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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 26, 1997
REGISTRATION NO. 333-28465
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CITYSCAPE FINANCIAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 11-2994671
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
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565 TAXTER ROAD
ELMSFORD, NEW YORK 10523-5200
(914) 592-6677
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JONAH L. GOLDSTEIN, ESQ.
GENERAL COUNSEL
CITYSCAPE FINANCIAL CORP.
565 TAXTER ROAD
ELMSFORD, NEW YORK 10523-5200
(914) 592-6677
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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<S> <C>
SEAN P. GRIFFITHS, ESQ. DAVID J. JOHNSON, JR., ESQ.
GIBSON, DUNN & CRUTCHER LLP ANDREWS & KURTH, L.L.P.
200 PARK AVENUE 601 S. FIGUEROA STREET
NEW YORK, NEW YORK 10166 LOS ANGELES, CALIFORNIA 90017
(212) 351-4000 (213) 896-3100
(FACSIMILE) (212) 351-4035 (FACSIMILE) (213) 896-3137
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement from the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 26, 1997
CITYSCAPE FINANCIAL CORP.
4,140,000 SHARES OF COMMON STOCK
This Prospectus relates to up to 4,140,000 shares (the "Securities") of
common stock, par value $0.01 per share (the "Common Stock"), of Cityscape
Financial Corp., a Delaware corporation (the "Company"), which may be offered
for sale from time to time by one or all of the selling stockholders named
herein and their permitted transferees (the "Selling Security Holders"). The
Common Stock is traded on the Nasdaq National Market ("Nasdaq") under the symbol
"CTYS." The closing price of the Common Stock as reported on Nasdaq on June 25,
1997 was $18.50 per share.
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION REVIEWED OR PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Company will not receive any proceeds from this offering. The aggregate
proceeds to the Selling Security Holders from the sale of the Securities will be
the offering price of the Securities sold, less applicable agents' commissions
and underwriters' discounts, if any. The Company will pay all expenses incident
to the preparation and filing of this registration statement for the Securities
under federal and state securities laws. The Company and the Selling Security
Holders have each agreed to indemnify each other against certain liabilities,
including liabilities arising under the Securities Act. The Selling Security
Holders may sell all or a portion of the Securities from time to time on terms
to be determined at the time of sale, either directly or through agents
designated from time to time or through brokers, dealers or underwriters
designated from time to time. To the extent required, the number of shares of
Common Stock to be sold, the offering price thereof, the name of each Selling
Security Holder and each agent, broker, dealer and underwriter, if any, and any
applicable brokerage fees, commissions or discounts and expenses with respect to
a particular offering will be set forth in an accompanying Prospectus
Supplement. See "Plan of Distribution."
SEE "RISK FACTORS" BEGINNING ON PAGE 5 HEREOF FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
SECURITIES.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFERING DESCRIBED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY SELLING SECURITY HOLDER OR THEIR RESPECTIVE AGENTS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES BY ANY PERSON IN ANY JURISDICTION IN WHICH
IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH OFFER, SOLICITATION OR SALE OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
The date of this Prospectus is June , 1997
<PAGE> 3
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3 (referred to herein, together
with all amendments and exhibits, as the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission.
Statements contained in this Prospectus such as contents of any contract or any
document referred to are not necessarily complete and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference. For further information relating to the Securities and to the
Company, reference is made to the Registration Statement.
The Company is subject to the periodic reporting and other informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith, files reports, proxy statements and other
information with the Commission. For further information with respect to the
Company, reference is hereby made to such reports and other information which
can be inspected and copied (at prescribed rates) at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1025,
Washington, D.C. 20549 and at the Commission's regional offices located at Seven
World Trade Center, 13th Floor, New York, New York 10048 and at 500 West
Madison, Suite 1400, Chicago, Illinois 60661. Copies may also be obtained at
prescribed rates from the Public Reference Section of the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission also
maintains a Web site that contains reports, proxy and information statements and
other information regarding the Company at (http://www.sec.gov). In addition,
the Common Stock is listed on the Nasdaq National Market and reports and other
information concerning the Company may be inspected at the offices of the
National Association of Securities Dealers, Inc. at 1735 K Street, N.W.,
Washington, DC 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed with the Commission and are hereby
incorporated by reference:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996;
2. The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1997,
3. The Company's Reports on Form 8-K filed on April 11, 1997, April
30, 1997 and May 20, 1997, and
4. The Company's description of the Common Stock contained in the
Company's Registration Statement on Form 8-A filed on December 1, 1995.
All reports and other documents filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of the filing of
the Registration Statement of which this Prospectus forms a part and prior to
the termination of the offering of the Securities covered by this Prospectus
shall be deemed to be incorporated by reference herein and to be part hereof
from the date of filing such reports and documents. Any statement contained
herein or in a report or document, all or a portion of which is incorporated or
deemed to be incorporated by reference herein, shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, upon the oral or written
request of any such person, a copy of any or all of the documents incorporated
herein by reference (other than exhibits to such documents, unless such exhibits
are expressly incorporated by reference into such documents). Requests for such
copies should be directed to the Company's Secretary at 565 Taxter Road,
Elmsford, New York 10523. The Company's telephone number at that location is
(914) 592-6677.
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This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
Cityscape Financial Corp., a Delaware corporation ("Cityscape" or the
"Company"), is a consumer finance company engaged in the business of
originating, purchasing, selling and servicing mortgage loans secured primarily
by one- to four-family residences. The Company originates and purchases loans in
the US through its subsidiary Cityscape Corp., a New York corporation ("CSC"),
using a network of independent mortgage brokers and loan correspondents, and in
the United Kingdom (excluding Northern Ireland, the "UK") through its indirect
subsidiary City Mortgage Corporation Limited ("CSC-UK") also using a network of
independent mortgage brokers. The majority of the Company's loans are made to
owners of single family residences who use the loan proceeds for such purposes
as debt consolidation, financing of home improvements and educational
expenditures. The Company focuses on lending to individuals who have impaired or
unsubstantiated credit histories and/or unverifiable income and require or seek
a high degree of personalized service and prompt response to their loan
applications. As a result, the Company's customers generally are not averse to
paying the higher interest rates that the Company charges for its loan programs
as compared to the interest rates charged by conventional mortgage sources.
The Company's principal executive office and mailing address is 565 Taxter
Road, Elmsford, New York 10523-5200 and its telephone number is (914) 592-6677.
For a more detailed discussion of the business of the Company, see the
Company's Annual Report or Form 10-K for the year ended December 31, 1996, which
is incorporated by reference herein.
RECENT DEVELOPMENT
SENIOR NOTES
On May 14, 1997, the Company issued $300.0 million aggregate principal
amount of 12.75% Senior Notes due June 1, 2004 (the "Senior Notes") pursuant to
an Indenture (the "Senior Note Indenture"), between the Company and The Chase
Manhattan Bank, as trustee (the "Trustee"). The Senior Notes are senior
obligations of the Company that are guaranteed by CSC and secured by a pledge by
CSC of a promissory note from CSC-UK having a minimum principal amount equal to
$115.0 million that represents certain advances made by CSC to CSC-UK. As of May
30, 1997, such promissory note had a principal amount of $129.5 million.
The Senior Notes will not be redeemable prior to maturity, provided that,
at any time and from time to time prior to June 1, 2000, the Company may redeem
in the aggregate up to $100.0 million of the original principal amount of the
Senior Notes with the proceeds of one or more equity offerings at a redemption
price (expressed as a percentage of principal amount) of 112.75% plus accrued
interest to the redemption date.
The Senior Note Indenture contains various restrictive covenants that,
among other things, limit: (i) the incurrence of certain additional indebtedness
by the Company; (ii) the creation of senior liens on assets of the Company;
(iii) the sale of assets of the Company; (iv) mergers and consolidations; (v)
the sale of assets of the Company and (vi) the making of certain investments and
the payment of dividends on capital stock of the Company. See "Risk
Factors -- Absence of Dividends".
Each holder of Senior Notes will have the right to require the Company to
repurchase all or any part of such holder's Senior Notes at a purchase price in
cash equal to 101% of the principal amount thereof plus accrued and unpaid
interest, if any, to the date of purchase upon the occurrence of a change in
control, which is deemed to occur (i) if any person (other than persons that
held such voting power as of the issue date of the Senior Notes and certain of
their transferees) directly or indirectly acquires 50% or more of the total
voting power of the Common Stock of the Company (or the successor company to the
Company under the Senior
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Notes upon a merger or sale of substantially all of the assets of the Company),
or (ii) if, during any 12-month period, individuals who at the beginning of such
period constituted the board of directors of the Company (together with any new
directors whose election by such board or whose nomination for election by the
stockholders of the Company was approved by a vote of a majority of directors of
the Company then still in office who were either directors at the beginning of
such period or whose election or nomination for election was so previously
approved) cease to constitute a majority of the directors of the Company then in
office.
An Event of Default is defined in the Senior Note Indenture as, among other
things, (i) a default in any payment of interest when due, continued for 30
days, (ii) a default in the payment of principal when due, (iii) the failure to
comply with certain covenants, (iv) a cross-default of other indebtedness in
excess of $5.0 million, (v) bankruptcy, insolvency or reorganization of the
Company or a significant subsidiary, or (vi) a judgment in excess of $5.0
million.
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RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be carefully considered before making an investment in the
Securities offered hereby. This Prospectus contains forward-looking statements
which involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in the following risk
factors and elsewhere in this Prospectus.
NEGATIVE CASH FLOWS
As a result of its increased volume of loan originations and purchases and
its growing use of securitizations, the Company has operated since March 1995,
and expects to continue to operate, on a negative cash flow basis. Prior to
1995, the Company sold loans primarily through whole loan sales which generate
immediate cash flow on the date of sale. The recognition of gain on sale of
loans through securitizations has a negative impact on the cash flow of the
Company because significant costs are incurred upon closing of the transactions
giving rise to such gain and the Company is required to pay income taxes on the
gain on sale in the period recognized, although the Company does not expect to
receive the cash representing the gain until later periods as the related loans
are repaid or otherwise collected.
