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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
(Amendment No. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-27314
CITYSCAPE FINANCIAL CORP.
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Delaware 11-2994671
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(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
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565 Taxter Road, Elmsford, New York 10523-5200
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(Address of principal executive offices, including zip code)
(914) 592-6677
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(Registrant's telephone number, including area code)
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(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
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APPLICABLE ONLY TO CORPORATE ISSUERS:
29,649,133 shares $.01 par value, of
Common Stock, as of January 7, 1997
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CITYSCAPE FINANCIAL CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 1996
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Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition at September 30, 1996 and
December 31, 1995 2
Consolidated Statements of Operations for the nine months and the three months
ended September 30, 1996 and 1995 3
Consolidated Statements of Cash Flows for the nine months ended September 30,
1996 and 1995 4
Notes to Consolidated Financial Statements 5 - 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9 - 17
Part II - OTHER INFORMATION 18 - 21
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<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
(Unaudited) (Audited)
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<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,665,244 $ 3,598,549
Cash held in escrow 3,613,292 5,920,118
Prepaid commitment fees 36,547,000 --
Available-for-sale securities 13,963,648 --
Mortgage servicing receivables 166,921,735 24,561,161
Trading securities 79,487,000 15,571,455
Mortgage loans held for sale, net 133,728,381 73,852,293
Mortgage loans held for investment, net 5,387,575 1,024,204
Equipment and leasehold improvements, net 10,790,555 2,380,571
Goodwill 47,921,112 19,258,011
Other assets 47,103,280 6,352,619
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Total assets $ 550,128,822 $ 152,518,981
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LIABILITIES
Warehouse financing facilities $ 102,817,361 $ 74,901,975
Accounts payable and other liabilities 53,364,933 16,410,833
Allowance for loan losses 15,628,408 2,130,954
Income taxes payable 45,578,735 1,204,803
Standby financing facility 7,966,292 771,361
Notes and loans payable 68,000,000 --
Convertible subordinated debentures 143,750,000 --
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Total liabilities 437,105,729 95,419,926
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STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 5,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, $.01 par value, 50,000,000 shares
authorized; 29,639,452 and 28,900,732 issued and outstanding
at September 30, 1996 and December 31, 1995, respectively 296,395 289,007
Additional paid-in capital 57,563,708 44,838,143
Foreign currency translation adjustment 275,750 (6,219)
Unrealized gain on available-for-sale securities, net of taxes 8,095,139 --
Retained earnings 46,792,101 11,978,124
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Total stockholders' equity 113,023,093 57,099,055
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COMMITMENTS AND CONTINGENCIES
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Total liabilities and stockholders' equity $ 550,128,822 $ 152,518,981
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
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CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1996 1995 1996 1995
REVENUES (AUDITED)
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Gain on sale of loans $ 45,327,543 $ 11,775,108 $ 98,637,249 $ 23,772,369
Mortgage origination income 467,357 815,350 2,659,006 2,219,988
Interest 7,502,251 1,536,533 16,980,622 3,670,291
Servicing income 1,045,515 210,812 2,401,368 309,500
Earnings from partnership interest -- 318,630 260,000 749,621
Other 3,927,265 77,617 4,563,455 121,035
------------ ------------ ------------ ------------
Total revenues 58,269,931 14,734,050 125,501,700 30,842,804
------------ ------------ ------------ ------------
EXPENSES
Salaries and employee benefits 10,735,791 3,652,995 25,288,379 7,910,183
Interest expense 5,530,319 947,479 11,912,046 2,769,166
Selling expenses 9,342,521 518,673 13,717,427 1,274,855
Other operating expenses 6,479,263 1,669,529 12,503,838 4,385,904
Amortization of goodwill 1,271,944 -- 2,474,224 --
------------ ------------ ------------ ------------
Total expenses 33,359,838 6,788,676 65,895,914 16,340,108
------------ ------------ ------------ ------------
Earnings before minority interest and income taxes 24,910,093 7,945,374 59,605,786 14,502,696
Minority interest -- 1,533,626 -- 2,379,235
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Earnings before income taxes 24,910,093 6,411,748 59,605,786 12,123,461
Provision for income taxes 10,495,256 2,625,317 24,791,809 4,910,002
------------ ------------ ------------ ------------
NET EARNINGS $ 14,414,837 $ 3,786,431 $ 34,813,977 $ 7,213,459
============ ============ ============ ============
PRIMARY EARNINGS PER SHARE
Net earnings per share of common stock $ 0.47 $ 0.17 $ 1.14 $ 0.32
============ ============ ============ ============
FULLY DILUTED EARNINGS PER SHARE
Net earnings per share of common stock $ 0.43 -- $ 1.11 --
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
AND COMMON STOCK EQUIVALENTS
Primary 30,914,069 22,416,592 30,430,599 22,416,592
============ ============ ============ ============
Fully Diluted 36,390,259 -- 33,423,898 --
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
(UNAUDITED) (AUDITED)
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 34,813,977 $ 7,213,459
Adjustments to reconcile net earnings to net
cash used in operating activities:
Depreciation and amortization 4,927,965 184,696
Income taxes payable 42,577,278 2,854,973
Earnings from partnership interest (260,000) (749,621)
Increase in mortgage servicing receivables (106,974,312) (12,609,509)
Increase in trading securities (63,915,545) (11,944,695)
Provision for losses 13,495,454 869,000
Increase in accrued interest receivable (3,763,555) (117,820)
(Increase) decrease in accounts receivable (8,483,680) 206,440
Proceeds from sale of mortgages 1,241,900,000 258,154,849
Mortgage origination funds disbursed (1,267,687,857) (293,011,000)
Increase in other assets (21,434,297) (5,332,379)
Increase in accounts payable & other liabilities 36,710,600 9,184,950
Other, net (13,236,922) 176,108
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Net cash used in operating activities (111,330,894) (44,920,549)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of J&J and Heritable (89,102,097) --
Net purchases of equipment (8,690,675) (681,356)
Net distributions from partnership 908,315 428,474
Increase in mortgages held for investment (1,564,371) (308,387)
Increase in real estate owned (236,383) --
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Net cash used in investing activities (98,685,211) (561,269)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in warehouse facility and notes payable 65,933,830 38,385,588
Increase in standby financing facilities 5,770,739 7,725,729
Net proceeds from issuance of subordinated debentures 139,134,125 --
Net proceeds from issuance of common stock 244,106 533,752
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Net cash provided by financing activities 211,082,800 46,645,069
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NET INCREASE IN CASH AND CASH EQUIVALENTS 1,066,695 1,163,251
Cash and cash equivalents at beginning of period 3,598,549 919,291
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Cash and cash equivalents at end of period $ 4,665,244 $ 2,082,542
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid during the period $ 8,481,979 $ 2,787,408
=============== ===============
Interest paid during the period $ 3,975,483 $ 2,810,943
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
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CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(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 United States, the Company is licensed or registered to do business in 40
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% in September 1995 (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 nine months ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1996. 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, 1995.
