<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-27314
CITYSCAPE FINANCIAL CORP.
<TABLE>
<CAPTION>
DELAWARE 11-2994671
<S> <C>
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (IRS EMPLOYER IDENTIFICATION NO.)
</TABLE>
565 TAXTER ROAD, ELMSFORD, NEW YORK 10523-2300
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(914) 592-6677
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
--------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR
IF CHANGED SINCE LAST REPORT)
INDICATE BY CHECK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO
BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
__ __
APPLICABLE ONLY TO CORPORATE ISSUERS:
64,878,969 SHARES $.01 PAR VALUE,
OF COMMON STOCK, WERE OUTSTANDING AS OF MAY 12, 1999
<PAGE> 2
CITYSCAPE FINANCIAL CORP.
(DEBTOR-IN-POSSESSION AS OF OCTOBER 6, 1998)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Statements of Financial Condition at March 31, 1999 and
December 31, 1998 2
Consolidated Statements of Operations for
the three months ended March 31, 1999 and 1998 3
Consolidated Statements of Cash Flows for the three months ended March 31,
1999 and 1998 4
Notes to Consolidated Financial Statements 5-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 11-22
AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 23
PART II - OTHER INFORMATION 24-29
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CITYSCAPE FINANCIAL CORP.
(DEBTOR-IN-POSSESSION AS OF OCTOBER 6, 1998)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 20,651,655 $ 18,405,426
Cash held in escrow 3,478,716 3,768,695
Trading securities 33,402,777 33,660,930
Mortgage loans held for sale, net 32,699,781 123,345,783
Investment in discontinued operations, net 13,008,401 13,008,401
Income taxes receivable 1,361,043 1,550,107
Other assets 24,980,382 15,598,619
------------- -------------
Total assets $ 129,582,755 $ 209,337,961
============= =============
LIABILITIES
Warehouse financing facilities $ 22,289,772 $ 105,969,355
Accounts payable and other liabilities 24,151,398 23,519,199
Liabilities subject to compromise 477,365,590 477,424,358
------------- -------------
Total liabilities 523,806,760 606,912,912
------------- -------------
STOCKHOLDERS' DEFICIT
Preferred stock, $.01 par value, 10,000,000 shares authorized; 5,177 shares
issued and outstanding; Liquidation Preference - Series A Preferred Stock,
$7,460,511; Series B Preferred Stock, $65,239,541 at March 31, 1999; 5,177
shares issued and outstanding; Liquidation Preference - Series A Preferred
Stock, $7,460,511; Series B Preferred Stock, $65,239,541 at
December 31, 1998 52 52
Common stock, $.01 par value, 100,000,000 shares authorized;
64,948,969 issued and outstanding at March 31, 1999
and December 31, 1998 649,489 649,489
Treasury stock, 70,000 shares at March 31, 1999 and December 31, 1998,
at cost (175,000) (175,000)
Additional paid-in capital 175,304,103 175,304,103
Accumulated deficit (570,002,649) (573,353,595)
------------- -------------
Total stockholders' deficit (394,224,005) (397,574,951)
------------- -------------
COMMITMENTS AND CONTINGENCIES
------------- -------------
Total liabilities and stockholders' deficit $ 129,582,755 $ 209,337,961
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
CITYSCAPE FINANCIAL CORP.
(DEBTOR-IN-POSSESSION AS OF OCTOBER 6, 1998)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
---- ----
<S> <C> <C>
Revenues
Gain (loss) on sale of loans $ 5,568,012 $ (4,425,047)
Net unrealized loss on valuation of residuals -- (7,100,000)
Interest 2,282,083 3,201,928
Mortgage origination income -- 899,308
Other 1,415,906 233,012
------------ ------------
Total revenues 9,266,001 (7,190,799)
------------ ------------
EXPENSES
Salaries and employee benefits 1,429,045 9,771,879
Interest expense 1,289,059 14,181,530
Selling expenses 140,926 969,903
Other operating expenses 2,394,293 15,684,469
Restructuring charge -- 3,233,760
------------ ------------
Total expenses 5,253,323 43,841,541
------------ ------------
Earnings (loss) before income taxes and reorganization items 4,012,678 (51,032,340)
Reorganization items 654,059 --
------------ ------------
Earnings (loss) before income taxes 3,358,619 (51,032,340)
Income tax provision 7,673 150,059
------------ ------------
Net earnings (loss) 3,350,946 (51,182,399)
Preferred stock dividends - increase in liquidation preference -- 1,570,356
Preferred stock - default payments -- 3,016,774
------------ ------------
NET EARNINGS (LOSS) APPLICABLE TO COMMON STOCK $ 3,350,946 $(55,769,529)
============ ============
NET EARNINGS (LOSS) PER COMMON SHARE:
Basic $ 0.05 $ (1.17)
============ ============
Diluted NMF(1) $ (1.17)(2)
============ ============
Weighted average number of common shares outstanding:
Basic 64,878,969 47,578,738
============ ============
Diluted NMF(1) 47,578,738(2)
============ ============
</TABLE>
(1) Not Meaningful Figure. See Note 6, "Earnings Per Share".
(2) For the three months ended March 31, 1998, the incremental shares from
assumed conversions are not included in computing the diluted per share
amounts because their effect would be antidilutive since an increase in the
number of shares would reduce the amount of loss per share. Therefore,
basic and diluted EPS figures are the same amount.
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
CITYSCAPE FINANCIAL CORP.
(DEBTOR-IN-POSSESSION AS OF OCTOBER 6, 1998)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Earnings (loss) from continuing operations $ 3,350,946 $ (51,182,399)
Adjustments to reconcile net earnings (loss) from continuing
operations to net cash used in continuing operating activities:
Depreciation and amortization 3,471 635,747
Income taxes payable 173,713 2,127,711
Decrease in mortgage servicing receivables -- 2,186,288
Decrease in trading securities 258,153 30,112,612
Proceeds from sale of mortgages 87,926,600 251,232,531
Mortgage origination funds disbursed -- (185,812,768)
Other, net (5,787,071) 26,145,939
------------- -------------
Net cash provided by continuing operating activities 85,925,812 75,445,661
------------- -------------
Net cash used in discontinued operating activities -- (10,923,892)
------------- -------------
Net cash provided by operating activities 85,925,812 64,521,769
------------- -------------
Cash flows from investing activities:
Purchases of equipment -- (286,877)
Proceeds from sale of mortgages held for investment -- 1,496,796
------------- -------------
Net cash provided by investing activities -- 1,209,919
------------- -------------
Cash flows from financing activities:
Decrease in warehouse financings (83,679,583) (65,221,486)
------------- -------------
Net cash used in financing activities (83,679,583) (65,221,486)
------------- -------------
Net increase in cash and cash equivalents 2,246,229 510,202
Cash and cash equivalents at beginning of period 18,405,426 2,594,163
------------- -------------
Cash and cash equivalents at end of period $ 20,651,655 $ 3,104,365
============= =============
Supplemental disclosure of cash flow information:
Income taxes paid during the period:
Continuing operations $ -- $ 1,200
============= =============
Discontinued operations $ -- $ --
============= =============
Interest paid during the period:
Continuing operations $ 1,568,366 $ 2,145,176
============= =============
Discontinued operations $ -- $ --
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
CITYSCAPE FINANCIAL CORP.
(DEBTOR-IN-POSSESSION AS OF OCTOBER 6, 1998)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. Organization
Cityscape Financial Corp. (the "Company") is a consumer finance company
which, through its wholly-owned subsidiary Cityscape Corp. ("CSC"), in the
business of selling and servicing mortgage loans secured primarily by one- to
four-family residences. CSC is licensed or registered to do business in 42
states and the District of Columbia. Until the Company suspended indefinitely
such business in November 1998, the Company also had been in the business of
originating and purchasing mortgage loans. The majority of the Company's loans
were made to owners of single family residences who use the loan proceeds for
such purposes as debt consolidation and financing of home improvements and
educational expenditures, among others. The Company is currently operating under
the protection of chapter 11 of title 11 of the United States Code (the
"Bankruptcy Code").
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and do not include all
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments consisting of normal recurring accruals, considered necessary for a
fair presentation of the results for the interim period have been included.
Operating results for the three months ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999. The accompanying consolidated financial statements and the information
included under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations" should be read in conjunction with the
consolidated financial statements and related notes of the Company for the year
ended December 31, 1998.
The Company's consolidated financial statements have been prepared on a
going concern basis, which contemplates continuity of operations, realization of
assets and the liquidation of liabilities and commitments in the normal course
of business. The Petitions (see Note 3), related circumstances, significant
losses from operations and net capital deficiency at March 31, 1999 raise
substantial doubt about the Company's ability to continue as a going concern.
The appropriateness of using the going concern basis is dependent upon, among
other things, confirmation of a plan of reorganization, the successful sale of
loans in the whole loan sales market, the ability to access warehouse lines of
credit and future profitable operations. While under the protection of chapter
11, the Company may sell or otherwise dispose of assets, and liquidate or settle
liabilities, for amounts other than those reflected in the accompanying
consolidated financial statements. The accompanying consolidated financial
statements reflect adjustments resulting from the adoption of the American
Institute of Certified Public Accountants Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7")
with respect to financial reporting requirements during reorganization
proceedings and do not include any adjustments in the event the Amended Plan (as
defined in Note 3) is not confirmed. Should the Amended Plan be confirmed, the
Company will adopt fresh-start accounting in accordance with SOP 90-7. The
consolidated financial statements do not include any adjustments relating to the
Company's ability to continue as a going concern.
The consolidated financial statements of the Company include the
accounts of CSC and its wholly-owned subsidiaries. The operating results of
CSC-UK are presented as a discontinued operation as discussed in Note 4. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Certain amounts in the statements have been reclassified to conform
with the 1999 classifications.
5
<PAGE> 7
3. Chapter 11 Proceedings
The Company determined during 1998 that the best alternative for
recapitalizing the Company over the long-term and maximizing the recovery of
creditors and senior equity holders of the Company was through a prepackaged
plan of reorganization for the Company and CSC, pursuant to the Bankruptcy Code.