The Company's principal cash requirements include the funding of loan
originations and purchases, payment of interest expenses (including, in the
future, interest expenses under the Senior Notes), funding the
overcollateralization requirements for securitizations, operating expenses,
income taxes and capital expenditures. The Company uses its cash flow from whole
loan sales, loans sold through securitizations, capital markets offerings,
pre-funding mechanisms through securitizations, loan origination fees, servicing
fees, net interest income and borrowings under its credit or warehouse
facilities to meet its working capital and other needs. For the years ended
December 31, 1995 and 1996, the Company had negative cash flow from operations
of $76.0 million and $165.5 million, respectively, due primarily to the
Company's sale of loans through securitizations. Also contributing to the
Company's negative cash flow is the increasing percentage of its loan volume
derived through the Wholesale Loan Acquisition Program and bulk purchases, which
have a greater negative impact on cash flows than loan volume derived from
independent mortgage brokers.
UNCERTAINTY AS TO AVAILABILITY OF FUNDING SOURCES
The Company funds substantially all of the loans which it originates and
purchases through borrowings under warehouse facilities secured by pledges of
its loans, loan purchase facilities under which the Company retains the rights
to repurchase loans sold, lines of credit secured by the residual and
interest-only interests in securitizations, a senior note issuance and
internally generated funds. These borrowings are in turn repaid with the
proceeds received by the Company from selling such loans either through
securitizations or whole loan sales. Any failure to renew or obtain adequate
funding under these credit or warehouse facilities, or other borrowings, or any
substantial reduction in the size of or pricing in the markets for the Company's
loans, could have a material adverse effect on the Company's operations. To the
extent that the Company is not successful in maintaining or replacing existing
financing, it would have to curtail its loan production activities or sell loans
earlier than is optimal, which would have a material adverse effect on the
Company's results of operations and financial condition.
The type, timing and terms of financing selected by the Company will be
dependent upon the Company's cash needs, the availability of financing sources
and the prevailing conditions in the financial markets. The Company anticipates
that funds currently available will be sufficient to fund the Company's
liquidity requirements into the fourth quarter of 1997. However, the Company has
substantial capital requirements and anticipates that it will need to raise
additional cash by such time through the issuance of additional debt or equity
securities or additional bank borrowings or a combination thereof. The Company
has no commitments for additional debt, equity or bank financings other than
those described in this Prospectus and there can be no assurance that any
sources will be available to the Company at any given time or as to the
favorability of the terms on which such sources may be available.
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DEPENDENCE ON FUNDING SOURCE
The Company has funded substantially all of its loan origination and
purchase volume and working capital requirements in the US and the UK through
financing facilities and through loan sales pursuant to mortgage loan purchase
agreements that include working capital facilities with Greenwich Capital
Markets, Inc. (referred to herein, including its affiliates, as "Greenwich").
During 1995 and 1996, the Company sold 10.3% and 93.8%, respectively, of its
loan originations and purchases to Greenwich. The US facility (the "US Greenwich
Facility") was provided through Greenwich's affiliate, Greenwich Capital
Financial Products, Inc., and the UK facility (the "UK Greenwich Facility") is
provided through its affiliate, Greenwich International, Ltd. With certain
exceptions, the Company has been required to sell all of its loans directly or
indirectly to Greenwich. The loans are then resold through securitizations or
whole loan sales. These provisions of the US Greenwich Facility and the UK
Greenwich Facility may prevent the Company from taking advantage of other more
favorable financing sources that may become available to the Company.
Additionally, the Company expects to derive a substantial portion of its working
capital through the mortgage loan purchase agreements.
The US Greenwich Facility provided for the purchase and sale of $1.0
billion of loans. The Company and Greenwich continued to purchase and sell loans
after the facility amount was exceeded through December 1996. The Company has a
commitment from Greenwich to enter into agreements to provide a $3.0 billion
mortgage loan financing facility at a rate of LIBOR plus 150 basis points, a
$25.0 million residual financing facility at a rate of LIBOR plus 300 basis
points and a $3.0 billion securitization facility, each for a term of one year,
subject to execution of definitive documents satisfactory to Greenwich as well
as certain other conditions. The Company and Greenwich, pending the completion
of definitive documents, are operating under the terms of the US Greenwich
Facility structured consistent with the new proposed arrangement, however, as a
financing facility. No definitive agreement exists with respect to the new
arrangement nor can any assurance be given that such an agreement will be
reached. Because it is structured as a financing facility and not as a purchase
and sale facility, the new arrangement with Greenwich could affect the timing of
the Company's reported gain on sale, adversely affecting gain on sale in a
future period if the Company fails to sell or securitize the loan origination
and purchase volume for such period. To the extent that the Company is not
successful in maintaining with Greenwich or replacing existing financing, it
would have to curtail its loan production activities or sell loans earlier than
is optimal, thereby adversely affecting the Company's results of operations and
financial condition. CSC-UK paid a fee to Greenwich in connection with the UK
Greenwich Facility in the aggregate amount of $38.0 million. The Company is
amortizing this fee over the 20-year life of the facility. If the facility were
to be terminated prior to its scheduled expiration in 2015, the Company would
have to write-off the fee earlier than anticipated, resulting in a charge to
earnings in the period of such write-off of the unamortized amount of the fee at
that time, which would have an adverse effect on the Company's results of
operations.
Additionally, the agreement governing the UK Greenwich Facility prohibits
the payment of dividends by CSC-UK to CSC prior to the repayment of all
outstanding balances under the working capital facility of the UK Greenwich
Facility.
DEPENDENCE ON SECURITIZATIONS
General
Since March 1995, the Company has pooled and sold through securitizations
an increasing percentage of the loans which it originates or purchases. The
Company derives a significant portion of its income by recognizing gains upon
the sale of loans through securitizations representing the fair value of the
interest-only and residual certificates received in the US and the fair value of
excess mortgage servicing receivables retained through UK securitizations and on
sales into the UK purchase facility. In determining excess mortgage servicing
receivables recognized through UK securitizations, the Company excludes normal
servicing and other ancillary fees and includes any prepayment interest due. In
loan sales through US securitizations, the Company sells loans that it has
originated or purchased to a real estate mortgage investment conduit ("REMIC")
trust for a cash purchase price and interests in such REMIC trust consisting of
interest-only regular interests and the residual interest which are represented
by the interest-only and residual certificates.
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The cash purchase price is raised through an offering by the REMIC trust of
pass-through certificates representing regular interests in the REMIC trust.
Following the securitization, the purchasers of the pass-through certificates
receive the principal collected and the investor pass-through interest rate on
the principal balance, while the Company recognizes as current revenue the fair
value of the interest-only and residual certificates.
Reliance on Securitization Market
Adverse changes in the US or UK securitization market for home equity and
home improvement loans could impair the Company's ability to originate, purchase
and sell loans through securitizations on a favorable or timely basis. Any such
impairment could have a material adverse effect upon the Company's results of
operations and financial condition. Furthermore, the Company's quarterly
operating results can fluctuate significantly as a result of the timing and
level of securitizations. If securitizations do not close when expected, the
Company's results of operations may be adversely affected for that period.
Reliance on Credit Enhancements
In addition, in order to gain access to the securitization market, the
Company has relied on credit enhancements provided by monoline insurance
carriers on the majority of the Company's US securitizations to guarantee
outstanding senior interests in the related REMIC trusts to enable it to obtain
an "AAA/Aaa" rating for such interests. The cost of such credit enhancement
results in a reduction in the gain on sale of loans sold in such securitization.
Any substantial reductions in the size or availability of the securitization
market for the Company's loans, or the unwillingness of insurance companies to
guarantee the senior interests in the Company's loan pools, could have a
material adverse effect on the Company's results of operations and financial
condition.
The documents governing the Company's securitizations require the Company
to build over-collateralization levels through retention of excess servicing
distributions and application thereof to reduce the principal balances of the
senior interests issued by the related trust or to create reserve funds. This
application causes the aggregate principal amount of the loans and cash in the
related pool to exceed the aggregate principal balance of the outstanding
investor certificates. Such excess amounts serve as credit enhancement for the
related trust and therefore fund losses realized on loans held by such trust.
The Company continues to be subject to the risks of default and foreclosure
following the sale of loans through securitizations to the extent excess
servicing distributions are required to be retained or applied to reduce
principal from time to time. Such retained amounts are pre-determined by the
entity issuing the guarantee of the related senior interests and are a condition
to obtaining an "AAA/Aaa" rating thereon. In addition, such retention diverts
cash which would otherwise flow to the Company through its retained interest in
the transaction represented by the interest-only and residual certificates and
excess mortgage servicing receivables the Company receives upon loan sales
through securitizations, thereby slowing, and in some circumstances, reducing
over the life of the related securitization, the flow of cash to the Company.
Availability and Cost of Pre-Funding Mechanism
In connection with the Company's pre-funding commitments in its
securitization transactions, investors deposit in cash a pre-funded amount into
the related trust to purchase loans the Company commits to sell on a forward
basis. This pre-funded amount is invested pending subsequent transfers of loans
to the trusts in short term obligations which pay a lower interest rate than the
interest rate the trust is obligated to pay the certificate investors on the
outstanding balance of the pre-funded amount. The Company is required to deposit
at the closing of the related transaction an amount sufficient to make up the
difference between these rates. The portion of the deposit that is not recovered
by the Company is recorded as an expense of the securitization transaction which
results in a reduction in the gain on sale of the loans sold in such
securitization. If the Company were unable to make such deposits, it would be
unable to access the pre-funding mechanism that allows it to sell relatively
greater volume through each securitization, which could result in an adverse
effect upon the Company's results of operations and financial condition.
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POTENTIAL CHANGE IN VALUATION OF INTEREST-ONLY AND
RESIDUAL CERTIFICATES AND MORTGAGE SERVICING RECEIVABLES
The Company sells over 90% of the loans that it originates or purchases
through securitizations or into loan purchase facilities with servicing
retained. The Company derives a substantial portion of its income by recording a
gain on sale when loans are sold in such a manner. In the case of a US
securitization, the Company receives as an investment the interest-only and
residual certificates the Company receives as a result of such securitization.
In the case of a UK securitization, or the sale of loans into a loan purchase
facility, the Company retains a mortgage servicing receivable. In addition,
since it adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights" in
October 1995, the Company also recognizes as an asset the capitalized value of
mortgage servicing rights (including normal servicing and other ancillary fees)
as a mortgage servicing receivable. The Company calculates the value of its
interest-only and residual certificates and mortgage servicing receivables based
upon their fair values. The fair value of these assets is determined based on
various economic factors, including loan types, balances, interest rates, dates
of origination, terms and geographic locations. The Company also uses other
available information applicable to the types of loans the Company originates
and purchases, such as reports on prepayment rates, interest rates, collateral
value, economic forecasts and historical default and prepayment rates of the
portfolio under review. The Company estimates the expected cash flows that it
will receive over the life of a portfolio of loans. These expected cash flows
constitute the excess of the interest rate payable by the obligors of loans over
the interest rate passed through to the purchasers of the related securities,
less applicable recurring fees and credit losses. The Company discounts the
expected cash flows at a discount rate that it believes is consistent with the
required risk-adjusted rate of return to an independent third party purchaser of
the interest-only and residual certificates or mortgage servicing receivables.