The consolidated financial statements of the Company include the accounts
of CSC and its wholly-owned subsidiaries and beginning in May 1995, CSC-UK. All
significant intercompany balances and transactions have been eliminated in
consolidation. The CSC Acquisition, the UK Acquisition, the J&J Acquisition and
the Heritable 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 statements have been reclassified to conform with
the 1996 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 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, as of the date of the acquisition.
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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 United
Kingdom-based mortgage banker formed CSC-UK. CSC-UK operates in the United
Kingdom (excluding Northern Ireland, the "UK"), and lends to individuals who are
unable to obtain mortgage financing from conventional mortgage sources such as
banks and building societies because of impaired or unsubstantiated credit
histories and/or unverifiable income. In September 1995, the Company entered
into an agreement with the three other shareholders of CSC-UK to acquire their
50.0% interest in CSC-UK not then owned by the Company through the issuance of
3,600,000 shares of the Company's Common Stock valued at $21.6 million (the "UK
Acquisition"). The UK Acquisition was completed in September 1995. The UK
Acquisition resulted in the recognition of $19.7 million of goodwill, which is
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 liabilities of $4.1
million. 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 of the outstanding stock of J&J
Securities Limited ("J&J"), a London-based mortgage banker, 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 the Company's Common Stock valued at
$9.8 million based on the closing price of the Common Stock on the date of such
acquisition less a discount for restrictions on the resale of such stock (the
"J&J Acquisition"). J&J has become a wholly-owned subsidiary of CSC-UK. The J&J
Acquisition was accounted for as a purchase transaction. J&J provides primarily
second lien mortgage loans to UK borrowers who are similar to the Company's UK
borrowers. Pursuant to the J&J Acquisition, the Company acquired assets with a
fair value of $52.6 million, consisting primarily of mortgage loans held for
sale of $51.9 million, and assumed liabilities with a fair value $46.5 million.
Additional fair market value of $21.8 million, representing the value of the
mortgage servicing receivables, was assigned to the net assets acquired in the
J&J Acquisition. 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 stock of Heritable
Group Limited ("Heritable") for approximately 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 the Company's Common Stock valued at $2.5 million based on
the closing price of the Common Stock on the date of such acquisition (the
"Heritable Acquisition"). Heritable, a UK-based mortgage finance company,
operates as a wholly-owned subsidiary of CSC-UK. The Heritable Acquisition was
accounted for as a purchase transaction. Heritable originates a wide range of
mortgage loan products secured primarily by single family residences geared
towards borrowers on the upper-end of the credit spectrum. Pursuant to the
Heritable Acquisition, the Company acquired assets with a fair value of $194.8
million, consisting primarily of mortgage loans held for sale of $190.5 million,
and assumed liabilities with a fair value of $182.8 million. Additional fair
market value of $29.2 million, representing the value of the mortgage servicing
receivables, was assigned to the net assets acquired in the Heritable
Acquisition. The Heritable 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.
4. New Accounting Pronouncements
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation." SFAS No.
123 encourages the adoption of a new fair value-based accounting method for
employee stock-based compensation plans and applies to all arrangements whereby
an employee receives stock or other equity instruments of an employer based on
the
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price of an employer's stock. These arrangements include restricted stock
options and stock appreciation rights. SFAS No. 123 also permits the retention
of the Company's current method of accounting for these plans under Accounting
Principles Board Opinion No. 25. The Company will continue its current method of
accounting for stock-based compensation and therefore, pro forma disclosures in
footnotes will be provided on an annual basis. The adoption of SFAS No. 123 had
no impact on the Company's results of operations or its financial condition.
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" which provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial components approach that focuses on
control. SFAS No. 125 distinguishes transfers of financial assets that are sales
from transfers that are secured borrowings. SFAS No. 125 is effective for
transfers and servicing of financial assets and extinguishment of liabilities
occurring after December 31, 1996 and is to be applied prospectively. 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 September 1995 and 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 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 into
shares of Common Stock.
6. Convertible Debentures
In May 1996, the Company issued $143.8 million of 6% Convertible
Subordinated Debentures due 2006 (the "Convertible Debentures"), convertible at
any time prior to redemption or maturity, at the holder's option, into shares of
the Company's Common Stock at a conversion price of $26.25, subject to
adjustment. The Convertible Debentures may be redeemed, at the option of the
Company, in whole or in part, at any time after May 15, 1999 at predetermined
redemption prices together with accrued and unpaid interest to the date fixed
for redemption. Interest at 6% per annum, is payable semi-annually on each May 1
and November 1. 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.
