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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):February 10, 1998
CITYSCAPE FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 0-27314 11-2994671
<S> <C> <C>
State or Other Jurisdiction Commission File (IRS Employer Identification
of Incorporation Number No.)
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565 Taxter Road, Elmsford, New York 10523-5200
(Address of Principal Executive Offices) Zip Code
Registrant's telephone number, including area code: (914) 592-6677
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Former name or former address,
if changed since last report
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Item 5. Other Events.
OFFICE OF FAIR TRADING
Cityscape Financial Corp. (Nasdaq SmallCap Market: CTYSC) (the
"Company") announced today that, as a result of discussions and correspondence
between the Company and the United Kingdom's Office of Fair Trading (the "OFT")
regarding the OFT's revised Non-Status Lending Guidelines for Lenders and
Brokers received by the Company in December 1997 (the "Revised Non-Status
Guidelines"), the Company has agreed to take action with respect to the use of
certain contract terms in the Company's existing UK loan agreements. The Company
has agreed to eliminate the use of the Rule of 78s method for calculating
prepayment fees on unregulated loans and revise the standard/concessionary rate
structure, and has provided assurances to the OFT regarding the Company's future
use of such revised terms.
With respect to the use of the Rule of 78s method on existing
unregulated loans, the Company agreed that it would not use such formula to
calculate prepayments. Instead, the Company will collect prepayment fees by
reference to a sliding scale whereby six months' interest will be charged for
prepayments occurring during the first three years of a loan, reducing to one
month's interest in the eighth year of a loan. There will be no prepayment fee
levied after the eighth year of a loan. Such prepayment fees will be based on
the concessionary rate of interest.
With respect to the standard/concessionary rate structure on existing
loans, the Company agreed that it would lower the differential between the
standard rate of interest and the concessionary rate of interest to not more
than 2.5%. For example, on a loan where the standard/concessionary rates had
been 18% and 9.9%, respectively, the loan agreement will now provide for the
standard/concessionary rates to be 12.4% and 9.9%, respectively.
As a result of these revisions to the terms of the applicable UK loans,
the Company expects to recognize an impairment in the value of its mortgage
servicing receivables in the UK of approximately $100 million which will have
a material adverse effect on the Company's operating results for the fourth
quarter of 1997 and on the Company's financial condition. Further, in the fourth
quarter of 1997, the Company expects to write off unamortized goodwill of $52.7
million recorded in connection with its UK operations.
Additionally, the Company and the OFT continue discussions with
respect to the Company's borrowers who, at the time their loans were made, were
vulnerable due to undue pressure from brokers or others or inability to
understand the loan terms. The Company has undertaken a review of its UK
borrowers to ascertain to what extent its borrowers were vulnerable. The OFT has
indicated that, in appropriate cases involving vulnerable borrowers, additional
modifications of loan terms beyond those discussed above may be required. The
OFT has indicated that those modifications may include termination of the loan
without prepayment fee or application of the concessionary rate to the loan with
the right to terminate subsequently without prepayment fee. As a result of the
Company's ongoing review of its borrowers and its continuing discussions with
the OFT, no assurance can be given that the value of the Company's mortgage
servicing receivables in the UK will not be further impaired which could have a
material adverse effect on the Company's operating results and financial
condition.
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UK GREENWICH FACILITY
The Company is currently in discussions with Greenwich International
Ltd., an affiliate of Greenwich Capital Markets, Inc. (together with any
affiliates, "Greenwich") regarding a financing facility for the origination and
purchase of loans in the UK (the "Revised UK Facility") which would replace
temporarily, and perhaps permanently, the purchase facility currently in place
between the Company and Greenwich (the "UK Greenwich Facility"). Greenwich has
indicated to the Company that, at the present time, the Company cannot access
the UK Greenwich Facility pursuant to its terms (although the Company and
Greenwich have continued to operate pursuant to the agreement), and no assurance
can be given that the Company will be able to access it at any time in the
future. Due to the uncertainty of the Company's ability to continue to access
the UK Greenwich Facility, the Company has determined that it is necessary to
write off the unamortized portion of the prepaid commitment fee to Greenwich,
resulting in a charge of $32.4 million during the fourth quarter of 1997.