As of March 31, 1997, the Company's balance sheet reflected the fair value of
interest-only and residual certificates and mortgage servicing receivables of
$155.0 million and $220.8 million (net of reserves of $31.4 million),
respectively.
Realization of the value of these interest-only and residual certificates
and mortgage servicing receivables in cash is subject to the prepayment and loss
characteristics of the underlying loans and to the timing and ultimate
realization of the stream of cash flows associated with such loans. If actual
experience differs from the assumptions used in the determination of the asset
value, future cash flows and earnings could be negatively impacted and the
Company could be required to write down the value of its interest-only and
residual certificates and mortgage servicing receivables. For example, in the
fourth quarter of 1996 the Company determined that the value of the
interest-only and residual certificates from its August 1995 securitization had
been impaired in the amount of $1.4 million and accordingly wrote down the value
of such certificates by that amount. The impairment was primarily attributable
to a change in the loss assumptions with respect to such securitization to be
consistent with those of the Company's subsequent securitizations. No assurance
can be given as to whether, and in what amounts, the Company in the future will
have to write down the value of the interest-only and residual certificates from
this or its other securitizations. In addition, if prevailing interest rates
rose, the required discount rate might also rise, resulting in impairment of the
value of the interest-only and residual certificates and mortgage servicing
receivables. The Company believes that there is no active market for the sale of
its interest-only and residual certificates or its mortgage servicing
receivables. No assurance can be given that these assets could be sold at their
stated value on the balance sheet, if at all.
CONSEQUENCES OF EXCEEDING PERMITTED DELINQUENCY AND DEFAULT LIMITS
The pooling and servicing agreements relating to the Company's
securitization transactions contain provisions with respect to the maximum
permitted loan delinquency rates and loan default rates, which, if exceeded,
would require amounts otherwise payable to the Company to be retained by the
related securitization trusts and would allow the termination of the Company's
right to service the related loans. The default rates on the pools of loans sold
in the March 1995 and August 1995 securitization transactions, the Company's
first two securitization transactions, have exceeded the permitted limits set
forth in the related pooling and servicing agreements. Accordingly,
overcollateralization requirements for these two securitizations have been
increased and cash otherwise payable to the Company from such securitizations is
being retained by
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the related trusts. No assurance can be given when, if ever, such amounts will
be released to the Company. In addition, this condition could result in the
termination of the Company's servicing rights with respect to the
securitizations' pools of loans by the trustee or the insurance company
providing credit enhancement for those transactions. For 1996, the revenues to
the Company from mortgage servicing rights on these pools of loans were
approximately $625,000. Although none of the parties to these transactions has
indicated its intention to terminate the Company's servicing rights and the
Company has no current expectation that they will do so, no assurance can be
given that any of such parties will not exercise its right to terminate. To
date, the permitted delinquency and default rates relating to the Company's
other securitizations have not been exceeded. However, such securitizations'
loan pools are less seasoned and no assurance can be given that such limits will
not be exceeded in the future. The retention of cash by securitization trusts or
the termination of the Company's servicing rights would have a material adverse
effect on the Company's results of operations and financial condition and could
affect the Company's ability to effect securitizations in the capital markets.
RISK OF ADVERSE ECONOMIC CONDITIONS
The Company's business may be adversely affected by periods of economic
slowdown or recession which may be accompanied by decreased demand for consumer
credit and declining real estate values. Any material decline in real estate
values reduces the ability of borrowers to use home equity to support borrowings
and increases the loan-to-value ratios of loans previously made by the Company,
thereby weakening collateral coverage and increasing the possibility of a loss
in the event of default. Further, delinquencies, foreclosures and losses
generally increase during economic slowdowns or recessions. Because of the
Company's focus on borrowers who are unable or unwilling to obtain mortgage
financing from conventional mortgage sources, the actual rates of delinquencies,
foreclosures and losses on such loans could be higher under adverse economic
conditions than those currently experienced in the conventional mortgage lending
industry. Any sustained period of such increased delinquencies, foreclosures or
losses could adversely affect the pricing of the Company's loan sales whether
through securitizations or whole loan sales.
HIGH-RISK BORROWERS
Loans made to borrowers who are unable or unwilling to obtain mortgage
financing from conventional mortgage sources may entail a higher risk of
delinquency and higher losses than loans made to borrowers who utilize
conventional mortgage sources. While the Company believes that the underwriting
criteria and collection methods it employs enable it to mitigate the higher
risks inherent in loans made to these borrowers, no assurance can be given that
such criteria or methods will afford adequate protection against such risks. In
the event that pools of loans sold and serviced by the Company experience higher
delinquencies, foreclosures or losses than anticipated, the Company's results of
operations or financial condition could be adversely affected.
LOAN DELINQUENCIES AND DEFAULTS
The Company is exposed to the risk of loan delinquencies and defaults upon
the closing of the loan. After a loan has been originated or purchased by the
Company, the loan is held as part of a portfolio of loans subject to sale either
through a securitization or on a whole loan basis. During the period a loan is
so held, the Company is at risk for loan delinquencies and defaults. Following
the sale of the loan through a securitization, the Company's direct risk with
respect to loan delinquency or default on such loan is limited to those
circumstances in which it is required to repurchase such loan due to a breach of
a representation or warranty in connection with the securitization. This risk
also exists for loans sold on a whole loan basis. On loans sold through
securitizations, the Company is also at risk of loan delinquency or default from
a first payment default and thereafter to the extent that losses are paid out of
a reserve account, or reduce the over-collateralization to the extent that funds
are available, and will result in a reduction in the value of the interest-only
and residual certificates and mortgage servicing receivables held by the
Company.
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RISKS FROM INTEREST RATE FLUCTUATIONS
Profitability may be directly affected by the level of and fluctuations in
interest rates which affect the Company's ability to earn a spread between
interest received on its loans and the costs of borrowings. The profitability of
the Company is likely to be adversely affected during any period of unexpected
or rapid changes in interest rates. A substantial and sustained increase in
interest rates could adversely affect the ability of the Company to originate
and purchase loans and could reduce the gain on sale recognized by the Company
when loans are sold through securitizations. A significant decline in interest
rates could decrease the size of the Company's loan servicing portfolio by
increasing the level of loan prepayments. Additionally, to the extent servicing
spread has been capitalized on the books of the Company or the Company holds
interest-only and residual certificates received upon loan sales through
securitizations, higher than anticipated rates of loan prepayments or losses
would reduce the aggregate amount of payments received by the REMIC trusts
pursuant to the Company's securitizations which would require the Company as
holder of the residual interests in such securitizations to write down the value
of such servicing spread or the fair value of such interest-only and residual
certificates, adversely impacting earnings and the value of the Common Stock.
Fluctuating interest rates also may affect the net interest income earned by the
Company resulting from the difference between the yield to the Company on loans
held pending sale and the interest paid by the Company for funds borrowed under
the Company's warehouse facility. In addition, inverse or flattened interest
yield curves could have an adverse impact on the profitability of the Company
because the loans pooled and sold by the Company generally have long-term rates,
while the senior interests in the related REMIC trusts are priced on the basis
of intermediate rates in the US.
RISKS RELATING TO RECENT EXPANSION AND PRODUCT EXTENSION
Since January 1, 1994, the Company has originated and purchased a
significantly greater number of loans than it had in previous years. In light of
this growth, the historical performance of the Company's earnings may be of
limited relevance in predicting future performance. Any credit or other problems
associated with the larger number of loans originated and purchased in the
recent past will not become apparent until sometime in the future.
The Company's significant growth and expansion have placed substantial new
and increased pressures on the Company's personnel and systems. In order to
support the growth of its business, the Company has added a significant number
of new operating procedures, facilities and personnel. There can be no assurance
that the addition of these new operating procedures and personnel will be
sufficient to enable the Company to meet its growing operating needs. Failure by
the Company to manage its growth effectively, or to sustain its historical
levels of performance in credit analysis and transaction structuring with
respect to the increased loan origination and purchase volume, could have a
material adverse effect on the Company's results of operations and financial
condition.
In addition, the Company has recently expanded its product offerings to
include conventional home improvement loans (commencing May 1996),
"Sav*-A-Loans(R)" (commencing May 1996), adjustable rate loans (commencing
October 1996), loans for occupants of government-owned residential properties in
the UK (commencing November 1996), conventional loans (commencing February 1997)
and, to a lesser extent, Title I loans (commencing December 1995), with which
the Company has relatively little experience. The Sav*-A-Loan(R) product, for
example, is offered to homeowners with little or no equity in their property but
who possess a favorable credit profile and debt-to-income ratio. The
Sav*-A-Loan(R) product has contributed and is expected to continue to contribute
an increasing percentage of the Company's US originations. The Company has
incurred certain expenses in connection with the development of these new
product offerings. No assurance can be given that the Company will be able to
develop these new product offerings successfully, or that the Company's
extension of its product offerings will not have a material adverse effect on
the Company's results of operations and financial condition.
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CREDIT RISK ASSOCIATED WITH HIGH LTV LOANS
Certain of the Company's loan products have high loan-to-value ratios
("LTV") and, although secured by real property, the collateral of such loans
often will not be sufficient to cover the principal amount of the loans in the
event of default. The principal balance of such a loan, such as the Company's
"Sav*-A-Loan(R)" product, inclusive of other loans secured by the same property
often exceeds the value of the underlying property by as much as 25%.
Consequently, the Company is less likely to use foreclosure as a means to
mitigate its losses upon the default of such loans or to recover any meaningful
amounts in the event of a foreclosure. With respect to these loans, LTV
determinations are based on a value of the underlying property, which is set by
a full appraisal, a drive-by appraisal or, if owned less than 12 months, the
sale price. Accordingly, there can be no assurance that such values accurately
reflect prevailing market prices of such properties, either when made or upon a
default on the related loan. For such loans, the Company relies primarily on the
creditworthiness of the borrower and, with respect to Title I loans, also relies
on FHA co-insurance for repayment. Losses not covered by the underlying
properties, if in excess of the Company's allowance for such losses included in
the calculation of the gain on sale, could have a material adverse effect on the
Company's results of operations and financial condition.