On October 6, 1998, the Company and CSC filed voluntary petitions (the
"Petitions") in the United States Bankruptcy Court for the Southern District of
New York (the "Bankruptcy Court").
During the second and third quarters of 1998, the Company engaged in
negotiations, first, with holders of a majority of the Notes (as defined below)
and, second, with holders of a majority of the Convertible Debentures (as
defined below). Those negotiations had resulted in acceptance by both groups by
the requisite majorities of the terms of a plan of reorganization (the "Original
Plan"). The Company had then solicited acceptances of the Original Plan from the
holders of its Notes, Convertible Debentures and Preferred Stock (as such terms
are defined below). The Original Plan received the requisite approval from all
classes except for the holders of the Company's Series B Preferred Stock (as
defined below). Although the Debtors and other parties with an economic stake in
the reorganization anticipated that the Original Plan would be confirmed at the
originally scheduled confirmation hearing, the Original Plan was not confirmed
due primarily to deteriorating market conditions and the Debtors' inability to
obtain necessary post-reorganization loan warehouse financing to allow them to
emerge from chapter 11. As a result, the Debtors have revised the Original Plan
(the "Amended Plan").
On November 17, 1998, the Company decided to suspend indefinitely all
of its loan origination and purchase activities. The Company notified its
brokers that it had ceased funding mortgage loans, other than loans that were in
its origination pipeline for which it had issued commitments. The Company's
decision was due to its determination, following discussions with potential
lenders regarding post-reorganization loan warehouse financing, that adequate
sources of such financing were not available. With no adequate sources of such
financing, the Company determined that it was unable to continue to originate
and purchase mortgage loans. On or about December 18, 1998, the Company funded
the last of the mortgage loans for which it had issued commitments as of
November 17, 1998.
The Amended Plan provides for substantive consolidation of the assets
of the Company and CSC and for distributions to creditors as summarized below.
Estimated recoveries are based upon (i) principal and accrued and unpaid
interest as of the chapter 11 petition date and (ii) an estimated, aggregate
amount of allowed general unsecured claims of $10.0 million. In summary, the
Amended Plan, if confirmed by the Bankruptcy Court, would provide that: (i)
administrative claims, priority tax claims, bank claims, other secured claims
and priority claims will be paid in full; (ii) holders of Notes would receive in
exchange for all of their claims, in the aggregate 92.48% of the new common
stock of the reorganized company (or 97.91% if the holders of the Convertible
Debentures vote to reject the plan); (iii) holders of the Convertible Debentures
would receive in exchange for all of their claims, in the aggregate, 5.43% of
the new common stock of the reorganized company (or 0% if the holders of the
Convertible Debentures vote to reject the plan); (iv) holders of general
unsecured claims would receive 2.09% of the new common stock of the reorganized
company; and (v) existing Common Stock (as defined below), Preferred Stock and
warrants of the Company would be extinguished and holders thereof would receive
no distributions under the Amended Plan. The Bankruptcy Court has scheduled a
hearing to consider confirmation of the Amended Plan for June 9, 1999. There can
be no assurance: (i) as to when, if ever, the Company's loan origination and
purchase activities will resume; (ii) that the terms of the Amended Plan will
not change; (iii) that the Bankruptcy Court will confirm the Amended Plan on
June 9, 1999, if at all; or (iv) that such plan will be consummated (even if it
is confirmed).
The Company and CSC are currently operating their business as
debtors-in-possession. In October 1998, the Bankruptcy Court entered final
orders approving debtor-in-possession financing arrangements. The Company and
CSC have now repaid all of their indebtedness under their debtor-in-possession
financing arrangements. Under the Bankruptcy Code, the Company and CSC may elect
to assume or reject real estate leases and other prepetition executory
contracts, subject to Bankruptcy Court approval. Upon rejection, under Section
502 of the Bankruptcy Code, a lessor's claim for damages resulting from the
rejection of a real property lease is limited to the rent to be received under
such lease, without acceleration, for the greater of one year, or 15%, not to
exceed three years, of the remaining term of the lease following
6
<PAGE> 8
the earlier of the date of the bankruptcy filing or the date on which the
property is returned to the landlord. On December 23, 1998 and April 27, 1999,
the Bankruptcy Court granted orders approving the rejection of certain executory
contracts and real estate leases. The Company and CSC are continuing to review
their remaining leases and executory contracts to determine which, if any,
additional leases and contracts, should be rejected.
Liabilities subject to compromise as of March 31, 1999, pursuant to the
Amended Plan are summarized as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
12 3/4% Senior Notes $ 300,000,000
6% Convertible Subordinated Debentures 129,620,000
Accrued interest related to Senior Notes
and Convertible Debentures 39,771,220
Accounts payable 7,974,370
-------------
Total $ 477,365,590
=============
</TABLE>
Other potential consequences of reorganization under chapter 11 have
not been recorded, including the effect of the determination as to the
disposition of executory contracts and leases as to which a final determination
by the Bankruptcy Court as to rejection had not yet been made. Pursuant to an
order of the Bankruptcy Court signed in October 1998, prepetition amounts owed
to trade creditors may be paid in the ordinary course of business.
In connection with the Company's restructuring efforts, the Company
deferred and continues to defer the interest payments on its Notes and
Convertible Debentures since June 1, 1998 and May 1, 1998, respectively. The
continued deferral of the interest payments on the Notes and Convertible
Debentures constitutes an "Event of Default" pursuant to the respective
Indentures under which the securities were issued. The Company stopped accruing
interest on the Notes and Convertible Debentures on October 6, 1998, the date
the Company filed the Petitions in the Bankruptcy Court.
4. The CSC-UK Sale; Discontinued Operations
The Company commenced operations in the United Kingdom in May 1995 with
the formation of City Mortgage Corporation Limited ("CSC-UK"), an English
corporation that originated, sold and serviced loans in England, Scotland and
Wales in which the Company initially held a 50% interest and subsequently
purchased the remaining 50%. CSC-UK had no operations and no predecessor
operations prior to May 1995. In April 1998, the Company sold all of the assets,
and certain liabilities, of CSC-UK.
As a result of liquidity constraints, the Company adopted a plan in
March 1998, prior to the issuance of its 1997 financial statements, to sell the
assets of CSC-UK. In April 1998, pursuant to an Agreement for the Sale and
Purchase of the Business of CSC-UK and its Subsidiaries and the Entire Issued
Share Capital of City Mortgage Receivables 7 Plc, dated March 31, 1998 (the "UK
Sale Agreement"), the Company completed the sale to Ocwen Financial Corporation
("Ocwen") and Ocwen Asset Investment Corp. ("Ocwen Asset") of substantially all
of the assets, and certain liabilities, of CSC-UK (the "UK Sale"). The sale did
not include the assumption by Ocwen of all of CSC-UK's liabilities, and
therefore, no assurances can be given that claims will not be made against the
Company in the future arising out of its former UK operations. Such claims could
have a material adverse effect on the Company's financial condition and results
of operations. The UK Sale included the acquisition by Ocwen of CSC-UK's whole
loan portfolio and loan origination and servicing businesses for a price of
pound sterling 249.6 million, the acquisition by Ocwen Asset of CSC-UK's
securitized loan residuals for a price of pound sterling 33.7 million and the
assumption by Ocwen of pound sterling 7.2 million of CSC-UK's liabilities. The
price paid by Ocwen was subject to adjustment to account for the actual balances
on the closing date of the loan portfolio and the assumed liabilities. As a
result of the sale, the Company received proceeds, at the time of the closing,
of $83.8 million, net of closing costs and other fees. During 1998, the Company
received an additional $4.5 million from Ocwen related to the loan portfolio
adjustments. On February 15, 1999, the Company entered into a settlement
agreement (superseded by a revised agreement on April 30, 1999), subject to the
approval of the
7
<PAGE> 9
Bankruptcy Court, with Ocwen whereby the Company will receive an additional
$3.3 million plus accrued interest in settlement of the assumed liabilities at
the date of sale.
Accordingly, the operating results of CSC-UK and its subsidiaries have
been segregated from continuing operations and reported as a separate line item
on the Company's financial statements. In addition, net assets of CSC-UK have
been reclassified on the Company's financial statements as investment in
discontinued operations.
5. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities and is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company has not completed its analysis of SFAS No. 133.
6. Earnings Per Share
Effective December 15, 1997, the Company adopted SFAS No. 128,
"Earnings per Share". SFAS No. 128 simplifies the standards for computing
earnings per share ("EPS") previously found in Accounting Principles Board
Opinion No. 15 and makes them comparable to international earnings per share
standards. It replaces the presentation of primary EPS with a presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator for the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
Basic EPS is computed by dividing net earnings applicable to Common
Stock by the weighted average number of Common Stock outstanding during the
period. Diluted EPS is based on the net earnings applicable to Common Stock
adjusted to add back the effect of assumed conversions (e.g., after-tax interest
expense of convertible debt) divided by the weighted average number of Common
Stock outstanding during the period plus the dilutive potential Common Stock
that were outstanding during the period.
The reconciliation of the numerators and denominators of the basic and
diluted EPS computations for the three months ended March 31, 1999 and 1998 is
as follows:
8
<PAGE> 10
<TABLE>
<CAPTION>
1999 1998
---------------------------------------- -------------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Net earnings (loss) $3,350,946 ($51,182,399)
Less: Preferred stock dividends - 1,570,356
Preferred stock -
default payments - 3,016,774
----------- -------------
BASIC EPS
Net earnings (loss) applicable
to Common Stock 3,350,946 64,878,969 $0.05 (55,769,529) 47,578,738 ($1.17)
=========== =========== ====== =======
EFFECT OF DILUTIVE SECURITIES
Warrants -
Stock options -
Convertible preferred stock -
Convertible Debentures -
------------- -----------
DILUTED EPS
Net earnings (loss) applicable
to Common Stock + assumed
conversions NMF(1) NMF(1) ($55,769,529) 47,578,738 ($1.17)
=========== ====== ============= =========== =======
</TABLE>
(1) Not Meaningful Figure.