The terms of the Revised UK Facility as currently proposed are not as
favorable to the Company as those in the UK Greenwich Facility. In connection
with entering into the Revised UK Facility, the Company will likely recognize
impairment of the value of its mortgage servicing receivables in the UK
resulting in a material adverse effect on the Company's results of operations.
Pending completion of a definitive agreement for the Revised UK Facility, the
Company and Greenwich continue to operate under the terms of the UK Greenwich
Facility. No definitive agreement exists with respect to the new arrangement nor
can any assurance be given that a definitive agreement will be reached, or that
Greenwich will continue to fund the Company's UK loan originations under the
terms of the UK Greenwich Facility or at all.
DOMESTIC CREDIT FACILITIES
The Company's warehouse facility with a group of banks for which
Corestates Bank N.A. served as agent terminated in January 1998. In addition,
the Company is currently in discussions with Bear Stearns Mortgage Capital
Corporation regarding the availability of the Company's $300.0 million warehouse
facility pursuant to its terms, and no assurance can be given as to the outcome
of such discussions or that the Company will be able to access this facility at
any time in the future. On February 3, 1998, the Company entered into a $30.0
million secured credit facility with CIT Group/Equipment Financing, Inc. Under
this facility, the Company borrows funds on a short-term basis to support the
accumulation of loans prior to sale and for other general working capital
purposes subject to a borrowing base. This credit facility bears interest at the
prime rate plus 0.5% and terminates in February 2000.
The Company's $400.0 million secured warehouse credit facility from
Greenwich terminated on December 31, 1997. Under this facility, the Company
borrowed funds on a short-term basis to support the accumulation of loans prior
to sale. The Company and Greenwich have entered into an extension agreement
through March 31, 1998 which provides for a maximum credit line of $100.0
million, subject to adjustment by Greenwich, at an interest rate of LIBOR plus
200 basis points and a fee of 0.25% of the aggregate principal balance of loans
to be paid to Greenwich in connection with any sale, securitization or any other
transfer to any third party of loans funded under the agreement.
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SALE OF RESIDUALS
The Company recently sold interest-only and residual certificates and
associated mortgage servicing receivables relating to certain of the Company's
home equity loan products with a book value of $38.4 million for net proceeds of
$26.5 million. As a result of the expected net realizable values implied by such
sale, the Company will recognize impairment of the value of its interest-only
and residual certificates and mortgage servicing receivables relating to the
Company's home equity loan products during the fourth quarter of 1997.
Additionally, the Company continues to review the assumptions underlying the
valuation of its interest-only and residual certificates
relating to the Company's Sav*-A-Loan(R) product, including the loss
expectations and discount rate of such certificates. If the Company determines
that changes in these assumptions are necessary, the Company will recognize
impairment of the value of such certificates during the fourth quarter of 1997.
INITIATIVES
The Company has previously announced a number of initiatives and the
retention of Bear, Stearns & Co. Inc. ("Bear Stearns") to explore strategic
alternatives for the Company. These initiatives include the disposal of loans
through whole loan sales, the sale of interest-only and residual certificates
and increased focus on the Company's higher margin lines of business. The
Company has announced that it has begun implementing a restructuring plan that
includes streamlining and downsizing its operations. The Company plans to reduce
its workforce in both the US and UK, close its branch operations in Virginia,
significantly reduce its correspondent originations for the foreseeable future
and exit its conventional lending business.
