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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
_X_ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 for the fiscal year ended December 31, 1998
___ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
COMMISSION FILE NUMBER: 0-27314
CITYSCAPE FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 11-2994671
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $0.01 per share.
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 such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirement for
the past 90 days.
Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
As of March 22, 1999, the aggregate market value of the registrant's Common
Stock held by nonaffiliates of the registrant was $295,224 based on the closing
sales price of the registrant's Common Stock as reported on the National
Quotation Bureau, Inc. OTC Bulletin Board on such date. For purposes of this
calculation, shares owned by officers, directors and 5% stockholders known to
the registrant have been deemed to be owned by affiliates. As of March 22, 1999,
the number of shares of the registrant's Common Stock outstanding was
64,878,969.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. BUSINESS
GENERAL(1)
Cityscape Financial Corp. (the "Company") is a consumer finance company
which, through its wholly-owned subsidiary, Cityscape Corp. ("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 44
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 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 chapter 11 of title 11 of the United States Code (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.
The Company's principal executive office and mailing address is 565 Taxter
Road, Elmsford, New York 10523-2300 and its telephone number is (914) 592-6677.
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) on the terms of a plan of reorganization that both groups would
find acceptable. 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 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 Company 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 Company has 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
- - ----------
(1) All references herein to "$" are United States dollars; all references to
"(pound)" 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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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 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 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 Company presently intends to seek confirmation of and to consummate the
Amended Plan on or before May 31, 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 Company's plan of reorganization will not
change; (iii) that the Bankruptcy Court will confirm such plan within the
anticipated timeframe, if at all; or (iv) that such plan will consummated (even
if it is confirmed). This summary of the Amended Plan is qualified in its
entirety by reference to the Disclosure Statement dated March 26, 1999, filed as
Exhibit 99.2 hereto, and to the Amended Plan which is an exhibit thereto.
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. In connection with its
downsizing, the Company recorded a restructuring charge of $3.2 million in the
first quarter of 1998. Of this amount, $1.1 million represented severance
payments made to 142 former employees and $2.1 million represented costs
incurred in connection with lease obligations and write-off of assets no longer
in service. During the fourth quarter of 1998, the Company recorded
reorganization items of $31.9 million. Of this amount, $3.9 million represents
severance payments to 335 former employees, $5.3 million represents costs
incurred in connection with lease obligations and write-offs of assets no longer
in service, $10.7 million represents professional fees and other miscellaneous
items related to the reorganization and $12.0 million represents the write-off
of the deferred debt issuance costs related to the Notes and Convertible
Debentures.
UK OPERATIONS
In the UK, the Company had commenced operations in May 1995 with the
formation of City Mortgage Corporation Limited ("CSC-UK"), an English
corporation that originated, sold and serviced loans in
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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.
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 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)249.6 million, the acquisition by Ocwen Asset
of CSC-UK's securitized loan residuals for a price of (pound)33.7 million and
the assumption by Ocwen of (pound)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 adjustment.
On February 15, 1999, the Company entered into a settlement agreement (subject
to a condition precedent) 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.
CESSATION OF CERTAIN BUSINESSES OF COMPANY
LOAN ORIGINATIONS AND PURCHASES
On November 17, 1998, the Company decided to suspend indefinitely all of
its loan origination and purchase activities. Previously, the Company originated
loans through a network of independent mortgage brokers and purchased loans on a
wholesale basis from selected financial institutions and mortgage bankers. The
Company offered a wide range of loan products, including fixed and adjustable
rate residential mortgage loans for refinancing, educational, home improvement
and debt consolidation purposes and fixed and adjustable rate purchase money
mortgage loans ("Core Products"). The Company also offered loans to homeowners
with little or no equity in their property but who possessed 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
("Sav*-A-Loans(R)"). Other loans that the Company had offered in the past
include jumbo loans, conventional home loans, Title I loans (loans partially
insured by the Federal Housing Administration (the "FHA"), an agency of the US
Department of Housing and Urban Development ("HUD"), pursuant to the Title I
credit and insurance program of the National Housing Act of 1934) and loans on
small multi-family and mixed-use properties ("Other Products").
The following table highlights certain selected information relating to the
origination and purchase of loans by the Company during the periods shown.
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LOAN ORIGINATIONS AND PURCHASES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Independent Mortgage Brokers:
Core Products ........................ $ 167,826 $ 392,330 $ 364,168
Sav*-A-Loan(R)Products ............... 236,502 429,126 97,753
Other Products ....................... 4,336 164,367 86,321
------------------------------------
Total principal balance ................. $ 408,664 $ 985,823 $ 548,242
Number of loans ...................... 8,031 17,850 9,173
Average principal balance per loan ... $ 50.9 $ 55.2 $ 59.8
Correspondent Loan Acquisition
Program:
Core Products ........................ $ 16,020 $ 425,693 $ 572,484
Sav*-A-Loan(R)Products ............... 32,098 239,993 39,565
Other Products ....................... -- 3,523 --
Bulk purchases (1) ................... -- -- 129,064
------------------------------------
Total principal balance .............. $ 48,118 $ 669,209 $ 741,113
Number of loans ...................... 942 11,752 11,960
Average principal balance per loan ... $ 51.1 $ 56.9 $ 62.0
Total Loan Originations and Purchases:
Core Products ........................ $ 183,846 $ 818,023 $ 936,652
Sav*-A-Loan(R)Products ............... 268,600 669,119 137,318
Other Products ....................... 4,336 167,890 86,321
Bulk purchases (1) ................... -- -- 129,064
------------------------------------
Principal balance .................... $ 456,782 $1,655,032 $1,289,355
Number of loans ...................... 8,973 29,602 20,863
Average principal balance per loan ... $ 50.9 $ 55.9 $ 61.8
</TABLE>
- - ----------
(1) Includes a one-time bulk purchase during 1996 of $129.1 million consisting
of 2,259 loans with an average principal balance of $57,100.
Independent Mortgage Brokers. During 1998, 1997 and 1996, $408.7 million
(89.5%), $985.8 million (59.6%) and $548.2 million (42.5%), respectively, of the
Company's loan originations and purchases were sourced through the independent
mortgage broker network. During 1998, 1997 and 1996, the single highest
producing independent mortgage broker accounted for 3.0%, 1.1% and 1.9%,
respectively, of the Company's production volume, and the ten highest producing
independent mortgage brokers accounted for 9.7%, 5.3% and 7.8%, respectively, of
the Company's loan production volume.
Correspondent Loan Acquisition Program. The Company purchased loans on a
flow basis through its Correspondent Loan Acquisition Program which are in the
form of complete loan packages originated by loan correspondents. The
Correspondent Loan Acquisition Program accounted for $48.1 million (10.5%),
$669.2 million (40.4%) and $612.0 million (47.5%) of the Company's total loan
origination and purchase volume for 1998, 1997 and 1996, respectively. No single
financial institution or other mortgage banker in the Correspondent Loan
Acquisition Program accounted for more than 0.9%, 2.8% or 7.4% of the Company's
loan originations and purchases during 1998, 1997 or 1996, respectively.
Geographic Distribution of Loans. Although the Company is licensed or
registered in 44 states and the District of Columbia, it has concentrated its
business in the eastern seaboard states and the midwest. For 1998,
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Maryland contributed 10.1% of the Company's total loan production volume and for
1997 and 1996, New York contributed 14.9% and 17.7% of the Company's total loan
production volume.
<TABLE>
GEOGRAPHIC DISTRIBUTION OF LOAN ORIGINATIONS
AND PURCHASES
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
STATES: 1998 1997 1996
- - ------- ----- ----- -----
<S> <C> <C> <C>
Maryland ....................... 10.1% 10.3% 7.0%
Illinois ....................... 9.7 7.1 10.0
Florida ........................ 8.7 6.0 2.0
New York ....................... 8.3 14.9 17.7
Virginia ....................... 6.9 5.6 4.6
Georgia ........................ 6.8 6.3 4.9
California ..................... 5.1 4.1 2.5
Pennsylvania ................... 4.9 5.7 8.4
North Carolina ................. 4.1 3.4 1.9
South Carolina ................. 4.0 3.4 3.8
Ohio ........................... 3.9 3.7 1.3
Indiana ........................ 3.7 2.6 1.7
New Jersey ..................... 2.6 7.5 10.9
Michigan ....................... 2.3 4.5 5.8
All others ..................... 18.9 14.9 17.5
----- ----- -----
Total ....................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
LOAN SALES THROUGH SECURITIZATIONS
Prior to the fourth quarter of 1997, the Company sold substantially all of
its loan production volume through securitizations. During 1998, 1997 and 1996,
the Company sold $414.2 million, $1.6 billion and $1.3 billion of loans,
representing 90.7%, 98.9%, and 99.1% of total originations and purchases during
these periods, respectively. Of these loan sales, during 1997 and 1996, the
Company sold $1.1 billion and $993.6 million, respectively, in securitizations.
In the fourth quarter of 1997, the Company's strategy shifted from
emphasizing the sale of its loan production volume through securitizations to
the use of whole loan sales. This strategy was due to liquidity constraints, the
Company's financial condition and its inability to access the capital markets.
Accordingly, the Company did not sell any of its loan production volume through
securitizations in 1998.
In loan sales through securitizations, the Company sold its loans into a
trust for a cash purchase price and interests in such trust consisting of
interest-only regular interests and the residual interest which were represented
by the interest-only and residual certificates. The Company retained no interest
in the loans sold into such trust other than its interest as a holder of the
interest-only and residual certificates issued by such trust. The cash purchase
price was 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 received the principal collected and
the investor pass-through interest rate on the principal balance, while the
Company recognized as current revenue the fair value of the interest-only and
residual certificates. An interest-only certificate represents an interest in a
trust with fixed terms that unconditionally entitles the holder to receive
interest payments that are either fixed or derived from a formula. A residual
certificate represents the interest in the trust which has no principal amount
and does not unconditionally entitle the holder to receive payments. A holder of
the residual certificate is entitled only to the remainder, if any, of the
interest cash flow from the mortgage loans sold to the trust after payment of
all other interests in such trust and as such bears the greatest degree of risk
regarding the performance of such mortgage loans. Securitizations take the form
of pass-through certificates which represent undivided beneficial ownership
interests in a portfolio consisting of the Company's loans that the
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Company has sold to a trust. The servicer of the loan portfolio remits the
principal and part of the interest payments on such loans to the trust which in
turn passes them to investors in the pass-through certificates. A portion of the
Company's securitizations have also included the payment of pre-funded amounts.
The Company recognized as current revenue the fair value of the
interest-only and residual certificates and, in future periods, may adjust the
value of such certificates to reflect the Company's estimate of the fair value
of such certificates at such time. Fair value is determined based on various
economic factors, including loan type, balance, interest rate, date of
origination, term and geographic location. The Company also uses other available
information such as reports on prepayment rates, collateral value, economic
forecasts and historical default and prepayment rates of the portfolio under
review, as well as actual valuations resulting from the sale of such
certificates. 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 paid on the related securities, less applicable fees and credit losses. The
Company discounts the expected cash flows at a discount rate which it believes
to be consistent with the required risk-adjusted rate of return to an
independent third party purchaser of the interest-only and residual
certificates. Realization of the value of these residual interests 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.
In a securitization, the Company purchased credit enhancements to the
senior interest in the related trusts in the form of insurance policies provided
by insurance companies. The pooling and servicing agreements that govern the
distribution of cash flows from the loans included in the trusts require either
(i) the establishment of a reserve that may be funded with an initial cash
deposit by the Company or (ii) the over-collateralization of the trust intended
to result in receipts and collections on the loans that exceed the amounts
required to be distributed to holders of senior interests. To the extent that
borrowers default on the payment of principal or interest on the loans, losses
will be paid out of the reserve account or will reduce the
over-collateralization to the extent that funds are available and will result in
a reduction in the value of the interest-only and residual certificates held by
the Company.
If payment defaults exceed the amount in the reserve account or the amount
of over-collateralization, as applicable, the insurance policy maintained by the
Company will pay any further losses experienced by holders of the senior
interests in the related trust. The delinquency rates on the pool of loans sold
in seven of the Company's securitizations have exceeded the permitted limits set
forth in the related pooling and servicing agreements. As a result of the
exceeded limits, the Company has been required to maintain in the related
reserve account all funds that would have otherwise been paid to the Company
with respect to the interest-only and residual certificates.
In securitizations, the Company may be required either to repurchase or to
replace loans which do not conform to the representations and warranties made by
the Company in the pooling and servicing agreements entered into when the
portfolios of loans are sold through a securitization. During 1998, 1997 and
1996, the Company repurchased 132 loans for $3.9 million, 63 loans for $5.4
million, and 73 loans for $4.7 million, respectively, primarily due to first
month defaults that remain uncured for 90 days.
CURRENT BUSINESS OF COMPANY
After the indefinite suspension of all loan origination and purchase
activities in November 1998, the Company has been in the business of selling and
servicing mortgage loans.
WHOLE LOAN SALES
Due to the Company's decision in the fourth quarter of 1997 to emphasize
whole loan sales to better manage cash flow, all loans sold during 1998 ($414.2
million) were through whole loan sales. During 1997 and 1996, the Company sold
$518.4 million (31.7%) and $283.9 million (22.2%) of its loan production volume
in whole loan sales. The Company anticipates that the disposition of
substantially all of
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its $123.3 million at December 31, 1998 in remaining unsold loans will be
through whole loan sales. No assurance can be given, however, that the Company
will be successful in selling its loans through whole loan sales or otherwise.
Loans are generally sold in portfolios. Upon the profitable sale of a loan
portfolio, the Company receives a "premium," representing a cash payment in
excess of the par value of the loans (par value representing the unpaid balance
of the loan amount given to the borrower) or in a few instances a "yield
differential" whereby the Company receives a portion of the interest paid by the
borrower for the life of the loan. Premiums on whole loan sales represented
0.7%, 4.5% and 1.6%, respectively, of the Company's total revenues (excluding
net unrealized losses) and 100.0% ($128,024), 9.7% ($8.1 million) and 2.2% ($1.7
million), respectively, of the Company's total gain on sale of loans in 1998,
1997 and 1996. Recently due to deteriorating market conditions, a majority of
the Company's loan portfolios have been sold for less than par value.
The Company sells substantially all of its loan production volume to
various institutional purchasers with customary representations and warranties
covering loans sold. The Company, therefore, may be required to repurchase loans
pursuant to its representations and warranties and may have to return a portion
of the premium earned if a loan is prepaid during a limited period of time after
sale, usually six months and not greater than one year. The Company typically
repurchased a loan if a default occurs within the first month following the date
the loan was originated or if the loan documentation is alleged to contain
misrepresentations made by the borrower.
LOAN SERVICING AND COLLECTIONS
Loan servicing is the collection of payments due under a loan, the
monitoring of the loan, the remitting of payments to the holder of the loan,
furnishing reports to such holder and the enforcement of such holder's rights,
including attempting to recover delinquencies and instituting loan foreclosures.
In order to maximize the premium earned on the sale of loans through whole
loan sales, beginning in the fourth quarter of 1997, the Company changed its
prior policy and now releases its servicing rights on substantially all of the
loan origination and purchase volume it sells through whole loan sales. The
Company retained the servicing rights to none of the $414.2 million in loans it
sold during 1998, 75.1% of the $1.6 billion in loans it sold during 1997, and
97.8% of the $1.3 billion in loans it sold during 1996. The Company expects that
as a result of its selling loans through whole loan sales with servicing
released as well as the indefinite suspension of all loan origination and
purchase activities, the size of its managed servicing portfolio will decrease
in the future. In addition, the Company is currently evaluating the potential
transfer of such servicing and, should such transfer occur, will adjust its
staffing accordingly.
As of December 31, 1998, the Company was servicing 25,179 loans
representing an aggregate of $1.2 billion. Revenue generated from loan servicing
amounted to 4.4% (excluding $68.8 million of net unrealized losses), 0.9%
(excluding $148.0 million of net unrealized losses), and 2.6% of total revenues
for 1998, 1997 and 1996, respectively.
In January 1998, the Company retained Ocwen Federal Bank FSB ("Ocwen FSB"),
established in the management and resolution of underperforming loans, as a
special loan servicer to sub-service the Company's 90-day-plus delinquent loans.
The Company has the right to deliver non-performing loans to Ocwen FSB on an
ongoing basis. In 1998, the Company transferred to Ocwen FSB 993 non-performing
loans with an aggregate unpaid principal balance of $66.4 million.
Due to the Company exceeding the delinquency rates permitted under the
terms of the pooling and servicing agreements with respect to the Company's
1995-2, 1995-3, 1996-1, 1996-2, 1996-3 and 1996-4 home equity securitizations,
during the third quarter of 1998 the Company entered into subservicing
agreements with respect to such loans with Fairbanks Capital Corp. ("Fairbanks")
and Ocwen FSB. As of December 31, 1998, the outstanding amount of such loans was
$550.5 million or 45.7% of the Company's
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total servicing portfolio and 93.3% of the Company's home equity servicing
portfolio. Under the terms of the subservicing agreements, Fairbanks and Ocwen
FSB as subservicers retain all rights, including the normal servicing fee and
any ancillary income, and obligations of the servicer as provided for under the
terms of the applicable securitizations and servicing agreements. The Company
expects to enter into a similar subservicing agreement for its 1995-1 home
equity securitization which, as of December 31, 1998, had approximately $14.4
million of loans outstanding.
The following table provides data on delinquency experience, real estate
owned ("REO") properties and charge-offs for the Company's serviced portfolio
(excluding loan balances under contract servicing agreements).
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------- -------------------------
% OF % OF % OF
DOLLARS IN SERVICED DOLLARS IN SERVICED DOLLARS IN SERVICED
THOUSANDS PORTFOLIO THOUSANDS PORTFOLIO THOUSANDS PORTFOLIO
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Serviced portfolio ....................... $1,204,044(1) 100.0% $2,231,519 100.0% $1,470,344 100.0%
========== ========== ========== ========== ========== ==========
Delinquencies:
30-59 days delinquent ................. $ 42,706 3.6% $ 65,063 2.9% $ 54,733 3.7%
60-89 days delinquent ................. 17,129 1.4 30,479 1.4 19,733 1.4
90 days or more delinquent ............ 37,683 3.1 27,808 1.3 24,800 1.7
---------- ---------- ---------- ---------- ---------- ----------
Total delinquencies ................ $ 97,518 8.1% $ 123,350 5.6% $ 99,266 6.8%
========== ========== ========== ========== ========== ==========
Defaults:
Bankruptcies .......................... $ 35,076 2.9% $ 25,131 1.1% $ 4,269 0.3%
Foreclosures .......................... 81,152 6.7 100,901 4.5 27,689 1.9
---------- ---------- ---------- ---------- ---------- ----------
Total defaults ..................... $ 116,228 9.6% $ 126,032 5.6% $ 31,958 2.2%
========== ========== ========== ========== ========== ==========
REO property ............................. $ 21,830 1.8% $ 8,549 0.4% $ 1,328 0.1%
========== ========== ========== ========== ========== ==========
Charge-offs .............................. $ 32,344 2.7% $ 4,734 0.2% $ 36 --
========== ========== ========== ========== ========== ==========
</TABLE>
(1) Includes the subservicing of the Company's 1995-2, 1995-3, 1996-1, 1996-2,
1996-3 and 1996-4 home equity securitizations totaling $550.5 million.