For the three months ended March 31, 1999, diluted EPS is not a
meaningful figure because the number of shares computed on a diluted basis would
exceed the number of shares authorized and if the Amended Plan is confirmed by
the Bankruptcy Court as contemplated, the potential dilutive shares include
convertible securities that under the terms of the Amended Plan would be
extinguished. See Note 3, "Chapter 11 Procedures". Securities outstanding at
March 31, 1999 that could potentially dilute basic EPS in the future are as
follows: Convertible Debentures; Series A Preferred Stock (as defined below);
Series B Preferred Stock; Series A Warrants (as defined below); and Series B
Warrants (as defined below); and options to purchase the Company's Common Stock,
par value $0.01 per share (the "Common Stock"). However, if the Amended Plan is
confirmed by the Bankruptcy Court as contemplated, the Series A Preferred Stock,
the Series B Preferred Stock, Series A Warrants and Series B Warrants would
receive no distributions. For the three months ended March 31, 1998, the
incremental shares from assumed conversions are not included in computing the
diluted per share amounts because their effect would be antidilutive since an
increase in the number of shares would reduce the amount of loss per share.
7. Valuation of Residuals
The interests that the Company received upon loan sales through its
securitizations are in the form of interest-only and residual certificates which
are classified as trading securities. The Company's trading securities are
comprised of interests in home equity mortgage loans and "Sav*-A-Loan(R)"
mortgage loans (loans generally made to homeowners with little or no equity in
their property but who possess a favorable credit profile and debt-to-income
ratio and who often use the proceeds from such loans to repay outstanding
indebtedness as well as make home improvements).
In accordance with SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise", the Company classifies the interest-only and
residual certificates as "trading securities" and, as such, they are recorded at
their fair value. Fair value of these certificates is determined based on
various economic factors, including
9
<PAGE> 11
loan types, sizes, interest rates, dates of origination, terms and geographic
locations. The Company also uses other available information such as reports on
prepayment rates, interest rates, collateral value, economic forecasts and
historical default and prepayment rates of the portfolio under review. If the
fair value of the interest-only and residual certificates is different from the
recorded value, the unrealized gain or loss will be reflected on the
Consolidated Statements of Operations.
The table below summarizes the value of the Company's trading
securities by product type.
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Home Equity $ 6,232,304 $ 6,490,461
Sav*-A-Loan (R) 27,170,473 27,170,469
------------ -------------
$33,402,777 $ 33,660,930
============ =============
</TABLE>
The key assumptions used to value the Company's trading securities at
March 31, 1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Home Equity
Discount Rate 20.0% 20.0%
Constant Prepayment Rate 30.0% 30.0%
Loss Rate per Annum 7.5% 7.5%
Sav*-A-Loan(R)
Discount Rate 20.0% 20.0%
Constant Prepayment Rate 16.8% 16.8%
Loss Rate per Annum 4.5% 4.5%
</TABLE>
During the first quarter of 1998, the Company recorded an unrealized
loss on valuation of residuals of $7.1 million which reflected an increase in
the expected loss rate on the Company's home equity securitized loans. As a
result of the increase in the volume of home equity loan liquidations during the
first quarter of 1998 resulting from the Company's increased liquidation
efforts, and corresponding higher losses experienced than previously expected on
such liquidations, the Company increased its loss rate assumption to 3.3% per
annum at March 31, 1998 from 1.7% per annum at December 31, 1997. At March 31,
1998 and December 31, 1997, the Company used a weighted average discount rate of
15% and a weighted average prepayment speed of 31.8%.
10
<PAGE> 12
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors including, but not limited to, the confirmation of the
Amended Plan, the ability to access loan warehouse or purchase facilities in
amounts, if at all, necessary to fund the Company's possible future loan
production, the successful sale of loans in the whole loan sales market, legal
proceedings and other matters, adverse economic conditions, competition and
other risks detailed from time to time in the Company's Securities and Exchange
Commission (the "Commission") 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.
GENERAL
The Company is a consumer finance company which, through its
wholly-owned subsidiary, CSC, is in the business of selling and servicing
mortgage loans secured primarily by one- to four-family residences. CSC is
licensed or registered to do business in 42 states and the District of Columbia.
Until the Company indefinitely suspended such business in November 1998, the
Company also had been in the business of originating and purchasing such
mortgage loans. The majority of the Company's loans were made to owners of
single family residences who use the loan proceeds for such purposes as debt
consolidation and financing of home improvements and educational expenditures,
among others. The Company is currently operating under the protection of the
Bankruptcy Code. No assurance can be given that the Company will emerge from
bankruptcy or that its loan origination or purchase activities will resume.
CHAPTER 11 PROCEEDINGS
The Company determined during 1998 that the best alternative for
recapitalizing the Company over the long-term and maximizing the recovery of
creditors and senior equity holders of the Company was through a prepackaged
plan of reorganization for the Company and CSC, pursuant to the Bankruptcy Code.
On October 6, 1998, the Company and CSC filed the Petitions in the Bankruptcy
Court.
On November 17, 1998, the Company decided to suspend indefinitely all
of its loan origination and purchase activities. The Company notified its
brokers that it had ceased funding mortgage loans, other than loans that were in
its origination pipeline for which it had issued commitments. The Company's
decision was based upon its determination, following discussions with potential
lenders regarding post-reorganization loan warehouse financing, that adequate
sources of such financing were not available. With no adequate sources of such
financing, the Company determined that it was unable to continue to originate
and purchase mortgage loans. On or about December 18, 1998, the Company funded
the last of the mortgage loans for which it had issued commitments as of
November 17, 1998.
The Amended Plan provides for substantive consolidation of the assets
of the Company and CSC and for distributions to creditors. Estimated recoveries
are based upon (i) principal and accrued and unpaid interest as of the chapter
11 petition date and (ii) an estimated, aggregate amount of allowed general
unsecured claims of $10.0 million.
In summary, the Amended Plan, if confirmed by the Bankruptcy Court,
would provide that: (i) administrative claims, priority tax claims, bank claims,
other secured claims and priority claims will be paid in full; (ii) holders of
Notes would receive in exchange for all of their claims, in the aggregate 92.48%
of the new common stock of the reorganized company (or 97.91% if the holders of
the Convertible Debentures vote to reject the plan); (iii) holders of the
Convertible Debentures would receive in exchange for all of their claims, in the
aggregate, 5.43% of the new common stock of the reorganized company (or 0% if
the holders of the Convertible Debentures vote to reject the plan); (iv) holders
of general unsecured claims would receive 2.09% of the new common stock of the
reorganized company; and (v) existing
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<PAGE> 13
Common Stock, Preferred Stock and warrants of the Company would be extinguished
and holders thereof would receive no distributions under the Amended Plan. The
Bankruptcy Court has scheduled a hearing to consider confirmation of the Amended
Plan for June 9, 1999. There can be no assurance: (i) as to when, if ever, the
Company's loan origination and purchase activities will resume; (ii) that the
terms of the Amended Plan will not change; (iii) that the Bankruptcy Court will
confirm the Amended Plan on June 9, 1999, if at all; or (iv) that such plan will
be consummated (even if it is confirmed).
The Company and CSC are currently operating their business as
debtors-in-possession. In October 1998, the Bankruptcy Court entered final
orders approving debtor-in-possession financing arrangements (see " - Liquidity
and Capital Resources"). The Company and CSC have now repaid all of their
indebtedness under their debtor-in-possession financing arrangements. Under the
Bankruptcy Code, the Company and CSC may elect to assume or reject real estate
leases and other prepetition executory contracts, subject to Bankruptcy Court
approval. Upon rejection, under Section 502 of the Bankruptcy Code, a lessor's
claim for damages resulting from the rejection of a real property lease is
limited to the rent to be received under such lease, without acceleration, for
the greater of one year, or 15%, not to exceed three years, of the remaining
term of the lease following the earlier of the date of the bankruptcy filing or
the date on which the property is returned to the landlord. On December 23, 1998
and April 27, 1999, the Bankruptcy Court granted orders approving the rejection
of certain executory contracts and real estate leases. The Company and CSC are
continuing to review their remaining leases and executory contracts to determine
which, if any, additional leases and contracts, should be rejected.
Liabilities subject to compromise as of March 31, 1999, pursuant to the
Amended Plan are summarized as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
12 -3/4% Senior Notes $300,000,000
6% Convertible Subordinated Debentures 129,620,000
Accrued interest related to Senior Notes
And Convertible Debentures 39,771,220
Accounts payable 7,974,370
------------
Total $477,365,590
============
</TABLE>
Other potential consequences of reorganization under chapter 11 have
not been recorded, including the effect of the determination as to the
disposition of executory contracts and leases as to which a final determination
by the Bankruptcy Court as to rejection had not yet been made. Pursuant to an
order of the Bankruptcy Court signed in October 1998, prepetition amounts owed
to trade creditors may be paid in the ordinary course of business.
DOWNSIZING OF OPERATIONS
US OPERATIONS
During 1998, the Company significantly downsized its operations due to
negative operating results, liquidity constraints and, as discussed above, the
reorganization proceedings and indefinite suspension of its loan origination and
purchase activities. In the US, the Company closed its branch operations in
Georgia, Illinois, Virginia, California and New York and significantly reduced
its number of employees, including servicing and corporate employees. As of May
5, 1999, the Company's workforce totaled 47 employees, all of whom were
full-time employees.
UK OPERATIONS
As a result of liquidity constraints, the Company adopted a plan in
March 1998 to sell the assets of CSC-UK. In April 1998, pursuant to the UK Sale
Agreement, the Company completed the UK Sale. As a result of the sale, the
Company received proceeds, at the time of closing, of $83.8 million, net of
closing costs and other fees.