7. First National Bank of Boston Term Loan
In June 1996, the Company entered into a $30.0 million term loan with The
First National Bank of Boston ("Bank of Boston") to fund loan originations and
purchases and working capital needs, secured by first and second liens on the
interest-only and residual certificates the Company receives upon loan sales
through securitizations. At September 30, 1996, the outstanding balance of the
term loan was $30.0 million. The term loan bore interest at a rate of 11.0% per
annum. In October 1996, the Company terminated the agreement and repaid all
amounts outstanding under this loan with proceeds from the Senior Secured
Facility (as defined below).
8. Subsequent Events
In October 1996, the Company entered into a $100.0 million Senior Secured
Credit Agreement ("Senior Secured Facility") with a group of lenders for which
CIBC Wood Gundy Securities Corp. ("CIBC") serves as agent. The Senior Secured
Facility terminates on October 30, 1998, and carries an initial interest rate of
11.0%, increasing 0.5% on the first day of each quarter commencing July 1, 1997
up to a maximum of 15.0%. Pursuant to the Senior Secured Facility, the Company
paid a 1.0% commitment fee and is required to pay (i) a 1.0% funding fee on the
amount of each borrowing, (ii) extension fees of
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1.0% on June 30, 1997 and 0.5% on the last day of each fiscal quarter thereafter
on the amount outstanding on such dates and (iii) commitment cancellation and
prepayment fees of 1.0% of the amount canceled or prepaid if terminated on or
before July 1, 1997, 2.0% of the amount canceled or prepaid if terminated after
July 1, 1997 but on or before April 1, 1998 and 3% of the amount canceled or
prepaid if terminated thereafter.
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PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Restatements
On September 26, 1996, the Company announced that it had determined that
certain adjustments should be made to the Company's previously issued financial
statements for the quarter ended June 30, 1996, to reflect a change in the
accounting treatment with respect to the valuation of assets acquired as a
result of the recent acquisitions of J&J and Heritable. The effect of this
accounting change resulted in the Company eliminating $50.9 million in revenues
and approximately $6.3 million of expenses originally recorded in connection
with the acquisitions and a reduction in reported earnings of $26.5 million, or
$0.78 per fully diluted share. Additionally, as a result of this accounting
change the goodwill initially recorded in connection with such acquisitions was
reduced from $60.5 million to $10.6 million resulting in a reduction of goodwill
amortization of approximately $496,000 from the previously reported figure for
the second quarter. The Staff of the Securities and Exchange Commission has
requested additional information from the Company in connection with the
accounting related to the J&J Acquisition and the Heritable Acquisition. The
Company is supplying such requested information.
On November 19, 1996, the Company announced that it had determined that
certain additional adjustments relating to the J&J Acquisition and the Heritable
Acquisition should be made to the financial statements for the quarter ended
June 30, 1996. These adjustments reflect a change in the accounting treatment
with respect to the $5.0 million of restructuring charges and the $17.3 million
of deferred taxes recorded as a result of such acquisitions. The effect of these
adjustments resulted in the Company increasing the goodwill as initially
restated in September from $10.6 million to $30.6 million reflecting the
reclassification, as costs of the acquisitions, of (i) the restructuring
charges, previously recorded as an expense, and (ii) the offset to the tax
liability incurred as part of the purchase accounting adjustments which had been
previously recorded as a deferred tax asset. This increase in goodwill resulted
in an increase of amortization expense as previously reported in the second
quarter of 1996 of $170,692 and will result in a $502,150 per quarter increase
in amortization expense through the first quarter of 2006. As a result of these
adjustments, second quarter net earnings increased by $2.8 million or $0.08 per
fully diluted share, from $8.3 million or $0.27 per fully diluted share, to
$11.1 million or $0.35 per fully diluted share. For the six months ended June
30, 1996, net earnings increased from the previously reported $17.6 million or
$0.58 per fully diluted share to $20.4 million or $0.66 per fully diluted share.
Further, as a result of these adjustments, there was increased goodwill
amortization recorded during the third quarter of 1996 which resulted in a
$502,150 decrease in previously announced net earnings of $0.02 per fully
diluted share from $14.9 million or $0.45 per fully diluted share to $14.4
million or $0.43 per fully diluted share. For the nine months ended September
30, 1996, net earnings increased $2.3 million to $34.8 million or $1.11 per
fully diluted share from the previously announced results of $32.5 million or
$1.04 per fully diluted share.
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
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recurring fees, including the costs of credit enhancements and trustee fees and,
in the case of CSC-UK loans sold prior to January 1, 1996, a third party
investment bank's significant participation in the cash flows associated with
such loans. Gain on sale of loans constituted approximately 78.6% and 77.3% of
total revenues for the nine months ended September 30, 1996 and 1995,
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 with the balance sold in whole loan sales to
institutional purchasers.
Results of Operations
Three Months Ended September 30, 1996 Compared to Three Months Ended September
30, 1995
Total revenues increased $43.6 million or 296.6% to $58.3 million for the
three months ended September 30, 1996 from $14.7 million for the comparable
period in 1995. This increase was due primarily to higher gains on sale of loans
resulting from the combined US and UK increased loan origination and purchase
volume and volume of loans sold compared to the prior period and increased
interest income resulting from higher average balances of loans held for sale,
as well as increased discount accretion recognized on higher average balances of
mortgage servicing receivables.
Gain on sale of loans increased $33.5 million or 283.9% to $45.3 million
for the three months ended September 30, 1996 from $11.8 million for the
comparable period in 1995. This increase was due primarily to CSC-UK's gain on
sale of loans of $21.3 million representing a 31.5% gain on the $67.6 million of
loan sales during the period compared to gain on sale of loans of $3.9 million
representing a 28.7% gain on the $13.6 million of loan sales during the
comparable period in 1995. The higher average gain on sale for the three months
ended September 30, 1996 was due primarily to the termination of the previous UK
purchase facility pursuant to which Greenwich International Ltd., a subsidiary
of Greenwich Capital Markets, Inc. (referred to herein, including any
subsidiaries as "Greenwich") retained a significant participation in such gain.
