 shares of IMC stock in a public offering.
Mortgage servicing receivables increased $28.0 million or 11.5% to
$270.9 million at June 30, 1997 from $242.9 million at December 31, 1996. The
increase represents $100.9 million of mortgage servicing receivables recognized
as a result of loans sold in the UK and the US with servicing rights retained.
Such increase was primarily offset by the transfer of $47.4 million of mortgage
servicing receivables to trading securities as a result of US securitization
transactions, the $15.0 million valuation allowance due to the new Non-Status
Guidelines in the UK, and amortization.
Trading securities, which consist of interest-only and residual
certificates, increased $105.9 million or 102.6% to $209.1 million at June 30,
1997 from $103.2 million at December 31, 1996. This increase was due to the
$890.2 million of US securitizations completed during the six months ended June
30, 1997.
Prepaid commitment fees, which represent a fee paid to Greenwich (as
defined below) as a result of the UK Greenwich Facility entered into by CSC-UK
and Greenwich in March 1996, decreased $1.9 million or 5.3% to $34.0 million at
June 30, 1997 from $35.9 million at December 31, 1997 as a result of
amortization of such fee over the 20-year life of the UK Greenwich Facility.
Mortgage loans held for sale, net decreased $8.8 million or 8.6% to
$93.4 million at June 30, 1997 from $102.2 million at December 31, 1996. This
decrease was due primarily to the volume of UK loans sold exceeding loan
origination volume in the UK during the six months ended June 30, 1997.
Included in mortgage loans held for sale are $41.6 million and $12.8 million of
self-funded loans as of June 30, 1997 and December 31, 1996, respectively.
Credit enhancement deposits, which represent initial reserve funds
established on UK securitizations and sales into purchase facilities, increased
$16.2 million or 46.2% to $51.3 million at June
14
<PAGE> 16
30, 1997 from $35.1 million at December 31, 1996. This increase was due
primarily to $264.4 million of UK securitizations during the first six months of
1997.
Goodwill, net of amortization, increased $6.8 million or 14.3% to $54.3
million at June 30, 1997 from $47.5 million at December 31, 1996. This increase
was due primarily to the recording of $10.2 million of goodwill as a result of
the M&G Acquisition offset by the amortization of the goodwill recorded in
connection with the UK Acquisition, the J&J Acquisition, the Greyfriars
Acquisition and the M&G Acquisition.
Other assets increased $13.1 million or 30.1% to $56.6 million at June
30, 1997 from $43.5 million at December 31, 1996. This increase was due
primarily to an increase in UK other assets to $10.8 million at June 30, 1997
from $6.5 million at December 31, 1996 and deferred issuance costs of $9.4
million relating to the Notes.
Warehouse financing facilities outstanding decreased $37.6 million or
42.1% to $51.8 million at June 30, 1997 from $89.4 million at December 31, 1996.
This decrease was due primarily to the increased volume of loans sold utilizing
the warehouse facility as reflected in the decrease in mortgages loans held for
sale, net, the decrease in subwarehouse loans receivable from $14.9 million at
December 31, 1996 to $4.9 million at June 30, 1997 and the repayment of $16.0
million outstanding under the UK Greenwich Facility with the proceeds of the
Notes.
Securities sold but not yet purchased decreased $47.6 million or 31.1%
to $105.3 million at June 30, 1997 from $152.9 million at December 31, 1996.
Securities sold but not yet purchased represent US Treasury securities sold
short as part of the Company's strategy to manage interest rate risk on loan
originations.
Accounts payable and other liabilities increased $6.5 million or 12.9%
to $56.7 million at June 30, 1997 from $50.2 million at December 31, 1996. This
increase was due primarily to increased accrued interest expense related to the
$300.0 million of Notes issued in May 1997.
Allowance for losses decreased $0.3 million or 0.9% to $33.4 million at
June 30, 1997 from $33.7 million at December 31, 1996. This decrease was due
primarily to the transfer of $47.4 million of US mortgage servicing receivables
with $12.8 million of allowance for losses to trading securities as a result of
US securitization transactions, which are recorded net of such allowance for
losses. Excluding the impact of these transfers, the Company's allowance for
losses increased $7.1 million during the first six months of 1997.