Accordingly, the operating results of CSC-UK and its subsidiaries have
been segregated from continuing operations and reported as a separate line item
on the Company's financial statements. In
12
<PAGE> 14
addition, net assets of CSC-UK have been reclassified on the Company's financial
statements as investment in discontinued operations.
As of March 31, 1999, the Company's net investment in discontinued
operations totaled $13.0 million, representing cash on hand in the discontinued
operation of approximately $9.1 million and net receivables (net of liabilities)
due of approximately $3.9 million. The Company expects to maintain a balance of
cash on hand in the discontinued operations to cover existing and potential
liabilities and costs pending dissolution of CSC-UK and its subsidiaries.
BUSINESS OVERVIEW
The Company primarily generates revenue from gain on sale of loans
recognized from premiums on loans sold through whole loan sales to institutional
purchasers, interest earned on loans held for sale, excess mortgage servicing
receivables and fees earned on loans serviced. Historically, the Company also
recognized gain on sale of loans sold through securitizations and origination
fees received as part of the loan application process. During the fourth quarter
of 1998, the Company decided to suspend indefinitely all of its loan origination
and purchase activities. In addition, during 1998 the Company redirected its
efforts to actively pursue the sale of its loans through whole loan sales with
servicing released rather than through securitizations. By employing whole loan
sales, the Company is better able to manage its cash flow as compared to
disposition of loans through securitizations. Whole loan sales represented all
of the Company's loan sales during 1998 and the first quarter of 1999, but with
the Company's prior emphasis on the sale of loans through securitizations, had
represented 31.7% and 22.2%, respectively, of all loan sales in 1997 and 1996.
Prior to 1998, gain on sale of loans included the present value of the
differential between the interest rate payable by an obligor on a loan over the
interest rate passed through to the purchaser acquiring an interest in such
loan, less applicable recurring fees, including the costs of credit enhancements
and trustee fees. For the years ended 1997 and 1996, gain on sale of loans also
included gain on securitization representing the fair value of the interest-only
and residual certificates that the Company received upon the sale of loans
through securitizations which are reflected as trading securities.
The following table sets forth selected operating data for the Company
for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Loans sold $ 89,956 $ 251,233
========== ==========
</TABLE>
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<PAGE> 15
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999 AS OF DECEMBER 31, 1998
DOLLARS IN % OF SERVICED DOLLARS IN % OF SERVICED
THOUSANDS PORTFOLIO THOUSANDS PORTFOLIO
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Portfolio Data:
Serviced portfolio(1) $1,022,785 100.0% $1,204,044 100.0%
========== ======= ========== =======
Delinquencies:
30-59 days delinquent $ 26,690 2.6% $ 42,706 3.6%
60-89 days delinquent 11,904 1.2% 17,129 1.4%
90 days or more delinquent 31,677 3.1% 37,683 3.1%
---------- ------- ---------- -------
Total delinquencies $ 70,271 6.9% $ 97,518 8.1%
========== ======= ========== =======
Defaults:
Bankruptcies $ 34,368 3.4% $ 35,076 2.9%
Foreclosures 81,312 7.9% 81,152 6.7%
---------- ------- ---------- -------
Total defaults $ 115,680 11.3% $ 116,228 9.6%
========== ======= ========== =======
REO property $ 22,078 2.2% $ 21,830 1.8%
========== ======= ========== =======
Charge-offs $ 18,919 1.8% $ 32,344 2.7%
========== ======= ========== =======
</TABLE>
(1) Excludes loans serviced pursuant to contract servicing agreements.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Revenues increased $16.5 million to $9.3 million for the three months
ended March 31, 1999 from negative $7.2 million for the comparable period in
1998. This increase was due primarily to a gain recorded on its sale of loans of
$5.6 million and interest income of $2.3 million during the first quarter of
1999 compared to a net loss on loan sales and a net unrealized loss on the
valuation of residuals during the first quarter of 1998.
Gain on sale of loans increased $10.0 million to $5.6 million for the
three months ended March 31, 1999 from a loss on sale of loans of $4.4 million
for the comparable period in 1998. This increase was primarily due to the
recognition of $7.0 million related to the Company's profit participation on
loans previously sold into the Company's purchase facility, offset by the sale
of $90.0 million of whole loans at a loss of $1.4 million. Under the terms of
the purchase facility, the Company as seller/servicer would sell loans on a
non-recourse basis into such facility and would retain a participation in future
profits in the form of servicing rights. Due to the uncertainty of the market
conditions, the Company did not attribute any value to the profit participation
of such loans and correspondingly did not recognize any gain upon the initial
sale into such facility. In April 1999, the Company terminated the purchase
facility and received approximately $7.0 million, representing the proceeds from
the Company's profit participation, which consisted of $5.0 million in cash and
$2.0 million in fair value of mortgage loans (consisting of approximately $4.1
million in principal amount of loans valued by the Company at $2.0 million). The
$7.0 million value attributable to this profit participation is presented as
other assets on the Statements of Financial Condition as of March 31, 1999. For
the three months ended March 31, 1998, the net loss on sale of loans was
primarily due to the sale of $251.2 million of whole loans at an average net
premium received of 0.7% as compared to the average premium paid on such loans
of 2.4%. Approximately $151.0 million of such whole loan sales represented loans
sold on a non-recourse basis into the Company's purchase facility without any
gain recorded.
No unrealized loss on valuation of residuals was recorded for the three
months ended March 31, 1999. The unrealized loss on valuation of residuals of
$7.1 million for the comparable period in 1998
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<PAGE> 16
reflected an increase in the expected default rate on the Company's home equity
securitizations from 1.7% per annum at December 31, 1997 to 3.3% per annum at
March 31, 1998.
Interest income decreased $0.9 million or 28.1% to $2.3 million for the
three months ended March 31, 1999 from $3.2 million for the comparable period in
1998. This decrease was due primarily to lower average balances of loans held
for sale in the first quarter of 1999 as compared to the same period in 1998
primarily resulting from the Company's cessation of loan origination and
purchase activity during the fourth quarter of 1998.
No mortgage origination income was recorded for the three months ended
March 31, 1999 as a result of the Company's decision in November 1998 to suspend
indefinitely its loan origination activity. Mortgage origination income was
$899,308 on loan originations of $151.2 million for the comparable period in
1998.
Other income increased $1.2 million or 507.7% to $1.4 million for the
three months ended March 31, 1999 from $233,012 for the comparable period in
1998. During 1998, the Company determined that as a result of the chapter 11
proceedings and the likelihood that all servicing rights will be transferred to
a servicer acceptable to the respective trustee on each of the securitizations,
there was no value assigned to such servicing rights. Therefore, during the
fourth quarter of 1998, the Company wrote down the value of the mortgage
servicing receivables and the corresponding allowance for losses to zero.
Accordingly due to the continued uncertainty of the Company's ability to retain
the servicing rights on its servicing portfolio, the Company accounts for any
servicing revenues as income when collected and costs as expense when incurred.
As a result of this change, the Company recorded servicing revenues of $1.4
million during the first quarter of 1999 as compared to approximately $228,000
during the first quarter of 1998.
Total expenses decreased $38.5 million or 87.9% to $5.3 million for the
three months ended March 31, 1999 from $43.8 million for the comparable period
in 1998. This decrease was due primarily to the Company's suspension of
origination and purchase activities and the corresponding reduction of its
workforce from 556 employees at March 31, 1998 to 52 at March 31, 1999 along
with the closing of its four branch offices subsequent to the first quarter of
1998.
Salaries and employee benefits decreased $8.4 million or 85.7% to $1.4
million for the three months ended March 31, 1999 from $9.8 million for the
comparable period in 1998. This decrease was due primarily to decreased staffing
levels to 52 employees at March 31, 1999 as compared to 556 employees at March
31, 1998 as a result of the Company's reorganization efforts and the Company's
decision in November 1998 to suspend indefinitely all loan origination and
purchase activities as well as employee attrition.
Interest expense decreased $12.9 million or 90.8% to $1.3 million for
the three months ended March 31, 1999 from $14.2 million for the comparable
period in 1998. This decrease was due primarily to the Company ceasing to accrue
interest on the Convertible Debentures and Notes as of October 6, 1998 due to
the filing of the Petitions.
Selling and other expenses decreased $14.2 million or 85.0% to $2.5
million for the three months ended March 31, 1999 from $16.7 million for the
comparable period in 1998. This decrease was due primarily to a decrease in
operating costs of $13.3 million or 84.7% to $2.4 million for the three months
ended March 31, 1999 from $15.7 million for the comparable period in 1998
reflecting the Company's downsizing and streamlining efforts during 1998 along
with its decision to suspend indefinitely all loan origination and purchase
activities during the fourth quarter of 1998. These actions resulted in
significantly lower number of employees and the closing of the Company's four
branch offices and correspondingly significantly lower operating costs.
No restructuring charges were recorded during the three months ended
March 31, 1999. Restructuring charges were $3.2 million for the comparable
period in 1998. This charge was related to a restructuring plan that includes
streamlining and downsizing the Company's operations. The Company closed its
branch operation in Virginia and significantly reduced its correspondent
originations and exited its conventional lending business. Of the $3.2 million,
$1.1 million represented severance payments made
15
<PAGE> 17
to 142 former employees and $2.1 million represented costs incurred in
connection with lease obligations and write-offs of assets no longer in service.
Net earnings applicable to common stock increased to $3.4
million for the three months ended March 31, 1999 from a net loss applicable to
common stock of $55.8 million for the comparable period in 1998. This increase
was due primarily to greater revenues from gains recognized on loans sold into
the Company's purchase facility as well as significantly lower operating costs
resulting from the Company's downsizing efforts. The first quarter 1998 loss was
due primarily to decreased loan originations, as well as decreased gain on sale
of loans as a result of the Company's strategy of selling loans through whole
loan sales instead of through securitizations. An increase in the liquidation
preference of the preferred stock in lieu of dividends and default payments of
$4.6 million was recorded during the first quarter of 1998, further increasing
the net loss applicable to common stock.