Additionally, the increase was due to the increased volume of US loan sales at
lower average gains during the three months ended September 30, 1996 ($441.7
million of loan sales at a weighted average gain of 5.4% ($24.0 million) in the
1996 period as compared to $98.9 million of loan sales at a weighted average
gain of 8.0% ($7.9 million) in the 1995 period). The lower average gain on sale
of loans recognized during the three months ended September 30, 1996 was due
primarily to the lower average margins from bulk purchases which began during
the second quarter of 1996, as well as interest income resulting from lower
margins from correspondent wholesale loans.
Mortgage origination income decreased $347,993 or 42.7% to $467,357 for the
three months ended September 30, 1996 from $815,350 for the comparable period in
1995. This decrease was due primarily to lower average origination fees earned,
partially offset by the increase in US loan origination and purchase volume to
$469.1 million for the three months ended September 30, 1996 from $123.2 million
for the comparable period in 1995. 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 total revenues
decreased to 0.8% for the 1996 period from 5.5% for the comparable period in
1995.
Interest income increased $6.0 million or 400.0% to $7.5 million for the
three months ended September 30, 1996 from $1.5 million for the comparable
period in 1995. This increase was due primarily to the increased balance of
loans held for sale during the 1996 period resulting from the increased loan
origination and purchase volume in excess of loans sold during the period, as
well as interest income resulting from the accretion of the discount recorded on
mortgage servicing receivables.
Servicing income increased $834,703 or 395.9% to $1.0 million for the three
months ended September 30, 1996 from $210,812 for the comparable period in 1995.
This increased income was due primarily to an increase in the average balances
of US loans serviced to $982.4 million for the three months ended September 30,
1996 from $164.3 million for the comparable period in 1995 and the increase in
the average balances of UK loans serviced to $377.3 million for the period
ending September 30, 1996 from $14.4 million for the comparable period in 1995.
The Company did not record earnings from partnership interest for the three
months ended September 30, 1996 as compared to $318,630 for the three months
ended September 30, 1995. This was due to the
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<PAGE> 12
conversion of Industry Mortgage Company, L.P. (including its successor, IMC
Mortgage Company, "IMC") from partnership to corporate form. IMC completed a
public offering of its common stock in June 1996. As a result of the offering,
the Company's interest in IMC is no longer accounted for under the equity method
of accounting, whereby the Company recognized its relative portion of the
partnership's earnings as revenues, but rather as available-for-sale securities
in accordance with SFAS No. 115.
Total expenses increased $26.6 million or 391.2% to $33.4 million for the
three months ended September 30, 1996 from $6.8 million for the comparable
period in 1995. 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 1996 period. Total expenses as a
percentage of total revenues increased to 57.3% for the three months ended
September 30, 1996 from 46.3% for the comparable period in 1995. This increase
was due primarily to the increased selling and commission costs for UK loan
originations. During the three months ended September 30, 1996, amortization of
goodwill related to the UK Acquisition, the J&J Acquisition and the Heritable
Acquisition totaled $1.3 million.
Salaries and employee benefits increased $7.0 million or 189.2% to $10.7
million for the three months ended September 30, 1996 from $3.7 million for the
comparable period in 1995. This increase was due primarily to increased staffing
levels to 526 US employees at September 30, 1996 compared to 220 US employees
for the comparable period in 1995 and the increased staffing levels associated
with the UK operations (278 UK employees at September 30, 1996 compared to 54 UK
employees for the comparable period in 1995) resulting from the growth in loan
origination and purchase volume and geographic expansion, increased loans
serviced, as well as the J&J Acquisition and the Heritable Acquisition.
Interest expense increased $4.6 million or 483.7%, to $5.5 million for the
three months ended September 30, 1996 from $947,479 for the comparable period in
1995. 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, as well as an increased balance of loans held pending sale during the
three months ended September 30, 1996 resulting from the increased loan
origination and purchase volume during the period.
Other expenses increased $13.6 million or 618.2% to $15.8 million for the
three months ended September 30, 1996 from $2.2 million for the comparable
period in 1995. This increase was due primarily to increased selling costs of
$8.8 million or 1,701.2% to $9.3 million for the three months ended September
30, 1996 from $518,673 for the comparable period in 1995, as a result of
increased selling and commission costs for UK loan originations, and increased
professional fees, travel and entertainment and occupancy costs incurred to
support the increased loan origination and purchase volume.
Net earnings increased $10.6 million or 278.9% to $14.4 million for the
three months ended September 30, 1996 from $3.8 million for the comparable
period in 1995. The growth in net earnings was due primarily to the 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 September 30,
1996.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30,
1995
Total revenues increased $94.7 million or 307.5% to $125.5 million for the
nine months ended September 30, 1996 from $30.8 million for the comparable
period in 1995. This increase was due primarily to higher gain on sale of loans
resulting from the combined US and UK increased loan origination and purchase
volume and volume of loans sold compared to the prior period and increased
interest income resulting from higher average balances of loans held for sale,
as well as increased discount accretion recognized on higher average balances of
mortgage servicing receivables.