Foreclosure Regulation and practices regarding the liquidation of
properties (e.g., foreclosure) and the rights of the mortgagor in default vary
greatly from state to state. Loans originated or purchased by the Company are
secured by mortgages, deeds of trust, trust deeds, security deeds or deeds to
secure debt, depending upon the prevailing practice in the state in which the
property securing the loan is located. Depending on local law, foreclosure is
effected by judicial action and/or non-judicial sale, and is subject to various
notice and filing requirements. If foreclosure is effected by judicial action,
as in New York and Illinois for example, the foreclosure proceedings may take
several months.
In general, the borrower, or any person having a junior encumbrance on the
real estate, may cure a monetary default by paying the entire amount in arrears
plus other designated costs and expenses incurred in enforcing the obligation
during a statutorily prescribed reinstatement period. Generally, state law
controls the amount of foreclosure expenses and costs, including attorneys'
fees, which may be recovered by a lender.
After the reinstatement period has expired without the default having been
cured, in certain states the borrower or junior lienholder has the right of
redemption of the property by paying the loan in full to prevent the scheduled
foreclosure sale. For example, in Illinois the right of redemption exists for 90
days from the date of foreclosure judgment; New York law does not recognize a
right of redemption.
There are a number of restrictions that may limit the Company's ability to
foreclose on a property. A lender may not foreclose on the property securing a
second mortgage loan unless it forecloses subject to each senior mortgage, in
which case the junior lender or purchaser at such a foreclosure sale will take
title to the property subject to the lien securing the amount due on the senior
mortgage. Moreover, if a borrower has filed for bankruptcy protection, a lender
may be stayed from exercising its foreclosure rights.
9
<PAGE> 10
Also, certain states provide a homestead exemption which may restrict the
ability of a lender to foreclose on residential property. In such states, the
Company requires the borrower to waive his or her right of homestead. While such
waivers are generally enforceable in Illinois, waivers of homestead rights may
not be enforceable in other states. Due to these restrictions, as the Company
has experienced an increase in the number of loans serviced and in the
percentage of such loans that are delinquent, there has been a substantial
increase in the number of properties pending foreclosure.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien due to several factors,
including the difficulty of determining the exact status of title to the
property, the possible deterioration of the property during the foreclosure
proceedings and a requirement that the purchaser pay for the property in cash or
by cashier's check. Thus, the foreclosing lender often purchases the property
from the trustee or referee for an amount equal to the principal amount
outstanding under the loan, accrued and unpaid interest and the expenses of
foreclosure. Depending upon market conditions, the ultimate proceeds of the sale
may not equal the lender's investment in the property. If, after determining
that purchasing a property securing a loan will minimize the loss associated
with the defaulted loan, the Company may bid at the foreclosure sale for such
property or accept a deed in lieu of foreclosure.
Except when subcontracted, loan foreclosures are the responsibility of the
Company's loan servicing operations. Prior to a foreclosure, the Company
performs a foreclosure analysis with respect to the mortgaged property to
determine the value of the mortgaged property and the bid that the Company will
make at the foreclosure sale. This is based on (i) a current valuation of the
property obtained through a drive-by appraisal conducted by an independent
appraiser, (ii) an estimate of the sale price of the mortgaged property obtained
by sending two local realtors to inspect the property, (iii) an evaluation of
the amount owed, if any, to a senior mortgagee and for real estate taxes and
(iv) an analysis of marketing time, required repairs and other costs, such as
real estate broker fees, that will be incurred in connection with the
foreclosure sale. The Company has established a committee comprised of members
of senior management to perform the foreclosure analyses.
The Company assigns all foreclosures to outside counsel located in the same
state as the mortgaged property. Bankruptcies filed by borrowers are also
assigned to appropriate local counsel who are required to provide monthly
reports on each loan file.
BUSINESS STRATEGY
If the Amended Plan is confirmed by the Bankruptcy Court, it is expected
that the reorganized company will reenter the mortgage loan origination business
at some time in the future, based on prevailing industry conditions and the
general business climate. The Company presently intends to seek confirmation of
and to consummate the Amended Plan on or before May 31, 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 Company's plan of
reorganization will not change; (iii) that the Bankruptcy Court will confirm
such plan within the anticipated timeframe, if at all; or (iv) that such plan
will be consummated (even if it is confirmed).
COMPETITION
Should the Company reenter the mortgage origination business at some time
in the future, as a consumer finance company, the Company would face intense
competition. The Company's bankruptcy petitions have caused the Company to be
competitively disadvantaged. Traditional competitors in the financial services
business include other mortgage banking companies, commercial banks, credit
unions, thrift institutions, credit card issuers and finance companies. Many of
these competitors in the consumer finance business are substantially larger and
have considerably greater financial, technical and marketing resources than the
Company will have if the Amended Plan is confirmed. Furthermore, certain large
national finance companies and conforming mortgage originators adapted their
conforming origination
10
<PAGE> 11
programs and allocate resources to the origination of non-conforming loans. In
addition, certain of these larger mortgage companies and commercial banks also
offer products similar to those that had been offered by the Company, targeting
customers similar to those of the Company. Competition can take many forms
including convenience in obtaining a loan, customer service, marketing and
distribution channels, amount and term of the loan, and interest rates.
REGULATION
The Company's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of its operations. The Company's lending activities
are subject to the Federal Truth-in-Lending Act and Regulation Z (including the
Home Ownership and Equity Protection Act of 1994), the Federal Equal Credit
Opportunity Act and Regulation B, as amended ("ECOA"), the Fair Credit Reporting
Act of 1970, as amended, the Federal Real Estate Settlement Procedures Act
("RESPA"), and Regulation X, the Home Mortgage Disclosure Act, the Federal Debt
Collection Practices Act and the National Housing Act of 1934, as well as other
federal and state statutes and regulations affecting the Company's activities.
The Company is also subject to the rules and regulations of, and examinations
by, HUD and state regulatory authorities with respect to originating,
processing, underwriting, selling, securitizing and servicing loans. These rules
and regulations, among other things, impose licensing obligations on the
Company, establish eligibility criteria for mortgage loans, prohibit
discrimination, provide for inspections and appraisals of properties, require
credit reports on loan applicants, regulate assessment, collection, foreclosure
and claims handling, investment and interest payments on escrow balances and
payment features, mandate certain disclosures and notices to borrowers and, in
some cases, fix maximum interest rates, fees and mortgage loan amounts. Failure
to comply with these requirements can lead to loss of approved status,
termination or suspension of servicing contracts without compensation to the
servicer, demands for indemnifications or mortgage loan repurchases, certain
rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement actions.
The Company believes that it is in compliance in all material respects with
applicable federal and state laws and regulations.
ENVIRONMENTAL MATTERS
To date, the Company has not been required to perform any investigation or
cleanup activities, nor has it been subject to any environmental claims. There
can be no assurance, however, that this will remain the case in the future.
In the course of its business, the Company has acquired, and may acquire in
the future, properties securing loans which are in default. Although the Company
primarily lends to owners of residential properties, there is a risk that the
Company could be required to investigate and clean up hazardous or toxic
substances or chemical releases at such properties after acquisition by the
Company, and may be held liable to a governmental entity or to third parties for
property damage, personal injury and investigation and cleanup costs incurred by
such parties in connection with the contamination. In addition, the owner or
former owners of a contaminated site may be subject to common law claims by
third parties based on damages and costs resulting from environmental
contamination emanating from such property. On all loan applications where the
Company believed there may have existed, or an appraisal may have indicated, a
possible environmental problem, the Company had required a Phase I Environmental
Report.
EMPLOYEES
As a result of the Company's reorganization efforts, the decision in the
fourth quarter of 1998 to suspend indefinitely all of its loan originations and
purchase activities and employee attrition, the Company's workforce has been
reduced from 837 employees at December 31, 1997 to 70 employees as of December
31, 1998, all of whom were full-time employees. Of the Company's employees
11
<PAGE> 12
at December 31, 1998, 11.4% were in management, 48.6% were in administrative
support and 40.0% were in servicing. None of the Company's employees is covered
by a collective bargaining agreement. As of March 22, 1999, the Company's
workforce was reduced to 54 employees. The Company considers its relations with
its employees to be satisfactory.
As a result of the difficult environment the Company has recently been
operating in, the Company is experiencing an increase in the rate of attrition
of its employees and an inability to attract, hire and retain qualified
replacement employees. Further attrition or inability to hire employees may
exacerbate the Company's difficult position which could have a material adverse
effect on the Company's results of operations and financial condition. No
assurance can be given that such attrition or inability to hire employees will
not occur.
ITEM 2. PROPERTIES
The Company's executive and administrative offices are located at 565
Taxter Road in Elmsford, New York, where the Company leases approximately 7,800
square feet of office space at an annual aggregate rent of approximately
$137,000. The lease expires on December 31, 1999. The Company's servicing
operations are located at 8 Skyline Drive, Hawthorne, New York, where the
Company leases an additional 5,710 square feet of office space at an annual
aggregate rent of approximately $103,000. This lease expires on June 30, 1999.
The Company has rejected or intends to reject all other material property leases
as part of its filings under the Bankruptcy Code.
ITEM 3. 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.
12
<PAGE> 13
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.
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
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 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 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 $20 million of such preferred stock. Plaintiffs seek
unspecified damages, including pre-judgement 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
13
<PAGE> 14
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 April 1998, the Company filed an action in the US District Court for the
District of Maryland against multiple parties entitled Cityscape Corp. vs.
Global Mortgage Company, et al. The Company is in the process of serving the
complaint on the defendants. To date, the Company has yet to receive any
responsive pleadings. The complaint seeks damages of $4.0 million stemming from
a series of 145 allegedly fraudulent residential mortgages which the Company
previously acquired. The Company has previously reserved for losses against such
loans.
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 Securities
and Exchange Commission (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 is supplying 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
14
<PAGE> 15
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)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 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 claimed that CSC-UK had
excessively charged borrowers, failed to notify borrowers of interest rate rises
and failed to advise borrowers of increased repayments. Ocwen claimed that these
liabilities totaled approximately (pound)13.0 million ($21.2 million).
Additionally, pursuant to the UK Sale Agreement, Ocwen held back a sum of
(pound)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.
On February 15, 1999, the Company, Ocwen and certain of their subsidiaries
entered into a settlement agreement, 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)2.0 million ($3.3 million) plus
interest from the Holdback account, and Ocwen will be paid the remaining
(pound)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 December 31, 1998.
The approval of the Bankruptcy Court is a condition to the effectiveness of
the settlement agreement. The Company will apply for the Bankruptcy Court's
approval subject to Ocwen's agreement to the Company's request to substitute
itself for the Company or its subsidiaries where appropriate, as the party to
related legal proceedings with borrowers. It is contemplated that this issue
will be resolved shortly.
Chapter 11 Proceedings. On October 6, 1998, the Company and CSC filed the
Petitions in the Bankruptcy Court. See "Chapter 11 Proceedings".
In addition, the Company is party to various legal proceedings arising out
of the ordinary course of its business. Management believes that none of these
ordinary course actions, individually or in the aggregate, will have a material
adverse affect on the results of operations or financial condition of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Effective with the opening of business on May 6, 1998, the Company's Common
Stock began to trade on the National Quotation Bureau, Inc. OTC Bulletin Board
(the "Pink Sheets"). From January 29, 1998 through May 1, 1998, the Company's
Common Stock traded on the Nasdaq SmallCap Market under the symbol "CTYSC."
Previously, the Company's Common Stock traded on the Nasdaq National Market
under the symbol "CTYS." Currently, the Company's Common Stock is traded under
the symbol "CYYSQ."
The following table sets forth the range of high and low bid prices per
share for the Common Stock for the periods indicated as reported by Nasdaq
through May 1, 1998 and the range of high and low bid prices per share for the
Common Stock for the periods indicated as reported in the Pink Sheets from May
6, 1998 (reflecting inter-dealer prices, without retail mark-up, mark-down or
commission which may not represent actual transactions).
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Year ended December 31, 1997:
First quarter ................................ $ 31.50 $ 17.50
Second quarter ............................... 20.00 11.50
Third quarter ................................ 19.00 8.63
Fourth quarter ............................... 10.44 0.25
Year ended December 31, 1998:
First quarter ................................ 0.97 0.50
Second quarter (through May 1, 1998) ......... 0.72 0.41
Second quarter (from May 6, 1998) ............ 0.34 0.03
Third quarter ................................ 0.17 0.02
Fourth quarter ............................... 0.02 0.01
</TABLE>
As of March 22, 1999, there were 607 stockholders of record of the
Company's Common Stock.
The Company has never paid any cash dividends on its Common Stock and does
not anticipate paying cash dividends in the foreseeable future. In addition,
certain agreements to which the Company is a party restrict the Company's
ability to pay dividends on common equity. The payment of dividends to the
Company by its subsidiaries is and will continue to be restricted by or subject
to, among other limitations, applicable provisions of laws of national and state
governments, contractual provisions, the earnings of such subsidiaries and
various business considerations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
16
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below as of December 31,
1998, 1997, 1996, 1995 and 1994 and for the years then ended have been derived
from the consolidated financial statements of the Company, of which the balance
sheet data at December 31, 1998 and 1997 and the operating results data for the
years ended December 31, 1998, 1997 and 1996 have been derived from audited
consolidated financial statements and notes thereto included in this Report. 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 2 to the Consolidated Financial
Statements), related circumstances, significant losses form operations and a net
capital deficiency at December 31, 1998 raise substantial doubt about the
Company's ability to continue as a going concern. Because of the significance of
the uncertainty of the Company to continue as a going concern, the independent
auditors' report, included herein, does not express an opinion on the 1998 and
1997 financial statements. The following data should be read in conjunction with
the Consolidated Financial Statements of the Company and Notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994(1)
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Gain on sale of loans ............................ $ 128 $ 83,365 $ 76,820 $ 26,305 $ 5,691
Net unrealized loss on valuation of
residuals ..................................... (68,847) (148,004) -- -- --
Mortgage origination income ...................... 2,238 4,849 2,812 2,751 2,551
Interest ......................................... 14,363 73,520 24,535 6,110 1,900
Other ............................................ 1,454 20,302 3,681 1,306 1,032
--------- --------- --------- --------- ---------
Total revenues .............................. (50,664) 34,032 107,848 36,472 11,174
Costs and expenses:
Salaries and employee benefits ................... 28,744 41,089 26,288 10,861 4,280
Other costs and expenses ......................... 109,425 129,526 38,360 11,080 5,041
--------- --------- --------- --------- ---------
Total costs and expenses .................... 138,169 170,615 64,648 21,941 9,321
(Loss) earnings from continuing
operations before extraordinary
item, income taxes and
reorganization items ............................. (188,833) (136,583) 43,200 14,531 1,853
Reorganization items ............................... 31,879 -- -- -- --
--------- --------- --------- --------- ---------
(Loss) earnings from continuing
operations before extraordinary item
and income taxes ................................ (220,712) (136,583) 43,200 14,531 1,853
Income taxes (benefit) provision(2) ................ 38 (18,077) 19,325 6,410 1,450
--------- --------- --------- --------- ---------
(Loss) earnings from continuing
operations before extraordinary item ............ (220,750) (118,506) 23,875 8,121 403
Discontinued operations:
(Loss) earnings from discontinued
operations, net of income tax
(benefit) provision, net of
extraordinary item, net of tax .................. -- (245,906) 26,806 3,750 --
Loss on disposal of discontinued
operations ..................................... -- (49,940) -- -- --
--------- --------- --------- --------- ---------
(Loss) earnings before extraordinary
item ............................................. (220,750) (414,352) 50,681 11,871 403
Extraordinary item (3) ............................. -- -- -- (296) --
--------- --------- --------- --------- ---------
Net (loss) earnings ................................ (220,750) (414,352) 50,681 11,575 403
Preferred stock dividends paid in
common stock ..................................... -- 905 -- -- --
Preferred stock - increase in
liquidation preference ........................... 6,278 917 -- -- --
Preferred stock - default payments ................. 14,049
Preferred stock - beneficial discount .............. -- 2,725 -- -- --
--------- --------- --------- --------- ---------
Net (loss) earnings applicable to
common stock ..................................... $(241,077) $(418,899) $ 50,681 $ 11,575 $ 403
========= ========= ========= ========= =========
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Earnings (loss) per
common share (4):
Basic:
Continuing operations before
extraordinary item ............................. $ (4.11) $ (3.70) $ 0.81 $ 0.38 $ 0.02
Discontinued operations .......................... -- (7.40) 0.91 0.18 --
Disposal of discontinued operations .............. -- (1.50) -- -- --
Extraordinary item ............................... -- -- -- (0.02) --
--------- --------- --------- --------- ---------
Net (loss) earnings .............................. $ (4.11) $ (12.60) $ 1.72 $ 0.54 $ 0.02
========= ========= ========= ========= =========
Diluted (5):
Continuing operations before
extraordinary item ............................. $ (4.11) $ (3.70) $ 0.78 $ 0.34 $ 0.02
Discontinued operations .......................... -- (7.40) 0.88 0.16 --
Disposal of discontinued operations .............. -- (1.50) -- -- --
Extraordinary item ............................... -- -- -- (0.01) --
--------- --------- --------- --------- ---------
Net (loss) earnings .............................. $ (4.11) $ (12.60) $ 1.66 $ 0.49 $ 0.02
========= ========= ========= ========= =========
Weighted average number of
Common shares:
Basic ............................................ 58,662 33,244 29,405 21,244 20,042
========= ========= ========= ========= =========
Diluted .......................................... 58,662 33,244 30,538 23,839 20,561
========= ========= ========= ========= =========
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994(1)
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets ....................................... $ 209,338 $ 394,002 $ 663,841 $ 135,946 $ 21,816
Mortgage servicing receivables, net ................ -- 4,969 40,068 3,436 --
Trading securities(6) .............................. 33,661 126,476 103,200 15,571 --
Mortgage loans held for sale, net .................. 123,346 93,290 88,127 73,852 16,681
Investment in discontinued operations,
net .............................................. 13,008 84,232 212,590 26,832 --
Total debt(7) ...................................... 105,969 507,099 335,479 72,942 16,100
Liabilities subject to compromise .................. 477,424 -- -- -- --
Total liabilities .................................. 606,913 570,827 525,009 78,849 18,030
Total stockholders' equity (deficit) ............... (397,575) (176,825) 138,832 57,099 3,177
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994(1)
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING STATISTICS:
Loan originations and purchases:
Core Products ....................................... $ 183,846 $ 818,023 $1,065,716 $ 417,864 $ 154,410
Sav*-A-Loan(R)Products ............................ 268,600 669,119 137,318 -- --
Other Products .................................... 4,336 167,890 86,321 -- --
--------- --------- --------- --------- ---------
Total .......................................... $ 456,782 $1,655,032 $1,289,355 $ 417,864 $ 154,410
Average principal balance per loan
originated and purchased .......................... $ 51 $ 56 $ 62 $ 70 $ 77
Weighted average initial
Loan-to-value ratio (8) ........................... 78.4% 73.6% 72.5% 66.4% 59.7%
Loan sales ........................................... $ 414,167 $1,637,387 $1,270,897 $ 358,997 $ 138,041
Loans serviced (9) ................................... $1,214,555 $2,590,479 $1,519,395 $ 386,720 $ 56,340
Loans 30+ days past due as a
percentage of serviced portfolio ................... 17.7% 11.2% 8.9% 3.9% 3.4%
Charge-offs .......................................... $ 32,344 $ 4,734 $ 167 $ 52 --
</TABLE>
- - ----------
(1) Gives effect to the Company's purchase of the capital stock of CSC as if
such purchase occurred on January 1, 1994. On April 27, 1994, the Company
acquired all of the capital stock of CSC in an
18
<PAGE> 19
acquisition in which the shareholders of CSC acquired beneficial ownership
of approximately 92% of the Company's Common Stock. The CSC Acquisition was
accounted for as a reverse acquisition for financial reporting purposes
with CSC being deemed to have acquired a 100% interest in the Company as of
the date of the acquisition. From the date of its formation in 1988 through
the date of the CSC Acquisition, the Company's activities were limited to
(i) the sale of initial shares in connection with its organization, (ii) a
registered public offering of securities and (iii) the pursuit of a
combination, by merger or acquisition. The Company presently has no
business operations other than those incidental to its ownership of all the
capital stock of CSC.