ABILITY OF THE COMPANY TO IMPLEMENT ITS GROWTH STRATEGY
The Company's growth strategy is dependent upon its ability to increase its
loan origination and purchase volume while maintaining its customary origination
fees, interest rate spreads and underwriting criteria with respect to such
increased loan origination and purchase volume. Implementation of this strategy
will depend in large part on the Company's ability to: (i) expand its broker
network in markets with a sufficient concentration of borrowers meeting the
Company's underwriting criteria; (ii) obtain adequate financing on favorable
terms; (iii) securitize loans profitably in the secondary market on a regular
basis; (iv) hire, train and retain skilled employees; and (v) continue to expand
in the face of increasing competition from other mortgage lenders. The Company's
failure with respect to any or all of these factors could impair its ability to
successfully implement its growth strategy which could have a material adverse
effect on the Company's results of operations and financial condition. The
Company will also incur start-up costs in connection with entering new markets
including costs associated with establishing new regional infrastructures. Such
additional costs could have a material adverse effect on the Company's results
of operations and financial condition. In addition, the Company's results of
operations will be adversely affected if revenues do not increase sufficiently
to compensate for the increase in operating expenses resulting from past,
current and future growth and expansion and there can be no assurance that any
expansion will be profitable or that it will not adversely affect the Company's
results of operations.
RISKS RELATED TO ACQUISITIONS
In September 1995, the Company acquired the remaining 50% of CSC-UK not
then owned by the Company in exchange for 3.6 million shares of Common Stock. In
April 1996, CSC-UK acquired all of the outstanding capital stock of J&J in
exchange for pound sterling 15.3 million ($23.3 million based on the Noon Buying
Rate on the date of such acquisition) and 548,000 shares of Common Stock valued
at $9.8 million. J&J's business is substantially similar to that of CSC-UK but
with a primary focus of making loans generally secured by second liens. In June
1996, CSC-UK acquired all of the outstanding capital stock of Greyfriars Group
Limited (formerly known as Heritable Group Limited and referred to herein as
"Greyfriars") in exchange for pound sterling 41.8 million ($64.1 million based
on the Noon Buying Rate on the date of such acquisition) and 99,362 shares of
Common Stock valued at $2.5 million. Greyfriars' business differs from that of
CSC-UK in that its loans are made primarily to borrowers with higher quality
credit characteristics, are generally secured by second liens and generally have
higher loan-to-value ratios and lower interest rates than those made by CSC-UK.
An important part of the Company's growth strategy is the acquisition of
consumer finance companies that complement or supplement the Company's existing
business in the US and in the UK, such as J&J and Greyfriars. Any acquisition
involves inherent uncertainties and risks, such as the effect on the acquired
business of integration into the Company, the availability of management
resources to oversee the operations
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of the acquired business, the risks of entering markets in which the Company has
no or limited direct prior experience, operating in different geographical
locations with different competitive conditions, different demographic
characteristics and different corporate cultures and the potential loss of key
employees of the acquired company. Integrating acquired products and operations
requires a significant amount of management's time and skill and may place
significant demands on the Company's operations and financial resources.
Although an acquired business may have enjoyed profitability and growth prior to
the acquisition, there can be no assurance that such profitability or growth
would continue thereafter. There can be no assurance that the Company will be
able to locate appropriate acquisition candidates, that any identified
candidates will be acquired or that acquired operations will be effectively
integrated or prove profitable. There can be no assurance that the financing
necessary to complete such acquisitions can be obtained by the Company on
favorable terms, if at all.
In addition, in connection with its acquisitions of CSC-UK, J&J and
Greyfriars, the Company has recognized $19.7 million, $5.2 million and $25.4
million, respectively, of goodwill and, as a result of a recent acquisition in
the UK of a retail mortgage broker, will recognize additional goodwill of
approximately $12.0 million. The Company may also recognize significant amounts
of goodwill in connection with future acquisitions. The Company is amortizing
goodwill recognized in its recent acquisitions over ten years, and the
relatively large amortization charge recognized in each such year may
significantly reduce earnings recorded in such period. In addition, in the event
that the Company determines that the carrying value of goodwill is impaired, it
would write down such carrying value which would result in a charge to earnings
in the period such determination is made. Any such charge could have a material
adverse effect on the Company's financial results. In connection with its
acquisitions, the Company accounted for as a cost of acquisition restructuring
charges in the aggregate amount of $5.0 million for items including charges for
terminated leases and severance payments, and may have to make similar
provisions with respect to future acquisitions. In the event that the actual
charges exceed the provisions made by the Company, such charges will have an
adverse effect on the Company's results of operations.
Future acquisitions by the Company could result in potentially dilutive
issuances of equity securities, the incurrence of debt and contingent
liabilities and amortization expenses of additional goodwill and other
intangible assets, which could materially affect the Company's results of
operations or financial condition.
RISKS RELATED TO OPERATIONS IN THE UK
General
Since the Company commenced operations in the UK in May 1995, the Company's
UK operations have become an increasingly important contributor to the Company's
overall operating results. For the three months ended March 31, 1997, 20.4% of
the Company's total loan origination and purchase volume (as compared to 14.0%
for the prior year's period) and 50.4% of the Company's total revenues (as
compared to 46.3% for the prior year's period) were attributable to the
Company's UK operations.
The Company's operations in the UK market are subject to most of the same
risks faced by the Company's US operations as well as the additional risks
customarily associated with US corporations conducting foreign activities,
including fluctuations in foreign currency exchange rates. To the extent that
unfavorable fluctuations in foreign currency exchange rates occur, the Company's
results of operations will be adversely affected. Although the Company is
exploring possible programs for hedging this risk, the Company is not aware of
any such program currently available that is suited to the Company's risk. There
can be no assurance that the Company will adopt a program to hedge this risk.
Additional risks in the UK include fluctuations in foreign currency controls,
expropriation, nationalization and other economic, tax and regulatory policies
of the UK government as well as the laws and policies of the US affecting
foreign trade and investment. A general election was held in the UK on May 1,
1997 in which the Labour Party was elected and it is anticipated that some shift
in fiscal and social policy will result. The Company's UK operations may be
adversely affected by any such changes.
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Business Prospects Risks
The Company believes that the market in the UK for borrowers who are unable
or unwilling to obtain mortgage financing from conventional mortgage sources at
competitive rates, if at all, is underserved as a result of regulatory policies
imposed on banks and building societies ("Conventional UK Lenders") in the late
1980s. Currently many of such borrowers obtain mortgage financing through
independent mortgage brokers predominantly funded by private investors. Since
commencing operations in the UK, the Company has derived its UK loan
originations primarily from mortgage brokers (with the exception of the loan
portfolios purchased as a result of the acquisitions of J&J and Greyfriars) and,
to a lesser extent, recently through direct marketing to occupants of
government-owned residential properties in the UK. Approximately 60.5% and 30.7%
of the Company's UK loans were originated through three mortgage brokers in 1995
and 1996, respectively. Although the Company believes that its products and
services will attract a consistent flow of loan origination volume from
independent mortgage brokers, there can be no assurance the Company will be able
to obtain similar levels of loan origination volume from brokers in the future.
Further, there can be no assurance that the Company, due to competition or other
factors, will be able to obtain similar terms and pricing for such loan
originations. In particular, the Company has agreed to pay increased commissions
to brokers on loans originated in connection with right of first refusal
agreements.
Legal and Regulatory Risks
The Company's mortgage lending business in the UK is subject to regulations
promulgated under the United Kingdom Consumer Credit Act 1974 (the "CCA")
applicable to loans made to individuals or partnerships with principal balances
of pound sterling 15,000 or less. Loans with principal balances in excess of
pound sterling 15,000 are not currently regulated within the UK, except in
limited circumstances. The government has announced its intention to bring
before Parliament regulations that would increase this amount. The CCA and
regulations promulgated thereunder, among other things, impose licensing
obligations on CSC-UK and its subsidiaries, define certain requirements relating
to the form, content, legibility, execution and delivery to the borrower of loan
documents, restrict communication with the borrower prior to completion of a
transaction, require information and notice of enforcement to be given to the
borrower, generally limit a lender to a one-month deferment with any
calculations of prepayment interest under the Rule of 78s method, require
rebates to the borrower on early settlement and create a cause of action for an
"extortionate credit bargain." A license is required to service loans in the UK
irrespective of the size of the loan. Failure to comply with the requirements of
these rules and regulations can result in the revocation or suspension of the
license to do business and/or render the mortgage unenforceable in the absence
of a court order.
Although the Company believes that CSC-UK has systems and procedures to
facilitate compliance with the requirements under the CCA and is in compliance
in all material respects with applicable laws and regulations, there can be no
assurance that more restrictive laws and regulations will not be adopted in the
future that could make compliance more difficult or expensive (see discussion
regarding the Office of Fair Trading (the "OFT") initiative below).
Approximately 36.9% (as a percentage of aggregate principal balances) of the
Company's UK loans were subject to the CCA and the regulations promulgated
thereunder at December 31, 1996. Of this 36.9%, 7.5% were loans originated by
CSC-UK, 25.7% by J&J and 66.8% by Greyfriars. By way of example, if regulations
were enacted to increase the regulated amount to pound sterling 25,000, an
additional 28.1% of the Company's UK loans at December 31, 1996 would have been
regulated. The Company cannot predict the likelihood of the enactment of these
regulations or the extent of such increase or any other change to the CCA or any
other legislation. The announced OFT regulatory initiative or other future
regulation, if enacted, could limit the Company's ability to impose fees and
charges and could have a material adverse effect on the Company's results of
operations and financial condition.
With regard to prepayment terms, if a UK borrower redeems his loan in full
prior to the maturity date (whether voluntarily or through a default), the
equivalent of an early payment fee is incurred as result of the borrower's
contractual obligation to pay a stated amount of interest for the credit
extended. The Company's UK loans provide for prepayment fees to be determined in
one of two ways. For some of the Company's UK loans, the prepayment fee is based
on an amount equal to a certain number of months' interest; however, for the
majority of the Company's UK loans, the total principal and interest due over
the full term of the loan is
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calculated and then the borrower is provided a rebate for the unexpired portion
of the loan term, resulting in the equivalent of an early payment fee. The
amount due on a majority of the Company's UK loans in the case of prepayment is
based on the amount of interest, at the Standard Rate (as defined herein) or the
Concessionary Rate (as defined herein) (whichever is in effect on the date of
prepayment), that has been "earned" and calculated in accordance with the "Rule
of 78s" method. Using this method, the prepayment of a loan will often result in
the Company receiving substantially more than such loan's original principal
balance.