In addition, the Company has retained CIBC Oppenheimer Corp. ("CIBC")
to explore strategic alternatives with the assistance of Bear Stearns. CIBC will
advise the Company with respect to strategic alternatives including but not
limited to the restructuring, refinancing, recapitalization or reorganization of
the Company and exploration of the possible sale of all or part of the Company's
UK business. No assurance can be given that the Company will be successful in
pursuing strategic alternatives, or in implementing its initiatives.
Furthermore, even if the Company is successful in implementing its strategic
alternatives and initiatives, no assurance can be given as to the effect of any
such success on the Company's results of operations or financial condition.
NASDAQ NATIONAL MARKET
On January 28, 1998, the Company received notice from the Nasdaq Stock
Market, Inc. ("Nasdaq") that the Company's Common Stock (the "Common Stock")
would be moved from the Nasdaq National Market to the Nasdaq SmallCap Market
effective with the opening of business on January 29, 1998.
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The Company believes that it meets all of the initial inclusion
requirements for listing on The Nasdaq SmallCap Market, with the exception of
the $4.00 per share bid price requirement. Nasdaq has adopted new maintenance
standards, which become effective on February 23, 1998, requiring a minimum
$1.00 per share bid price which the Company's Common Stock currently does not
meet. Accordingly, Nasdaq has informed the Company that the securities were
moved to The Nasdaq SmallCap Market pursuant to a waiver of the $4.00 per share
initial inclusion requirement and an exception to the $1.00 per share
maintenance requirement. The exception requires the Company to achieve a bid
price of at least $1.00 per share on or before May 22, 1998. If the Company is
deemed to have met the terms of the exception, the Common Stock shall continue
to be listed on The Nasdaq SmallCap Market.
The Company believes that it can meet this condition; however, there
can be no assurance that it will be able do so. If at some future date the
Company's Common Stock should cease to be listed on The Nasdaq SmallCap Market,
the Common Stock may be listed on the OTC Bulletin Board. For the duration of
the exception, the Company's Nasdaq symbol will be (CTYSC).
In addition, pursuant to the terms of the Company's 6% Convertible
Preferred Stock, Series A (the "Series A Preferred Stock"), and the Company's 6%
Convertible Preferred Stock, Series B (the "Series B Preferred Stock" and,
together with the Series A Preferred Stock, the "Preferred Stock"), the Company
is required to continue the listing or trading of the Common Stock on Nasdaq or
on certain other securities exchanges. As a result of the delisting of the
Common Stock from the Nasdaq National Market, (i) the conversion restrictions
that apply to the Series B Preferred Stock are lifted (prior to the delisting,
no more than 50% of the 5,000 shares of Series B Preferred Stock initially
issued could be converted) and (ii) the conversion period is increased to 15
consecutive trading days and the conversion discount is increased to 10% (prior
to the delisting, the conversion price was equal to the lowest daily sales price
of the Common Stock during the four consecutive trading days immediately
preceding conversion, discounted by up to 5.5%). In addition, as a result of the
delisting of the Common Stock and during the continuance of such delisting, (i)
the dividend rate is increased to 15% and (ii) the Company is obligated to make
monthly cash payments to the holders of the Preferred Stock equal to 3% of the
$10,000 liquidation preference per share of the Preferred Stock, as adjusted
(the "Liquidation Preference"), provided that if the Company does not make such
payments in cash, such amounts will be added to the Liquidation Preference. As
of February 10, 1998, 672 shares of Series A Preferred Stock and 4,623 shares of
Series B Preferred Stock were outstanding.
LITIGATION
On or about September 29, 1997, a putative class action lawsuit (the
"Ceasar Action") was filed against the Company and two of its officers and
directors in the United States District Court for the Eastern District of New
York (the "Eastern District") on behalf of all purchasers of the Company's
Common Stock during the period from April 1, 1997 through August 15, 1997.