(2) Includes a one-time charge of $680,000 related to the change in tax status
in 1994 from an "S" corporation to a "C" corporation.
(3) Represents a loss, net of taxes, related to the early extinguishment of
subordinated debentures in December 1995.
(4) Earnings per share figures for the effected periods reflect the 100% stock
dividends paid in September 1995 and July 1996.
(5) For the years ended December 31, 1998 and 1997, the incremental shares from
assumed conversions are not included in computing the diluted per share
amounts because the effect would be antidilutive since an increase in the
number of shares would reduce the amount of loss per share. Therefore,
basic and diluted earnings per share figures are of equal amount.
(6) Represents the interest-only and residual mortgage certificates that the
Company received upon loan sales through securitizations.
(7) Includes short-term borrowings due under warehouse facilities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
(8) Excludes the Company's Sav*-A-Loan(R) Products and Other Products.
(9) Includes contract servicing operations by the Company. See "Item 1--
Current Business of Company-- Loan Servicing and Collections."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and accompanying notes for the
years ended December 31, 1998, 1997 and 1996. 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 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 44 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.
19
<PAGE> 20
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. See "Item 1 - Chapter 11 Proceedings."
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"). 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 petitions or the date on which the property is returned to the
landlord. On December 23, 1998, the Bankruptcy Court granted an order 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 December 31, 1998, pursuant to the
Plan are summarized as follows:
<TABLE>
<CAPTION>
<S> <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 ................................... 8,033,138
------------
Total .............................................. $477,424,358
============
</TABLE>
Other potential consequences of reorganization under chapter 11 that 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.
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
20
<PAGE> 21
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 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, Preferred Stock and warrants of the Company would be extinguished and
holders thereof would receive no distributions under the Amended Plan.The
Company presently intends to seek confirmation of and to consummate the Amended
Plan on or before May 31, 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 Company's plan of reorganization will not change; (iii)
that the Bankruptcy Court will confirm such plan within the anticipated
timeframe, if at all; or (iv) that such plan will consummated (even if it is
confirmed). This summary of the Amended Plan is qualified in its entirety by
reference to the Disclosure Statement dated March 26, 1999, filed as Exhibit
99.2 hereto, and to the Amended Plan which is an exhibit thereto.
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. In connection with its
downsizing, the Company recorded a restructuring charge of $3.2 million in the
first quarter of 1998. Of this amount, $1.1 million represented severance
payments made to 142 former employees and $2.1 million represented costs
incurred in connection with lease obligations and write-off of assets no longer
in service. During the fourth quarter of 1998, the Company recorded
reorganization items of $31.9 million. Of this amount, $3.9 million represents
severance payments to 335 former employees, $5.3 million represents costs
incurred in connection with lease obligations and write-offs of assets no longer
in service, $10.7 million represents professional fees and other miscellaneous
items related to the reorganization and $12.0 million represents the write-off
of the deferred debt issuance costs related to the Notes and Convertible
Debentures.
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. See "Item 1 - Downsizing of Operations - UK
Operations."
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. The Company has restated its 1996 financial statements to present
operating results of CSC-UK as a discontinued operation.
As of December 31, 1998, 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 until dissolution of the existing legal entities of CSC-UK
and its subsidiaries.
21
<PAGE> 22
OVERVIEW OF PREVIOUS AND CURRENT BUSINESS
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. Recently, however, 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, 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.
Gain on Sale of Loans. 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. During 1998,
1997 and 1996, gain on sale of loans constituted approximately 0.7% (excluding a
net unrealized loss on valuation of residuals of $68.8 million), 45.8%
(excluding a net unrealized loss on valuation of residuals of $148.0 million)
and 71.2%, respectively, of total revenues.
Loan Originations and Purchases. The following table highlights certain
selected information relating to loans originated by the Company during the
periods shown. As discussed above, on November 17, 1998, the Company decided to
suspend indefinitely all of its loan origination and purchase activities.
<TABLE>
LOAN ORIGINATION AND PURCHASES
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total originations and purchases ..... $ 456,782 $1,655,032 $1,289,355
Weighted average interest rate:
Core Products ..................... 9.7% 11.2% 11.8%
Sav*-A-Loan(R)Products ............ 13.0% 14.0% 14.4%
Other Products .................... 9.0% 9.0% 10.5%
Bulk purchases .................... -- -- 12.0%
Overall weighted average interest rate 11.6% 12.0% 12.0%
Weighted average initial loan-to-value
ratio(1) .......................... 78.4% 73.6% 72.5%
Percentage of loans secured by first
mortgages:
Core Products ..................... 87.9% 91.7% 94.0%
Sav*-A-Loan(R)Product ............. 0.2% 1.4% 0.8%
</TABLE>
- - ----------
(1) Excludes the Company's Sav*-A-Loan(R) products and Other Products. The
loan-to-value ratio of a loan secured by a first mortgage is determined by
dividing the amount of the loan by the appraised value of the mortgaged
property at origination. The loan-to-value ratio of a loan secured by a
second mortgage is determined by taking the sum of the loans secured by the
first and second mortgages and dividing by the appraised value of the
mortgaged property at origination.
22
<PAGE> 23
The Company decreased its loan originations and purchases in 1998 to $456.8
million from $1.7 billion in 1997. This decrease was due to fluctuating market
conditions, the Company's reorganization proceedings and the Company's decision
to suspend indefinitely all loan origination and purchase activities during the
fourth quarter of 1998. In addition, due to the factors mentioned above, the
weighted average interest rates on loans originated in 1998 decreased to 11.6%
from 12.0% in 1997 and the weighted average initial loan-to-value ratio
increased to 78.4% in 1998 from 73.6% in 1997. See "Item 1 - Cessation of
Certain Businesses of Company - Loan Originations and Purchases" for further
discussion of the loan products and channels of the 1998 loan originations and
purchases.
Loan Sales. The Company sells virtually all of the loans it originated in
loan sales through whole loan sales. See "Item 1-- Current Business of Company--
Whole Loan Sales". During 1998, 1997 and 1996, the Company sold $414.2 million,
$1.6 billion and $1.3 billion of loans, respectively, of which $414.2 million,
$518.4 million and $283.9 million, respectively, were sold in whole loan sales.
Gains on the sale of loans through securitizations and into loan purchase
facilities were $75.3 million and $75.1 million, or 41.3% and 69.6% of the
Company's total revenues (excluding net unrealized losses) in 1997 and 1996,
respectively. See "Item 1 Cessation of Certain Businesses of Company - Loan
Sales Through Securitizations". Gains on whole loan sales represented 0.7%, 4.5%
and 1.6% of the Company's total revenues (excluding net unrealized losses) in
1998, 1997 and 1996, respectively.
During 1998, 1997 and 1996, gains on loan sales totaled $128,024 (less than
0.1% weighted average gain), $83.4 million (5.1% weighted average gain) and
$76.8 million (6.0% weighted average gain), respectively. Recently, due to
deteriorating market conditions, a majority of the Company's loan portfolios
were sold for less than par value.
Loan Servicing. In 1998, the Company sold the servicing rights to all of
the loans it sold. In 1997 and 1996, the Company retained the servicing rights
for approximately 75.1% and 97.8%, respectively, of the loans it sold. The
Company anticipates that it will continue to sell whole loans on a servicing
released basis. As of December 31, 1998, the Company was servicing 25,179 loans
with an aggregate principal balance of $1.2 billion. Revenue generated from loan
servicing amounted to 4.4% (excluding $68.8 million of net unrealized losses),
0.9% (excluding $148.0 million of net unrealized losses) and 2.6% of total
revenues for 1998, 1997 and 1996, respectively. Due to the Company's decision to
sell loans in the whole loan sale market with servicing released as well as the
indefinite suspension of all loan origination and purchase activities, the
Company anticipates that the size of the servicing portfolio will continue to
decrease in the future. In addition, the Company is currently evaluating the
potential transfer of such servicing and, should such transfer occur, will
adjust its staffing accordingly. See "Item 1 - Current Business of Company -
Loan Servicing and Collections" for further discussion of the Company's loan
servicing portfolio.
In January 1998, the Company retained Ocwen FSB, established in the
management and resolution of underperforming loans, as a special loan servicer
to sub-service the Company's 90-day-plus delinquent loans. The Company has the
right to deliver non-performing loans to Ocwen on an ongoing basis. In 1998, the
Company transferred to Ocwen FSB 993 non-performing loans with an aggregate
unpaid principal balance of $66.4 million.
Due to the Company exceeding the delinquency rates permitted under the
terms of the pooling and servicing agreements with respect to the Company's
1995-2, 1995-3, 1996-1, 1996-2, 1996-3 and 1996-4 home equity securitizations,
during the third quarter of 1998 the Company entered into subservicing
agreements with respect to such loans with Fairbanks and Ocwen FSB. As of
December 31, 1998, the outstanding amount of such loans was $550.5 million or
45.7% of the Company's total servicing portfolio and 93.3% of the Company's home
equity servicing portfolio. Under the terms of the subservicing agreements,
Fairbanks and Ocwen FSB as subservicers retain all rights, including the normal
servicing fee and any ancillary income, and obligations of the servicer as
provided for under the terms of the applicable securitizations and servicing
agreements. The Company expects to enter into a similar subservicing
23
<PAGE> 24
agreement for its 1995-1 home equity securitization which, as of December 31,
1998, had approximately $14.4 million of loans outstanding.
BUSINESS STRATEGY
If the Amended Plan is confirmed by the Bankruptcy Court, it is expected
that the reorganized Company will reenter the mortgage loan origination business
at some time in the future, based on prevailing industry conditions and the
general business climate. The Company presently intends to seek confirmation and
to consummate the Amended Plan on or before May 31, 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 Company's plan of
reorganization will not change; (iii) that the Bankruptcy Court will confirm
such plan within the anticipated timeframe, if at all; or (iv) that such plan
will be consummated (even if it is confirmed).
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
During 1998, the Company recorded negative revenues of $50.7 million
primarily as a result of the recording of a $68.8 million net unrealized loss on
the Company's trading securities which are in the form of interest-only and
residual mortgage certificates. This represents a $84.7 million decrease in
revenues from 1997 primarily also as a result of decreased gain on sale of
loans, interest income, and other income which included a $18.0 million gain on
sale of available-for-sale securities during 1997.
For 1998, the Company recorded a gain on sale of loans totaling $128,024.
This gain was due primarily to the sale of $414.2 million of whole loans at an
average net premium received of 0.81% as compared to the average premium paid on
such loans of 0.78%. For 1997, 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. During 1997, the Company recognized $83.4 million of gain on
sale of loans representing a weighted average gain of 5.1% on $1.6 billion of
loans sold. The Company expects that it will continue to sell the majority of
loans through whole loan sales and therefore expects to continue to recognize
lower net margins as compared to the margins recognized in 1997. Due to the
Company's decision to suspend indefinitely all origination and purchase
activities, the Company expects that the volume of loans sales in the future
will be reduced.
During 1998, the Company recorded an unrealized loss on valuation of
residuals of $68.8 million, consisting of a $42.9 million unrealized loss on its
home equity residuals and $25.9 million on its Sav*-A-Loan(R) residuals. This
unrealized loss was primarily a result of (i) the Company increasing the
weighted average discount rate used to value its residuals to 20.0% at December
31, 1998 from 15.0% at December 31, 1997 for both its home equity and
Sav*-A-Loan(R) residuals and (ii) an increase in the loss assumptions from 1.7%
per annum at December 31, 1997 to 7.5% per annum at December 31, 1998 for its
home equity securitizations and an increase from 3.1% per annum at December 31,
1997 to 4.5% per annum at December 31, 1998 for its Sav*-A-Loan(R)
securitizations. As of December 31, 1998, the Company used a 30.0% per annum
weighted average prepayment speed on its home equity securitizations and 16.8%
per annum weighted average prepayment speed on its Sav*-A-Loan(R)
securitizations. The increase in the discount rate reflects the changes in
market conditions experienced in the mortgage-backed securities markets since
the second quarter of 1998. See the Notes to Consolidated Financial Statements
for further discussion of the Company's trading securities.
Mortgage origination income decreased $2.6 million or 54.2% to $2.2 million
for the year ended December 31, 1998 from $4.8 million for the comparable period
in 1997. This decrease was due primarily to a lower volume of loan originations
for the year ended December 31, 1998 as compared to the same period in 1997.
24
<PAGE> 25
Interest income decreased $59.1 million or 80.4% to $14.4 million for the
year ended December 31, 1998 from $73.5 million for the comparable period in
1997. This decrease was due primarily to the cessation of the recognition of
accreted interest on the Company's residuals in the second quarter of 1998 as a
result of the devaluation of the residuals, as well as lower originations during
1998 and lower weighted average coupons on the loans originated in 1998.
Other income decreased $18.8 million or 92.6% to $1.5 million in 1998 from
$20.3 million in 1997. This decrease was due primarily to the inclusion in 1997
of $18.0 million of gain on the sale of IMC Mortgage Company ("IMC") Common
Stock owned by the Company. Additionally, there was a decrease in servicing
income of $820,378 or 50.0% to $819,910 during 1998 from $1.6 million in 1997,
due primarily to the continued attrition of the loans that were sold with
servicing retained prior to the Company's adoption of Statement of Financial
Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing
Rights." The Company expects that servicing revenues will be lower in the future
as a result of the subservicing agreements entered into with Fairbanks.
Total expenses decreased $32.4 million or 19.0% to $138.2 million in 1998
from $170.6 million in 1997. This decrease was due primarily to lower salaries
and interest expense offset by increased other operating expenses relating to
increased professional fees as well as $3.2 million of restructuring charges and
$2.0 million relating to the settlement of a lawsuit.
Salaries and benefits decreased $12.4 million or 30.2% to $28.7 million in
1998 from $41.1 million in 1997. This decrease was due primarily to a reduction
of staffing levels to 70 employees as of December 31, 1998 as compared to 837
employees as of December 31, 1997. This decrease in employees was primarily a
result of the Company's reorganization efforts as well as employee attrition and
the Company's decision to suspend indefinitely all loan origination and purchase
activities.
Interest expense decreased $24.3 million or 34.4% to $46.4 million in 1998
from $70.7 million in 1997. This decrease was due primarily to lower interest on
warehouse facility borrowings due to a lower average balance of loans in
inventory during 1998, the discontinuance in 1998 of the Company's interest rate
management strategy which resulted in higher interest expense and offsetting
interest income and in 1997 the recognition of $4.7 million in interest expense
related to the inducement of the Convertible Debentures.
Selling and other expenses increased $5.3 million or 11.5% to $51.5 million
in 1998 from $46.2 million in 1997. This increase was due primarily to increased
other operating expenses of $5.0 million or 11.9% to $47.1 million in 1998 from
$42.1 million in 1997 resulting from increased professional fees as a result of
the Company's restructuring and streamlining efforts as well as a $2.0 million
charge due to the settlement of a lawsuit and increased foreclosure costs during
1998.
Provision for loan losses of $8.3 million was recorded for the year ended
December 31, 1998 as compared to $12.6 million for the year ended December 31,
1997. This decrease was due primarily to significantly lower originations in
1998 ($456.8 million) as compared to 1997 ($1.6 billion) resulting in a lower
level of problem loans originated during 1998 and correspondingly in a lower
loan loss provision. This was offset by the fact that a provision for losses was
required against a higher portion of the loans held for sale resulting from the
deterioration of the market for such loans.
During 1998, the Company recorded a restructuring charge of $3.2 million.
This charge was related to a restructuring plan that included streamlining and
downsizing the Company's operations. During February 1998, 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 represents severance payments made to 142 former employees and $2.1
million represents costs incurred with lease obligations and write-offs of
assets no longer in service.
In addition to the restructuring charges of $3.2 million, reorganization
items of $31.9 million were recorded during 1998. As part of its reorganization
plan and the Company's decision to indefinitely
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suspend its loan origination and purchase activities in November 1998, the
Company reduced its workforce by 335 employees and closed its branch operations
in California, Illinois, New York and Georgia, while maintaining corporate and
servicing offices in New York. Of this amount, $3.9 million represents severance
payments to 335 former employees, $5.3 million represents costs incurred in
connection with lease obligations and write-offs of assets no longer in service,
$10.7 million represents professional fees and other miscellaneous items related
to the reorganization and $12.0 million represents the write-off of the deferred
debt issuance costs related to the Notes and Convertible Debentures which are
classified as liabilities subject to compromise at December 31, 1998.
For the year ended December 31, 1998, the Company recorded an income tax
provision of $38,267 as compared to an income tax benefit of $18.1 million for
the comparable period in 1997. In 1997 the Company recorded a tax benefit of
$18.1 million which represented the refunds claimed by the Company from the tax
loss carrybacks generated as a result of the net operating losses. As a result
of additional net operating losses recorded in 1998, the Company did not
generate federal tax liability during this period. The Company's tax provision
in 1998 reflects the state tax liabilities incurred. See the Notes to the
Consolidated Financial Statements for further discussion of the Company's tax
position.