FINANCIAL CONDITION
March 31, 1999 Compared to December 31, 1998
Cash and cash equivalents increased $2.3 million or 12.5% to $20.7
million at March 31, 1999 from $18.4 million at December 31, 1998.
Trading securities, which consist of interest-only and residual
certificates, decreased $0.3 million or 0.9% to $33.4 million at March 31, 1999
from $33.7 million at December 31, 1998. This decrease was due primarily to cash
received on the home equity certificates.
Mortgage loans held for sale, net decreased $90.6 million or 73.5% to
$32.7 million at March 31, 1999 from $123.3 million at December 31, 1998. This
decrease was due primarily to no loan origination or purchase activity during
the first quarter of 1999 and the volume of loans sold.
Investment in discontinued operations, net was $13.0 million at March
31, 1999, unchanged from the balance at December 31, 1998. This balance
primarily consisted of cash on hand of approximately $9.1 million and net
receivables (net of liabilities) due of approximately $3.9 million. The Company
expects to maintain a balance of cash on hand in the discontinued operations to
cover existing and potential liabilities and costs pending dissolution of CSC-UK
and its subsidiaries.
Income taxes receivable decreased $0.2 million or 12.5% to $1.4 million
at March 31, 1999 from $1.6 million at December 31, 1998. This decrease was due
primarily to the receipt of state tax refunds.
Other assets increased $9.4 million or 60.3% to $25.0 million at March
31, 1999 from $15.6 million at December 31, 1998. This increase was due
primarily to the recognition of $7.0 million related to the Company's profit
participation on loans previously sold into the Company's purchase facility. In
April 1999, the Company terminated the purchase facility and received
approximately $7.0 million, representing the proceeds of the Company's profit
participation, which consisted of $5.0 million in cash and $2.0 million in fair
value of mortgage loans (consisting of approximately $4.1 million in principal
amount of loans valued by the Company at $2.0 million).
Warehouse financing facilities outstanding decreased $83.7 million or
79.0% to $22.3 million at March 31, 1999 from $106.0 million at December 31,
1998. This decrease was due primarily to the volume of loans sold and no
origination or purchase activity during the first quarter of 1999.
Accounts payable and other liabilities increased $0.7 million or 3.0%
to $24.2 million at March 31, 1999 from $23.5 million at December 31, 1998. This
increase was due to deposits received during the first quarter of 1999 on loan
sales that closed during April 1999. Such deposits when received are classified
as accounts payable until such time that the sale transaction is completed.
Stockholders' deficit decreased $3.4 million or 0.9% to a deficit of
$394.2 million at March 31, 1999 from $397.6 million at December 31, 1998. This
decrease was due to net earnings of $3.4 million for the three months ended
March 31, 1999.
16
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
The Company's business requires substantial cash to support its
operating activities. The Company's principal cash requirements include the
payment of interest expenses, operating expenses and income taxes and prior to
the indefinite suspension of its loan origination and purchase activities, the
funding of loan production. The Company uses its cash flow from the sale of
assets, whole loan sales, net interest income and borrowings under its loan
warehouse facility to meet its working capital needs. There can be no assurance
that funds generated from operations will be sufficient to satisfy such
obligations. The Company's liquidity is dependent upon favorable conditions in
the whole loan sale market and the Company's ability to sell certain assets. The
Company's liquidity in the future is dependent upon its ability to access
funding sources. No assurances can be given as to such access or the occurrence
of such conditions (see "Credit Facilities" Below).
Historically, the Company has operated on a negative cash flow basis.
During the three months ended March 31, 1999 and 1998, the Company provided net
cash of $85.9 million and $75.4 million from continuing operations,
respectively. Additionally, in the three months ended March 31, 1998, the
Company was provided $1.2 million from investing activities. During the three
months ended March 31, 1999 and 1998, the Company used cash from financing
activities of $83.7 million and $65.2 million, respectively. In addition, during
the three months ended March 31, 1998, the Company used net cash in discontinued
operations of $10.9 million.
The Company is required to comply with various operating covenants as
defined in the Greenwich DIP Facility (as defined below). The covenants include
restrictions on, among other things, the ability to (i) modify, stay, vacate or
amend the bankruptcy court orders approving such facilities, (ii) create, incur,
assume or suffer to exist any lien upon or with respect to any of the Company's
properties, (iii) create, incur, assume, or suffer to exist any debt, (iv) wind
up, liquidate or dissolve itself, reorganize, merger or consolidate with or
into, or convey, sell, assign, transfer, lease or otherwise dispose of all or
substantially all of its assets, (v) acquire all or substantially all of the
assets or the business of any Person, (vi) create, incur, assume, or suffer to
exist any obligation as lessee for the rental or hire of any real or personal
property, (vii) sell, transfer, or otherwise dispose of any real or personal
property to any Person and therefore directly or indirectly leaseback the same
or similar property, (viii) pay any dividends or other distributions, (ix) sell,
lease, assign, transfer or otherwise dispose of any of the Company's now owned
or hereafter acquired assets, (x) sell any mortgage loans on a recourse basis,
(xi) make any loan or advance to any Person, or purchase or otherwise acquire
any capital stock, assets, obligations, or other securities of, make any capital
contribution to, or otherwise invest in or acquire any interest in any Person,
or participate as a partner or joint venturer with any other Person, (xii)
engage in derivatives or hedging transactions, (xiii) assume, guarantee or
become directly or contingently responsible for the obligations of another
Person, (xiv) enter into transactions with any affiliate, (xv) use any part of
the proceeds for the purpose of purchasing or carrying margin stock, (xvi)
purchase any subwarehouse mortgage loan, (xvii) make bulk purchase of mortgage
loans and (xviii) make any payments of principal or interest on account of any
indebtedness or trade payable prior to the filing date with certain exceptions.
CREDIT FACILITIES
Greenwich Warehouse Facility. Prior to the filing of the Petitions,
Greenwich Capital Financial Products, Inc., an affiliate of Greenwich Capital
Markets, Inc. (referred to herein, including any affiliates as "Greenwich")
provided a warehouse credit facility under which CSC borrowed funds on a
short-term basis to support the accumulation of loans by CSC prior to sale (the
"Greenwich Facility"). Subsequent to the filing of the Petitions and pursuant to
an order of the Bankruptcy Court dated October 27, 1998, the Company and CSC
obtained a $100 million post-petition warehouse facility from Greenwich (the
"Greenwich DIP Facility") which repaid in full amounts due under the Greenwich
Facility. The Greenwich DIP Facility is secured by substantially all of the
assets of CSC and the capital stock of CSC and is guaranteed by the Company. The
Greenwich DIP Facility originally bore interest at an interest rate of LIBOR
plus 2.75%. The Greenwich DIP Facility was scheduled to terminate on February
28, 1999; however, the parties agreed by amendment to the Greenwich DIP Facility
(the "Greenwich DIP Facility Amendment") to extend the termination of such
facility until April 30, 1999. The Greenwich DIP Facility Amendment was approved
by an order of the Bankruptcy Court dated March 24, 1999. Under the
17
<PAGE> 19
Greenwich DIP Facility Amendment, the interest rate was changed to the prime
rate plus 2.50% (10.25% at March 31, 1999). As of May 12, 1999, there was no
balance outstanding under the Greenwich DIP Facility Amendment, and the facility
size has been reduced to $1 million. In addition, Greenwich has consented to an
extension of the termination date until the earlier of June 30, 1999 or the
confirmation of a plan of reorganization or liquidation of CSC.
CIT Warehouse Facility. Prior to the filing of the Petitions, The CIT
Group/Equipment Financing, Inc. ("CIT") provided a warehouse credit facility
under which CSC borrowed funds on a short-term basis to support the accumulation
of loans by CSC prior to sale (the "CIT Facility"). Subsequent to the filing of
the Petitions and pursuant to an order of the Bankruptcy Court dated October 27,
1998, the Company and CSC obtained a $150 million post-petition warehouse
facility (the "CIT/Nomura DIP Facility") from CIT and Nomura Asset Capital
Corporation ("Nomura") which repaid in full amounts due under the CIT Facility.
The CIT/Nomura DIP Facility was secured by substantially all of the assets of
CSC and the capital stock of CSC and was guaranteed by the Company. As of May
12, 1999, there was no balance outstanding under the CIT/Nomura DIP Facility,
and such facility had been terminated during April 1999.
LOAN SALES
The Company disposes all of its loan production through whole loan
sales where the Company receives a cash premium at the time of a profitable
sale. During 1998, 1997, 1996 and the first quarter of 1999, the Company sold
$414.2 million, $518.4 million, $283.9 million and $90.0 million respectively,
in whole loan sales, accounting for 100.0%, 31.7%, 22.2% and 100.0% of all loan
sales in the respective periods. As a result of the Company's financial
condition, the Company is currently unable to sell its loans through
securitizations and expects to sell its loans only through whole loan sales
during 1999.
Prior to adopting a whole loan sales strategy for liquidity purposes,
the Company derived a significant portion of its income by recognizing gains
upon the sale of loans through securitizations based on the fair value of the
interest-only and residual certificates that the Company receives upon the sale
of loans through securitizations and on sales into loan purchase facilities. In
loan sales through securitizations, the Company sells loans that it has
originated or purchased to a trust for a cash purchase price and interests in
such trust consisting of interest-only regular interest and the residual
interest which are represented by the interest-only and residual certificates.
The cash purchase price is raised through an offering by the trust of
pass-through certificates representing regular interests in the 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.
Since it adopted SFAS No. 122, "Accounting for Mortgage Servicing
Rights" in October 1995, the Company recognized as an asset the capitalized
value of mortgage servicing rights (including normal servicing and other
ancillary fees) as a mortgage servicing receivable based on their fair values.
The fair value of these assets is determined based on various economic factors,
including loan types, sizes, interest rates, dates of origination, terms and
geographic locations. The Company also uses other available information
applicable to the types of loans the Company originated and purchased (giving
consideration to such risks as default and collection) 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 purchaser, 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, 1999, the Company's balance sheet
reflected the fair value of interest-only and residual certificates of $33.4
million.