Gain on sale of loans increased $74.8 million or 314.3% to $98.6 million
for the nine months ended September 30, 1996 from $23.8 million for the
comparable period in 1995. This increase was due primarily to CSC-UK's gain on
sale of loans of $48.8 million representing a 35.8% gain on the $136.4 million
of loan sales during the 1996 period compared to gain on sale of loans of $6.2
million representing a 29.1% gain on the $21.3 million of loan sales during the
comparable period in 1995. The higher average gain on sale for the nine months
ended September 30, 1996 was due primarily to the termination of the previous UK
purchase facility pursuant to which Greenwich retained a significant
11
<PAGE> 13
participation in such gain. Additionally, the increase was due to the increased
volume of US loan sales at lower average gains ($898.4 million of loan sales at
a weighted average gain of 5.5% ($49.8 million) in the 1996 period as compared
to $232.5 million of loan sales at a weighted average gain of 7.6% ($17.6
million) in the 1995 period). The lower average gain on sale of loans recognized
during the nine months ended September 30, 1996 was due primarily to the lower
average margins from bulk purchases which began during the second quarter of
1996, lower margins from correspondent wholesale loans, as well as lower margins
from changes in interest rates during the second quarter of 1996.
Mortgage origination income increased $439,018 or 19.8% to $2.7 million for
the nine months ended September 30, 1996 from $2.2 million for the comparable
period in 1995. This increase was due primarily to (i) the increase in US loan
origination and purchase volume to $925.8 million for the nine months ended
September 30, 1996 from $271.7 million for the comparable period in 1995 and
(ii) the increase in UK loan origination and purchase volume to $377.0 million
for the nine months ended September 30, 1996 from $21.3 million for the
comparable period in 1995. 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 2.1% for the 1996 period from 7.2% for the comparable period in 1995.
Interest income increased $13.3 million or 359.5% to $17.0 million for the
nine months ended September 30, 1996 from $3.7 million for the comparable period
in 1995. This increase was due primarily to the increased balance of loans held
for sale during the 1996 period resulting from the increased loan origination
and purchase volume in excess of loans sold during the period, as well as
interest income resulting from the accretion of the discount recorded on
mortgage servicing receivables.
Servicing income increased $2.1 million or 675.9% to $2.4 million for the
nine months ended September 30, 1996 from $309,500 for the comparable period in
1995. This increased income was due primarily to an increase in the average
balances of US loans serviced to $661.4 million for the nine months ended
September 30, 1996 from $139.1 million for the nine months ended September 30,
1995 and the increase in the average balances of UK loans serviced to $212.3
million for the 1996 period from $13.4 million for the 1995 period.
Earnings from partnership interest decreased $489,621 or 65.3% to $260,000
for the nine months ended September 30, 1996 from $749,621 for the nine months
ended September 30, 1995. This decrease was due primarily to lower earnings
recognized from the equity interest in IMC during the nine months ended
September 30, 1996. In June 1996, IMC converted from partnership to corporate
form and effected a public offering of its common stock. As a result of the
offering, the Company's interest in IMC is no longer accounted for under the
equity method of accounting, whereby the Company recognized its relative portion
of the partnership's earnings as revenues, but rather as available-for-sale
securities in accordance with SFAS No. 115.
Total expenses increased $49.6 million or 304.3% to $65.9 million for the
nine months ended September 30, 1996 from $16.3 million for the comparable
period in 1995. This increase was due primarily to increased salaries, selling
expenses and operating expenses related to increased loan origination and
purchase volume during the 1996 period. Total expenses as a percentage of total
revenues decreased to 52.5% for the nine months ended September 30, 1996 from
52.9% for the comparable period in 1995. During the nine months ended September
30, 1996, amortization of goodwill related to the UK Acquisition, the J&J
Acquisition and the Heritable Acquisition totaled $2.5 million.
Salaries and employee benefits increased $17.4 million or 220.3% to $25.3
million for the nine months ended September 30, 1996 from $7.9 million for the
comparable period in 1995. This increase was due primarily to increased staffing
levels to 526 US employees at September 30, 1996 compared to 220 US employees
for the comparable period in 1995 and the increased staffing levels associated
with the UK operations (278 UK employees at September 30, 1996 compared to 54 UK
employees for the comparable period in 1995) resulting from the growth in loan
origination and purchase volume and geographic expansion, increased loans
serviced, as well as the J&J Acquisition and the Heritable Acquisition.
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<PAGE> 14
Interest expense increased $9.1 million or 325.0%, to $11.9 million for the
nine months ended September 30, 1996 from $2.8 million for the comparable period
in 1995. 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, as well as an increased balance of loans held pending sale during the nine
months ended September 30, 1996 resulting from the increased loan origination
and purchase volume during the period.
Other expenses increased $20.5 million or 359.6% to $26.2 million for the
nine months ended September 30, 1996 from $5.7 million for the comparable period
in 1995. This increase was due primarily to increased selling costs of $12.4
million or 953.8% to $13.7 million for the nine months ended September 30, 1996
from $1.3 million for the comparable period in 1995 as a result of increased
selling and commission costs for UK loan originations and increased professional
fees, travel and entertainment and occupancy costs incurred to support the
increased loan origination and purchase volume.
Net earnings increased $27.6 million or 383.3% to $34.8 million for the
nine months ended September 30, 1996 from $7.2 million for the comparable period
in 1995. This growth in net earnings was due primarily to increased revenues
resulting from an increase in US and UK loan origination and purchase volume and
volume of loans sold during the nine months ended September 30, 1996 as the
Company expanded its geographic base to 40 states and the District of Columbia
and further penetrated existing markets.
Financial Condition
September 30, 1996 Compared to December 31, 1995
Cash and cash equivalents increased $1.1 million or 30.6% to $4.7 million
at September 30, 1996 from $3.6 million at December 31, 1995.
Prepaid commitment fees were recorded as an asset at March 31, 1996 as a
result of the UK Greenwich Facility (as such term is defined in "- Liquidity and
Capital Resources") entered into by CSC-UK and Greenwich in March 1996, to be
amortized over the 20-year life of the UK Greenwich Facility. The unamortized
balance at September 30, 1996 was $36.5 million. There was no corresponding
asset at December 31, 1995.