Between approximately October 14, 1997 and December 3, 1997, nine additional
class action complaints were filed against the same defendants, as well as
certain additional Company officers and directors. Four of these additional
complaints were filed in the Eastern District and five were filed in the United
States District Court for the Southern District of New York (the "Southern
District"). On or about October 28, 1997, the plaintiff in the Ceasar Action
filed an amended
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complaint naming three additional officers and directors as defendants. The
amended complaint in the Ceasar Action also extended the proposed class period
from November 4, 1996 through October 22, 1997. The longest proposed class
period of any of the complaints is from April 1, 1996 through October 22, 1997.
On or about February 2, 1998, an additional lawsuit brought on behalf of two
individual investors, rather than on behalf of a putative class of investors,
was filed against the Company and certain of its officers and directors in
federal court in New Jersey.
In these actions, plaintiffs allege that the Company and its senior
officers engaged in securities fraud by affirmatively misrepresenting and
failing to disclose material information regarding the lending practices of the
Company's UK subsidiary, and the impact that these lending practices would have
on the Company's financial results. Plaintiffs allege that a number of public
filings and press releases issued by the Company were false or misleading. In
each of the complaints, plaintiffs have asserted violations of Section 10(b) and
Section 20(a) of the Securities Exchange Act of 1934. Plaintiffs seek
unspecified damages, including pre-judgment interest, attorneys' and
accountants' fees, and court costs.
The complaints filed in the Southern District actions have all been
transferred to the Eastern District. On December 5, 1997, the Eastern District
plaintiffs filed a motion for appointment of lead plaintiffs and approval of
co-lead counsel. The court has not yet ruled on plaintiffs' motion. The Company
anticipates that, at a minimum, all of the putative class action complaints will
be consolidated with the Ceasar Action in the Eastern District.
Although no assurance can be given as to the outcome of these lawsuits,
the Company believes that the allegations in each of the actions are without
merit and that its disclosures were proper, complete and accurate. The Company
intends to defend vigorously against these actions and seek their early
dismissal. These lawsuits, however, if decided in favor of plaintiffs, could
have a material adverse effect on the Company.
On November 13, 1997, Resource Mortgage Banking, Ltd. and two of its
affiliates filed against the Company, Cityscape Corp., and two of the Company's
officers and directors in state court in Connecticut an application for a
prejudgment remedy. The object of the application for a prejudgment remedy is to
obtain a court order granting these plaintiffs prejudgment attachment against
assets of the Company in Connecticut pending resolution of plaintiffs'
underlying claims. Plaintiffs propose to file an 18 count complaint against the
defendants seeking $60 million in purported damages that allegedly result from
an asserted breach of an alleged five-year oral contract. To date, the
Connecticut court has taken no action with respect to the application. Although
no assurance can be given as to the outcome of this action, the Company believes
that these allegations are without merit and intends to defend vigorously
against this action.
Cityscape Financial Corp. is a consumer finance company that, through
its wholly-owned subsidiaries, Cityscape Corp. and City Mortgage Corporation
Limited, is engaged in the business of originating, purchasing, selling and
servicing mortgage loans in the United States and the United Kingdom, secured
primarily by one- to four-family residences. Cityscape was founded in 1985 and
is headquartered in Elmsford, New York with regional processing offices in
California, Georgia and Illinois.
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This report on Form 8-K 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, but not limited to, risks related to
operations in the UK, liquidity and negative cash flows, uncertainty as to
availability of funding sources including but not limited to funding sources
pending definitive agreements, dependence on securitizations, potential changes
in valuations of interest-only and residual certificates and mortgage servicing
receivables, risks of adverse economic conditions, risks related to the
Company's expansion and product extension, competition, and other risks detailed
from time to time in the Company's SEC reports. The Company undertakes no
obligation to release publicly any revisions to these forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of anticipated or unanticipated events.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Current Report on Form 8-K to be
signed on its behalf by the undersigned hereunto duly authorized.
CITYSCAPE FINANCIAL CORP.
(Registrant)
By Tim S. Ledwick
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Name: Tim S. Ledwick
Title: Vice President - Chief
Financial Officer
Dated: February 11, 1998
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