During 1998, the Company determined that as a result of the chapter 11
proceedings and the likelihood that all servicing rights will be transferred to
a servicer acceptable to the trustee on the securitization, there is no value
assigned to such servicing rights. Accordingly, during the fourth quarter the
Company wrote down the value of the mortgage servicing receivables and the
corresponding allowance
18
<PAGE> 20
for losses to zero. Accordingly, the Company will account for any future
servicing revenues as income when collected and costs as expenses when incurred.
Realization of the value of 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 affected and the
Company could be required to write down the value of its interest-only and
residual certificates. 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.
CONVERTIBLE DEBENTURES
In May 1996, the Company issued $143.8 million of 6% Convertible
Subordinated Debentures due 2006 (the "Convertible Debentures"), convertible at
any time prior to redemption or maturity, at the holder's option, into shares of
the Company's Common Stock at a conversion price of $26.25, subject to
adjustment. The Convertible Debentures may be redeemed, at the option of the
Company, in whole or in part, at any time after May 15, 1999 at predetermined
redemption prices together with accrued and unpaid interest to the date fixed
for redemption. The coupon at 6% per annum, is payable semi-annually on each May
1 and November 1 which commenced November 1, 1996. The terms of the Indenture
governing the Convertible Debentures do not limit the incurrence of additional
indebtedness by the Company, nor do they limit the Company's ability to make
payments such as dividends.
Since May 1, 1998, the Company has deferred the interest payments on
the Convertible Debentures as part of its plan to reorganize the business. The
continued deferral of the interest payments on the Convertible Debentures
constitutes an "Event of Default" pursuant to the Indenture under which such
securities were issued. As of October 6, 1998, due to the filing of the
Petitions, the Company stopped accruing interest on the Convertible Debentures.
At March 31, 1999, there were $129.6 million of Convertible Debentures
outstanding and they are included in the classification liabilities subject to
compromise on the Statements of Financial Condition.
SENIOR NOTES
In May 1997, the Company issued $300.0 million aggregate principal
amount of 12 3/4% Senior Notes due September 1, 2004 in a private placement.
Such Notes are not redeemable prior to maturity except in limited circumstances.
The coupon at 12 3/4% per annum, is payable semi-annually on each June 1 and
December 1 which commenced December 1, 1997. In September 1997, the Company
completed the exchange of such Notes for a like principal amount of 12 3/4%
Series A Senior Notes due 2004 (the "Notes") which have the same terms as the
Notes in all material respects, except for certain transfer restrictions and
registration rights.
Since June 1, 1998, the Company has deferred the interest payments on
the Notes as part of its plan to reorganize the business. The continued deferral
of the interest payments on the Notes constitutes an "Event of Default" pursuant
to the Indenture under which such securities were issued. As of October 6, 1998,
due to the filing of the Petitions, the Company stopped accruing interest on the
Notes. At March 31, 1999, the Notes are included in the classification
liabilities subject to compromise on the Statements of Financial Condition.
Convertible Preferred Stock
In April 1997, the Company completed the private placement of 5,000
shares of 6% Convertible Preferred Stock, Series A (the "Series A Preferred
Stock"), with an initial liquidation preference (the "Liquidation Preference")
of $10,000 per share, and related five-year warrants (the "Series A Warrants")
to purchase 500,000 shares of Common Stock with an exercise price of $20.625 per
share. Dividends on the Series A Preferred Stock are cumulative at the rate of
6% of the Liquidation Preference per annum payable quarterly. Dividends are
payable, at the option of the Company, (i) in cash, (ii) in shares of Common
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Stock valued at the closing price on the day immediately preceding the dividend
payment date or (iii) by increasing the Liquidation Preference in an amount
equal to and in lieu of the cash dividend payment.
During 1998, the Company elected to add an amount equal to the dividend
to the Liquidation Preference of the Series A Preferred Stock in lieu of payment
of such dividend. In addition, amounts equal to 3% of the Liquidation Preference
for each 30-day period (prorated for shorter periods) was added to the
Liquidation Preference due to the delisting of the Company's Common Stock from
the Nasdaq National Market on January 29, 1998 (as discussed below). As of
October 6, 1998, due to the filing of the Petitions, the Company stopped
accruing and paying dividends on the Series A Preferred Stock. As of October 6,
1998, the Liquidation Preference varies up to $14,298 per share.
The Series A Preferred Stock is redeemable at the option of the Company
at a redemption price equal to 120% of the Liquidation Preference under certain
circumstances. The Series A Preferred Stock is convertible into shares of Common
Stock, subject to redemption rights, at a conversion price equal to the lowest
daily sales price of the Common Stock during the four consecutive trading days
immediately preceding such conversion, discounted by up to 4% and subject to
certain adjustments.
As of March 31, 1999, an aggregate of 4,374 shares of the Series A
Preferred Stock had been converted (626 shares remain outstanding) into an
aggregate of 12,681,270 shares of Common Stock. As of March 31, 1999, all Series
A Warrants were outstanding.
In September 1997, the Company completed the private placement of 5,000
shares of 6% Convertible Preferred Stock, Series B (the "Series B Preferred
Stock"), with an initial Liquidation Preference of $10,000 per share, and
related five-year warrants (the "Series B Warrants") to purchase 500,000 shares
of Common Stock with an exercise price per share equal to the lesser of (i)
$14.71 or (ii) 130% of the average closing sales prices over the 20 trading day
period ending on the trading day immediately prior to the first anniversary of
the original issuance of the Series B Warrants. Dividends on the Series B
Preferred Stock are cumulative at the rate of 6% of the Liquidation Preference
per annum payable quarterly. Dividends are payable, at the option of the
Company, (i) in cash, (ii) in shares of Common Stock valued at the closing price
on the day immediately preceding the dividend payment date or (iii) by
increasing the Liquidation Preference in an amount equal to and in lieu of the
cash dividend payment.
During 1998, the Company elected to add an amount equal to the dividend
to the Liquidation Preference of the Series B Preferred Stock in lieu of payment
of such dividend. In addition, amounts equal to 3% of the Liquidation Preference
for each 30-day period (prorated for shorter periods) was added to the
Liquidation Preference due to the delisting of the Company's Common Stock from
the Nasdaq National Market on January 29, 1998. As of October 6, 1998, due to
the filing of the Petitions, the Company stopped accruing and paying dividends
on the Series B Preferred Stock. As of October 6, 1998, the Liquidation
Preference is $14,335 per share.
The Series B Preferred Stock is redeemable at the option of the Company
at a redemption price equal to 120% of the Liquidation Preference under certain
circumstances. In addition, the Series B Preferred Stock is redeemable at a
redemption price equal to 125% of the Liquidation Preference upon notice of, or
the announcement of the Company's intent to engage in a change of control event.
The Series B Preferred Stock is convertible into shares of Common Stock, subject
to certain redemption rights and restrictions, at a conversion price equal to
the lowest daily sales price of the Common Stock during the four consecutive
trading days immediately preceding such conversion, discounted up to 4% and
subject to certain adjustments.
As of March 31, 1999, an aggregate of 449 shares of Series B Preferred
Stock had been converted (4,551 shares remain outstanding) into an aggregate of
21,470,375 shares of Common Stock. As of March 31, 1999, all Series B Warrants
were outstanding.
As of March 31, 1999, if all of the outstanding shares of the Series A
Preferred Stock and the Series B Preferred Stock were converted into Common
Stock, the Company would not have sufficient authorized shares of Common Stock
to satisfy all of these conversions.
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In addition, pursuant to the terms of the Company's Series A Preferred
Stock and the Company's Series B Preferred Stock (together the "Preferred
Stock"), the Company is required to continue the listing or trading of the
Common Stock on Nasdaq or 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, provided that if the Company does not make
such payments in cash, such amounts will be added to the Liquidation Preference.
Based on the current market price of the Common Stock, the Company does not have
available a sufficient number of authorized but unissued shares of Common Stock
to permit the conversion of all of the shares of the Preferred Stock.
The description above of the covenants contained in the Company's
credit facility and other sources of funding does not purport to be complete
and is qualified in its entirety by reference to the actual agreements, which
are filed by the Company with the Commission and can be obtained from the
Commission. The continued availability of funds provided to the Company under
these agreements is subject to the Company's continued compliance with these
covenants. In addition, the Notes, the Convertible Debentures, the Series A
Preferred Stock and the Series B Preferred Stock permit the holders of such
securities to require the Company to purchase such securities upon a change of
control (as defined in the respective Indenture or Certificate of Designations,
as the case may be).
IMPACT OF YEAR 2000
Issues surrounding the Year 2000 arise out of the fact that many
existing computer programs use only two digits to identify a year in the date
field. With the approach of the Year 2000, computer hardware and software that
are not made Year 2000 ready might interpret "00" as Year 1900 rather than Year
2000. The Year 2000 problem is not just a technology issue; it also involves the
Company's customers, suppliers and third parties.
As previously discussed, on October 6, 1998, the Company filed a
bankruptcy case under chapter 11 of the Bankruptcy Code. As a result of changes
in circumstances, including deteriorating market conditions and the Company's
inability to obtain the necessary financing, on November 17, 1998, the Company
suspended indefinitely all of its loan origination and purchase activities.
Therefore, the Company no longer needs software that relates to the origination
and purchase of mortgage loans. Should the Company resume origination and
purchase activity, the Company believes that it will be able to purchase,
install and implement a Year 2000 ready "off the shelf" origination system,
although there can be no assurance that the Company will be able to obtain and
implement such system.
The Company's loan servicing computer operations are performed by
CPI/Alltel. CPI/Alltel provides the Company with quarterly updates regarding its
progress and schedule for Year 2000 readiness. CPI/Alltel has publicly announced
that it will be Year 2000 ready by year-end. If CPI/Alltel is not Year 2000
ready by the end of the second quarter of 1999, the Company believes it will be
able to transfer its servicing platform to a Year 2000 ready service provider,
although no assurance can be given of such transfer. The failure to achieve such
compliance or transfer of the servicing platform in a timely manner could have
an adverse effect on the servicing operations conducted by the Company.