There can be no assurance that regulatory developments in the UK, including
those that might be brought about by a change in the political party whose
members constitute a majority of Parliament as a result of the May 1, 1997
elections, will not result in significant changes relating to certain provisions
of many CSC-UK loans, most notably the calculation of prepayments using the Rule
of 78s and the use of the standard/concessionary rate structure. The Company
believes that these provisions are enforceable under English law and do not
violate common law prohibitions on penalty interest. The enforceability of these
provisions, however, has not been tested in English courts. In the event an
appropriate English court were to address these issues, no assurance can be
given that such a court will not reach a holding that negatively affects the
terms of such loans, which holding could have a material adverse effect on the
Company's results of operations and financial condition.
In addition, CSC-UK received a letter in March 1997 from the OFT, the
Director General of which has responsibility, under the CCA, for the granting of
consumer credit licenses to mortgage lenders and for the subsequent monitoring
of their activities to ensure continued fitness to hold such licenses. The
Company believes the letter was also sent to other lenders, as well as
intermediaries and other entities involved directly or indirectly in the
non-status lending market. The letter states that, when determining the fitness
of licensees, the OFT will consider whether the licensee or its associates have
engaged in business practices which appear to be inappropriate, regardless of
their legality. The letter specifically sets forth certain practices deemed by
the OFT to fall within such categories.
The majority of the stated business practices are either (i) not applicable
to CSC-UK's operations or (ii) practices in which CSC-UK engages and believes
itself to be in compliance or easily able to modify its operations in order to
comply with the OFT letter. The OFT letter, however, questions the
appropriateness of standard/concessionary rate structures, as well as the
calculation of prepayments using the Rule of 78s method. The Company is
reviewing and evaluating its practices with respect to each issue raised in the
letter and is in discussion with the OFT regarding its concerns raised in the
letter. The Company does not believe regulatory initiatives set forth in the
letter will have a material adverse effect on any of its existing mortgage loans
or to the continuance of its licenses, although no assurances to that effect can
be given at this time. In partial response to the OFT letter and after
preliminary discussions with OFT, the Company volunteered to discontinue
originating unregulated loans that utilize the Rule of 78s method commencing in
the early part of the second half of 1997.
The Company commenced broadening its UK product offerings with products
that calculate payments without using the Rule of 78s in anticipation of
potential regulatory initiatives like those set forth in the OFT letter. The
elimination of the Rule of 78s loan products could have a material adverse
effect in future periods on the Company's results of operations and financial
condition, especially if the Company is unsuccessful in its product broadening
efforts. In future periods, the OFT's regulatory initiatives could also result
in the Company's elimination or modification of regulated loan products
utilizing the Rule of 78s. Such elimination or modification could also have a
material adverse effect in future periods on the Company's results of operations
and financial condition, especially if the Company is unsuccessful in its
product broadening efforts. In addition, the Company believes that it may be
required to modify aspects of its standard/concessionary rate structure in
response to the regulatory initiatives set forth in the OFT letter. No assurance
can be given as to the effect of such modifications or that the OFT will not
require the elimination of its standard/concessionary rate structure, either of
which could have a material adverse effect in future periods on the Company's
results of operations and financial condition.
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Dependence on Secondary Market
Since March 1996, CSC-UK has pooled and sold through securitizations an
increasing percentage of the loans which it originates. Although the Company
believes that a UK secondary market exists for the type of mortgage loans it
originates in the UK, the UK secondary market for such loans is less developed
than the US secondary market for such loans. The Company believes that its March
1996 sale was the first publicly offered, London Stock Exchange listed
securitization of loans of the type originated by the Company sold in the UK
secondary market in several years. No assurances can be given that CSC-UK will
be successful in structuring, marketing and completing loan securitizations in
the UK in the future or that a viable and liquid market for whole loan sales
will develop similar to that in the US. Failure to securitize or sell mortgage
loans in the UK would have a material adverse effect on CSC-UK's, and therefore
the Company's, results of operations and financial condition.
Unseasoned Loan Portfolio
The Company has been servicing loans in the UK only since May 1995 and,
accordingly, the UK loan serviced portfolio is unseasoned. The Company has
experienced an increase in delinquency rates in connection with its UK serviced
portfolio. Further, J&J's historical delinquency experience has been higher than
that of CSC-UK, totaling 43.3% at December 31, 1996.
Potential Change in Valuation of Mortgage Servicing Receivables
Due to the relatively brief period the Company has operated in the UK and
because the UK market for the types of loans sold by the Company has been very
fragmented and underserved, the Company has limited data on which to base
certain of the assumptions, including prepayment assumptions, necessary to
determine the gain on sale recognized when the Company sells UK loans through
securitizations. A component of such gain on sale, which is capitalized on the
Company's balance sheet as mortgage servicing receivables, results from two
attributes of the Company's UK loans that are not shared by the Company's US
loans. Unlike the Company's US loans, certain UK loans have significant
prepayment fees and/or provide the borrower with an opportunity to pay a reduced
interest rate (the "Concessionary Rate") to the extent the borrower pays the
loan when due (as opposed to the standard interest rate (the "Standard Rate")
that would apply at any time during which any payment arrears exist). In its UK
securitizations, the Company acquires an uncertificated residual interest,
carried on the Company's balance sheet as mortgage servicing receivables, in the
excess cash flows generated by such securitizations. Following the sale of UK
loans into securitizations, the Company retains no control over the loans sold
and has no control over the borrowers' performance under such loans and no
control over the ability to realize prepayments calculated using the Rule of 78s
or interest rates in excess of the Concessionary Rate. Accordingly, even though
under the terms of the Company's UK securitizations, the Company is entitled to
such prepayments and interest in excess of the Concessionary Rate, there can be
no assurance that such prepayments or excess interest can be achieved. In
addition, in the event of a forced sale, any proceeds would be distributed first
to pay related enforcement expenses, then to pay any aggregate outstanding
concessionary interest and then to pay the holders of the senior interests,
before any proceeds were available to pay the holder of the residual interest.
To the extent that actual prepayments occur at a slower rate than assumed on UK
loans, the Company may realize lower prepayment calculations, or realize the
prepayments at a later time, than assumed at the time the gain on sale was
originally determined resulting in impairment to mortgage servicing receivables.
If more borrowers than were initially assumed earned the opportunity to pay the
Concessionary Rate, the Company will realize a lower than expected yield on such
borrowers' loans also resulting in impairment to mortgage servicing receivables.
Although the Company believes that its assumptions with respect to UK
prepayments and borrowers who will be eligible to pay the Concessionary Rate are
reasonable, no assurance can be given that actual results will not differ
substantially. In addition, no assurance can be given that the regulatory
environment will not adversely change or competitors entering the UK market will
not offer to borrowers better prepayment and interest terms than those currently
offered by the Company. Either of such developments could impair the Company's
mortgage servicing receivables and would have a negative impact on the Company's
financial condition and results of operations.
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Mortgage servicing receivables may also be impaired as a result of certain
adjustments in interest rates affecting UK loans. The interest rates on the
majority of the Company's UK loans may be adjusted upward by the Company based
upon a UK base borrowing rate. The Company's UK loans have generally been less
sensitive to fluctuations in interest rates than is typically the case for US
adjustable rate loans. The Company's UK securitizations and loan sales into the
UK Greenwich Facility have variable pass-through rates based on LIBOR, requiring
an increase in the rate upon a specified increase in LIBOR. To the extent that
the Company's UK loan interest rates are not adjusted upward in a timely manner
in response to increases in the variable pass-through rate relating to the
securitization, mortgage servicing receivables will be impaired. In addition, if
such interest rates are adjusted upward and borrowers are unable to make the
resulting higher payments, the Company's UK loans may experience greater
delinquencies and losses which could cause the mortgage servicing receivables to
be impaired.
CONTINGENT RISKS
Although the Company sells substantially all loans which it originates and
purchases on a nonrecourse basis, the Company retains some degree of credit risk
on substantially all loans sold. During the period of time that loans are held
pending sale, the Company is subject to the various business risks associated
with the lending business including the risk of borrower default, the risk of
foreclosure and the risk that a rapid increase in interest rates would result in
a decline in the value of loans to potential purchasers. In addition, documents
governing the UK Greenwich Facility and the Company's securitizations require
the Company to commit to repurchase or replace loans which do not conform to the
representations and warranties made by the Company at the time of sale. When
borrowers are delinquent in making monthly payments on loans included in a REMIC
trust, the Company is required to advance interest payments with respect to such
delinquent loans to the extent that the Company deems such advances ultimately
recoverable. These advances require funding from the Company's capital resources
but have priority of repayment from the succeeding month's collections.
In the ordinary course of its business, the Company is subject to claims
made against it by borrowers and private investors arising from, among other
things, losses that are claimed to have been incurred as a result of alleged
breaches of fiduciary obligations, misrepresentations, errors and omissions of
employees, officers and agents of the Company (including its appraisers),
incomplete documentation and failures by the Company to comply with various laws
and regulations applicable to its business. The Company believes that liability
with respect to any currently asserted claims or legal actions is not likely to
be material to the Company's consolidated results of operations or financial
condition; however, any claims asserted in the future may result in legal
expenses or liabilities which could have a material adverse effect on the
Company's results of operations and financial condition.
GEOGRAPHIC CONCENTRATION OF US OPERATIONS
Approximately 18.0% of the Company's US loan origination and purchase
volume for 1996 was derived from the state of New York. Although the Company is
licensed or registered in 42 states and the District of Columbia and intends to
continue to expand into other markets, it is expected that the state of New York
will continue to provide a substantial portion of its loan origination and
purchase activity. Consequently, the Company's results of operations and
financial condition are affected by general trends in the New York economy and
the residential real estate market. Should a downturn occur in the New York
economy or its residential real estate market, the Company's equity position or
portfolio performance relating to existing New York loans would be adversely
affected. In particular, the economy and the residential real estate market in
and around New York City, where a significant portion of the Company's New York
loans have been originated, has historically been affected by fluctuations in
the financial markets.
COMPETITION
As a consumer finance company specializing in mortgage loans, the Company
faces intense competition, primarily from mortgage banking companies, commercial
banks, credit unions, thrift institutions, credit card issuers, finance
companies and, additionally in the UK, building societies and new market
entrants who are affiliated with some of the Company's US competitors. Many of
these competitors in the financial services
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<PAGE> 18
business are substantially larger and have more capital and other resources than
the Company. Furthermore, certain large national finance companies and
conforming mortgage originators in the US have announced their intention to
adapt their conforming origination programs and allocate resources to the
origination of non-conforming loans. In addition, certain of these larger
mortgage companies and commercial banks have begun to offer products similar to
those offered by the Company, targeting customers similar to those of the
Company. The entrance of these competitors into the Company's market could have
a material adverse effect on the Company's financial condition and results of
operations.