Notes and loans payable increased $163.6 million or 119.9% to $300.1
million at June 30, 1997 from $136.5 million at December 31, 1996. This increase
was due to the issuance of the $300.0 million of Notes offset by the repayment
of $150.0 million outstanding under the Senior Secured Facility, $25.0 million
note related to the UK Greenwich Facility, $6.4 million of premium advances
under the US Greenwich Facility and $5.0 million under the Bank of Boston
Facility.
Stockholders' equity increased $85.5 million or 61.6% to $224.3 million
at June 30, 1997 from $138.8 million at December 31, 1996 due primarily to net
earnings of $20.8 million for the six months ended June 30, 1997 and an increase
in paid-in-capital of $69.8 million relating to the issuance of the Series A
Preferred Stock and the induced conversion of the Convertible Debentures. This
increase was offset by a reduction in unrealized gain on available-for-sale
securities, net of taxes of $1.2 million, a foreign currency translation
adjustment, net of taxes of $2.9 million and preferred dividends on Series A
Preferred Stock of $1.1 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business requires substantial cash to support its
operating activities. The Company's principal cash requirements include the
funding of loan originations and purchases, payment of interest expenses,
funding the overcollateralization requirements for securitizations, operating
expenses,
15
<PAGE> 17
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,
processing fees, net interest income and borrowings under its warehouse
facility, US purchase facilities, standby facilities and UK purchase facility to
meet its working capital needs and to fund acquisitions.
Adequate credit facilities and other sources of funding, including the
ability of the Company to sell loans, are essential to the continuation of the
Company's ability to originate and purchase loans. As a result of increased loan
originations and purchases and its growing securitization program, the Company
has operated, and expects to continue to operate, on a negative cash flow basis.
During the six months ended June 30, 1997 and 1996, the Company used operating
cash of $93.0 million and $41.2 million, respectively. Additionally, during the
six months ended June 30, 1997 and 1996, the Company used cash of $19.1 million
and $91.6 million, respectively, in investing activities. The Company's sale of
loans through securitizations has resulted in a gain on sale of loans through
securitizations recognized by the Company. The recognition of this gain on sale
has a negative impact on the cash flow of the Company because significant costs
are incurred upon closing of the transactions giving rise to such gain and the
Company is required to pay income taxes on the gain on sale in the period
recognized, although the Company does not receive the cash representing the gain
until later periods as the related loans are repaid or otherwise collected.
During the same periods, the Company received cash from financing activities of
$157.9 million and $136.0 million, respectively.
The Company is required to comply with various operating and financial
covenants as defined in the agreements described above, including maintaining an
adjusted leverage ratio of senior debt to adjusted tangible net worth of less
than 10:1 and an adjusted tangible net worth greater than $50.0 million. The
covenants in certain of the Company's sources of funding also restrict actions
by the Company and its subsidiaries, including, among other things (i) the
incurrence and existence of indebtedness, (ii) the incurrence and existence of
liens or other encumbrances, (iii) the payment of dividends and repurchases of
capital stock, (iv) investments, loans and advances, (v) the incurrence and
existence of contingent obligations, (vi) consolidations, mergers and sales of
assets, (vii) the incurrence and existence of payment restrictions affecting
subsidiaries, (viii) certain transactions with affiliates, (ix) changes in lines
of businesses, (x) transfers of assets to subsidiaries and (xi) the incurrence
and existence of negative pledges. The descriptions above of the covenants
contained in the Company's credit facilities and other sources of funding do not
purport to be complete and are qualified in their entirety by reference to the
exhibits filed with or incorporated by reference in the Company's Annual Report
on Form 10-K or the Company's Quarterly Reports on Form 10-Q. The continued
availability of funds provided to the Company under these agreements is subject
to the Company's continued compliance with these covenants. In addition, the
Notes, the Convertible Debentures and the Series A Preferred Stock permit the
holders of such securities to require the Company to purchase such securities
upon a change of control (as defined in the respective Indentures or the
Certificate of Designation, as the case may be).
The Company's business requires continual access to short- and
long-term sources of debt and equity capital. While management believes that it
will be able to refinance or otherwise repay its debt in the normal course of
business, there can be no assurance that existing lines of credit can be
extended or refinanced or that funds generated from operations will be
sufficient to satisfy such obligations.
The Company's cash requirements may be significantly influenced by
possible acquisitions or strategic alliances, although there are no present
agreements with respect to any significant acquisitions or strategic alliances.