The Company currently uses the Oracle General Ledger System for
accounting purposes. Oracle states that it is Year 2000 ready. The Company is in
the process of implementing a new accounting and financial reporting system
which is stated to be Year 2000 ready.
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The costs incurred to date by the Company regarding its Year 2000
readiness have not been material; however, there can be no assurances that such
costs in the future will not be material. Even if the Company is Year 2000
ready, failures by significant third parties to address their Year 2000
readiness may disrupt the Company's operations and cause it to incur financial
losses. These third parties include financial counterparties, subservicers,
telecommunications companies, vendors and utilities.
All references herein to "$" are to United States dollars; all
references to "pound sterling" are to British Pounds Sterling. Unless otherwise
specified, translation of amounts from British Pounds Sterling to United States
dollars has been made herein using exchange rates at the end of the period for
which the relevant statements are prepared for balance sheet items and the
weighted average exchange rates for the relevant period for statement of
operations items, each based on the noon buying rate in New York City for cable
transfers in foreign currencies as certified for customs purposes by the Federal
Reserve Bank of New York.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market
prices and interest rates. The Company's market risk arises from interest rate
risk inherent in its financial instruments. The Company is not currently subject
to foreign currency exchange risk or commodity price risk. The Company does not
make use of off-balance sheet derivative instruments to control interest rate
risk.
The interests that the Company received upon loan sales through its
securitizations are in the form of interest-only and residual certificates which
are classified as trading securities. Trading securities do not have a stated
maturity or amortization period. The expected amount of the cash flow as well as
the timing is dependent on the performance of the underlying collateral
supporting each securitization. The actual cash flow of these instruments could
vary substantially if the performance is different from the Company's
assumptions. The Company generally develops its assumptions by analyzing past
portfolio performance, current loan characteristics and current market
conditions. The Company currently values the trading securities using a weighted
average discount rate of 20%.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of business, aside from the matters discussed
below, the Company is subject to various legal proceedings and claims, the
resolution of which, in management's opinion, will not have a material adverse
effect on the consolidated financial position or the results of operations of
the Company.
Ceasar Action. 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 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 (the "New Jersey Action").
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 putative class action complaints, plaintiffs have asserted
violations of Section 10(b) and Section 20(a) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Plaintiffs seek unspecified damages,
including pre-judgment interest, attorneys' and accountants' fees and court
costs.
In December 1997, the Eastern District plaintiffs filed a motion for
appointment of lead plaintiffs and approval of co-lead counsel. On September 23,
1998, the court granted this motion. On March 25, 1998, the Company and its
defendant officers and directors filed a motion with the federal Judicial Panel
for Multidistrict Litigation ("JPML"), seeking consolidation of all current and
future securities actions, including the New Jersey Action, for pre-trial
purposes before Judge Sterling Johnson in the Eastern District. On June 12,
1998, the JPML granted this motion. As a result of the Company's chapter 11
proceedings, the action against the Company has been stayed.
Simpson Action. In February 1998, a putative class action lawsuit (the
"Simpson Action") was filed against the Company in the U.S. District Court for
the Northern District of Mississippi (Greenville Division). The Simpson Action
is a class action brought under the anti-kickback provisions of Section 8 of the
Real Estate Settlement Procedures Act ("RESPA"). The complaint alleges that, on
November 19, 1997, plaintiff Laverne Simpson, through the services of Few
Mortgage Group ("Few"), a mortgage broker, obtained refinancing for the mortgage
on her residence in Greenville, Mississippi. Few secured financing for plaintiff
through the Company. In connection with the financing, the Company is alleged to
have paid a premium to Few in the amount of $1,280.00. Plaintiff claims that the
payment was a referral fee and duplicative payment prohibited under Section 8 of
RESPA. Plaintiff is seeking compensatory damages for the amounts "by which the
interest rates and points charges were inflated." Plaintiff also claims to
represent a class consisting of all other persons similarly situated, that is,
persons (i) who secured mortgage financing from the Company through mortgage
brokers from an unspecified period to date (claims under Section 8 of RESPA are
governed by a one year statute of limitations) and (ii) whose mortgage brokers
received a fee from the Company. Plaintiff is seeking to recover compensatory
damages, on behalf of the putative class, which is alleged to be "numerous," for
the amounts that "the interest rates and points charges were inflated" in
connection with each class member's mortgage loan transaction. The Company
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answered the complaint and plaintiff has not yet moved for class certification.
To date, there has not been a ruling on the merits of either plaintiff's
individual claim or the claims of the putative class.
Other Matters. In April 1998, the Company was named as a defendant in
an Amended Complaint filed against 59 separate defendants in the Circuit Court
for Baltimore City entitled Peaks v. A Home of Your Own, Inc. et al. This action
is styled as a class action and alleges various causes of action (including
Conspiracy to Defraud, Fraud, Violation of Maryland Consumer Protection Act and
Unfair Trade Practices, Negligent Misrepresentation and Negligence) against
multiple parties relating to 89 allegedly fraudulent mortgages made on
residential real estate in Baltimore, Maryland. The Company is alleged to have
purchased at least eight of the loans (and may have purchased 15 of the loans)
at issue in the Complaint. The Company has not yet been involved in any
discovery and has yet to file its response. In August 1998, the plaintiff filed
an amended complaint in which the class action allegations were dropped and
instead the complaint was joined by 80 individual plaintiffs. The Company
believes that eight of these plaintiffs may have claims that involve loans
acquired by the Company. The Company has continued to monitor the proceedings
and has participated informally in certain settlement discussion, but, as a
result of the Company's chapter 11 proceedings, has not been required to file a
response and has not been required to participate formally in any discovery.
In September 1998, Elliott Associates, L.P. and Westgate International,
L.P. filed a lawsuit against the Company and certain of its officers and
directors in the Southern District. In the complaint, plaintiffs describe the
lawsuit as "an action for securities fraud and breach of contract arising out of
the private placement, in September 1997, of the Series B Preferred Stock of
Cityscape." Plaintiffs allege violations of Section 10(b) of the Exchange Act
(Count I); Section 20(a) of the Exchange Act (Count II); and two breach of
contract claims against the Company (Counts III and IV). Plaintiffs allege to
have purchased a total of approximately $20 million of such preferred stock.
Plaintiffs seek unspecified damages, including pre-judgment interest, attorneys'
fees, other expenses and court costs. The Company and its defendant officers and
directors have moved to dismiss this action.
Although no assurance can be given as to the outcome of the lawsuits
described above, 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.
In January 1998, the Company commenced a breach of contract action in
the Southern District against Walsh Securities, Inc. ("Walsh"). The action
alleges that Walsh breached certain obligations that it owed to the Company
under an agreement whereby Walsh sold mortgage loans to the Company. The Company
claims damages totaling in excess of $11.9 million. In March 1998, Walsh filed a
motion to dismiss, or, alternatively, for summary judgment. In May 1998, the
Company served papers that opposed Walsh's motion and moved for summary judgment
on certain of the loans. In December 1998, Judge Stein of the Southern District
denied Walsh's motion to dismiss, or, alternatively, for summary judgment with
respect to all but 69 of the loans at issue in the litigation. With respect to
those 69 loans, Judge Stein granted Walsh's motion and dismissed the loans from
the litigation. At that time, Judge Stein also denied the Company's motion for
summary judgment. On February 1, 1999, Judge Stein denied the Company's motion
for reconsideration of that part of his December 1998 order which granted
Walsh's motion to dismiss with respect to 69 of the loans at issue. The case has
currently entered a pre-trial discovery phase.
In August 1998, the Company filed a lawsuit in the Circuit Court for
Baltimore City Maryland, entitled Cityscape and Atlas v. Global Mortgage, et
al., against various defendants seeking damages resulting from the Company's
acquisition in 1995 and 1996 of 145 fraudulent residential mortgages. The
Complaint, as amended on March 19, 1999, seeks $5.5 million in compensatory
damages, plus unspecified punitive damages, against the mortgage broker, title
company, closing agent, settlement attorney, and appraisers involved in the
fraudulent loans based on theories of negligence, malpractice, conspiracy and
fraud. The case is in the discovery stage, with a trial date currently set for
November 1999.
In March 1999, the Company commenced an adversary proceeding before
Judge Adlai S. Hardin, Jr. in the Bankruptcy Court against Wilshire Funding
Corp. and Wilshire Servicing Corporation,
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subsidiaries of the Wilshire Financial Services Group, Inc. The adversary
proceeding alleges breach by Wilshire Funding Corp. of contractual obligations
arising out of a January 8, 1998 Asset Purchase Agreement between Wilshire
Funding Corp. and Cityscape Funding Corporation IV and the Company, and breach
by Wilshire Servicing Corporation of contractual obligations arising out of
related Assignment Agreements. CSC seeks damages of approximately $3.7 million,
plus interest, attorneys' fees and costs.