The UK market for the type of loans the Company originates is highly
fragmented and, for a variety of reasons, underserved by conventional lenders as
compared to the US market. The Company anticipates that it will face additional
competition in the UK in the future which will likely have a negative impact on
the average gain on sale realized upon the sale of UK loans and could have a
material adverse effect on the Company's results of operations and financial
condition.
Competition can take many forms, including convenience in obtaining a loan,
customer service, marketing and distribution channels and interest rates.
Competition may be affected by fluctuations in interest rates and general
economic conditions. During periods of rising rates, competitors that have
"locked in" low borrowing costs may have a competitive advantage. During periods
of declining rates, competitors may solicit the Company's customers to refinance
their loans. During economic slowdowns or recessions, the Company's borrowers
may have new financial difficulties and may be receptive to offers by the
Company's competitors. The current level of gains realized by the Company and
its competitors on the sale of the type of loans they originate and purchase is
attracting additional competitors into this market with the possible effect of
lowering gains that may be realized on the Company's future loan sales. During
1996, the Company experienced an increase in the weighted average loan-to-value
ratio on its Core Products and in the premiums it paid under its Wholesale Loan
Acquisition Program to its correspondents, and experienced a slower rate of
growth in originations from its independent mortgage brokers. The Company is
unable at this time to determine whether such increases and slowing will
continue in 1997. Furthermore, as the Company expands into the market of
borrowers with higher quality credit and loan products that require more
significant capital, the Company will face additional competition with the
possible effect of lowering gains realized by the Company.
The Company depends largely on independent mortgage brokers and financial
institutions and other mortgage bankers for its originations and purchases of
new loans. The Company's competitors also seek to establish relationships with
the Company's independent mortgage brokers and financial institutions and other
mortgage bankers. In addition, the Company expects the volume of wholesale loans
purchased by the Company to increase and the relative proportion of wholesale
loans to total loans originated and purchased by the Company to expand. The
Company's future results may become more exposed to fluctuations in the volume
and cost of its wholesale loans resulting from competition from other purchasers
of such loans, market conditions and other factors.
US LEGISLATIVE AND REGULATORY RISKS
Members of Congress and government officials have from time to time
suggested the elimination of the mortgage interest deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. Because many of the Company's loans are made to borrowers
for the purpose of consolidating consumer debt or financing other consumer
needs, the competitive advantages of tax deductible interest, when compared with
alternative sources of financing, could be eliminated or seriously impaired by
such government action. Accordingly, the reduction or elimination of these tax
benefits could have a material adverse effect on the demand for loans of the
kind offered by the Company.
The Company's US business is subject to extensive regulation, supervision
and licensing by federal, state and local governmental authorities and is
subject to various laws and judicial and administrative decisions imposing
requirements and restrictions on part or all of its operations. The Company's
consumer lending activities are subject to the Federal Truth-in-Lending Act and
Regulation Z (including the Home Ownership and Equity Protection Act of 1994),
the Federal Equal Credit Opportunity Act and Regulation B, as amended ("ECOA"),
the Fair Credit Reporting Act of 1970, as amended, the Federal Real Estate
Settlement
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<PAGE> 19
Procedures Act ("RESPA") and Regulation X, the Home Mortgage Disclosure Act, the
Federal Debt Collection Practices Act and the National Housing Act of 1934, as
well as other federal and state statutes and regulations affecting the Company's
activities. The Company is also subject to the rules and regulations of, and
examinations by, the Department of Housing and Urban Development ("HUD") and
state regulatory authorities with respect to originating, processing,
underwriting, selling, securitizing and servicing loans. These rules and
regulations, among other things, impose licensing obligations on the Company,
establish eligibility criteria for mortgage loans, prohibit discrimination,
provide for inspections and appraisals of properties, require credit reports on
loan applicants, regulate assessment, collection, foreclosure and claims
handling, investment and interest payments on escrow balances and payment
features, mandate certain disclosures and notices to borrowers and, in some
cases, fix maximum interest rates, fees and mortgage loan amounts. Failure to
comply with these requirements can lead to loss of approved status, termination
or suspension of servicing contracts without compensation to the servicer,
demands for indemnifications or mortgage loan repurchases, certain rights of
rescission for mortgage loans, class action lawsuits and administrative
enforcement actions.
Although the Company believes that it has systems and procedures to
facilitate compliance with these requirements and believes that it is in
compliance in all material respects with applicable local, state and federal
laws, rules and regulations, there can be no assurance that more restrictive
laws, rules and regulations will not be adopted in the future that could make
compliance more difficult or expensive.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 1997, the Company adopted the Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfer and Servicing of Financial Assets and Extinguishment of
Liabilities." SFAS No. 125 addresses the accounting for all types of
securitization transactions, securities lending and repurchase agreements,
collateralized borrowing arrangements and other transactions involving the
transfer of financial assets. SFAS No. 125 distinguishes transfers of financial
assets that are sales from transfers that are secured borrowings. SFAS No. 125
is generally effective for transactions that occur after December 31, 1996, and
it is to be applied prospectively. SFAS No. 125 requires the Company to allocate
the total cost of mortgage loans sold to the mortgage loans sold (servicing
released), retained certificates and servicing rights based on their relative
values. The pronouncement also requires the Company to provide additional
disclosure about the retained certificates in its securitizations and to account
for these assets at fair value in accordance with SFAS No. 115. The Company does
not believe that SFAS No. 125 will have a material effect on the Company's
securitizations as currently structured; however, there can be no assurance that
SFAS No. 125 will not have a material adverse effect on future securitization
structures the Company may employ, reduce the Company's gain on sale of loans in
the future or otherwise adversely affect the Company's results of operations or
financial condition.
POSSIBLE ENVIRONMENTAL LIABILITIES
US
In the course of its business, the Company has acquired, and may acquire in
the future, properties securing loans which are in default. Under various
federal, state and local environmental laws, ordinances and regulations, a
current or previous owner or operator of real estate may be required to
investigate and clean up hazardous or toxic substances or chemical releases at
such property, and may be held liable to a governmental entity or to third
parties for property damage, personal injury and investigation and cleanup costs
incurred by such parties in connection with the contamination. Such laws
typically impose cleanup responsibility and liability which, under such laws,
has been interpreted to be joint and several unless the harm is divisible and
there is a reasonable basis for allocation of responsibility. The costs of
investigation, remediation or removal of such substances may be substantial, and
the presence of such substances, or the failure to properly remediate such
property, may adversely affect the owner's ability to sell or rent such property
or to borrow using such property as collateral. Persons who arrange for the
disposal or treatment of hazardous or toxic substances also may be liable for
the costs of removal or remediation of such substances at the disposal or
treatment facility, whether or not the facility is owned or operated by such
person. In addition, the owner or former owners of a
18
<PAGE> 20
contaminated site may be subject to common law claims by third parties based on
damages and costs resulting from environmental contamination emanating from such
property.
UK
"Owners" or "occupiers" of contaminated land in the UK are potentially
liable under UK environmental laws. Such persons can be required to clean up
affected land, cease polluting activities, obtain licenses in connection with
disposal of waste, reimburse relevant enforcement authorities for clean-up costs
related to land and controlled waters and pay fines for non-compliance with
relevant laws and regulations. The potential liability of such persons may be
substantial and the presence of any polluting substances or the failure to
properly remediate such land may adversely affect the owner's or occupier's
ability to sell or rent the property on such land or to borrow using such
property as security. In addition to liability under statute, such persons may
be liable to third parties at common law for property damage, economic loss and
personal injury.
A lender may be deemed to be an "owner" upon enforcement of its interest in
a mortgaged property following default by a borrower depending on the method of
enforcement employed. A lender may also, depending on the degree of control it
has, be liable as a person who has caused or knowingly permitted pollution to
occur. A new statutory framework providing for the identification and allocation
of responsibility for costs associated with the investigation and clean-up of
contaminated land is set out in the Environmental Protection Act 1990, as
amended, and is expected to be implemented during 1997. Under this framework,
local authorities will have a duty to inspect land within their jurisdiction for
the purpose of identifying contamination.
No assurance can be given in either the US or the UK that any prior owner
or tenant of a property did not create any material environmental condition not
known to the Company, that future laws, ordinances or regulations will not
impose any material environmental liability, or that a material environmental
condition does not otherwise exist as to any one or more of the properties now
owned or acquired in the future by the Company, any of which could result in a
material adverse effect on the Company's results of operations and financial
condition.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock may experience fluctuations that are
unrelated to the operating performance of the Company. In particular, the price
of the Common Stock may be affected by general market price movements as well as
developments specifically related to the consumer finance industry such as,
among other things, interest rate movements, loss and delinquency rates and the
Company's access to and the overall performance of the securitization market. In
addition, the Company's operating income on a quarterly basis is significantly
dependent upon the successful completion of the Company's loan sales in the
market, and the inability of the Company to complete significant loan sale
transactions in a particular quarter may have a material adverse impact on the
Company's results of operations for that quarter and could, therefore,
negatively impact the price of the Common Stock.
COMMON STOCK ELIGIBLE FOR FUTURE SALE
As of June 25, 1997, 30,980,119 shares of Common Stock were issued and
outstanding. Of these shares, 8,502,603 shares of Common Stock were available
for resale in the public market without restriction or further registration
under the Securities Act, except for shares held by affiliates of the Company,
which shares were subject to the resale limitations of Rule 144 promulgated
under the Securities Act. 22,477,516 of the shares of Common Stock outstanding
were deemed to be "restricted securities" as the term is defined in Rule 144,
all of which are eligible for sale in the public market in compliance with Rule
144. In addition, as of June 25, 1997, the Company had granted options to
purchase up to 3,791,850 shares of Common Stock, of which 3,575,050 were
outstanding, 185,800 had been exercised and 31,000 had expired.