The Company recorded a net loss applicable to common stock of $241.1
million for the year ended December 31, 1998 as compared to net loss applicable
to common stock of $418.9 million in 1997. This loss was due primarily to
decreased loan originations which decreased gain on sale of loans without a
corresponding decrease in expenses. In addition the Company's strategy of
selling loans through whole loan sales instead of through securitizations
decreased gain on sale of loans, as well as the recognition of unrealized losses
on valuation of residuals of $68.8 million during 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Total revenues decreased $73.8 million or 68.5% to $34.0 million in 1997
from $107.8 million in 1996. This decrease was due primarily to a net unrealized
loss on valuation of residuals of $148.0 million during 1997, offset by
increased gain on sale of loans of $6.6 million, increased interest income of
$49.0 million resulting primarily from an increase in intercompany income from
CSC-UK, and a gain on sale of available-for-sale securities of $18.0 million.
Gain on sale of loans increased $6.6 million or 8.6% to $83.4 million in
1997 from $76.8 million in 1996. The increase was due to increased volume of
loan sales at lower average gains ($1.6 billion of loan sales at a weighted
average gain of 5.1% in 1997 as compared to $1.3 billion of loan sales at a
weighted average gain of 6.0% in 1996). The lower average gain on sale of loans
recognized in 1997 was due primarily to lower margins from correspondent loans,
as well as a higher percentage of the Company's loan originations and purchases
being sold as whole loan sales to enhance the Company's liquidity position.
Whole loans sales result in lower margins than loans sold in securitizations,
but are immediately cash flow positive. The Company expects that it will sell
the majority of its loans through whole loan sales and therefore expects to
continue to recognize lower net margins in the future.
During 1997, the Company recognized an unrealized loss on valuation of
residuals of $148.0 million. This unrealized loss consists of $89.8 million of
losses on its home equity residuals, $35.9 million on its Sav*-A-Loan(R)
residuals and $22.3 million on its mortgage servicing receivables. At December
31, 1997, the Company determined the fair value of its home equity
securitizations based upon the net realizable value as implied by the first
quarter 1998 sale of its home equity residuals and recorded net unrealized
losses of $89.8 million. The unrealized loss related to the Sav*-A-Loan(R)
residuals reflects the Company's change in the assumptions used to value such
residuals as follows: the discount rate was increased to 15% from 12%; constant
prepayment speed was increased to 16.8% from 14% after the twelfth month; and
the default rate was increased to a weighted average of 306 basis points per
annum from a weighted average default rate of 175 basis points per annum. The
Company valued its mortgage servicing receivables on a net realizable value
assuming a liquidation price based upon the value implied by the servicing
rights sold in conjunction with the January 1998 home equity residual sale.
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Mortgage origination income increased $2.0 million or 71.4% to $4.8 million
in 1997 from $2.8 million in 1996. This increase was due primarily to higher
originations during 1997 partially offset by lower fees earned on the Company's
broker originations. It is anticipated that the Company's origination fees as a
percentage of loans originated will continue to decrease in the future.
Interest income increased $49.0 million or 200.0% to $73.5 million in 1997
from $24.5 million in 1996. This increase was due primarily to the increased
intercompany note interest charged on a higher average note balance with CSC-UK
from $149.3 million at December 31, 1996 to $309.3 million at December 31, 1997,
as well as interest earned on a higher average balance of mortgage loans held
for sale balance resulting from increased loan production volume in excess of
loans sold during the period.
Other income increased $16.6 million or 448.6% to $20.3 million in 1997
from $3.7 million in 1996. This increase was due primarily to the inclusion of
$18.0 million of gain on the sale of IMC Common Stock owned by the Company. The
increase was offset by the decrease in servicing income of $1.2 million or 42.9%
to $1.6 million in 1997 from $2.8 million in 1996. The Company expects servicing
income to continue to decrease in the future primarily due to the continued
attrition of the loans that were sold with servicing retained prior to the
Company's adoption of SFAS No. 122, "Accounting for Mortgage Servicing Rights."
Total expenses increased $106.0 million or 164.1% to $170.6 million in 1997
from $64.6 million in 1996. This increase was due primarily to increased
salaries, selling expenses and operating expenses related to increased loan
origination and purchase volume during 1997. Excluding the net unrealized loss
on valuation of residuals, total expenses as a percentage of total revenues
increased to 93.7% in 1997 from 59.9% in 1996. As a result of streamlining
efforts by the Company during the first quarter of 1998, the Company expects
total expenses to decrease in the future.
Salaries and benefits increased $14.8 million or 56.3% to $41.1 million in
1997 from $26.3 million in 1996. This increase was due primarily to increased
staffing levels to 837 US employees at December 31, 1997 compared to 638
employees at December 31, 1996, with an average of 844 employees for the year of
1997. This increase in average employees resulted from the growth in loan
production volume and geographic expansion and increased loans serviced. As a
result of the Company's restructuring and streamlining efforts, the number of
employees has decreased to 577 at March 15, 1998.
Interest expense increased $53.4 million or 308.7% to $70.7 million in 1997
from $17.3 million in 1996. This increase was due primarily to increased
interest expense related to $300.0 million of Notes issued in May 1997 as well
as the increased balance of loans held pending sale during 1997, resulting from
the increased loan production volume during 1997. Also included in interest
expense for the year ended December 31, 1997 is a one-time charge of $4.7
million related to the $14.0 million induced conversion of the Convertible
Debentures in April 1997.
Selling and other expenses increased $25.7 million or 125.4% to $46.2
million in 1997 from $20.5 million in 1996. This increase was due primarily to
increased other operating expenses of $23.9 million or 131.3% to $42.1 million
in 1997 from $18.2 million in 1996 resulting from increased professional fees,
travel and entertainment and occupancy costs incurred to support the increased
loan production volume. Additionally, the increase was due to increased selling
costs of $1.8 million or 78.3% to $4.1 million in 1997 from $2.3 million in 1996
as a result of increased loan production volume in 1997 as compared to 1996.
Provision for loan losses of $12.6 million was recorded for the year ended
December 31, 1997 as compared to $532,396 for the year ended December 31, 1996.
This increase was due primarily to an increased balance of mortgages held for
investment resulting from increased loan production volume during 1997.
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Income tax benefit (expense) changed from an expense of $19.3 million in
1996 to an income tax benefit of $18.1 million in 1997 due to pretax losses of
$136.6 million. The 1997 tax benefit was reduced due to a valuation reserve
established in 1997 due to the uncertainty of the Company's ability to continue
as a going concern.
The Company recorded a loss from continuing operations of $118.5 million
for the year ended December 31, 1997 as compared to earnings from continuing
operations of $23.9 million for the year ended December 31, 1996. This loss was
primarily due to the Company recognizing a net unrealized loss on valuation of
residuals of $148.0 million during 1997 as well as increased total expenses
during 1997 and lower average gains.
The Company recorded a loss from discontinued operations of $245.9 million
for the year ended December 31, 1997 as compared to earnings from discontinued
operations of $27.4 million for the year ended December 31, 1996. This loss from
discontinued operations was due primarily to a valuation adjustment related to
the Office of Fair Trading initiatives. See " - Downsizing - UK Operations."
The Company adopted a plan in March 1998 to sell the assets of CSC-UK. As a
result, the Company recorded a $49.9 million loss on disposal of discontinued
operations.
The Company recorded a net loss applicable to common stock of $418.9
million for the year ended December 31, 1997 as compared to net earnings
applicable to common stock of $50.7 million in 1996. This loss was due primarily
to the $148.0 million net unrealized loss on the valuation of residuals, the
loss on the disposal of discontinued operations of $49.9 million, as well as the
loss from discontinued operations of $240.9 million.
FINANCIAL CONDITION
DECEMBER 31, 1998 COMPARED TO DECEMBER 31, 1997
Cash and cash equivalents increased $15.8 million to $18.4 million at
December 31, 1998 from $2.6 million at December 31, 1997. This increase was
primarily due to the cash proceeds from the sale of CSC-UK.
The Company did not have any recorded mortgage servicing receivables at
December 31, 1998 as compared to $5.0 million at December 31, 1997. This
decrease was due primarily to mortgage servicing receivables sold in conjunction
with the sale of trading securities of $2.5 million, amortization of $1.8
million as well as a valuation adjustment of $0.7 million at December 31, 1998.
This valuation adjustment was due to the Company determining 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.
Trading securities, which consist of interest-only and residual
certificates, decreased $92.8 million or 73.4% to $33.7 million at December 31,
1998 from $126.5 million at December 31, 1997. This decrease was partially due
to the Company's sale of residual certificates and related mortgage servicing
receivables relating to certain of the Company's home equity loan products for
net proceeds of $26.5 million ($24.0 million allocated to trading securities and
$2.5 million allocated to mortgage servicing receivables) during the first
quarter of 1998 to enhance the Company's liquidity position. Additionally, the
Company recorded a write-down of $68.8 million during 1998 primarily resulting
from an increase in the expected loss rate used to value such residuals
reflecting the Company's recent increase in losses on liquidation of
non-performing loans in its home equity portfolio and Sav*-A-Loan(R) portfolios,
as well as an increased weighted average discount rate reflecting the changes in
market conditions experienced in the overall mortgage-backed securities market.
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Mortgage loans held for sale, net increased $30.0 million or 32.2% to
$123.3 million at December 31, 1998 from $93.3 million at December 31, 1997.
This increase was due primarily to the volume of loans originated exceeding the
volume of loans sold during 1998, as well as the reclassification of $4.8
million of mortgages held for investment, net at December 31, 1998 to mortgages
held for sale, net.
The Company did not have any mortgages held for investment, net at December
31, 1998 as compared to $6.5 million at December 31, 1997. This decrease was due
primarily to $4.8 million of loans transferred to mortgages held for sale, net
primarily due to the Company's decision to sell all mortgage loans.
Investment in discontinued operations, net decreased $71.2 million or 84.6%
to $13.0 million at December 31, 1998 from $84.2 million at December 31, 1997.
This decrease primarily represented net cash proceeds from the sale of
discontinued operations during 1998. The balance at December 31, 1998 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 until the dissolution of the
existing legal entities of CSC-UK and its subsidiaries.
Income taxes receivable decreased $16.8 million or 91.3% to $1.6 million at
December 31, 1998 from $18.4 million at December 31, 1997. This decrease was due
primarily to the receipt of a federal tax refund of $15.8 million and state tax
refunds of $1.0 million.
Other assets decreased $17.7 million or 53.2% to $15.6 million at December
31, 1998 from $33.3 million at December 31, 1997. This decrease was due
primarily to the elimination of deferred debt issuance costs of $13.5 million at
December 31, 1997, as well as a write-off of $3.8 million of equipment and
leasehold improvements during 1998.
Warehouse financing facilities outstanding increased $28.5 million or 36.8%
to $106.0 million at December 31, 1998 from $77.5 million at December 31, 1997.
This increase was due primarily to the volume of loans originated exceeding the
volume of loans sold during 1998.
Accounts payable and other liabilities decreased $40.2 million or 63.1% to
$23.5 million at December 31, 1998 from $63.7 million at December 31, 1997. This
decrease was due primarily to $39.8 million of accrued interest payable on the
Notes and Convertible Debentures and $8.0 million of other accounts payable were
reclassified as liabilities subject to compromise as required by SOP 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code".
The Company recorded $477.4 million of liabilities subject to compromise at
December 31, 1998 as required by SOP 90-7. This consists of $300.0 million of
Notes, $129.6 million of Convertible Debentures, $39.8 million of accrued
interest payable on the Notes and Convertible Debentures and $8.0 million of
accounts payable. See "Chapter 11 Proceedings."
The stockholders' deficit increased $220.8 million or 124.9% to a deficit
of $397.6 million at December 31, 1998 as compared to a stockholders' deficit of
$176.8 million at December 31, 1997. This increase in the deficit was the result
of a net loss of $220.8 million for the year ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business requires substantial cash to support its operating
activities. The Company's principal cash requirements includes 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 and purchase facilities 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
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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.
The Company has operated, and expects to continue to operate, on a negative
cash flow basis. During 1998, 1997 and 1996, the Company used net cash of $86.9
million, $124.7 million and $105.9 million from continuing operations,
respectively. Additionally, in the years ended 1998 and 1997, the Company was
provided $74.2 million and $30.2 million, respectively, from investing
activities. In 1996, the Company used $3.5 million in investing activities. In
April 1998, CSC-UK completed the UK Sale and received proceeds, at the time of
the closing of $83.8 million, net of closing costs and other fees.
During 1997 and 1996, the Company's sale of loans through securitizations
resulted in a gain on sale of loans through securitizations recognized by the
Company. The recognition of this gain on sale has a negative impact on the cash
flow of the Company because significant costs are incurred upon closing of the
transactions giving rise to such gain and the Company is required to pay income
taxes on the gain on sale in the period recognized, although the Company does
not receive the cash representing the gain until later periods as the related
loans are repaid or otherwise collected. During 1998, 1997 and 1996, the Company
received from financing activities $28.5 million, $273.9 million and $255.5
million, respectively. In addition, during 1997 and 1996, the Company used net
cash in discontinued operations of $177.3 million and $149.3 million,
respectively.
The Company is required to comply with various operating covenants as
defined in the Greenwich DIP Facility (as defined below) and CIT 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 the support 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
relative priority of the Greenwich DIP Facility and the CIT/Nomura DIP Facility
(as defined below) in the assets of CSC and the Company is determined under an
intercreditor
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agreement between Greenwich and CIT and Nomura (each as defined below), The
Greenwich DIP Facility originally bore interest at an interest rate of LIBOR
plus 2.75% (7.8% on December 31, 1998). 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 Greenwich DIP Facility Amendment, the interest rate was
changed to the prime rate plus 2.50%. As of February 28, 1999, $18.9 million was
outstanding under the Greenwich DIP Facility.
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 is secured by substantially all of the assets of CSC
and the capital stock of CSC and is guaranteed by the Company. The CIT/Nomura
DIP Facility originally bore interest at an interest rate of LIBOR plus 2.75% or
the prime rate (7.75% on December 31, 1998). The CIT/Nomura DIP Facility was
scheduled to terminate on February 28, 1999; however, the parties agreed by
amendment to the CIT/Nomura DIP Facility (the "CIT/Nomura DIP Facility
Amendment") to extend the termination of such facility until March 31, 1999,
subject to further extension on a weekly basis upon written notice to CIT and
Nomura. The CIT/Nomura DIP Facility Amendment was approved by an order of the
Bankruptcy Court dated March 24, 1999. Under the CIT/Nomura DIP Facility
Amendment, the interest rate was changed to the prime rate plus 2.00%. As of
February 28, 1999, $14.9 million was outstanding under the CIT/Nomura DIP
Facility.
LOAN SALES
Beginning in the fourth quarter of 1997, the Company disposes of 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 and 1996, the
Company sold $414.2 million, $518.4 million and $283.9 million, respectively, in
whole loan sales, accounting for 100.0%, 31.7% and 22.2% 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.
Historically, the Company used overcollateralization accounts as a means of
providing credit enhancement for its securitizations. This mechanism slows the
flow of cash to the Company and causes some or all of the amounts otherwise
distributable to the Company as cash flow in excess of amounts payable as
current interest and principal on the securities issued in its securitizations
to be deposited in an overcollateralization account for application to cover
certain losses or to be released to the Company later if not so used. This
temporary or permanent redirection of such excess cash flows reduces the present
value of such cash flows, which are the principal component of the gain on the
sale of the securitized loans recognized by the Company in connection with each
securitization. See "--Overview of Previous and Current Business -- Loan Sales."
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
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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 December 31, 1998, the Company's balance sheet reflected the fair value of
interest-only and residual certificates of $33.7 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 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. See "Item 1 - Cessation of Certain
Businesses of Company -- Loan Sales Through Securitizations."
SALE OF RESIDUAL CERTIFICATES AND MORTGAGE SERVICING RECEIVABLES
In order to enhance the Company's liquidity position, in January 1998, the
Company sold residual certificates and associated mortgage servicing receivables
relating to certain of the Company's home equity loan products for net proceeds
of $26.5 million (which equated to book value at December 31, 1997).
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.
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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 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.
At December 31, 1998, there were $129.6 million of Convertible Debentures
outstanding and they are included in the classification liabilities subject to
compromise on the Statement 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 payment 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 December 31, 1998, the Notes are included in the classification
liabilities subject to compromise on the Statement 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 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 December 31, 1998, 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 December 31, 1998, all
Series A Warrants were outstanding.
33
<PAGE> 34
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 December 31, 1998, 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 December 31, 1998, all Series B
Warrants were outstanding.
As of December 31, 1998, if all of the outstanding shares of the Series A
Preferred Stock and those shares of the Series B Preferred Stock not subject to
conversion restrictions, were converted into Common Stock, the Company would not
have sufficient authorized shares of Common Stock to satisfy all of these
conversions.
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.
34
<PAGE> 35
The description above of the covenants contained in the Company's credit
facilities 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).
ACCOUNTING CONSIDERATIONS
In June 1998, the Financial Accounting Standards Board ("FASB") issued 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.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." SFAS No. 134 requires that
after the securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed securities or
other retained interests based on its ability and intent to sell or hold those
investments. SFAS No. 134 is effective for the first fiscal quarter beginning
after December 15, 1998. The Company intends to continue to classify its
interests in mortgage backed securities as trading securities and therefore
believes that SFAS No. 134 will not have an impact on its financial reporting.
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 fluctuating 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 uses 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.
35
<PAGE> 36
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.
ITEM 7A. 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%.
36
<PAGE> 37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
Cityscape Financial Corp. Financial Statements:
Report of Independent Auditors by KPMG LLP 38
Consolidated Statements of Financial Condition at
December 31, 1998 and 1997 39
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 40
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1998, 1997 and 1996 41
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 42
Notes to Consolidated Financial Statements 43-71
37
<PAGE> 38
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cityscape Financial Corp.:
We have audited the accompanying consolidated statements of financial
condition of Cityscape Financial Corp. and Subsidiary - Debtor-in-Possession as
of October 6, 1998 (the "Company") as of December 31, 1998 and 1997 and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the results of
operations, changes in stockholders' equity and cash flows of the Company for
the year ended December 31, 1996 in conformity with generally accepted
accounting principles.
The accompanying 1998, 1997 and 1996 consolidated financial statements have
been prepared assuming that the Company will continue as a going concern. The
Company has suffered significant net losses for the years ended December 31,
1998 and 1997, and has a net capital deficiency as of December 31, 1998 and
1997. At December 31, 1998 and 1997, these circumstances and the Petitions and
related circumstances discussed in Notes 2 and 4 raise substantial doubt about
the entity's ability to continue as a going concern. Management's plans in
regard to these matters are described in Note 2. The 1998 and 1997 financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Because of the significance of the uncertainty discussed in the preceding
paragraph, we are unable to express, and we do not express, an opinion on the
accompanying 1998 and 1997 financial statements.