Available-for-sale securities in the amount of $14.0 million were recorded
as an asset at September 30, 1996 as a result of the Company's equity interest
in IMC. Prior to June 1996, the Company had recorded a 9.1% limited partnership
interest in IMC. At December 31, 1995, the Company's investment in partnerships
was $758,315 and was recorded as other assets. In June 1996, IMC converted into
corporate form and effected a public offering of common stock. As a result of
the offering, the Company's interest in IMC is no longer accounted for under the
equity method of accounting, whereby the Company recognized its relative portion
of the partnership earnings as revenues, but rather as available-for-sale
securities in accordance with SFAS No. 115. Available-for-sale securities are
reported on the Company's statement of financial condition at fair market value
with any corresponding change in value reported as an unrealized gain or loss
(if assessed to be temporary) as an element of stockholders' equity after giving
effect for taxes.
Mortgage servicing receivables increased $142.3 million or 578.5% to $166.9
million at September 30, 1996 from $24.6 million at December 31, 1995. This
increase was due primarily to the $50.9 million of mortgage servicing
receivables recorded as a result of the J&J Acquisition and the Heritable
Acquisition and the $107.5 million recognized as a result of the increase of
loan sales primarily in the UK with servicing retained, partially offset by
amortization expenses.
Trading securities, which consist of interest only and residual
certificates, increased $63.9 million or 409.6% to $79.5 million at September
30, 1996 from $15.6 million at December 31, 1995. This increase was due to the
$758.1 million of US securitizations completed during the first nine months of
1996.
Mortgage loans held for sale, net increased $59.8 million or 80.9% to
$133.7 million at September 30, 1996 from $73.9 million at December 31, 1995.
This increase was due primarily to the volume of US
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<PAGE> 15
loans originated exceeding loan sale volume in the first nine months of 1996 and
loans acquired as part of the Heritable Acquisition which were not yet sold.
Mortgage loans held for investment, net increased $4.4 million or 440.0% to
$5.4 million at September 30, 1996 from $1.0 million at December 31, 1995. This
increase was due primarily to the Company's increased loan origination and
purchase volume and the inclusion of $2.8 million of mortgages held for
investment by CSC-UK. As a percentage of total assets, mortgage loans held for
investment increased to 1.0% at September 30, 1996 from 0.7% at December 31,
1995.
Goodwill and other intangibles, net of amortization, increased $28.6
million or 148.2% to $47.9 million at September 30, 1996 from $19.3 million at
December 31, 1995. This increase was due primarily to the goodwill recorded in
connection with the J&J Acquisition and Heritable Acquisition of $5.2 million
and $25.4 million, respectively, offset by $2.5 million of amortization during
the period.
Other assets increased $40.7 million or 635.9% to $47.1 million at
September 30, 1996 from $6.4 million at December 31, 1995. This increase was due
primarily to the inclusion at September 30, 1996 of subwarehouse loan
receivables of $19.6 million, deferred costs of $4.4 million related to the
issuance of the Convertible Debentures, CSC-UK receivables related to loan sales
to Greenwich of approximately $12.4 million and other assets of CSC-UK of $3.6
million.
Warehouse financing facilities outstanding increased $27.9 million or 37.2%
to $102.8 million at September 30, 1996 from $74.9 million at December 31, 1995.
This increase was due primarily to the increased origination and purchase volume
in excess of the volume of loans sold as reflected in the increase in mortgages
held for sale, net.
Accounts payable and other liabilities increased $37.0 million or 225.6% to
$53.4 million at September 30, 1996 from $16.4 million at December 31, 1995.
This increase was due primarily to the inclusion of CSC-UK and increased escrow
balances associated with the increased loan servicing portfolio.
Allowance for losses increased $13.5 million or 642.9% to $15.6 million at
September 30, 1996 from $2.1 million at December 31, 1995. This increase was due
primarily to increased loans sold in the UK with servicing rights retained.
Notes and loans payable totaled $68.0 million at September 30, 1996
representing the $38.0 million note payable recorded in connection with the UK
Greenwich Facility and the $30.0 million term loan with the Bank of Boston.
Stockholders' equity increased $55.9 million or 97.9% to $113.0 million at
September 30, 1996 from $57.1 million at December 31, 1995. This increase was
due primarily to net earnings of $34.8 million for the nine months ended
September 30, 1996 and stock issued in connection with the J&J Acquisition and
Heritable Acquisition totaling $12.3 million, in addition to an $8.1 million
unrealized gain on available-for-sale securities, net of taxes and a foreign
currency translation adjustment of $275,750.
Liquidity and Capital Resources
The Company's business requires substantial cash to support its operating
activities. The Company's principal cash requirements include the funding of
loan originations and purchases, payment of interest expenses, funding the
overcollateralization requirements for securitizations, operating expenses,
income taxes and capital expenditures.The Company uses its cash flow from whole
loan sales, loans sold through securitizations, capital market offerings,
pre-funding mechanisms through securitizations, loan origination fees,
processing fees, net interest income and borrowings under its warehouse
facility, US purchase facilities, standby facilities and UK purchase facility to
meet its working capital needs and to fund acquisitions such as the J&J
Acquisition and the Heritable Acquisition.
Adequate credit facilities and other sources of funding, including the
ability of the Company to sell loans, are essential to the continuation of the
Company's ability to originate and purchase loans. As a result of increased loan
originations and purchases and its growing securitization program, the Company
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<PAGE> 16
has operated, and expects to continue to operate, on a negative cash flow basis.
During the nine month periods ended September 30, 1996 and 1995, the Company
used operating cash of $111.3 million and $44.9 million, respectively.