Regulatory Matters. In April and June 1996, CSC-UK acquired J&J
Securities Limited (the "J&J Acquisition") and Greyfriars Group Limited
(formerly known as Heritable Finance Limited) (the "Greyfriars Acquisition"),
respectively. In October 1996, the Company received a request from the staff of
the Commission for additional information concerning the Company's voluntary
restatement of its financial statements for the quarter ended June 30, 1996. The
Company initially valued the mortgage loans in the J&J Acquisition and the
Greyfriars Acquisition at the respective fair values which were estimated to
approximate par (or historical book value). Upon the subsequent sale of the
mortgage portfolios, the Company recognized the fair value of the mortgage
servicing receivables retained and recorded a corresponding gain for the fair
value of such mortgage servicing receivables. Upon subsequent review, the
Company determined that the fair value of such mortgage servicing rights should
have been included as part of the fair value of the mortgage loans acquired as a
result of such acquisitions. The effect of this accounting change resulted in a
reduction in reported earnings of $26.5 million. Additionally, as a result of
this accounting change, the goodwill initially recorded in connection with such
acquisitions was reduced resulting in a reduction of goodwill amortization of
approximately $496,000 from the previously reported figure for the second
quarter. On November 19, 1996, the Company announced that it had determined that
certain additional adjustments relating to the J&J Acquisition and the
Greyfriars Acquisition should be made to the financial statements for the
quarter ended June 30, 1996. These adjustments reflect a change in the
accounting treatment with respect to restructuring charges and deferred taxes
recorded as a result of such acquisitions. This caused an increase in the amount
of goodwill recorded which resulted in an increase of amortization expense as
previously reported in the second quarter of 1996 of $170,692. The staff of the
Commission has requested additional information from the Company in connection
with the accounting related to the J&J Acquisition and the Greyfriars
Acquisition. The Company has supplied such requested information. In mid-October
1997, the Commission authorized its staff to conduct a formal investigation
which, to date, has continued to focus on the issues surrounding the restatement
of the financial statements for the quarter ended June 30, 1996. The Company is
continuing to cooperate fully in this matter.
As a result of the Company's negative operating results, the Company
received inquiries from the New York State Department of Banking regarding the
Company's qualifications to continue to hold a mortgage banking license. In
connection with such inquiries, the Company was fined $50,000 in 1998 and agreed
to provide the banking department with specified operating information on a
timely basis and to certain restrictions on its business. Although the Company
believes it complies with its licensing requirements, no assurance can be given
that additional inquiries by the banking department or similar regulatory bodies
will not have an adverse effect on the licenses that the Company holds which in
turn could have a negative effect on the Company's results of operations and
financial condition.
UK Sale Agreement. On September 4, 1998, CSC-UK commenced proceedings
in the High Court of Justice, London against Ocwen for the payment of certain
sums due under the UK Sale Agreement (the "Proceedings"). Although Ocwen
initially informed CSC-UK that it would defend the Proceedings, Ocwen then
satisfied CSC-UK's claim by paying CSC-UK pound sterling 1.7 million ($2.8
million) on November 24, 1998. Prior to CSC-UK initiating the Proceedings, Ocwen
informed CSC-UK that it would defend the (then proposed) Proceedings on the
basis that any sums owed by Ocwen to CSC-UK, should be set off or extinguished
against a sum which Ocwen claimed was due or, alternatively, was recoverable by
it from CSC-UK on the grounds of CSC-UK's alleged breach of warranty or
misrepresentation with respect to matters concerning loans of Greyfriars (the
"Alleged Loan Liabilities"). With respect to the Alleged Loan Liabilities,
Ocwen's attorneys claimed that CSC-UK had breached certain provisions of loan
agreements with borrowers whose loans had been sold to Ocwen. Ocwen claimed that
these liabilities totaled approximately pound sterling 13.0 million ($21.2
million). Additionally, pursuant to the UK Sale Agreement, Ocwen held back a sum
of pound sterling 3.5 million ($5.7 million) with respect to the purchase price,
pending the determination of certain other figures under the UK Sale Agreement
(the "Holdback"), which sum was paid into a Holdback account at the time of the
UK Sale Agreement.
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On February 15, 1999, the Company, Ocwen and certain of their
subsidiaries entered into a settlement agreement (superseded by a revised
agreement on April 30, 1999), in full and final settlement of all causes of
action, claims, demands, liabilities, damages, costs, charges and expenses that
the Company, CSC-UK and Ocwen and their respective subsidiaries may have against
each other. Such claims include Ocwen's alleged claim against the Company and/or
CSC-UK with respect to the Alleged Loan Liabilities. Under the settlement
agreement, CSC-UK will be paid pound sterling 2.0 million ($3.3 million) plus
interest from the Holdback account, and Ocwen will be paid the remaining pound
sterling 1.5 million ($2.4 million) plus interest from the Holdback account. The
above settlement is contemplated in the Company's recorded investment in
discontinued operations at March 31, 1999.
The approval of the Bankruptcy Court is a condition to the
effectiveness of the settlement agreement. As requested by the Company, Ocwen
has agreed to substitute itself for the Company or its subsidiaries where
appropriate, as the party to related legal proceedings with borrowers.
Chapter 11 Proceedings. On October 6, 1998, the Company and CSC filed
the Petitions in the Bankruptcy Court. See "Chapter 11 Proceedings".
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Since May 1, 1998, the Company has deferred the interest payments on
its 6% Convertible Subordinated Debentures due 2006 (the "Convertible
Debentures") as part of its plan to reorganize the business. The continued
deferral of the interest payment on the Convertible Debentures constitutes an
"Event of Default" pursuant to the Indenture under which such securities were
issued. As of October 6, 1998, due to the filing of the Petitions, the Company
stopped accruing interest on the Convertible Debentures. The amount of accrued
interest on the Convertible Debentures is $7.8 million
Since June 1, 1998, the Company has deferred the interest payments on
its $300.0 million aggregate principal amount of 12 3/4% Series A Senior Notes
due 2004 (the "Notes") as part of its plan to reorganize the business. The
continued deferral of the interest payments on the Notes constitutes an "Event
of Default" pursuant to the Indenture under which such securities were issued.
As of October 6, 1998, due to the filing of the Petitions, the Company stopped
accruing interest on the Notes. The amount of accrued interest on the Notes is
$32.0 million.
As of October 6, 1998, due to the filing of the Petitions, the Company
stopped accruing and paying dividends on its 6% Convertible Preferred Stock,
Series A (the "Series A Preferred Stock"). The amount of accrued dividends on
the Series A Preferred Stock is $18,541.
As of October 6, 1998, due to the filing of the Petitions, the Company
stopped accruing and paying dividends on its 6% Convertible Preferred Stock,
Series B (the "Series B Preferred Stock"). The amount of accrued dividends on
the Series B Preferred Stock is $162,107.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<S> <C>
3.1 Certificate of Incorporation of the Company, as amended, incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 as
declared effective by the Commission on December 20, 1995.
3.2 Bylaws of the Company, as amended, incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement on Form S-1 as declared effective by the
Commission on December 20, 1995.
11.1* Computation of Earnings Per Share
27.1* Financial Data Schedule
</TABLE>
- ---------------------------
* Filed herewith
(b) Reports on Form 8-K
None.
28
<PAGE> 30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cityscape Financial Corp.
(Registrant)
Date: May 17, 1999 By:/s/ Tim S. Ledwick
------------ ------------------
Tim S. Ledwick
Title: Vice President and
Chief Financial Officer
(as chief accounting officer and
on behalf of the registrant)
29
<PAGE> 1
CITYSCAPE FINANCIAL CORP.
Exhibit 11.1
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998 (1)
---- --------
<S> <C> <C>
Net earnings (loss) $ 3,350,946 ($51,182,399)
Less: Preferred stock dividends -- 1,570,356
Less: Preferred stock default payments -- 3,016,774
------------ ------------
NET EARNINGS (LOSS) APPLICABLE TO COMMON STOCK 3,350,946 (55,769,529)
ADJUSTMENT TO NET EARNINGS (LOSS):
Add: After-tax interest expense from Convertible
Debentures -- --
Preferred stock dividends -- --
------------ ------------
TOTAL ADJUSTMENTS -- --
------------ ------------
ADJUSTED NET EARNINGS (LOSS) APPLICABLE TO COMMON STOCK $ 3,350,946 ($55,769,529)
============ ============
WEIGHTED AVERAGE COMMON SHARES 64,878,969 47,578,738
Effect of dilutive securities:
Warrants --
Stock options --
Convertible preferred stock --
Convertible Debentures --
------------ ------------
ADJUSTED WEIGHTED AVERAGE COMMON SHARES NMF(2) 47,578,738
============ ============
NET EARNINGS (LOSS) PER COMMON SHARE:
BASIC $ 0.05 ($ 1.17)
============ ============
DILUTED NMF(2) ($ 1.17)
============ ============
</TABLE>
(1) For the three months ended March 31, 1998, the incremental shares from
assumed conversions are not included in computing the diluted share
amounts because their effect would be antidilutive since an increase in
the number of shares would reduce the amount of loss per share.
(2) For the three months ended March 31, 1999, diluted EPS is not a
meaningful figure ("NMF") due to the fact that the number of shares
computed on a diluted basis would exceed the shares authorized and if the
Amended Plan is confirmed by the Bankruptcy Court as contemplated, the
potential dilutive shares include convertible securities that under the
terms of the Amended Plan would be extinguished. See Note 3, "Chapter 11
Proceedings".
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 20,651,655
<SECURITIES> 33,402,777
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 32,699,781
<CURRENT-ASSETS> 0<F1>
<PP&E> 35,215
<DEPRECIATION> 0
<TOTAL-ASSETS> 129,582,755
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
52
<COMMON> 649,489
<OTHER-SE> (394,873,546)
<TOTAL-LIABILITY-AND-EQUITY> 129,582,755
<SALES> 0
<TOTAL-REVENUES> 9,266,001
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,964,264
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,289,059
<INCOME-PRETAX> 3,358,619
<INCOME-TAX> 7,673
<INCOME-CONTINUING> 3,350,946
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,350,946<F2>
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0<F3>
<FN>
<F1>The Company makes use of an unclassified balance sheet style due to the nature
of its business. Current Assets and Current Liabilities are therefore
reflected as zero in accordance with the instructions of Appendix E to the
EDGAR Filer Manual.
<F2>Net income represents net earnings applicable to common stock.
<F3>Diluted EPS is not a meaningful figure due to the fact that the number
of shares computed on a diluted basis would exceed the shares authorized and
if the Amended Plan is confirmed by the Bankruptcy Court as contemplated, the
potential dilutive shares include convertible securities that under the terms
of the Amended Plan would be extinguished. See Note 3, "Chapter 11
Proceedings".
</FN>
</TABLE>