In May 1996, the Company issued $143.8 million of 6% Convertible Debentures
due 2006 (the "Convertible Debentures") convertible at any time into shares of
Common Stock, currently at a conversion price of $26.25 per share, subject to
adjustment. The Company may also issue up to 800,000 shares of
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<PAGE> 21
Common Stock from time to time as additional consideration for conversion of
debentures. Through June 25, 1997, an aggregate of $14,130,000 principal amount
of Convertible Debentures has been converted into an aggregate of 538,281 shares
of Common Stock, including the induced conversion by the Company of $14.0
million aggregate principal amount in April, 1997 resulting in the issuance by
the Company of 533,332 shares of Common Stock for the conversion and an
additional 342,708 shares of Common Stock to induce conversion and the payment
of $420,000 in cash (equal to accrued but unpaid interest) to the converting
holders.
On April 9, 1997, the Company completed a private placement of 5,000 shares
of Series A Preferred Stock and Warrants to purchase 500,000 shares of Common
Stock with an exercise price of $20.625 per share. The Series A Preferred Stock
is convertible into shares of Common Stock, subject to certain redemption rights
and restrictions, including volume restrictions limiting the number of shares of
Series A Preferred Stock which may be converted by each holder thereof to no
more than 25% of such shares during the 90 calendar days following the original
issuance date and an additional 25% for each successive 90 day period (with each
such holder being able to convert 100% of such shares at any time on or after
the 271st calendar day following the original issuance date), at a conversion
price equal to the lowest daily sales price of the Common Stock during the four
consecutive trading days immediately preceding such conversion (the "Low Sales
Price"), discounted over time up to 4% and subject to certain adjustments. The
number of shares of Common Stock issuable upon conversion of a share of Series A
Preferred Stock is equal to the quotient of the liquidation preference for such
share of Series A Preferred Stock (initially $10,000 subject to increase for
accrued but unpaid dividends and certain other payments the Company may be
required to make pursuant to the terms of the Series A Preferred Stock) divided
by the Low Sales Price on the date of conversion. To date, 1,208 shares of
Series A Preferred Stock have been converted into an aggregate of 976,332 shares
of Common Stock. Pursuant to the terms of the Series A Preferred Stock, as of
June 9, 1997 and based on a Low Sales Price as of such date of $16.63 per share
of Common Stock and 78 days of accrued dividends, an additional 42 shares of
Series A Preferred Stock (representing the conversion of 0.8% of the initial
5,000 shares of Series A Preferred Stock) could immediately be converted into an
aggregate of 25,591 shares of Common Stock and sold under the Registration
Statement the Company has filed with the Commission. The Company has set June
30, 1997 as the record date for the payment of dividends with respect to the
Series A Preferred Stock, has decided to pay such dividends in the form of
shares of Common Stock, and, assuming no further conversions of such stock and
basing the calculation on the June 25, 1997 closing price of $18.50 per share of
Common Stock, the Company will issue an aggregate of approximately 28,012 shares
of Common Stock as dividend payments to the holders thereof on such date in
accordance with the terms of the Series A Preferred Stock.
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock or the availability of shares of Common Stock for future
sale would have on the market price of the Common Stock prevailing from time to
time. Sales of substantial amounts of Common Stock, or the perception that such
sales could occur, could have an adverse effect on the prevailing market prices
for the Common Stock. See "Shares Eligible for Future Sale."
DEPENDENCE ON KEY PERSONNEL
The Company's growth and development to date have been largely dependent
upon the services of Robert Grosser, Chairman of the Board, Chief Executive
Officer and President of the Company, and Robert C. Patent, Vice Chairman of the
Board and Executive Vice President of the Company. Although the Company has been
able to hire and retain other qualified and experienced management personnel,
the loss of Mr. Grosser's or Mr. Patent's services for any reason could have a
material adverse effect on the Company. The Company has entered into employment
agreements with Messrs. Grosser and Patent and maintains key man life insurance
in the amount of $2.0 million on Mr. Grosser.
In the UK, David A. Steene, the Managing Director of CSC-UK, has played an
important role in the development of CSC-UK and the loss of his services could
have a material adverse effect on CSC-UK and therefore on the Company. CSC-UK
has entered into an employment agreement with Mr. Steene.
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<PAGE> 22
CONTROL BY CERTAIN STOCKHOLDERS
As of June 25, 1997, certain members of the Company's senior management and
Board of Directors beneficially owned an aggregate of 56.4% of the outstanding
shares of Common Stock. Such persons, if they were to act in concert, have
majority control of the Company, with the ability to approve certain fundamental
corporate transactions (including mergers, consolidations and sales of assets)
and to elect all members of the Board of Directors without further vote of the
minority stockholders.
ABSENCE OF DIVIDENDS
The Company has not paid any cash dividends on its Common Stock since its
inception and does not currently anticipate paying dividends on its Common Stock
in the foreseeable future. In addition, certain agreements to which the Company
is a party restrict the Company's ability to pay dividends on its Common Stock.
The Company conducts substantially all of its operations through its
subsidiaries. Accordingly, the Company's ability to pay dividends is also
dependent upon the ability of its subsidiaries to make cash distributions to the
Company. The payment of dividends to the Company by its subsidiaries is and will
continue to be restricted by or subject to, among other limitations, the terms
of the Senior Note Indenture, applicable provisions of laws of national or state
governments, contractual provisions, the earnings of such subsidiaries and
various business considerations.
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<PAGE> 23
SELLING SECURITY HOLDERS
In November 1996, Franklin Mutual Advisers, Inc., ("FMAI"), as agent for
the Selling Security Holders, acquired certain options held by consultant Jay L.
Bochman for an aggregate purchase price of $82.3 million. Those options
represented the right to purchase from three of the Company's principal
shareholders 4,140,000 currently outstanding shares of the Company's Common
Stock. Such options were exercised by FMAI in January 1997. The Company has
granted to such institutional investors registration rights relating to the
resale of the acquired shares of the Company's Common Stock. These registration
rights require the Company to (i) file a registration statement for the resale
of the shares of Common Stock subject to the options as soon as reasonably
practicable and (ii) use its reasonable efforts to cause the registration
statement to be declared effective as promptly as is reasonably practicable
following the filing thereof, but not prior to the earlier of the date the
Commission declares effective the first registration statement registering the
Company's sale of newly issued Common Stock and March 31, 1997. The following
table sets forth certain information as of June 25, 1997 with respect to the
beneficial ownership of the Common Stock by the Selling Security Holders.
Because (i) the Selling Security Holders may offer all or a portion of the
Securities which they hold pursuant to the offering contemplated hereby, and
(ii) there are currently no agreements, arrangements or understandings with
respect to the sale of any of the Securities, no estimate can be given as to the
amount of Securities that will be held by the Selling Security Holders after
completion of this offering. See "Plan of Distribution".
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES
NAME BENEFICIALLY OWNED(1) OWNED AND OFFERED HEREBY
- ---------------------------------------------------- --------------------- ------------------------
<S> <C> <C>
Mutual Shares Fund.................................. 1,411,000 1,311,000
Mutual Qualified Fund............................... 861,000 861,000
Mutual Beacon Fund.................................. 987,000 987,000
Mutual Discovery Fund............................... 1,050,600 593,000
Mutual European Fund................................ 88,000 88,000
The Orion Fund Limited.............................. 280,000 280,000
Mutual Shares Securities Fund....................... 12,000 12,000
Mutual Discovery Securities Fund.................... 8,000 8,000
</TABLE>
- ---------------
(1) FMAI is an investment adviser registered under the Investment Advisers Act
of 1940. One or more of FMAI's advisory clients (including the Selling
Security Holders) are the beneficial owners of 4,697,600 shares of the
Company's Common Stock. Pursuant to the investment advisory agreements with
its advisory clients, FMAI has sole investment discretion and voting
authority with respect to such securities. FMAI is a wholly-owned subsidiary
of Franklin Resources, Inc. ("FRI"), a diversified financial services
organization. Neither FRI nor FMAI nor any of FRI's other adviser
subsidiaries has any interest in dividends or proceeds from the sale of the
Company's Common Stock and each disclaims beneficial ownership of the
Company's Common Stock owned by FMAI's advisory clients, including the
Selling Security Holders.
None of the Selling Security Holders has had a material relationship with
the Company within the past three years other than as a result of the ownership
of the Securities and other securities of the Company.
USE OF PROCEEDS
All 4,140,000 Securities covered by this Prospectus may be offered from
time to time by one or all of the Selling Security Holders. Accordingly, the
Company will not receive any proceeds from the sale of the Securities offered by
the Selling Security Holders hereunder.
PLAN OF DISTRIBUTION
The Securities offered hereby are being offered directly by the Selling
Security Holders. The Company will not receive any proceeds from the sale of any
of the Securities by the Selling Security Holders. The sale of the Securities
may be effected by the Selling Security Holders or permitted transferees from
time to time in
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<PAGE> 24
transactions in the over-the-counter market, on the Nasdaq National Market, in
negotiated transactions, or a combination of such methods of sale, at fixed
prices which may be changed, at market prices prevailing at the time of sale, at
prices related to prevailing market prices or at negotiated prices. The Selling
Security Holders or permitted transferees may effect such transactions by
selling the Securities from time to time acting as principals for their own
account directly, through an agent designated from time to time or through
brokers, dealers, agents or underwriters and such brokers, dealers, agents or
underwriters may receive compensation in the form of discounts, concessions or
commissions from the Selling Security Holders or permitted transferees and/or
the purchasers of the Securities for whom such brokers, dealers, agents or
underwriters may act as agents or to whom they sell as principals (which
compensation as to a particular broker-dealer might be in excess of customary
commissions).
At the time a particular offer of Securities is made, to the extent
required, a supplemental prospectus will be distributed which will set forth the
number of Securities being offered and the terms of the offering including the
name or names of any underwriters, dealers or agents, the purchase price paid by
any underwriter for the Securities purchased from the Selling Security Holders,
any discounts, commissions and other items constituting compensation from the
Selling Security Holders and any discounts, commissions or concessions allowed
or reallowed or paid to dealers.
In order to comply with the securities laws of certain states, if
applicable, the Securities will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Securities may not be sold unless they have been registered or qualified for
sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with by the Company and
the Selling Security Holders.
The Selling Security Holders and any broker-dealers, agents or underwriters
that participate with the Selling Security Holders in the distribution of the
Securities may be deemed to be "underwriters" within the meaning the Section
2(11) of the Securities Act, and any commissions received by them and any profit
on the resale of the Securities purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Securities may not simultaneously engage in
market making activities with respect to the Common Stock of the Company for a
period of two business days prior to the commencement of such distribution. In
addition and without limiting the foregoing, each Selling Security Holder will
be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including, without limitation, Regulation M, which
provisions may limit the timing of purchases and sales of shares of the
Company's Common Stock by the Selling Security Holders.