New York, New York KPMG LLP
March 31, 1999
38
<PAGE> 39
<TABLE>
CITYSCAPE FINANCIAL CORP.
(DEBTOR-IN-POSSESSION AS OF OCTOBER 6, 1998)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 18,405,426 $ 2,594,163
Cash held in escrow 3,768,695 24,207,517
Mortgage servicing receivables, net -- 4,969,162
Trading securities 33,660,930 126,475,656
Mortgage loans held for sale, net 123,345,783 93,290,024
Mortgages held for investment, net -- 6,530,737
Investment in discontinued operations, net 13,008,401 84,232,000
Income taxes receivable 1,550,107 18,376,574
Other assets 15,598,619 33,325,976
------------- -------------
Total assets $ 209,337,961 $ 394,001,809
============= =============
LIABILITIES
Warehouse financing facilities $ 105,969,355 $ 77,479,007
Accounts payable and other liabilities 23,519,199 63,727,810
Senior notes -- 300,000,000
Convertible subordinated debentures -- 129,620,000
Liabilities subject to compromise 477,424,358 --
------------- -------------
Total liabilities 606,912,912 570,826,817
------------- -------------
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 December 31,
1998; 5,295 shares issued and outstanding;
Liquidation Preference - Series A Preferred
Stock, $6,820,000; Series B Preferred Stock,
$47,046,745 at December 31, 1997 52 53
Common stock, $.01 par value; 100,000,000
shares authorized; 64,948,969 and 47,648,738
issued at December 31, 1998 and 1997,
respectively 649,489 476,487
Treasury stock, 70,000 shares at
December 31, 1998 and 1997, at cost (175,000) (175,000)
Additional paid-in capital 175,304,103 175,477,104
Accumulated deficit (573,353,595) (352,603,652)
------------- -------------
Total stockholders' deficit (397,574,951) (176,825,008)
------------- -------------
COMMITMENTS AND CONTINGENCIES
Total liabilities and stockholders' deficit $ 209,337,961 $ 394,001,809
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE> 40
<TABLE>
CITYSCAPE FINANCIAL CORP.
(DEBTOR-IN-POSSESSION AS OF OCTOBER 6, 1998)
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
REVENUES
Gain on sale of loans $ 128,024 $ 83,365,502 $ 76,820,290
Net unrealized loss on valuation of residuals (68,846,790) (148,004,447) --
Interest 14,362,900 73,520,473 24,535,115
Mortgage origination income 2,238,078 4,848,613 2,811,534
Other 1,454,148 20,301,883 3,680,938
------------- ------------- ------------
Total revenues (50,663,640) 34,032,024 107,847,877
------------- ------------- ------------
EXPENSES
Salaries and employee benefits 28,744,183 41,088,956 26,287,642
Interest expense 46,438,779 70,689,198 17,279,836
Selling expenses 4,423,984 4,136,812 2,337,544
Other operating expenses 47,060,545 42,085,275 18,210,714
Provision for loan losses 8,267,267 12,614,269 532,396
Restructuring charge 3,233,760 -- --
------------- ------------- ------------
Total expenses 138,168,518 170,614,510 64,648,132
------------- ------------- ------------
(Loss) earnings from continuing operations before
income taxes and reorganization items (188,832,158) (136,582,486) 43,199,745
Reorganization items 31,879,518 -- --
------------- ------------- ------------
(Loss) earnings from continuing operations before
income taxes (220,711,676) (136,582,486) 43,199,745
Income tax provision (benefit) 38,267 (18,076,574) 19,324,460
------------- ------------- ------------
(Loss) earnings from continuing operations (220,749,943) (118,505,912) 23,875,285
DISCONTINUED OPERATIONS:
(Loss) earnings from discontinued operations, net of income tax (benefit)
provision of ($37,188,000) and $15,102,974 in 1997 and 1996, and net of
extraordinary item of $425,000 in 1997 -- (245,906,000) 26,805,597
Loss on disposal of discontinued operations -- (49,939,996) --
------------- ------------- ------------
NET (LOSS) EARNINGS (220,749,943) (414,351,908) 50,680,882
Preferred stock dividends paid in common stock -- 904,531 --
Preferred stock - increase in liquidation preference 6,278,214 917,530 --
Preferred stock - default payments 14,048,722 -- --
Preferred stock - beneficial discount -- 2,725,000 --
------------- ------------- ------------
NET (LOSS) EARNINGS APPLICABLE TO COMMON STOCK $(241,076,879) $(418,898,969) $ 50,680,882
============= ============= ============
EARNINGS (LOSS) PER COMMON SHARE:
Basic
(Loss) earnings from continuing operations $ (4.11) $ (3.70) $ 0.81
(Loss) earnings from discontinued operations -- (7.40) 0.91
Loss on disposal of discontinued operations -- (1.50) --
------------- ------------- ------------
Net (loss) earnings $ (4.11) $ (12.60) $ 1.72
============= ============= ============
DILUTED(1)
(Loss) earnings from continuing operations $ (4.11) $ (3.70) $ 0.78
(Loss) earnings from discontinued operations -- (7.40) 0.88
Loss on disposal of discontinued operations -- (1.50) --
------------- ------------- ------------
Net (loss) earnings $ (4.11) $ (12.60) $ 1.66
============= ============= ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic 58,661,544 33,244,212 29,404,557
============= ============= ============
Diluted 58,661,544(1) 33,244,212(1) 30,537,991
============= ============= ============
</TABLE>
(1) For the years ended December 31, 1998 and 1997, 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.
40
<PAGE> 41
<TABLE>
CITYSCAPE FINANCIAL CORP.
(DEBTOR-IN-POSSESSION AS OF OCTOBER 6, 1998)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<CAPTION>
PREFERRED SHARES COMMON SHARES
----------------------------- ----------------------------- ADDITIONAL
NUMBER NUMBER PAID-IN
OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 -- $ -- 28,900,732 $ 289,007 $ 44,838,143
Comprehensive income:
Net earnings -- -- -- -- --
Other comprehensive income, net of taxes
Unrealized gain on available-for-sale
securities -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- --
Other comprehensive income -- -- -- -- --
Comprehensive income -- -- -- -- --
Issuance of common stock -- -- 101,039 1,010 672,246
J & J Acquisition -- -- 548,000 5,480 9,789,164
Greyfriars Acquisition -- -- 99,362 994 2,483,056
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1996 -- -- 29,649,133 296,491 57,782,609
Comprehensive loss:
Net loss -- -- -- -- --
Other comprehensive loss, net of taxes -- -- -- -- --
Unrealized loss on available-for-sale
securities -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- --
Other comprehensive loss -- -- -- -- --
Comprehensive loss: -- -- -- -- --
Issuance of common stock -- -- 204,288 2,043 829,864
Induced conversion of convertible
subordinated debentures -- -- 876,040 8,760 18,170,749
Issuance of preferred stock 10,000 100 -- -- 97,958,497
Conversion of preferred stock (4,705) (47) 16,851,414 168,514 (168,467)
Preferred stock dividends paid in common stock -- -- 67,863 679 903,852
Purchase of treasury stock -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1997 5,295 53 47,578,738 476,487 175,477,104
Comprehensive loss:
Net loss -- -- -- -- --
Comprehensive loss: -- -- -- -- --
Conversion of preferred stock (118) (1) 17,300,231 173,002 (173,001)
============= ============= ============= ============= =============
Balance at December 31, 1998 5,177 $ 52 64,878,969 $ 649,489 $ 175,304,103
============= ============= ============= ============= =============
<CAPTION>
RETAINED
EARNINGS
UNREALIZED (ACCUMULATED Comprehensive TREASURY
GAIN DEFICIT) Income(Loss) STOCK TOTAL
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 11,971,905 $ 57,099,055
Comprehensive income
Net earnings -- 50,680,882 $ 50,680,882 -- 50,680,882
Other comprehensive income, net of taxes
Unrealized gain on available-for-sale
securities 8,328,950 -- 8,328,950 -- 8,328,950
Foreign currency translation adjustment -- 9,77l,356 9,771,356 -- 9,771,356
-------------
Other comprehensive income 18,100,306
-------------
Comprehensive income $ 68,781,188
=============
Issuance of common stock -- -- -- 673,256
J & J Acquisition -- -- -- 9,794,644
Greyfriars Acquisition -- -- -- 2,484,050
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1996 8,328,950 72,424,143 -- 138,832,193
Comprehensive loss:
Net loss -- (414,351,908) $(414,351,908) -- (414,351,908)
Other comprehensive loss, net of taxes
Unrealized loss on available-for-sale
securities (8,328,950) -- (8,328,950) -- (8,328,950)
Foreign currency translation adjustment -- (9,771,356) (9,771,356) -- (9,771,356)
-------------
Other comprehensive loss (18,100,306)
-------------
Comprehensive loss $(432,452,214)
=============
Issuance of common stock -- -- -- 831,907
Induced conversion of convertible
subordinated debentures -- -- -- 18,179,509
Issuance of preferred stock -- -- -- 97,958,597
Conversion of preferred stock -- -- -- --
Preferred stock dividends paid in common stock -- (904,531) -- --
Purchase of treasury stock -- -- (175,000) (175,000)
------------- ------------- ------------- -------------
Balance at December 31, 1997 -- (352,603,652) (175,000) (176,825,008)
Comprehensive loss -- (220,749,943) $(220,749,943) -- (220,749,943)
Net loss
-------------
Comprehensive loss $(220,749,943)
=============
Conversion of preferred stock -- -- -- --
============= ============= ============= =============
Balance at December 31, 1998 $ -- $(573,353,595) $ (175,000) $(397,574,951)
============= ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE> 42
<TABLE>
CITYSCAPE FINANCIAL CORP.
(DEBTOR-IN-POSSESSION AS OF OCTOBER 6, 1998)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
(Loss) earnings from continuing operations $ (220,749,943) $ (118,505,912) $ 23,875,285
Adjustments to reconcile net earnings from continuing
operations to net cash used in continuing operations:
Depreciation and amortization 6,019,520 2,846,394 3,110,200
Income taxes payable 16,737,913 (27,527,673) 5,251,091
Earnings from partnership interest -- -- (753,663)
Unrealized gain on securities -- -- (429,688)
Decrease (increase) in mortgage servicing receivables 4,969,162 35,098,537 (34,500,974)
Decrease (increase) in trading securities 92,814,726 (23,275,720) (87,628,481)
Provision for losses 8,267,267 12,614,269 7,931,660
Net purchases of securities under agreement to resell -- 154,176,608 (153,796,920)
(Repayment of ) proceeds from securities sold but not yet purchased -- (152,862,526) 152,862,526
Proceeds from sale of mortgages 414,167,300 1,637,387,344 1,270,897,455
Mortgage origination funds disbursed (460,300,178) (1,655,191,573) (1,289,354,776)
Accrued interest payable on senior notes and convertible debentures 39,771,220 4,483,700 --
Accrued reorganization charges 8,521,475 -- --
Other, net 2,881,472 6,085,062 (3,340,867)
--------------- --------------- ---------------
Net cash used in continuing operating activities (86,900,066) (124,671,490) (105,877,152)
--------------- --------------- ---------------
Net cash used in discontinued operating activities -- (177,259,754) (149,317,683)
--------------- --------------- ---------------
Net cash used in operating activities (86,900,066) (301,931,244) (255,194,835)
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of discontinued operations, net 71,223,599 -- --
Proceeds from equipment sale & lease-back financing -- 1,776,283 --
Purchases of equipment -- (5,134,122) (4,578,368)
Proceeds from sale of mortgages held for investment 2,997,382 15,248,227 --
Proceeds from sale of available-for-sale securities -- 18,288,999 --
Net distributions from partnership -- -- 1,099,488
--------------- --------------- ---------------
Net cash provided by (used in) investing activities 74,220,981 30,179,387 (3,478,880)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in warehouse facility 28,490,348 5,216,716 91,745
(Decrease) increase in standby financing facility -- (7,966,292) 7,194,931
Proceeds from notes and loan payable -- 49,000,000 144,520,719
Repayment of notes and loans payable -- (161,405,843) (33,000,000)
Proceeds from issuance of preferred stock -- 98,249,950 --
Proceeds from issuance of convertible subordinated debentures -- -- 136,060,800
Net proceeds from issuance of common stock -- 221,296 653,256
Purchase of treasury stock -- (175,000) --
Net proceeds from issuance of senior notes -- 290,758,908 --
--------------- --------------- ---------------
Net cash provided by financing activities 28,490,348 273,899,735 255,521,451
--------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents 15,811,263 2,147,878 (3,152,264)
Cash and cash equivalents at beginning of the year 2,594,163 446,285 3,598,549
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF THE YEAR $ 18,405,426 $ 2,594,163 $ 446,285
=============== =============== ===============
Supplemental disclosure of cash flow information:
Income taxes paid during the year:
Continuing operations $ 1,303 $ 5,904,507 $ 14,699,560
Discontinued operations -- 767,335 5,012,017
Interest paid during the year:
Continuing operations $ 9,051,343 $ 57,194,601 $ 11,625,526
Discontinued operations -- 867,394 1,231,438
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE> 43
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 44
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. 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) on the terms of a plan of reorganization that both groups would
find acceptable. 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 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 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 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
43
<PAGE> 44
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 Company presently
intends to seek confirmation of and to consummate the Amended Plan on or before
May 31, 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 Company's plan of reorganization will not change; (iii) that the Bankruptcy
Court will confirm such plan within the anticipated timeframe, 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 a final
order approving debtor-in-possession financing arrangements (see Note 10). 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 Petitions or the date
on which the property is returned to the landlord. On December 23, 1998, the
Bankruptcy Court granted an order 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 December 31, 1998, pursuant to the
Plan are summarized as follows:
<TABLE>
<CAPTION>
<S> <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 8,033,138
------------
Total $477,424,358
============
</TABLE>
Other potential consequences of reorganization under chapter 11 that 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
Indenture 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.
3. 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
44
<PAGE> 45
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)249.6 million, the
acquisition by Ocwen Asset of CSC-UK's securitized loan residuals for a price of
(pound)33.7 million and the assumption by Ocwen of (pound)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 (subject to a condition precedent) 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. The Company has restated its 1996 financial statements to present
the operating results of CSC-UK as a discontinued operation.
Summarized financial information for the discontinued operations is as
follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------
<S> <C> <C>
SUMMARIZED STATEMENTS OF OPERATIONS:
Revenues
Gain on sale of loans $ 27,797,000 $ 79,432,000
Servicing receivables (106,153,000) --
Interest income 18,811,000 12,333,000
Other income 21,444,000 7,167,000
-------------------------------
(38,101,000) 98,932,000
Expenses
Interest expense 26,599,000 7,564,334
Write-off and amoritization of goodwill 58,185,000 3,775,176
Write-off and amoritzation of prepaid
commitment fees 35,245,000 1,800,000
Other operating expenses 125,389,000 43,883,919
-------------------------------
(Loss) earnings before income taxes and
extraordinary item (283,519,000) 41,908,571
Gain on extinguishment of debt, net of taxes 425,000 --
-------------------------------
(Loss) earnings before income taxes (283,094,000) 41,908,571
Income tax (benefit) provision (37,188,000) 15,102,974
-------------------------------
(Loss) earnings from discontinued operations $ (245,906,000) $ 26,805,597
===============================
</TABLE>
As of December 31, 1998, 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 operation to cover existing and potential
liabilities and costs until the dissolution of the existing legal entities of
CSC-UK and its subsidiaries.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
45
<PAGE> 46
Basis of Presentation
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 2), related circumstances, significant
losses from operations and net capital deficiency at December 31, 1998 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 is
not confirmed. Should the Amended Plan (as defined in Note 2) 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.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts
of CSC and its wholly-owned subsidiaries. The Company has reclassified its 1996
financial statements to present the operating results of CSC-UK as a
discontinued operation as discussed in Note 3. All significant intercompany
balances and transactions have been eliminated in consolidation.
Revenue Recognition
On January 1, 1997, the Company prospectively adopted Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities."
Gains and losses on sale of mortgage loans are recognized when mortgage
loans are sold to investors. The Company primarily sells loans on a non-recourse
basis, at a price above the face value of the loan. Gain on the sale of loans is
recorded on the settlement date. Included in gain on sale of loans for years
prior to 1998 is the present value of the differential between the interest rate
payable by an obligor on a loan over the interest rate passed through to the
purchaser acquiring an interest in such loan, less applicable recurring fees
including the costs of credit enhancements and trustee fees.
For the years prior to 1998, included in the gain on sale of loans is gain
on securitizations representing the fair value of the interest-only and residual
certificates received by the Company which are reflected as trading securities.
Gain on sales from securitization represents the difference between the proceeds
received from the trust plus the fair value of the interest-only and residual
certificates less the carrying value of the loans sold. Fair value of these
certificates 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 such as reports on
collateral value, economic forecasts and historical default and prepayment rates
of the portfolio under review. Beginning in the fourth quarter of 1997, the
Company began selling its loans on a whole loan sale basis with servicing
released.
46
<PAGE> 47
Interest income includes income from mortgage loans held for sale and
mortgage loans held for investment, in each case, calculated using the interest
method and recognized on an accrual basis. The Company defers the accrual of
interest when a loan becomes 90 days delinquent.
Valuation of Residuals
In initially valuing its trading securities and mortgage servicing
receivables, the Company established an allowance for expected losses and
calculated that allowance on the basis of historical experience and management's
best estimate of future credit losses likely to be incurred. In the case where
the securitization of loans results in the retention by the Company of
interest-only and/or residual certificates, such allowance is embodied in the
fair value of such certificates. In the case where the sale of loans into a loan
purchase facility results in the retention of mortgage servicing rights, such
allowance was reported in the liability section of the statement of financial
condition. The amount of this provision is reviewed quarterly and adjustments
are made if actual experience or other factors indicate management's estimate of
losses should be revised. While the Company retains a substantial amount of risk
of default on the loan portfolios that it sells, such risk had been
substantially reduced through the sales of loans through securitization.
Through the Company's loan sales through securitizations and loan purchase
facilities, the Company has provided investors with a variety of additional
forms of credit enhancements. In certain securitizations, the Company purchases
credit enhancements to the senior interest in the related securitization trusts
in the form of insurance policies provided by insurance companies. The pooling
and servicing agreements that govern the distribution of cash flows from the
loans included in the securitization trusts require either (i) the establishment
of a reserve that may be funded with an initial cash deposit by the Company or
(ii) the over-collateralization of the securitization trust intended to result
in receipts and collections on the loans that exceed the amounts required to be
distributed to holders of senior interests. To the extent that borrowers default
on the payment of principal or interest on the loans, losses will reduce the
over-collateralization to the extent that funds are available and will result in
a reduction in the value of the interest-only and residual certificates held by
the Company.