The Company anticipates that it will need to raise additional cash
during the fourth quarter of 1997 through the issuance of additional debt or
equity securities or additional bank borrowings or a combination thereof. The
Company has no commitments for additional debt, equity or bank financings other
than as described herein 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.
Credit Facilities
16
<PAGE> 18
Warehouse Facility. The Company borrows funds on a short-term basis to
support the accumulation of loans prior to sale. These short-term borrowings are
made under a warehouse line of credit with a group of banks for which CoreStates
Bank N.A. ("CoreStates") serves as agent (the "Warehouse Facility"). Pursuant to
the Warehouse Facility, the Company has available a secured revolving credit
line of $72.0 million to finance the Company's origination or purchase of loans,
pending sale to investors or for holding certain loans in its own portfolio (the
"Revolving Credit Line"). The Revolving Credit Line is settled on a revolving
basis in conjunction with ongoing loan sales and bears interest at a variable
rate based on the prime and LIBOR rates (8.75% at June 30, 1997) based on (i) 25
basis points over the higher of either the prime rate or the federal funds rate
plus 50 basis points, or (ii) LIBOR (A) divided by the result of one minus the
stated maximum rate at which reserves are required to be maintained by Federal
Reserve System member banks, (B) plus 175 basis points, as periodically elected
by the Company. The outstanding balance of this portion of the Warehouse
Facility was $51.5 million at June 30, 1997. The Revolving Credit Line extends
through September 1997.
The Warehouse Facility also permits the Company to use up to 20.0% of
the Revolving Credit Line to provide subwarehouse lines of credit to certain
loan correspondents from whom the Company purchases loans. In July 1995, the
Company began lending funds on a short-term basis to assist in the funding of
loans originated by certain of the Company's loan correspondents. Each borrowing
under these subwarehouse credit lines has a term of not more than 30 days. The
Company requires personal guarantees of the credit line from the principals of
the related loan correspondents. At June 30, 1997, the aggregate balance of
loans outstanding under this program was $4.9 million, with applications pending
for an additional $14.0 million of loans.
The Company also has a loan and security agreement with CoreStates
whereby CoreStates agrees to lend the Company up to $10.0 million to fund loan
originations and purchases. Borrowings under the agreement bear interest at the
prime rate plus 25 basis points (8.75% at June 30, 1997) and are due upon
demand. The agreement terminates on September 30, 1997. There was no outstanding
balance under the loan and security agreement at June 30, 1997.
US Purchase Facilities and Standby Facilities. The Company has a $50.0
million loan purchase agreement (the "US Purchase Facility") with ContiTrade
Services Corporation ("ContiTrade") whereby the Company originates and then
sells loans to ContiTrade and retains the right to repurchase loans at a future
date for whole loan sales to institutional investors or for sales through
securitizations. This agreement extends through June 1999. There was no
principal balance of loans sold to and retained by ContiTrade at June 30, 1997
under the US Purchase Facility. In October 1996, the Company entered into a $5.0
million unsecured revolving credit facility with The First National Bank of
Boston (the "Bank of Boston Facility"). The Bank of Boston Facility bears
interest at a variable rate based on The First National Bank of Boston Base Rate
plus 50 basis points (9.0% at June 30, 1997). Advances under the Bank of Boston
Facility are due on October 24, 1997. The outstanding balance under this
facility was paid off with proceeds from the Notes.
In June 1996, the Company entered into a purchase and sale agreement
with Greenwich Capital Financial Products, Inc., an affiliate of Greenwich
Capital Markets, Inc. (referred to herein, including any affiliates as
"Greenwich"), effective as of February 2, 1996 (the "US Greenwich Facility"),
with respect to mortgage loans originated or purchased by the Company in the US.
Pursuant to the US Greenwich Facility, the Company sold loans to Greenwich which
were subsequently included in securitizations. In addition, the Company was
advanced amounts based on a percentage of the principal balance of the loans
sold to Greenwich. Advanced amounts outstanding under this facility bore
interest at a rate of LIBOR plus 175 basis points (7.66% at June 30, 1997). 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
17
<PAGE> 19
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. The
Company retains servicing rights on all loans sold pursuant to the US Greenwich
Facility.