The Company has agreed to register the Securities under the Securities Act
and bear certain expenses (other than selling commissions) in connection with
such registration and to indemnify and hold the Selling Security Holders
harmless against certain liabilities under the Securities Act that could arise
in connection with the sale by the Selling Security Holders of the Securities.
There can be no assurance that the Selling Security Holders will sell all
or any of the shares of Common Stock offered hereunder.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by Gibson, Dunn & Crutcher LLP, New York, New York.
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EXPERTS
The consolidated financial statements of the Company as of and for the year
ended December 31, 1994 and as of and for the year ended December 31, 1996 have
been incorporated by reference herein and in the registration statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing. The consolidated financial
statements of the Company as of and for the year ended December 31, 1995 have
been incorporated by reference herein and in the registration statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing, and upon the report of BDO Stoy
Hayward, Registered Auditors, incorporated by reference herein.
The financial statements of J&J as of and for the years ended September 30,
1993, 1994 and 1995 have been incorporated by reference herein and in the
registration statement in reliance upon the report of BDO Stoy Hayward,
Registered Auditors, as stated in its report incorporated by reference herein.
The consolidated financial statements of Heritable Finance Limited
(referred to herein as Greyfriars) as of December 31, 1994 and 1995 and for each
of the years in the three-year period ended December 31, 1995 have been
incorporated by reference herein and in the registration statement in reliance
upon the report of KPMG, Registered Auditors, incorporated by reference herein,
and upon the authority of said firm as experts in accounting and auditing.
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<PAGE> 26
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........................ $18,034
Printing expenses.......................................................... $10,000
Accounting fees and expenses............................................... $ 7,500
Legal fees and expenses.................................................... $20,000
Listing fees............................................................... *
Fees and expenses for qualifications under state securities laws........... *
Transfer agent's fees and expenses......................................... $ 2,000
Miscellaneous.............................................................. $ 4,700
-------
Total............................................................ $62,234
=======
</TABLE>
- ---------------
* Not applicable or none.
All amounts except the Securities and Exchange Commission registration fee
are estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145(a) of the Delaware General Corporation Law (the "GCL") provides
that a Delaware corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise,
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding if he or she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had no cause to believe his
or her conduct was unlawful.
Section 145(b) of the GCL provides that a Delaware corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses actually
and reasonably incurred by such person in connection with the defense or
settlement of such action or suit if he or she acted under similar standards,
except that no indemnification may be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of his or her duty to the
corporation unless and only to the extent that the court in which such action or
suit was brought shall determine that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to be indemnified for such expenses as the court shall deem
proper.
Section 145 of the GCL further provides that to the extent a director or
officer of a corporation has been successful in the defense of any action, suit
or proceeding referred to in subsection (a) and (b) or in the defense of any
claim, issue or matter therein, such officer or director shall be indemnified
against expenses actually and reasonably incurred by him or her in connection
therewith; that indemnification provided for by Section 145 shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled,
and that the corporation may purchase and maintain insurance on behalf of a
director or officer of the corporation against any liability asserted against
such officer or director and incurred by him or her in any such capacity or
arising out of his or her status as such, whether or not the corporation would
have the power to indemnify him or her against such liabilities under Section
145 of the GCL.
As permitted by Section 102(b)(7) of the GCL, the Company's Certificate of
Incorporation provides that a director shall not be liable to the Company or its
stockholders for monetary damages for breach of
II-1
<PAGE> 27
fiduciary duty as a director. However, such provision does not eliminate or
limit the liability of a director for acts or omissions not in good faith or for
breaching his or her duty of loyalty, engaging in intentional misconduct or
knowingly violating a law, paying a dividend or approving a stock repurchase
which was illegal, or obtaining an improper personal benefit. A provision of
this type has no effect on the availability of equitable remedies, such as
injunction or rescission, for breach of fiduciary duty.
The Company's Bylaws require the Company to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Company) by reason
of the fact that he is or was a director, officer, employee or agent of the
Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company, and with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, does not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, that he had
reasonable cause to believe that his conduct was unlawful.
In addition, the Company's Bylaws require the Company to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Company to procure a judgment in its favor by reason of the fact that he is or
was a director, officer, employee or agent of the Company, or is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company, except that no indemnification may
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable for negligence or misconduct in the performance
of his duty to the Company unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Any indemnification (unless ordered by a court) made by the Company may be
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct as set forth
above. Such determination must be made (i) by the Board by a majority vote of a
quorum consisting of directors who were not parties to such action, suit or
proceeding, or (ii) if such a quorum is not obtainable, or, even if obtainable,
a quorum of disinterested directors so directs, by independent legal counsel in
a written opinion, or (iii) by the stockholders.
To the extent that a director, officer, employee or agent of the Company
has been successful on the merits or otherwise in defense of any covered action,
suit or proceeding, or in defense of any covered claim, issue or matter therein,
he will be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
Expenses incurred by an officer or director in defending a civil or
criminal action, suit or proceeding may be paid by the Company in advance of the
final disposition of such action, suit or proceeding as authorized by the Board
in the specific case upon receipt of an undertaking by or on behalf of the
director or officer to repay such amount unless it shall ultimately be
determined that he is entitled to be indemnified by the Company as authorized in
this Article. Such expenses incurred by other employees and agents may be so
paid upon such terms and conditions, if any, as the Board deems appropriate.
II-2
<PAGE> 28
The Company presently maintains policies of directors' and officers'
liability insurance in the amount of $10.0 million.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------------------------------------------------------------------
<C> <S>
4.1 Certificate of Incorporation of the Company, as amended, incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form S-1 as declared
effective by the Commission on December 20, 1995.
4.2 Bylaws of the Company, as amended, incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1 as declared effective by the
Commission on December 20, 1995.
5.1* Opinion of Gibson, Dunn & Crutcher LLP.
23.1** Consent of KPMG Peat Marwick LLP
23.2** Consent of KPMG, Registered Auditors
23.3** Consent of BDO Stoy Hayward
23.4** Consent of BDO Stoy Hayward 23.5
23.5* Consent of Gibson, Dunn & Crutcher LLP (contained in Exhibit 5.1)
24.1* Power of Attorney (included on signature page of the initial filing of the
Registration Statement)
</TABLE>
- ---------------
* Previously filed.
** Filed herein.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement: (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933; (ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE> 29
(c) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(d) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report, to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
II-4
<PAGE> 30
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing a Form S-3 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Village of Elmsford, State of New York, on
June 26, 1997.
CITYSCAPE FINANCIAL CORP.
By: /s/ ROBERT C. PATENT
------------------------------------
Robert C. Patent
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacity indicated on June 26, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ----------------------------------------------
<C> <S>
* Chairman of the Board, Chief Executive
- --------------------------------------------- Officer, President and Director (Principal
Robert Grosser Executive Officer)
/s/ ROBERT C. PATENT Vice Chairman of the Board, Executive Vice
- --------------------------------------------- President and Director
Robert C. Patent
* Director
- ---------------------------------------------
Asher Fensterheim
* Director
- ---------------------------------------------
Jonah L. Goldstein
* Director
- ---------------------------------------------
Arthur P. Gould
* Director
- ---------------------------------------------
Hollis W. Rademacher
* Director
- ---------------------------------------------
Robert M. Stata
* Director
- ---------------------------------------------
David A. Steene
* Chief Financial Officer (Principal Financial
- --------------------------------------------- and Accounting Officer)
Tim S. Ledwick
</TABLE>
*By: /s/ ROBERT C. PATENT
-------------------------------
Robert C. Patent
Attorney-in-Fact
II-5
<PAGE> 31
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------ ------------------------------------------------------------------------ ------------
<C> <S> <C>
4.1 Certificate of Incorporation of the Company, as amended, incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on Form
S-1 as declared effective by the Commission on December 20, 1995.
4.2 Bylaws of the Company, as amended, incorporated by reference to Exhibit
3.2 to the Company's Registration Statement on Form S-1 as declared
effective by the Commission on December 20, 1995.
5.1* Opinion of Gibson, Dunn & Crutcher LLP
23.1** Consent of KPMG Peat Marwick LLP
23.2** Consent of KPMG, Registered Auditors
23.3** Consent of BDO Stoy Hayward
23.4** Consent of BDO Stoy Hayward
23.5* Consent of Gibson, Dunn & Crutcher LLP (contained in Exhibit 5.1)
24.1* Power of Attorney (included on signature page of the initial filing of
the Registration Statement)
</TABLE>
- ---------------
* Previously filed.
** Filed herewith.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Cityscape Financial Corp.:
We consent to the incorporation by reference in the Registration Statement
on Form S-3 of Cityscape Financial Corp. of our report dated February 28, 1997,
which report makes reference to the report of other auditors, relating to the
consolidated statements of financial condition of Cityscape Financial Corp. and
its subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period then ended, which report appears in the December
31, 1996 annual report on Form 10-K of Cityscape Financial Corp, and to the
reference to our firm under the heading "Experts" in the registration statement.
/s/ KPMG Peat Marwick LLP
New York, New York
June 26, 1997
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Cityscape Financial Corp.:
We consent to the incorporation by reference in the Registration Statement
on Form S-3 of Cityscape Financial Corp. of our report dated April 2, 1996,
relating to the consolidated statements of financial condition of Heritable
Finance Limited as of December 31, 1995 and 1994, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period then ended, which report appears in the December
31, 1996 annual report on Form 10-K of Cityscape Financial Corp, and to the
reference to our firm under the heading "Experts" in the registration statement.
/s/ KPMG
Chartered Accountants
Registered Auditors
London, United Kingdom
June 26, 1997
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Cityscape Financial Corp.:
We consent to the incorporation by reference in the Registration Statement
on Form S-3 of Cityscape Financial Corp. of our report dated November 30, 1995
for the three years ended September 30, 1995 relating to J&J Securities Limited,
which report appears in the December 31, 1996 annual report on Form 10-K of
Cityscape Financial Corp, and to the reference to our firm under the heading
"Experts" in the prospectus.
/s/ BDO STOY HAYWARD
London, England
June 26, 1997
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Cityscape Financial Corp.:
We consent to the incorporation by reference in the Registration Statement
on Form S-3 of Cityscape Financial Corp. of our report dated March 27, 1996,
which report appears in the December 31, 1996 annual report on Form 10-K of
Cityscape Financial Corp, and to the reference to our firm under the heading
"Experts" in the prospectus.
/s/ BDO STOY HAYWARD
London, England
June 26, 1997