Although the Company believes it has made reasonable estimates of the fair
value of the interest-only and residual certificates and mortgage servicing
receivables likely to be realized, the rate of prepayment and the amount of
defaults utilized by the Company are estimates and actual experience may vary,
and has varied from its estimates (See Note 6). The fair value of the
interest-only and residual certificates and mortgage servicing receivables
recorded by the Company upon the sale of loans through securitizations will have
been overstated if prepayments or losses are greater than anticipated. Higher
than anticipated rates of loan prepayments or losses would require the Company
to write down the fair value of the interest-only and residual certificates,
adversely impacting earnings. Similarly, if delinquencies, liquidations or
interest rates were to be greater than was initially assumed, the fair value of
the interest-only and residual certificates would be negatively impacted which
would have an adverse effect on income for the period in which such events
occurred. The Company reviews these factors and, if necessary, adjusts the
remaining asset to the fair value of the interest-only and residual
certificates, pursuant to SFAS No. 115. Should the estimated average loan life
assumed for this purpose be shorter than the actual life, the amount of cash
actually received over the lives of the loans would exceed the gain previously
recognized at the time the loans were sold through securitizations and would
result in additional income.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and money market funds.
Such funds are deemed to be cash equivalents for purposes of the statements of
cash flows.
Mortgage Servicing Rights
The Company recognizes as separate assets the rights to service mortgage
loans for others, however those servicing rights are acquired. On a quarterly
basis the Company assesses capitalized mortgage servicing
47
<PAGE> 48
rights for impairment based on the current fair value of those rights. Mortgage
servicing rights are amortized in proportion to and over the period of the
estimated net servicing income. See Note 5.
Mortgage Loans Held for Sale, Net
Mortgage loans held for sale, net, are reported at the lower of cost or
market value, determined on an aggregate basis. Market value is determined by
current investor yield requirements and credit quality of the loans in
accordance with SFAS No. 65 "Accounting for Certain Mortgage Banking
Activities."
Mortgage Loans Held for Investment, Net
As required by SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," the Company measures impairment based on observable market prices for the
similar loans or on the fair value of the collateral of the loan if the loan is
collateral dependent. An allowance for loan losses is maintained if the measure
of the impaired loan is less than its recorded value.
Real Estate Owned, Net
Real estate owned consists of real estate acquired through foreclosure or
deed-in-lieu of foreclosure on defaulted loan receivables. These properties are
carried at the lower of fair value less estimated selling costs or the
acquisition cost of the properties.
Equipment and Leasehold Improvements, Net
Equipment and leasehold improvements, net, are stated at original cost less
accumulated depreciation and amortization. Depreciation is computed principally
by using the straight-line method based on the estimated lives of the
depreciable assets.
Expenditures for maintenance and repairs are charged directly to the
appropriate operating account at the time the expense is incurred. Expenditures
determined to represent additions and betterments are capitalized. Cost of
assets sold or retired and the related amounts of accumulated depreciation are
eliminated from the accounts in the year of sale or retirement. Any resulting
profit or loss is reflected in the statement of earnings.
Deferred Debt Issuance Costs
The Company capitalizes costs incurred related to the issuance of long-term
debt. These costs are deferred and amortized on a straight-line basis over the
life of the related debt and recognized as a component of interest expense. With
the adoption of SOP 90-7, unamortized deferred debt issuance costs related to
liabilities subject to compromise were written-off and included in
reorganization items on the Statement of Operations. See Note 19.
Liabilities Subject to Compromise
In accordance with SOP 90-7, the Company classifies all prepetition
liabilities that will be impaired by the plan as liabilities subject to
compromise.
Income Taxes
The Company accounts for income taxes under the asset and liability method.
Under this method deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement and tax reporting bases of existing assets and liabilities. Deferred
tax assets and liabilities are measured using enacted tax laws. Deferred tax
liabilities and assets are adjusted for the effect of a change in tax laws or
rates.
48
<PAGE> 49
Earnings Per Share
Effective December 15, 1997, the Company adopted SFAS No. 128, "Earnings
per Share". Basic earnings per share ("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.
For the years ended December 31, 1998 and 1997, the Company has a net loss
applicable to Common Stock. Including potential Common Stock in the denominator
of a diluted EPS calculation would be antidilutive since an increase in the
number of shares outstanding would reduce the amount of loss per share. Thus,
there is no difference between basic and diluted EPS for these periods.
Reclassifications
Certain amounts in the statements have been reclassified to conform to the
1998 classifications.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change relate to the
valuation of the interest-only and residual certificates included in trading
securities, the valuation of mortgage servicing receivables and mortgage loans
held for sale, net, restructuring charges and reorganization charges.
New Accounting Pronouncements
In June 1998, the FASB issued 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.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." SFAS No. 134 requires that
after the securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed securities or
other retained interests based on its ability and intent to sell or hold those
investments. SFAS No. 134 is effective for the first fiscal quarter beginning
after December 15, 1998. The Company intends to continue to classify its
interests in mortgage backed securities as trading securities and therefore
believes that SFAS No. 134 will not have an impact on its financial reporting.
5. MORTGAGE SERVICING RECEIVABLES
The mortgage servicing receivables represent the unamortized net present
value of the mortgage servicing rights retained by the Company taking into
account several factors including industry practices. The amount is amortized
over the estimated lives of the underlying receivables sold.
Effective October 1, 1995, the Company adopted SFAS No. 122 "Accounting for
Mortgage Servicing Rights." This statement changed the methodology used to
measure impairments of mortgage servicing receivables. The new accounting
methodology, as amended by SFAS No. 125, measures the asset's impairment on a
disaggregate basis based on the predominant risk characteristic of the portfolio
and discounts
49
<PAGE> 50
the asset's estimated future cash flow using a current market rate. The Company
has determined the predominant risk characteristics to be interest rate risk and
prepayment risk. On a quarterly basis, the Company reviews the mortgage
servicing receivables for impairment.
At December 31, 1997, mortgage servicing receivables consist of the
following:
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Mortgage servicing receivables $9,524,535
Less: valuation allowance 4,555,373
----------
Mortgage servicing receivables, net $4,969,162
==========
</TABLE>
The activity in the mortgage servicing receivables for the years ended
December 31, 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------------
<S> <C> <C>
Balance, beginning of year $ 9,524,535 $ 50,130,313
Additions from operations -- 19,583,586
Valuation adjustments (4,899,271) (22,266,661)
Securitizations -- (34,571,269)
Sales (2,783,274) --
Amortization (1,841,990) (3,351,434)
-----------------------------
Balance, end of year $ -- $ 9,524,535
=============================
</TABLE>
As a result of the Company's liquidity concerns, the Company sold trading
securities during the first quarter of 1998 for net proceeds of $26.5 million.
Included in the sale of the trading securities were the mortgage servicing
rights. Accordingly, at December 31, 1997, the Company valued its mortgage
servicing receivable on a net realizable value assuming a liquidation of such
assets and recognized an impairment to the value of the mortgage servicing
receivables of $22.3 million. During 1997, $34.6 million of mortgage servicing
receivables were transferred to trading securities reflecting the Company's
securitization of its excess servicing rights on a pool of mortgage loans
resulting in the Company recording interest-only and residual certificates.
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 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 for losses to zero. Accordingly, the
Company will account for any future servicing revenues as income when collected
and costs as expenses when incurred.
6. TRADING SECURITIES
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).
During the years ended December 31, 1997 and 1996, the Company sold $1.1
billion and $993.6 million of its loan origination and purchase volume in
various securitizations. During the year ended
50
<PAGE> 51
December 31, 1998, all of the Company's loan sales were through whole loan
sales. In loan sales through securitizations, the Company sells loans that it
has originated or purchased to a real estate trust for a cash purchase price and
interests in such trusts which are represented by the interest-only and residual
certificates. The cash purchase price is raised through an offering of
pass-through certificates by the trust.
In accordance with SFAS No. 115, 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 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>
1998 1997
--------------------------------
<S> <C> <C>
Home Equity $ 6,490,461 $ 75,216,390
Sav*-A-Loan (R) 27,170,469 51,259,266
--------------------------------
Total $ 33,660,930 $126,475,656
================================
</TABLE>
The key assumptions used to value the Company's trading securities at
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------
<S> <C> <C> <C>
HOME EQUITY
Discount Rate 20.0% 15.0% 10.0%
Constant Prepayment Rate 30.0% 31.8% 24.0%
Loss Rate per Annum 7.5% 1.7% 0.5%
SAV*-A-LOAN(R)
Discount Rate 20.0% 15.0% N/A
Constant Prepayment Rate 16.8% 16.8% N/A
Loss Rate per Annum 4.5% 3.1% N/A
</TABLE>
At December 31, 1997, the Company determined the fair value of its home
equity securitizations based upon the net realizable value as implied by the
first quarter 1998 sale of three of its home equity residuals. Accordingly, the
Company recorded net unrealized losses of $89.8 million during 1997 related to
its home equity securitizations.
The unrealized loss of $35.9 million recorded during 1997 related to the
Sav*-A-Loan(R) residuals reflects the Company's change in the assumptions used
to value such residuals as follows: discount rate increased to 15% from 12%,
constant prepayment speed increased to 16.8% from 14% after the twelfth month,
and the annual default rate increased from a weighted average loss rate of 1.75%
per annum to a weighted average loss rate of 3.06% per annum.
During 1998, the Company recorded an unrealized loss on valuation of
residuals of $68.8 million consisting of a $18.9 million unrealized loss on its
home equity residuals and $25.9 million on its Sav*-A-Loan(R) residuals. This
unrealized loss was primarily a result of the Company increasing the discount
rate to 20% at December 31, 1998 from 15% at December 31, 1997 and increasing
the loss assumptions to 7.5% per annum at December 31, 1998 on its home equity
securitizations from 1.7% atDecember 31, 1998, as well as increasing the loss
assumptions on its Sav*-A-Loan residuals to 4.5% per annum at December 31, 1998
from 3.1% at December 31, 1998. The increased discount rate reflects the erosion
and turmoil in
51
<PAGE> 52
the subprime mortgage market experienced during 1998 and corresponding lack of
liquidity in the marketplace. The Company's loss experience through increased
liquidation efforts indicates higher loss levels than previously anticipated
requiring the corresponding increase in loss assumptions. The Company reduced
the constant prepayment rate on its home equity securitizations to 30% per annum
from 31.8% per annum reflecting the slower speeds experienced over the last half
of 1998.
7. MORTGAGE LOANS HELD FOR SALE, NET
The following table summarizes the carrying values of the Company's
mortgage loans held for sale at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------------------------------
<S> <C> <C>
Home Equity $ 27,762,311 $ 40,992,381
Sav*-A-Loan (R) 95,583,472 52,297,643
--------------------------------
$123,345,783 $ 93,290,024
================================
</TABLE>
Substantially all of the mortgages are pledged as collateral for the
Company's warehouse financing facilities. Mortgage loans held for sale, net are
reported at the lower of cost or market value, determined on an aggregate basis.
There was no allowance for market losses on mortgage loans held for sale at
December 31, 1997.
Included in mortgages held for sale at December 31, 1998 is $4.8 million of
loans formerly classified as mortgages held for investment (representing $13.6
million in principal value net of $8.8 million of reserves). The Company
reclassified these loans due to its decision to sell all of its mortgage loans
as part of its reorganization. During 1998, the Company recorded a $7.1 million
valuation allowance against its mortgages held for sale that were not formerly
classified as mortgages held for investment.
8. MORTGAGE LOANS HELD FOR INVESTMENT, NET
The following table summarizes the carrying values of the Company's
mortgage loans held for investment, net, at December 31, 1997:
<TABLE>
<CAPTION>
1997
------------
<S> <C>
Mortgage loans held for investment $ 11,906,032
Allowance for loan losses (5,375,295)
------------
Mortgage loans held for investment, net $ 6,530,737
============
</TABLE>
During 1997, the allowance for loan losses was increased by provisions
through the Consolidated Statements of Operations of $12.6 million and decreased
by charge-offs of $7.3 million. During 1998, $4.8 million of mortgages held for
investment, net were reclassified as mortgages held for sale due to the
Company's decision to sell all mortgages held. See Note 7 .
9. OTHER ASSETS
Other assets at December 31, 1998 and 1997 consist of the following:
52
<PAGE> 53
<TABLE>
<CAPTION>
1998 1997
------------------------
<S> <C> <C>
Prepaid expenses $ 1,234,741 $ 548,952
Deferred debt issuance costs -- 13,509,074
Accrued interest receivable 802,104 1,175,234
Accounts receivable 3,425,931 6,297,270
Premiums due on sales 994,335 2,072,457
Servicing advances, net of allowance 8,405,999 2,600,776
Equipment and leasehold improvements, net 38,686 6,058,206
Real estate owned, net 26,160 328,064
Other 670,663 735,943
------------------------
Total $15,598,619 $33,325,976
========================
</TABLE>
Deferred debt issuance costs represent the deferred expenses for the
Convertible Debentures (see Note 12), issued in May 1996, and the Senior Notes
(see Note 11) which were issued in May 1997. At December 31, 1998, deferred debt
issuance costs of $12.0 million were written off and included as reorganization
items on the Statement of Operations for the year ended December 31, 1998 as
required by SOP 90-7.
Equipment and leasehold improvements of $3.8 million were also written-off
at December 31, 1998 primarily due to the Company's deteriorating business and
ultimate decision to suspend its origination and purchase activities which
resulted in the rejection of several capital leases, the closing of four offices
and a significant reduction in staffing levels (see Note 19).
10. FINANCING FACILITIES AND LOAN PURCHASE AGREEMENTS
Greenwich Warehouse Facility. In January 1997, CSC entered into a secured
warehouse credit facility with Greenwich Capital Financial Products, Inc., an
affiliate of Greenwich Capital Markets, Inc. (referred to herein, including any
affiliates as "Greenwich") to provide a $400.0 million warehouse facility under
which CSC borrowed funds on a short-term basis to support the accumulation of
loans prior to sale (as amended, the "Greenwich Facility"). Advances under the
Greenwich Facility bore interest at a rate of LIBOR plus 150 basis points. The
Greenwich Facility was guaranteed by the Company and was secured by the mortgage
loans and related assets financed under the Greenwich Facility and by a pledge
(on a pari passu basis with the CIT Facility) of the capital stock of certain
subsidiaries of CSC holding certain residual securities, as well as by a reserve
fund (containing approximately $8.8 million as of December 31, 1998) to cover
certain losses of Greenwich under a related whole loan sale agreement. This
facility was scheduled to expire on December 31, 1997, at which time CSC and
Greenwich entered into an extension agreement through October 8, 1998 (as
amended, the "Extension Agreement"). The Extension Agreement provided for a
maximum credit line of $150.0 million, subject to adjustment by Greenwich, at an
interest rate of LIBOR plus 200 basis points and a fee of 0.25% of the aggregate
principal balance of loans to be paid to Greenwich in connection with any sale
or securitization or any other transfer to any third party of loans funded under
this agreement.
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 relative priority
of the Greenwich DIP Facility and the CIT/Nomura DIP Facility (as defined below)
in the assets of CSC and the Company is determined under an intercreditor
agreement between Greenwich and CIT and Nomura (each as defined below), The
Greenwich DIP Facility originally bore interest at an interest rate of LIBOR
plus 2.75% (7.8% on December 31, 1998).
53
<PAGE> 54
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 Greenwich DIP
Facility Amendment, the interest rate was changed to the prime rate plus 2.50%.
As of December 31, 1998, $73.4 million was outstanding under the Greenwich DIP
Facility.
CIT Warehouse Facility. On February 3, 1998, CSC entered into a revolving
credit facility with the CIT Group/Equipment Financing, Inc. ("CIT") to finance
CSC's origination and purchase of mortgage loans, the repayment of certain
indebtedness and, subject to certain limitations, other general corporate
purposes (as amended, the "CIT Facility"). The CIT Facility was guaranteed by
the Company, and bore interest at the prime rate plus 50 basis points. Pursuant
to the CIT Facility, CSC had available a secured revolving credit line in an
amount equal to the lesser of (i) $30.0 million or (ii) a commitment calculated
as a percentage (generally 80% or 85%) of the mortgage loans securing the CIT
Facility. The CIT Facility was also subject to sub-limits on the amount of
certain varieties of mortgage loan products that may be used to secure advances
thereunder. In addition, the CIT Facility was secured by the mortgage loans and
related assets financed under the CIT Facility or self-funded by CSC, by a
pledge of 65% of the capital stock of CSC-UK, by a pledge (on a pari passu basis
with the Greenwich Facility) of the capital stock of certain subsidiaries of CSC
holding certain residual securities and by certain other assets.
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 is secured by
substantially all of the assets of CSC and the capital stock of CSC and is
guaranteed by the Company. The CIT/Nomura DIP Facility originally bore interest
at an interest rate of LIBOR plus 2.75% or the prime rate (7.75% on December 31,
1998). The CIT/Nomura DIP Facility was scheduled to terminate on February 28,
1999; however, the parties agreed by amendment to the CIT/Nomura DIP Facility
(the "CIT/Nomura DIP Facility Amendment") to extend the termination of such
facility until March 31, 1999, subject to further extension on a weekly basis
upon written notice to CIT and Nomura. The CIT/Nomura DIP Facility Amendment was
approved by an order of the Bankruptcy Court dated March 24, 1999. Under the
CIT/Normura DIP Facility Amendment, the interest rate was changed to the prime
rate plus 2.00%. As of December 31, 1998, $32.6 million was outstanding under
the CIT/Nomura DIP Facility.
The carrying amount of the financing facilities is considered to be a
reasonable estimate of fair value.
11. 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.
In connection with its restructuring efforts, the Company determined to
defer the June 1, 1998 interest payment on the Notes. The continued deferral of
the interest payment 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 (see Note 2), the Company stopped accruing
interest on the Notes.
At December 31, 1998, the Notes are included in the classification
liabilities subject to compromise on the Statement of Financial Condition.
54
<PAGE> 55
12. CONVERTIBLE SUBORDINATED 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.
In April 1997, the Company induced the conversion of $14.0 million
aggregate principal amount of its Convertible Debentures resulting in the
issuance upon conversion of 533,332 shares of the Common Stock (at a conversion
price of $26.25 per share) pursuant to the terms of the Convertible Debentures.
To induce conversion, the Company issued an additional 342,708 shares of Common
Stock and paid the holders of the induced Convertible Debentures $420,000 in
cash. In the second quarter of 1997, these transactions resulted in the
reduction of Convertible Debentures by $14.0 million, a charge to interest
expense of $4.7 million related to the fair market value of the 342,708
inducement shares ($4.3 million) and the cash payment and an increase in
stockholders' equity of $18.2 million due to the issuance of the conversion
shares and the inducement shares. The net effect of these transactions was an
increase of $13.6 million to stockholders' equity in the second quarter of 1997.