UK Purchase Facility. In March 1996, CSC-UK entered into a mortgage
loan purchase agreement with Greenwich effective as of January 1, 1996 (the "UK
Greenwich Facility"), that includes a working capital facility with respect to
the funding of variable rate, residential mortgage loans originated or purchased
by CSC-UK in the UK and terminated a previous facility with Greenwich. Pursuant
to the UK Greenwich Facility and with certain exceptions, CSC-UK sells all of
the loans it originates to Greenwich which must buy such loans. CSC-UK and/or
Greenwich subsequently resells these loans through whole loan sales or
securitizations. The UK Greenwich Facility includes a working capital facility
pursuant to which CSC-UK is advanced amounts based on a percentage of the
principal balance of loans originated or purchased by CSC-UK and sold to
Greenwich, which advance may not exceed pound sterling 10.0 million in the
aggregate outstanding at any time. Outstanding amounts under this working
capital facility bear interest at a rate of LIBOR plus 255 basis points (8.46%
at June 30, 1997). This agreement expires as to the working capital facility on
December 31, 2000 and as to the purchase facility on December 31, 2015. Both
CSC-UK and Greenwich are prohibited from entering into substantially similar
transactions with other parties. CSC-UK agreed to pay a fee to Greenwich in
connection with the UK Greenwich Facility in the aggregate amount of $38.0
million evidenced by two notes bearing interest at a rate of 6.2%, $13.0 million
of which was paid in December 1996 and $25.0 million of which was due in
December 1997, but was paid in May 1997. Due to the early extinguishment of
debt, an extraordinary gain of $425,000, net of taxes, was recognized in the
second quarter of 1997. Such fee is amortized over the life of the UK Greenwich
Facility. There was no outstanding balance under the working capital facility
portion of the UK Greenwich Facility at June 30, 1997.
Convertible Debentures
In May 1996, the Company issued $143.8 million of 6% Convertible
Subordinated Debentures due 2006 convertible at any time into shares of Common
Stock, currently at a conversion price of $26.25 per share, subject to
adjustment. The terms of the indenture governing the Convertible Debentures do
not limit the incurrence of additional indebtedness by the Company, nor do they
limit the Company's ability to make payments such as dividends. As of July 31,
1997, an aggregate of $14.1 million principal amount of Convertible Debentures
had been converted into Common Stock.
In April 1997, the Company induced the conversion of $14.0 million
aggregate principal amount of its Convertible Debentures resulting in the
issuance upon conversion of 533,332 shares of Common Stock (at a conversion
price of $26.25 per share) pursuant to the terms of the Convertible Debentures.
To induce conversion, the Company issued an additional 342,708 shares of Common
Stock and paid the holders of the induced Convertible Debentures $420,000 in
cash. In the second quarter of 1997, these transactions resulted in the
reduction of Convertible Debentures by $14.0 million, a charge to earnings of
$4.7 million related to the fair market value of such 342,708 inducement shares
($4.3 million) and such cash payment and an increase in stockholders' equity of
$18.3 million due to the issuance of the conversion shares and the inducement
shares. The net effect of these transactions was an increase of $13.6 million to
stockholders' equity in the second quarter of 1997.
6% Convertible Preferred Stock, Series A
In April 1997, the Company completed the private placement of 5,000
shares of its Series A Preferred Stock, with a Liquidation Preference of $10,000
per share, and related five-year Warrants to purchase 500,000 shares of Common
Stock. The Series A Preferred Stock is redeemable at the option of the Company
at a redemption price equal to 120% of the Liquidation Preference under certain
circumstances. The Series A Preferred Stock is convertible into shares of Common
Stock, subject to certain restrictions and redemption rights, at a conversion
price equal to the lowest daily sales price of the Common Stock during the four
consecutive trading days immediately preceding such conversion,
18
<PAGE> 20
discounted by up to 4% and subject to certain adjustments. As of July 31, 1997,
an aggregate of 1,689 shares of Series A Preferred Stock had been converted
into an aggregate of 1,310,909 shares of Common Stock.
Senior Notes
In May 1997, the Company issued $300.0 million aggregate principal
amount of 12 3/4% Senior Notes due 2004 in a private placement. The Notes are
not redeemable prior to maturity except in limited circumstances. The Company
has an effective registration statement pursuant to which it is offering to
exchange all outstanding Notes for a like principal amount of 12 3/4% Series A
Senior Notes due 2004. The New Notes will have the same terms as the Notes in
all material respects, except for certain transfer restrictions and registration
rights relating to the Notes.