Additionally, during the same periods, the Company used $98.7 million and
$561,269, respectively, in investing activities, primarily to fund the Company's
acquisitions of J&J and Heritable in the 1996 period. The Company's sale of
loans through securitizations resulted in a gain on sale 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 $211.1 million and $46.6 million,
respectively.
The Company borrows funds on a short-term basis to support the accumulation
of loans prior to sale. These short-term borrowings are made under a warehouse
line of credit with a group of banks for which CoreStates Bank, N.A.
("CoreStates") serves as agent (the "Warehouse Facility"). Pursuant to the
Warehouse Facility, the Company has available a secured revolving credit line of
$72.0 million to finance the Company's origination or purchase of loans pending
sale to investors 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 (7.46%
at September 30, 1996) based on the prime and LIBOR rates 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, plus (B) 175 basis points, as periodically elected by the
Company. The outstanding balance of this portion of the Warehouse Facility was
$71.8 million at September 30, 1996. The Revolving Credit Line extends through
June 1997. In addition, the Warehouse Facility provided for a secured revolving
working capital credit line of up to $3.0 million to be used by the Company for
general corporate purposes (the "Working Capital Credit Line"). The Working
Capital Credit Line operated as a revolving facility. The Working Capital Credit
Line bore interest at a variable rate (9.3% at September 30, 1996) based on 100
basis points over the higher of either the prime rate or the federal funds rate
plus 50 basis points. The outstanding balance under the Working Capital Credit
Line at September 30, 1996 was $3.0 million. The Working Capital Credit Line was
terminated on November 12, 1996.
The Warehouse Facility also permits the Company to use up to 20.0% of the
Revolving Credit Line to provide 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 September 30, 1996, the aggregate balance of
loans outstanding under this program was $19.6 million (including self-funded
loans), with applications pending for additional $12.7 million of loans.
The Company has a $50.0 million loan purchase agreement (the "US Purchase
Facility") with ContiTrade Services Corporation ("ContiTrade") whereby the
Company originates and then sells loans and retains the rights to repurchase
loans at a future date for whole loan sales to institutional investors or for
sales through securitizations. The US Purchase Facility extends through June
1999. The aggregate principal balance of loans sold to and retained by
ContiTrade at September 30, 1996 under the US Purchase Facility was $3.7
million. The Company also has a standby financing arrangement with ContiTrade
(the "Standby Facility") whereby ContiTrade provides the Company a $10.0 million
line of credit which is secured by the interest-only and residual certificates
the Company receives upon loan sales through securitizations. As of September
30, 1996, the Company had $2.0 million available under the Standby Facility. The
Standby Facility bears interest at a variable rate based on LIBOR plus 200 basis
points (7.4% at September 30, 1996) and the agreement extends through June 1999.
In June 1996, the Company entered into a purchase and sale agreement with
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 sells loans to Greenwich for
subsequent inclusion in securitizations. In addition, the Company is advanced
amounts based on a percentage of the principal balance of the loans sold to
Greenwich. Advanced amounts outstanding under
15
<PAGE> 17
this facility bear interest at a rate of LIBOR plus 175 basis points (7.19% at
September 30, 1996). The US Greenwich Facility expires on the earlier to occur
of $1.0 billion in loans sold into the facility or February 2, 1998. The Company
had approximately $142.3 million available under the facility at September 30,
1996. The Company retains servicing rights on all loans sold into the US
Greenwich 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 will
subsequently resell these loans through whole loan sales or securitizations. The
UK Greenwich Facility includes a working capital facility pursuant to which
CSC-UK is advanced amounts based on a percentage of the principal balance of
loans originated or purchased by CSC-UK and sold to Greenwich, which advance may
not exceed 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 September 30, 1996). This agreement
expires as to the working capital facility on December 31, 2000 and as to the
purchase facility on December 31, 2015. Both CSC-UK and Greenwich are prohibited
from entering into substantially similar transactions with other parties. CSC-UK
agreed to pay a fee to Greenwich in connection with the UK Greenwich Facility in
the aggregate amount of $38.0 million, evidenced by two notes bearing interest
at a rate of 6.2%, payable, respectively, in amounts of $13.0 million on
December 15, 1996 and $25.0 million on December 15, 1997. Such fee is amortized
over the life of the UK Greenwich Facility. The outstanding balance under the
working capital facility portion of the UK Greenwich facility as pound-sterling
9.9 million ($15.5 million) at September 30, 1996.
In May 1996, the Company issued Convertible Debentures in the aggregate
principal amount of $143.8 million. Proceeds from the Convertible Debentures
were used to repay the indebtedness incurred in connection with the J&J
Acquisition, to finance the Heritable Acquisition and for general corporate
purposes.
In June 1996, the Company entered into a $30.0 million term loan with the
Bank of Boston to fund loan originations and purchases and working capital
needs, secured by first and second liens on the interest-only and residual
certificates the Company receives upon loan sales through securitizations. At
September 30, 1996, the outstanding balance of the term loan was $30.0 million.
The term loan bore interest at a rate of 11.0% per annum. In October 1996, the
Company terminated the agreement and repaid all amounts outstanding under this
loan with proceeds from the Senior Secured Facility.
The Company also has a loan and security agreement with CoreStates whereby
CoreStates agrees to lend the Company up to $10.0 million to fund loan
originations and purchases. Borrowings under the agreement bear interest at the
prime rate plus 25 basis points (8.5% at September 30, 1996) and are due upon
demand. The agreement terminates on June 30, 1997. The outstanding balance under
the loan and security agreement was $9.9 million at September 30, 1996.