During 1997, an aggregate of $14.1 million of Convertible Debentures had been
converted into Common Stock, including the induced conversion described above.
During 1998, there were no conversions of Convertible Debentures into Common
Stock.
The Company deferred the May 1, 1998 interest payment 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 (see Note 2), the Company stopped accruing interest
on the Convertible Debentures. As of December 31, 1998, there were $129.6
million of Convertible Debentures outstanding.
At December 31, 1998, the Convertible Debentures are included in the
classification liabilities subject to compromise on the Statement of Financial
Condition.
13. CONVERTIBLE PREFERRED STOCK
Series A Preferred Stock
In April 1997, the Company completed the private placement of 5,000 shares
of its 6% Convertible Preferred Stock, Series A (the "Series A Preferred
Stock"), with 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
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 1997, preferred stock dividends of $904,531 were paid to the holders
of the Series A Preferred Stock in the form of 67,863 shares of the Common
Stock. For the December 31, 1997 dividend, the Company elected to add an amount
equal to the dividend to the Liquidation Preference of the Series A
55
<PAGE> 56
Preferred Stock in lieu of payments of such dividend. During 1997, there was
also recognition of the effect of a beneficial conversion feature related to the
Series A Preferred Stock of $1.1 million.
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 (see Note 2), the Company
stopped paying and accruing dividends on the Series A Preferred Stock. As of
October 6, 1998, the Liquidation Preference varies up to $14,198 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 December 31, 1997 and 1998, an aggregate of 4,328 and 4,374 shares of
the Series A Preferred Stock had been converted (672 and 626 shares remain
outstanding) into an aggregate of 10,570,119 and 12,681,270 shares of Common
Stock, respectively. As of December 31, 1997 and 1998, all Series A Warrants
were outstanding.
Series B Preferred Stock
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.
The first dividend payment date was December 31, 1997. For this dividend,
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.
During 1997, there was also recognition of the effect of a beneficial conversion
feature related to the Series B Preferred Stock of $1.6 million.
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 (see Note 2), the Company stopped paying and
accruing 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 115% of the Liquidation Preference upon notice of, or
the announcement of the Company's intent to engage in a change of control event,
or, if such notice or announcement occurs on or after March 14, 1998, the
redemption price will equal 125% of the Liquidation
56
<PAGE> 57
Preference. 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 December 31, 1997 and 1998, an aggregate of 377 and 449 shares of
Series B Preferred Stock had been converted (4,623 and 4,551 shares remain
outstanding) into an aggregate of 6,281,295 and 21,470,375 shares of Common
Stock, respectively. As of December 31, 1997 and 1998, all Series B Warrants
were outstanding.
As of December 31, 1997 and 1998, if all of the outstanding shares of the
Series A Preferred Stock and those shares of the Series B Preferred Stock not
subject to conversion restrictions, were converted into Common Stock, the
Company would not have sufficient authorized shares of Common Stock to satisfy
all of these conversions.
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.
14. STOCKHOLDERS' EQUITY (DEFICIT)
During April and June 1996, the Company issued 274,000 (548,000 after
giving effect to the 1996 Dividend as discussed below) and 49,681 (99,362 after
giving effect to the 1996 Dividend as discussed below) shares of Common Stock,
respectively, in exchange for all of the capital stock of J&J Securities Limited
and Greyfriars Group Limited resulting in an increase of $12.3 million to
Stockholders' equity.
On July 1, 1996, the Company effected a 2 for 1 Common Stock split in the
form of a 100% stock dividend, increasing the shares of Common Stock outstanding
by 14,806,709 (the "1996 Dividend").
During 1996, the Company issued 101,039 shares of Common Stock resulting in
an increase to Stockholders' equity of $673,256.
During 1997, the Company issued 204,288 shares of Common Stock resulting in
an increase to Stockholders' equity of $831,907.
In April 1997, the Company induced the conversion of $14.0 million
aggregate principal amount of its Convertible Debentures resulting in the
issuance of 876,040 shares of Common Stock (see Note 13). The net result of this
transaction was an increase of $18.2 million to Stockholders' equity.
In April and September 1997, the Company issued 5,000 shares, respectively,
(10,000 shares in total) of Preferred Stock (see Note 13). The net result of
these transactions was an increase of $98.0 million to
57
<PAGE> 58
Stockholders' equity. During 1997, 4,705 shares of Preferred Stock were
converted into 16,851,414 shares of Common Stock. In addition, 67,863 shares of
Common Stock were issued as preferred stock dividends.
During 1997, the Company purchased 70,000 shares of Common Stock which
resulted in a decrease in Stockholders' equity of $175,000.
During 1998, 118 shares of Preferred Stock were converted into 17,300,231
shares of Common Stock. There was no change to Stockholders' equity due to these
transactions.
15. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution plan (401(k)) for all eligible
employees. Contributions to the plan are in the form of employee salary
deferrals which may be subject to an employer matching contribution up to a
specified limit at the discretion of the Company. In addition, the Company may
make a discretionary annual profit sharing contribution on behalf of its
employees. The Company's contribution to the plan amounted to $155,011 and
$87,126 for the years ended December 31, 1997 and 1996, respectively. The
Company made no contribution to the plan for the year ended December 31, 1998.
If the Amended Plan is confirmed by the Bankruptcy Court as contemplated,
the following employee stock plans will be inoperative going forward. However,
set forth below are the terms and payouts of such plans as of December 31, 1998.
The Stock Purchase Plan
Effective December 1994, the Board of Directors adopted, and the
stockholders of the Company approved, the Company's 1995 Employee Stock Purchase
Plan (the "Stock Purchase Plan"). The Stock Purchase Plan permits eligible
employees of the Company to purchase Common Stock through payroll deductions of
up to ten percent of their base salary, up to a maximum of $25,000 in fair
market value of the stock (determined at the time such option is granted) for
all purchase periods ending within any calendar year. The price of Common Stock
purchased under the Stock Purchase Plan will be 85% of the lower of the fair
market value of a share of Common Stock on the commencement date or the
termination date of the relevant offering period as determined by the bid price
listed on the National Quotation Bureau, Inc. OTC Bulletin Board or the Nasdaq
National Market System, as applicable. The Stock Purchase Plan was suspended
indefinitely after the plan period ended December 31, 1997.
For the plan periods ending June 30, 1996 and December 31, 1996, employees
purchased 13,034 and 8,921 shares at a price of $8.82 and $22.31 per share,
respectively. For the plan periods ending June 30, 1997 and December 31, 1997,
employees purchased 11,754 and 17,345 shares at a price of $16.95 and $0.43 per
share, respectively. In accordance with APB No. 25, "Accounting for Stock Issued
to Employees", the Stock Purchase Plan is deemed to be non-compensatory and
results in no expense.
The Directors Plan
Directors who are not employees of the Company receive stock options
pursuant to the Company's 1995 Non-Employee Directors Stock Option Plan (the
"Directors Plan"). The Directors Plan provides for automatic grants of an option
to purchase 40,000 shares of Common Stock to the Company's eligible non-employee
directors upon their election to the Board of Directors of the Company. Each
eligible non-employee director is granted an additional option, subject to
certain restrictions, to purchase 15,000 shares of Common Stock on each
anniversary of his or her election so long as he or she remains an eligible
non-employee director of the Company. Initial options granted under the
Directors Plan generally vest 50% upon the first anniversary of the grant date
and 50% upon the second anniversary of the grant date. Additional options
generally vest upon the first anniversary of the grant date. The exercise price
of any options granted under the Directors Plan is the fair market value of the
Common Stock on the date of grant. No more than 400,000 shares of Common Stock
may be issued upon exercise of options granted under the Directors Plan,
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<PAGE> 59
subject to adjustment to reflect stock splits, stock dividends and similar
capital stock transactions. Options may be granted under the Directors Plan
until June 1, 2005.
Stock Option Plans
Effective June 1, 1995, the Board of Directors adopted, and the
stockholders of the Company approved, the 1995 Stock Option Plan (the "1995
Stock Option Plan"). No more than 3,600,000 shares of Common Stock may be issued
upon exercise of options granted under the 1995 Stock Option Plan, and no
eligible person may receive options to purchase more than 600,000 shares of
Common Stock during any calendar year, subject to adjustment to reflect stock
splits, stock dividends and similar capital stock transactions. The exercise
price of the options granted under the 1995 Stock Option Plan cannot be less
than the fair market value of the Common Stock on the date of grant. Options may
be granted under the 1995 Stock Option Plan until June 1, 2005.
Effective April 17, 1997, the Board of Directors adopted, and the
stockholders of the Company approved, the 1997 Stock Option Plan (the "1997
Stock Option Plan"). No more than 1,500,000 shares of Common Stock may be issued
upon exercise of options granted under the 1997 Stock Option Plan, and no
eligible person may receive options to purchase more than 500,000 shares of
Common Stock during any calendar year, subject to adjustment to reflect stock
splits, stock dividends and similar capital stock transactions. The exercise
price or the options granted under the 1997 Stock Option Plan cannot be less
than the fair market value of the Common Stock on the date of grant. Options may
be granted under the 1997 Stock Option Plan until April 17, 2007.
16. OTHER INCOME
Other income includes the following for the years ended December 31, 1998,
1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Servicing income $ 819,910 $ 1,640,288 $ 2,791,348
Gain on sale of
available-for-sale securities -- 17,957,258 --
Other income 634,238 704,337 889,590
-------------------------------------
$ 1,454,148 $20,301,883 $ 3,680,938
=====================================
</TABLE>
Gain on sale of available-for-sale securities represent the pre-tax gain on
the sale of 1,090,910 shares (after giving effect to a February 1997 100% stock
dividend) of IMC Mortgage Company, including its predecessor Industry Mortgage
Company, L.P., ("IMC") during 1997. Prior to IMC's conversion to corporate form,
the Company recorded its investment under the equity method of accounting and as
such recognized earnings from partnership interest of $753,663 in 1996.
17. OTHER OPERATING EXPENSES
Other operating expenses include the following for the years ended December
31, 1998, 1997 and 1996:
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<PAGE> 60
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Professional fees $13,259,811 $12,272,453 $ 5,754,908
Travel and entertainment 1,464,732 2,656,336 2,069,164
Telephone 1,316,613 2,055,482 1,335,232
Foreclosure costs 6,511,805 3,266,222 161,490
Occupancy 2,707,517 2,476,794 1,186,797
Office and computer supplies 1,390,062 2,560,059 1,186,447
Temporary help 1,478,732 1,267,265 437,150
Equipment leasing 1,993,722 1,386,113 416,397
Depreciation 3,495,258 1,361,670 553,941
Settlement expense 2,040,000 -- --
Subservicer fees 1,196,617 -- --
Other 10,205,676 12,782,881 5,109,188
-------------------------------------
Total $47,060,545 $42,085,275 $18,210,714
=====================================
</TABLE>
18. RESTRUCTURING CHARGE
In February 1998, the Company announced that it begun implementing a
restructuring plan that includes streamlining and downsizing its operations. The
Company closed its branch operations in Virginia and significantly reduced its
correspondent originations for the foreseeable future and exited its
conventional lending business. Accordingly, in the first quarter of 1998, the
Company recorded a restructuring charge of $3.2 million. Of this amount, $1.1
million represented severance payments made to 142 former employees and $2.1
million represented costs incurred in connection with lease obligations and
write-off of assets no longer in service.
19. REORGANIZATION ITEMS
Reorganization items for the year ended December 31, 1998 are detailed
below:
<TABLE>
<CAPTION>
<S> <C>
Professional fees $ 7,716,294
Severance 3,896,393
Lease rejections/leasehold improvements 5,338,000
Deferred debt issuance costs 12,012,011
Other reorganization items 2,916,820
-----------
$31,879,518
===========
</TABLE>
On October 22, 1998, the Company reduced its workforce by 243 employees,
from 454 employees to 211 employees. In connection with this reduction, the
Company closed its branch operations in California and Illinois, while
maintaining its offices in New York and Georgia. 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 loan origination and purchase activities and closed branch
operations in New York and Georgia and reduced its workforce by 92 additional
employees, including corporate and servicing employees. Accordingly, the Company
recorded a reorganization charge of $31.9 million during the fourth quarter of
1998.
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<PAGE> 61
20. INCOME TAXES
The provision (benefit) for income taxes from continuing operations for the
years ended December 31, 1998, 1997 and 1996 are comprised of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
Current
Federal $ -- $(14,558,408) $ 13,436,306
State 38,267 300,000 3,638,803
------------------------------------------
38,267 (14,258,408) 17,075,109
------------------------------------------
Deferred
Federal -- (3,818,166) 1,999,996
State -- -- 249,355
------------------------------------------
-- (3,818,166) 2,249,351
------------------------------------------
Provision (benefit)
for income taxes
from continuing
operations $ 38,267 $(18,076,574) $ 19,324,460
==========================================
</TABLE>
The reconciliation of income tax computed at the US federal statutory tax rate
to the effective income tax rate for the years ended December 31, 1998, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------
<S> <C> <C> <C>
Federal income tax at statutory rate (35.0%) (35.0%) 35.0%
State and local taxes, net of
federal tax benefit -- -- 5.5%
Unrecognized deferred tax asset 35.0% 19.3% --
Other, net -- 2.5% 4.2%
-------------------------
-- (13.2%) 44.7%
=========================
</TABLE>
Deferred income taxes included in the Consolidated Statements of Financial
Condition reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for tax reporting purposes primarily resulting from the use of
the cash basis for tax reporting purposes.
Deferred taxes as of December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
Gross deferred tax assets $ 161,146,951 $ 69,914,468 $ 10,293,342
Less: valuation allowance (101,058,388) (26,376,554) --
---------------------------------------------
Net deferred assets 60,088,563 43,537,914 10,293,342
---------------------------------------------
Deferred tax liabilities 60,088,563 43,537,914 14,111,508
---------------------------------------------
Net deferred tax liabilities $ -- $ -- $ 3,818,166
=============================================
</TABLE>
The major components of the gross deferred tax assets and the gross
deferred tax liabilities are the net operating loss and the book versus tax
differences relating to the gain on sale of loans.
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<PAGE> 62
In accordance with the provisions of Internal Revenue Code Section 382,
utilization of the Company's net operating loss carryforwards could be limited
in years following a change in the Company's ownership. In general, a change in
ownership occurs if a shareholder's (or the combined group of the shareholders
each owning less than 5%) ownership increases 50 percentage points over a three
year period. The net operating loss limitation is computed by applying a
percentage (approximately 5%, as determined by the Internal Revenue Code) to the
value of the Company on the date of the change. The Section 382 limitation
limits the use of the net operating loss carryforward as computed on the date of
the change in ownership. Net operating losses incurred after the date of the
change of ownership are not limited unless another change in ownership occurs. A
change in ownership occurred in October of 1997 primarily as a result of
conversions of the Company's Series A Preferred Stock into the Company's Common
Stock. Additionally, it is expected that a change in ownership will occur upon
the Company's emergence from bankruptcy. Accordingly, the Company's use of
pre-ownership change net operating losses and certain other tax attributes (if
any), to the extent remaining after the reduction thereof as a result of the
cancellation of indebtedness of the Company, will be limited and generally will
not exceed each year the product of the long-term tax-exempt rate and the value
of the Company's stock increased to reflect the cancellation of indebtedness
pursuant to the Amended Plan.
21. (LOSS) EARNINGS PER SHARE
The reconciliation of the numerators and denominators of the basic and
diluted EPS computations for the years ended December 31, 1998, 1997 and 1996 is
as follows:
62
<PAGE> 63
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
1998 (NUMERATOR) (DENOMINATOR) AMOUNT
- - --------------------------------------------- --------------- ------------- ---------
<S> <C> <C> <C>
Earnings (loss) from continuing operations $ (220,749,943)
Less: Preferred stock dividends 20,326,936
---------------
BASIC EPS
Earnings (loss) applicable to Common Stock (241,076,879) 58,661,544 $ (4.11)
========
EFFECT OF DILUTIVE SECURITIES
Stock options - -
Warrants - -
Convertible preferred stock - -
Convertible Debentures - -
--------------- ------------
DILUTED EPS
Earnings (loss) applicable to Common Stock +
assumed conversions $ (241,076,879) 58,661,544 $ (4.11)
=============== ============ ========
1997
- - ---------------------------------------------
Earnings (loss) from continuing operations $ (118,505,912)
Less: Preferred stock dividends 4,547,061
---------------
BASIC EPS
Earnings (loss) applicable to Common Stock (123,052,973) 33,244,212 $ (3.70)
========
EFFECT OF DILUTIVE SECURITIES
Stock options - -
Warrants - -
Convertible preferred stock - -
Convertible Debentures - -
--------------- ------------
DILUTED EPS
Earnings (loss) applicable to Common Stock +
assumed conversions $ (123,052,973) 33,244,212 $ (3.70)
=============== ============ ========
1996
- - ---------------------------------------------
Earnings (loss) from continuing operations $23,875,285
BASIC EPS
Earnings (loss) applicable to Common Stock 23,875,285 29,404,557 $0.81
========
EFFECT OF DILUTIVE SECURITIES
Stock options - 1,133,434
Convertible Debentures - -
--------------- ------------
DILUTED EPS
Earnings (loss) applicable to Common Stock +
assumed conversions $23,875,285 30,537,991 $0.78
=============== ============ ========
</TABLE>
For the years ended December 31, 1998 and 1997, 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. Securities outstanding at
December 31, 1998 that could potentially dilute basic EPS in the future are as
follows: Convertible Debentures; stock options; Series A Preferred Stock; Series
B Preferred Stock; Series A Warrants; and Series B Warrants. 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 year ended December 31, 1996,
the effect of the Convertible Debentures is antidilutive and is not included in
the computation of diluted EPS.
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<PAGE> 64
22. COMMITMENTS AND CONTINGENCIES
Leases
Since the filing of the Petitions in the Bankruptcy Court, the Company has
undertaken a comprehensive review and evaluation of their various unexpired,
nonresidential real property leases and various executory contracts. Based on
this review and due to substantial downsizing of the Company's business, the
Company has rejected four leases of non-residential real property and six leases
relating to equipment, maintenance and information systems software. A charge of
$5.3 million relating to the rejection of these leases and other leases it
intends on rejecting is included in reorganization items on the Statement of
Operations for the year ended December 31, 1998.
Rent expense for office space amounted to $2.5 million, $2.3 million and
$1.1 million for the years ended December 31, 1998, 1997 and 1996, respectively.
Litigation
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.
On December 5, 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.