All references herein to "$" are to United States dollars; all
references to "(pound sterling)" are to British Pounds Sterling. Unless
otherwise specified, translation of amounts from British Pounds Sterling to
United States dollars has been made herein using exchange rates at the end of
the period for which the relevant statements are prepared for balance sheet
items and the weighted average exchange rates for the relevant period for
statement of operations items, each based on the noon buying rate in New York
City for cable transfers in foreign currencies as certified for customs purposes
by the Federal Reserve Bank of New York.
19
<PAGE> 21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to various legal proceedings arising out of the
ordinary course of its business. Management believes that none of these actions,
individually or in the aggregate, will have a material adverse effect on the
results of operations or financial condition of the Company.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Stockholders was held on June 4, 1997.
(b) Elected two directors to hold office until the 2000 Annual Meeting, and
in each case until their successors are elected and qualified.
ELECTED DIRECTORS FOR AGAINST UNVOTED
----------------- --- ------- -------
Robert M. Stata* 26,305,816 18,325 3,420,181
David A. Steene 26,305,716 18,425 3,420,181
INCUMBENT DIRECTORS
-------------------
Robert Grosser
Robert C. Patent
Asher Fensterheim
Jonah L. Goldstein
Arthur P. Gould
Hollis W. Rademacher
* Mr. Stata resigned from the Board of Directors, effective July 29,
1997, and the Board appointed Steven M. Miller to fill the vacancy.
(c) Stockholders approved an amendment to the Company's Certificate of
Incorporation to increase the Company's authorized Common Stock by
50,000,000 shares to an aggregate of 100,000,000 shares and the
Company's authorized Preferred Stock by 5,000,000 shares to an
aggregate of 10,000,000 shares as follows:
Number of votes for 23,707,823
Number of votes against 124,901
Number of abstentions 8,170
Number of broker non-votes 2,483,247
Number of shares not voted 3,420,181
Stockholders approved the Company's 1997 Stock Option Plan and to
reserve 1,500,000 shares for issuance under the plan (subject to
antidilution adjustments specified in the plan) as follows:
Number of votes for 20,915,800
Number of votes against 2,907,774
Number of abstentions 17,320
Number of broker non-votes 2,483,247
Number of shares not voted 3,420,181
20
<PAGE> 22
Stockholders approved and ratified the selection of KPMG Peat Marwick
LLP as independent accountants of the Company for the fiscal year
ending December 31, 1997 as follows:
Number of votes for 26,145,234
Number of votes against 175,917
Number of abstentions 2,990
Number of shares not voted 3,420,181
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
3.1 Certificate of Incorporation of the Company, as amended,
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-4 filed with the Commission on
June 26, 1997.
4.1 Indenture, dated as of May 14, 1997, among the Company, CSC and
The Chase Manhattan Bank, incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form S-4 filed
with the Commission on June 26, 1997.
4.2 Registration Rights Agreement, dated as of May 14, 1997, among
the Company, CSC, CIBC Wood Gundy Securities Corp., Bear,
Stearns & Co. Inc. and Oppenheimer & Co., Inc., incorporated by
reference to Exhibit 4.2 to the Company's Registration Statement
on Form S-4 filed with the Commission on June 26, 1997.
10.1 1997 Stock Option Plan, incorporated by reference to Exhibit
10.53 to the Company's Registration Statement on Form S-4 filed
with the Commission on June 26, 1997.
11.1* Computation of Earnings Per Share
27.1* Financial Data Schedule
- ---------------------------
* Filed herewith
(b) Reports on Form 8-K
1. Form 8-K dated April 11, 1997 reporting the Company's private
placement of 5,000 shares of 6% Convertible Preferred Stock,
Series A.
2. Form 8-K dated April 30, 1997 reporting the Company's results for
the three months ended March 31, 1997.
3. Form 8-K dated April 30, 1997 reporting the Company's offering in a
private placement of $300.0 million Senior Notes due 2004.
4. Form 8-K dated May 20, 1997 reporting the Company's private
placement of $300.0 million 12 3/4% Senior Notes due 2004.
21
<PAGE> 23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cityscape Financial Corp.
-------------------------
Date: August 14, 1997 By:/s/ Tim S. Ledwick
--------------- ------------------
Tim S. Ledwick
Title: Chief Financial Officer
(as chief accounting officer and
on behalf of the registrant)
22
<PAGE> 24
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
3.1 Certificate of Incorporation of the Company, as amended,
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-4 filed with the Commission on
June 26, 1997.