In October 1996, the Company entered into a $100.0 million Senior Secured
Facility with a group of lenders for which CIBC serves as agent. The Senior
Secured Facility terminates on October 30, 1998, and carries an initial interest
rate of 11.0%, increasing 0.5% on the first day of each quarter commencing July
1, 1997 up to a maximum of 15.0%. Pursuant to the Senior Secured Facility, the
Company paid a 1.0% commitment fee and is required to pay (i) a 1.0% funding fee
on the amount of each borrowing, (ii) extension fees of 1.0% on June 30, 1997
and 0.5% on the last day of each fiscal quarter thereafter on the amount
outstanding on such dates and (iii) commitment cancellation and prepayment fees
of 1.0% of the amount canceled or prepaid if terminated on or before July 1,
1997, 2.0% of the amount canceled or prepaid if terminated thereafter. The
Company initially drew down $50.0 million which was used to repay the $30.0
million term note with the Bank of Boston, fund loan originations and for
general corporate purposes.
In October 1996, the Company entered into a $5.0 million unsecured
revolving credit facility with the Bank of Boston. Advances under the line of
credit are due on October 24, 1997 and bear interest at the Bank of Boston's
Base Rate plus 50 basis points (8.75% at December 31, 1996). As of December 31,
1996, the outstanding balance of the unsecured revolving credit facility was
$5.0 million.
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<PAGE> 18
The Company is required to comply with various operating and financial
covenants as defined in the agreements described above including maintaining an
adjusted leverage ratio of senior debt to adjusted tangible net worth of less
than 10:1 an adjusted tangible net worth greater than $50 million. In addition,
CSC-UK may not pay dividends to the Company. The continued availability of funds
provided to the Company under these agreements is subject to the Company's
continued compliance with these covenants.
The Company's business requires continual access to short- and long-term
sources of debt and equity capital. While management believes that it will be
able to refinance or otherwise repay its debt in the normal course of business,
there can be no assurance that existing lines can be extended or refinanced or
that funds generated from operations will be sufficient to satisfy such
obligations.
The Company's cash requirements may be significantly influenced by possible
acquisitions or strategic alliances, although there are no present agreements
with respect to any significant acquisitions or strategic alliances.
The Company anticipates that it will need to raise additional cash within
the next several months through the issuance of additional debt or equity
securities or additional bank borrowings or a combination thereof. The Company
has no commitments for debt, equity or bank financings and there can be no
assurance that any sources will be available to the Company at any given time or
as to the favorability of the terms on which such sources may be available.
All references herein to "$" 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 at using exchange rates at the end of the period
for which the relevant statements are prepared for balance sheet items and the
weighted average exchange rates for the relevant period for statement of
operation items, each based on the noon buying rate in New York City for cable
transfers in foreign currencies as certified for customs purposes by the Federal
Reserve Bank of New York.
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<PAGE> 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to various routine legal proceedings arising out of
the ordinary course of its business. Management believes that none of these
actions, individually or in the aggregate, will have a material adverse effect
on the results of operations or financial condition of the Company.
Item 2. Changes in Securities
On July 1, 1996, a 100% stock dividend was paid to stockholders of record
on June 24, 1996.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
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3.1 Certificate of Incorporation of the Company, as amended,
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 as declared effective by the
Commission on December 20, 1995.
3.2 Bylaws of the Company, as amended, incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-1
as declared effective by the Commission on December 20, 1995.
4.1 Indenture, dated as of May 7, 1996, between the Company and The
Chase Manhattan Bank, N.A., incorporated by reference to Exhibit
4.2 to the Company's Quarterly Report on Form 10-Q filed with
the Commission on May 15, 1996.
4.2 Registration Rights Agreement, dated as of April 26, 1996, among
the Company, NatWest Securities Limited, Bear, Stearns & Co.
Inc., CIBC Wood Gundy Securities Corp. and Wasserstein Perella
Securities, Inc., incorporated by reference to Exhibit 4.3 to
the Company's Quarterly Report on Form 10-Q filed with the
Commission on May 15, 1996.
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10.1 Lease Agreement, dated as of July 7, 1996, between CSC and
Robert Martin Company, incorporated by reference to Exhibit
10.56 to the Company's Quarterly Report on Form 10-Q filed with
the Commission on August 14, 1996.
10.2 Loan Agreement, dated as of August 6, 1996, between CSC and
CoreStates, incorporated by reference to Exhibit 10.57 to the
Company's Registration Statement on Form S-1 filed with the
Commission on September 4, 1996.
10.3 Amendment No. 1 dated as of August 30, 1996, to the Purchase and
Sale Agreement, dated as of February 2, 1996, between CSC and
Greenwich Capital Financial Products, Inc., incorporated by
reference to Exhibit 10.63 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 filed with the Commission on
September 27, 1996.
10.4 Senior Secured Credit Agreement, dated October 30, 1996, among
the Company and CIBC Wood Gundy Securities Corp. and the lenders
named therein, filed previously as Exhibit 10.60.
10.5 Amendment No. 2 dated as of October 30, 1996 to the Purchase and
Sale Agreement, dated as of February 2, 1996, as amended between
CSC and Greenwich Capital Financial Products, Inc., filed
previously as Exhibit 10.62.
11.1 Computation of Earnings Per Share, filed previously.
27.1 Financial Data Schedule, filed previously.
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(b) Reports on Form 8-K:
1. Form 8-K/A dated August 28, 1996, Form 8-K/A dated September 11,
1996 and Form 8-K/A dated September 26, 1996 amending Form 8-K
dated June 28, 1996 reporting the Company's acquisition of
Heritable.
2. Form 8-K/A dated September 27, 1996 amending Form 8-K dated May 2, 1996
reporting the Company's acquisition of J&J.
3. Form 8-K dated September 27, 1996 revising the Company's results for the
six months and three months ended June 30, 1996.
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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: January 30, 1997 By /s/ Tim S. Ledwick
-----------------
Tim S. Ledwick
Title: Chief Financial Officer
(as chief accounting officer and
on behalf of the registrant)
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