4.1 Indenture, dated as of May 14, 1997, among the Company, CSC and
The Chase Manhattan Bank, incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form S-4 filed
with the Commission on June 26, 1997.
4.2 Registration Rights Agreement, dated as of May 14, 1997, among
the Company, CSC, CIBC Wood Gundy Securities Corp., Bear,
Stearns & Co. Inc. and Oppenheimer & Co., Inc., incorporated by
reference to Exhibit 4.2 to the Company's Registration Statement
on Form S-4 filed with the Commission on June 26, 1997.
10.1 1997 Stock Option Plan, incorporated by reference to Exhibit
10.53 to the Company's Registration Statement on Form S-4 filed
with the Commission on June 26, 1997.
11.1* Computation of Earnings Per Share
27.1* Financial Data Schedule
- ---------------------------
* Filed herewith
<PAGE> 1
EXHIBIT 11.1
CITYSCAPE FINANCIAL CORP.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
PRIMARY
<S> <C> <C> <C> <C>
NET EARNINGS APPLICABLE TO COMMON STOCK $ 2,944,603 $11,125,996 $19,739,394 $20,399,140
=========== =========== =========== ===========
Weighted average common shares 30,718,839 29,399,898 30,224,293 29,170,432
Adjustment to common shares:
Assume exercise of stock options 992,568 1,052,150 1,038,522 981,635
----------- ----------- ----------- -----------
WEIGHTED AVERAGE PRIMARY SHARES 31,711,407 30,452,048 31,262,815 30,152,067
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE $ 0.09 $ 0.37 $ 0.63 $ 0.68
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
1997 (1) 1996 1997 1996
----------- ----------- ----------- -----------
FULLY DILUTED
<S> <C> <C> <C> <C>
Net earnings applicable to common stock $11,125,996 $19,739,394 $20,399,140
Adjustment to net earnings:
Add: After-tax interest expense from Convertible
Debentures 800,353 2,675,284 800,353
Preferred Stock dividends - 1,066,874 -
----------- ----------- -----------
ADJUSTED NET EARNINGS APPLICABLE TO COMMON STOCK $11,926,349 $23,481,552 $21,199,493
=========== =========== ===========
Weighted average common shares 29,399,898 30,224,293 29,170,432
Adjustment to common shares:
Assume conversion of Convertible Debentures 3,309,786 5,471,237 1,654,892
Assume conversion of Convertible Preferred Stock - 1,456,600 -
Assume exercise of stock options 1,132,255 818,536 1,115,369
----------- ----------- -----------
WEIGHTED AVERAGE FULLY DILUTED SHARES 33,841,939 37,970,666 31,940,693
=========== =========== ===========
EARNINGS PER COMMON SHARE N/A (1) $ 0.35 $ 0.62 $ 0.66
======= =========== =========== ===========
</TABLE>
(1) Because the effect of the convertible preferred stock and convertible
subordinated debentures was antidilutive, fully diluted earnings per
share is not applicable.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
<CASH> 47,959,185
<SECURITIES> 221,657,391
<RECEIVABLES> 270,901,501
<ALLOWANCES> 0
<INVENTORY> 93,374,648
<CURRENT-ASSETS> 0<F1>
<PP&E> 23,389,278
<DEPRECIATION> 7,047,491
<TOTAL-ASSETS> 966,493,037
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 429,734,876
0
37
<COMMON> 317,125
<OTHER-SE> 223,981,869
<TOTAL-LIABILITY-AND-EQUITY> 966,493,037
<SALES> 0
<TOTAL-REVENUES> 159,705,486
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 85,980,969
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,706,076
<INCOME-PRETAX> 37,018,441
<INCOME-TAX> 16,637,173
<INCOME-CONTINUING> 20,381,268
<DISCONTINUED> 0
<EXTRAORDINARY> 425,000
<CHANGES> 0
<NET-INCOME> 19,739,394<F2>
<EPS-PRIMARY> 0.63
<EPS-DILUTED> 0.62
<FN>
<F1>
The Company makes use of an unclassified balance sheet style due to the nature
of its business. Current Assets and Current Liabilities are therefore reflected
as zero in accordance with the instructions of Appendix E to the EDGAR Filer
Manual.
</FN>
<FN>
<F2>
Net income represents net earnings applicable for common stock.
</FN>
</TABLE>