64
<PAGE> 65
Covino Action. In November 1997, Resource Mortgage Banking, Ltd., Covino
and Company, Inc. and LuxMac LLC filed against the Company, CSC and two of the
Company's officers and directors in state court in Connecticut an application
for a prejudgment remedy. The object of the application for the prejudgment
remedy was to obtain a court order granting these plaintiffs prejudgment
attachment against assets of the Company and CSC in Connecticut pending
resolution of plaintiffs' underlying claims. Plaintiffs proposed to file an 18
count complaint against the defendants seeking $60 million in purported damages,
injunctive relief, treble damages and punitive damages in an unspecified sum. In
February 1998, Judge William B. Lewis orally granted defendants' motion to
dismiss on the ground of forum non conveniens and entered a judgment of
dismissal, and shortly thereafter, set in a memorandum of decision his reasons
for granting the motion to dismiss. Plaintiffs did not file an appeal of the
order of dismissal.
In February 1998, Resource Mortgage Banking, Ltd., Covino and Company, Inc.
and LuxMac LLC filed an action against the Company, CSC and two of the Company's
officers and directors in state court in New York seeking $60 million in
purported damages, injunctive relief, treble damages and punitive damages in an
unspecified sum.
In March 1998, plaintiffs sought a preliminary injunction to prevent the
Company and CSC from selling certain assets known as strip, residuals, excess
servicing and/or servicing rights and their substantial equivalent having as
constituent any mortgage loan exceeding $350,000 generated by the Company or CSC
between September 2, 1994, and April 1, 1997, and any mortgage loan exceeding
$500,000 generated by the Company or CSC from April 1, 1997 to the present. The
New York Court signed a temporary restraining order that required the Company
and CSC to refrain from the specified sales.
Settlement discussions commenced after plaintiffs' motion for preliminary
injunction was fully submitted. Settlement negotiations were concluded and the
litigation was settled shortly after the New York Court issued a decision in
plaintiffs' favor. The Company paid and expensed $2.04 million to plaintiffs,
and the Company, CSC and the defendant officers and directors gave releases in
favor of the plaintiffs. Plaintiffs agreed to discontinue their claims with
prejudice, withdraw as moot their motion for injunctive relief, consent to
vacatur of injunctive relief in the litigation and gave releases in favor of the
Company, CSC and the defendant officers and directors.
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
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,
65
<PAGE> 66
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 United States District Court for the Southern District of New
York. 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 $20 million
of such preferred stock. Plaintiffs seek unspecified damages, including
pre-judgement 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 judgement. In May 1998, the Company
served papers that opposed Walsh's motion and moved for partial summary
judgement 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 April 1998, the Company filed an action in the US District Court for the
District of Maryland against multiple parties entitled Cityscape Corp. vs.
Global Mortgage Company, et al. The Company is in the process of serving the
complaint on the defendants. To date, the Company has yet to receive any
responsive pleadings. The complaint seeks damages of $4.0 million stemming from
a series of 145 allegedly fraudulent residential mortgages which the Company
previously acquired. The Company has previously reserved for losses against such
loans.
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 Securities
and Exchange Commission (the "Commission") for additional information concerning
the Company's voluntary restatement of its financial statements for the quarter
ended June 30, 1996. The
66
<PAGE> 67
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 is supplying 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)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 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 claimed that CSC-UK had
excessively charged borrowers, failed to notify borrowers of interest rate rises
and failed to advise borrowers of increased repayments. Ocwen claimed that these
liabilities totaled approximately (pound)13.0 million ($21.2 million).
Additionally, pursuant to the UK Sale Agreement, Ocwen held back a sum of
(pound)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.
On February 15, 1999, the Company, Ocwen and certain of their subsidiaries
entered into a settlement agreement 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)2.0 million ($3.3 million) plus
interest from the Holdback account, and Ocwen will be paid the remaining
(pound)1.5 million ($2.4 million) plus interest from the Holdback account. The
above
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<PAGE> 68
settlement is contemplated in the Company's recorded investment in discontinued
operations at December 31, 1998.
The approval of the Bankruptcy Court is a condition to the effectiveness of
the settlement agreement. The Company will apply for the Bankruptcy Court's
approval subject to Ocwen's agreement to the Company's request to substitute
itself for the Company or its subsidiaries where appropriate, as the party to
related legal proceedings with borrowers. It is contemplated that this issue
will be resolved shortly.
Chapter 11 Proceedings. On October 6, 1998, the Company and CSC filed the
Petitions in the Bankruptcy Court. See Note 2.
Employee Agreements
The Company has employment agreements with 3 officers and employees of the
Company. The Company guarantees annual compensation ranging from $210,000 to
$300,000 per year. The employment agreements extend through December 31, 1999.
23. CONCENTRATIONS
For the years ended December 31, 1998, 1997 and 1996, revenues from loan
sales and loan servicing constituted the primary source of the Company's
revenues. For the years ended December 31, 1998 and 1997, there were no
institutional purchasers who accounted for more than 10% of the total revenues.
For the year ended December 31, 1996, there was one institutional purchaser who
acted as a conduit to securitize the Company's loan originations that accounted
for 10% or more (36.7%) of the total revenues.
24. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition, for which it
is practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based upon estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and the estimated future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. SFAS No. 107 excludes certain
financial instruments and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts do not represent the
underlying value of the Company.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and cash equivalents: The carrying amount of cash on hand and money
market funds is considered to be a reasonable estimate of fair market value.
Mortgage servicing receivables: The fair value was determined by using
estimated discounted future cash flows taking into consideration the current
interest rate environment, current prepayment rates and default experience. The
carrying amount is considered to be a reasonable estimate of fair market value.
Trading securities: The fair value on the Company's Sav*-A-Loan(R) trading
securities was determined by using estimated discounted future cash flows taking
into consideration the current interest rate environment, current prepayment
rates and default experience. Such securities are carried at fair value. The
fair value on the Company's home equity trading securities was based upon net
realizable value.
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<PAGE> 69
Mortgage loans held for sale, net: The fair values were estimated by using
current institutional purchaser yield requirements. The fair value of the
mortgage loans held for sale, net totaled $123.3 million and $95.2 million at
December 31, 1998 and 1997, respectively.
Mortgage loans held for investment, net: The fair value was estimated using
a combination of the current interest rate at which similar loans with
comparable maturities would be made to borrowers with similar credit ratings,
and adjustments for the additional credit risks associated with loans of this
type. Since the loans had a weighted average coupon rate of 12.2% at December
31, 1997, and since additional credit risk adjustments had been provided through
reserves for loan losses, the carrying value was a reasonable estimate of fair
value.
Warehouse financing facilities: This facility has an original maturity of less
than 120 days and, therefore, the carrying value is a reasonable estimate of
fair value.
25. SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
The following is a summary of the significant noncash investing and
financing activities during the years ended 1998, 1997 and 1996:
<TABLE>
<CAPTION>
<S> <C>
1998:
Reclassification of mortgages held for
investment to mortgages held for sale $ 3,533,355
1997:
Reclassification of mortgages held for
sale to mortgages held for investment $14,641,389
Conversion of Convertible Debentures
into Common Stock 14,110,000
Preferred Dividends paid in the form
of Common Stock 904,531
1996:
Available-for-sale securities received $14,618,194
Reclassification of mortgages held for
sale to mortgages held for investment 4,182,414
Conversion of Convertible Debentures
into Common Stock 20,000
</TABLE>
26. SELECTED QUARTERLY DATA (UNAUDITED)
The following represents selected quarterly financial data for the Company:
69
<PAGE> 70
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1998
- - ----------------------------------------------------
Revenues $ (7,190,799) $ (4,559,167) $ (317,488) $ (38,596,186)
Net loss (51,182,399) (35,888,488) (46,559,664) (87,119,392)
Preferred stock dividends 4,587,130 6,896,165 8,229,387 614,254
Net loss applicable to common stock $ (55,769,529) $ (42,784,653) $ (54,789,051) $ (87,733,646)
Loss per common share: $ (1.17)(5) $ (0.75)(5) $ (0.84)(5) $ (1.35)(5)
1997
- - ----------------------------------------------------
Revenues $ 45,549,383 $ 54,737,559 $ (25,384,830) $ (40,870,088)
Earnings (loss) from continuing operations 7,486,095 7,474,266 (47,371,328) (86,094,945)
Earnings (loss) from discontinued operations
net of taxes 9,308,696 (3,462,789) (22,271,374) (229,480,533)
Loss on disposal of discontinued operations -- -- -- (49,939,996)
Net earnings (loss) 16,794,791 4,011,477 (69,642,702) (365,515,474)
Preferred stock dividends -- 1,066,874 1,035,315 2,444,872
Net earnings (loss) applicable to common stock $ 16,794,791 $ 2,944,603 $ (70,678,017) $(367,960,346)
Earnings (loss) per common share(1)(2):
Basic
Continuing operations $ 0.25 $ 0.21 $ (1.50) $ (2.21)
Discontinued operations 0.32 (0.11) (0.69) (5.72)
Disposal of discontinued operations -- -- -- (1.25)
-------------- ------------- ------------- -------------
Net (loss) earnings $ 0.57 $ 0.10 $ (2.19) $ (9.18)
============== ============= ============= =============
Diluted
Continuing operations $ 0.24(3) $ 0.20(4) $ (1.50) $ (2.21)
Discontinued operations 0.30 (0.11) (0.69) (5.72)
Disposal of discontinued operations -- -- -- (1.25)
-------------- ------------- ------------- -------------
$ 0.54 $ 0.09 $ (2.19)(5) $ (9.18)(5)
============== ============= ============= =============
1996
- - ----------------------------------------------------
Revenues $ 15,832,612 $ 20,887,927 $ 32,873,161 $ 38,254,177
Earnings from continuing operations 3,433,928 7,111,505 8,193,845 5,136,007
Earnings from discontinued operations, net of taxes 5,839,216 4,014,491 6,220,992 10,730,898
Net earnings $ 9,273,144 $ 11,125,996 $ 14,414,837 $ 15,866,905
Earnings per common share(1)(2):
Basic
Continuing operations $ 0.12 $ 0.24 $ 0.28 $ 0.18
Discontinued operations 0.20 0.14 0.21 0.36
-------------- ------------- ------------- -------------
Net earnings $ 0.32 $ 0.38 $ 0.49 $ 0.54
============== ============= ============= =============
Diluted
Continuing operations $ 0.11 $ 0.24(3) $ 0.26 $ 0.16(3)
Discontinued operations 0.20 0.13 0.17 0.35
-------------- ------------- ------------- -------------
Net earnings $ 0.31 $ 0.37 $ 0.43 $ 0.51
============== ============= ============= =============
</TABLE>
(1) In the fourth quarter of 1997, the Company adopted SFAS No. 128. Prior
period amounts have been restated to comply with the requirements of SFAS
No. 128.
(2) The total of the four quarters' earnings (loss) per share may not equal the
annual earnings (loss) per share.
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<PAGE> 71
(3) For these quarters, the Convertible Debentures are antidilutive and are not
included in the computation of diluted EPS. Earnings from continuing
operations is used as the "control number" in determining whether these
potential common shares are dilutive or antidilutive.
(4) For this quarter, Convertible Debentures and convertible preferred stock
are antidilutive and are not included in the computation of diluted EPS.
Earnings from continuing operations is used as the "control number" in
determining whether these potential common shares are dilutive or
antidilutive.
(5) For these quarters, 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
27. COMPREHENSIVE INCOME
During the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income". SFAS No. 130 requires the reporting of
comprehensive income in addition to net income from operations. Comprehensive
income is a more inclusive financial reporting methodology that includes
disclosure of certain financial information that historically has not been
recognized in the calculation of net income.
The table below details the comprehensive (loss) income for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1997 1996
------------ ------------- -------------
<S> <C> <C> <C>
Net (loss) earnings $(220,749,943) $(414,351,908) $ 50,680,882
Other comprehensive income,
net of income taxes:
Foreign currency
translation adjustments -- (9,771,356) 9,771,356
Unrealized (loss) gain on
available-for-sale securities -- (8,328,950) 8,328,950
------------- ------------- -------------
Comprehensive (loss) income, net of tax $(220,749,943) $(432,452,214) $ 68,781,188
============= ============= =============
</TABLE>
71
<PAGE> 72
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position with the Company
of each person who is an executive officer or director of the Company or its
subsidiaries.
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY
- - ---- --- --------------------------
<S> <C> <C>
Steven M. Miller 43 Chief Executive Officer, President and Director;
Senior Vice
President and Director of CSC
Robert C. Patent 48 Vice Chairman of the Board, Executive
Vice President, Treasurer and Director;
Executive Vice President, Treasurer,
Assistant Secretary and Director of CSC
Robert Grosser 41 Chairman of the Board and Director; Director of CSC
Jonah L. Goldstein 63 General Counsel and Director; General
Counsel and Director of CSC
Arthur P. Gould 81 Director
Hollis W. Rademacher 63 Director
Peter S. Kucma 49 President and Director of CSC
Cheryl P. Carl 46 Vice President and Secretary;
Executive Vice President, Treasurer, Secretary
and Director of CSC
Tim S. Ledwick 41 Vice President and Chief Financial Officer;
Senior Vice President, Chief Financial Officer
of CSC
</TABLE>
Director and officer positions of CSC are currently for a term of one year.
Effective with the Company's 1996 annual meeting of stockholders held on June
12, 1996, the Board of Directors of the Company has been divided into three
classes as nearly equal in size as is practicable and directors of the Company
serve staggered terms of three years. Executive officers of the Company and CSC
are appointed by their respective Boards of Directors. The name and business
experience during the past five years of each director and executive officer of
the Company are described below:
Steven M. Miller has been Chief Executive Officer and President since
November 1997. Mr. Miller has also served as Senior Vice President and Director
of CSC since March 1997. Previously, Mr. Miller was Senior Vice President and
Co-Head of the Asset Backed Group of Greenwich Capital Markets, Inc. Mr. Miller
became a Senior Vice President at Greenwich Capital Markets, Inc. in 1992 and in
May 1995 he was given the additional role of Co-Head of the Asset Backed Group.
Prior to that time, Mr. Miller was a Vice President at Greenwich Markets, Inc.
Robert C. Patent has been Executive Vice President and a Director of the
Company since April 1994, Treasurer since June 1995 and the Vice Chairman of its
Board since September 1995. Mr. Patent also has served as Executive Vice
President and as Director of CSC since October 1990 and as Treasurer since
January 1994 and Assistant Secretary since January 1995.
Robert Grosser has been a Director of the Company since April 1994 and its
Chairman of the Board since September 1995. Mr. Grosser has also served as a
Director of CSC since its inception. Until resigning from such positions in
November 1997, Mr. Grosser had also served as Chief Executive Officer and
President of the Company and CSC. Mr. Grosser currently serves on the board of
the National Home Equity Mortgage Association.
72
<PAGE> 73
Jonah L. Goldstein has been General Counsel of the Company since September
1995 and a Director since June 1995. Mr. Goldstein served as a consultant to CSC
from December 1993 through June 1995 and has served as a Director since January
1995 and as General Counsel since January 1996. Effective July 1, 1995, Mr.
Goldstein entered into an employment agreement with the Company. From its
formation in 1980 until its acquisition by CSC in 1994, Mr. Goldstein was
President and Chairman of Astrum Funding Corp. ("Astrum"), a mortgage banker.
Mr. Goldstein currently serves as Chairman and Director of Advance Abstract
Corp., a company that sells title insurance. He is also sole shareholder of
Jonah L. Goldstein, P.C.
Arthur P. Gould has been a Director of the Company since June 1995. Since
1973, Mr. Gould has served as President of Arthur P. Gould & Co., an investment
firm (formerly a division of Inter-Regional Financial Group Inc.). Previously,
Mr. Gould was President of Golden Shield Corporation, a subsidiary of General
Telephone & Electronics Corporation and then President, Corporate Development
Division of Laidlaw & Co. Incorporated and Vice President and Director of
Laidlaw & Co. Incorporated.
Hollis W. Rademacher has been a Director of the Company since June 1995.
Currently, Mr. Rademacher is actively involved in a variety of financial
consulting and corporate director capacities. Mr. Rademacher serves as a
director of several closely held organizations in the financial service,
distribution and real estate industries. He also serves as Director of Schawk,
Inc., a public company engaged in producing molded plastic products and
pre-press services and products for printed packaging applications and College
Television Network and Wintrust Financial Corp. From 1988 to 1993, Mr.
Rademacher served as Chief Financial Officer of Continental Bank Corp.
Peter S. Kucma has been President and a Director of CSC since November
1997. Previously, he served as Senior Vice President and Chief Operating Officer
of CSC since May 1997. Prior to joining the Company, Mr. Kucma was employed by
GE Capital Mortgage Services, Inc., serving as Vice President (General Manager)
- - - GE Capital Home Equity Services from 1996 through April 1997, Vice President
Operations Management/Business Development from 1994 to 1996, Vice President -
Asset and Risk Management from 1991 to 1994 and Vice President of Finance and
Chief Financial Officer from 1990 to 1991. From 1985 to 1990, Mr. Kucma served
as Vice President of Finance and Chief Financial Officer of Travelers Mortgage
Services, Inc.
Cheryl P. Carl has been Secretary of the Company since June 1994 and Vice
President since June 1996. Ms. Carl also has served as Vice President of CSC
since January 1994, Secretary of CSC since June 1994 and as Assistant Treasurer
and as Director of CSC since January 1995. Ms. Carl was promoted to Senior Vice
President/Operations of CSC in June 1996. Ms. Carl was promoted to Executive
Vice President and Treasurer of CSC in May 1998. From its formation in 1980
until its acquisition by CSC in 1994, Ms. Carl was Executive Vice President and
Director of Astrum, a mortgage banker specializing in non-conventional loans.
Ms. Carl also is a Director and Secretary of Advance Abstract Corp., a company
that sells title insurance.
Tim S. Ledwick has been Chief Financial Officer of the Company since March
1995 and Vice President since June 1996. Mr. Ledwick also has served as Vice
President, Chief Financial Officer of CSC since September 1994. Mr. Ledwick was
promoted to Senior Vice President of CSC in March 1997. From 1992 until 1994,
Mr. Ledwick was Vice President/Controller-Subsidiaries and from 1989 until 1992
was Controller-Subsidiaries for River Bank America.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive officers
and directors and persons who own more than 10% of the Company's Common Stock to
file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the
Commission. Executive officers, directors and 10% stockholders are required by
the Commission to furnish the Company with copies of all Forms 3, 4 and 5 that
they file.
73
<PAGE> 74
Based solely on its review of copies of such forms and such written
representations regarding compliance with such filing requirements as were
received from its executive officers, directors and greater than 10%
stockholders, the Company believes that all such Section 16(a) filing
requirements were complied with respect to the Company's 1998 fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
BOARD OF DIRECTORS
The Company maintains a compensation committee, an audit committee, a stock
option plan committee and a stock purchase plan committee of the Board of
Directors. Messrs. Gould and Rademacher serve on the compensation committee,
Messrs. Gould, Rademacher and Patent serve on the audit committee and Messrs.
Gould and Rademacher serve on the stock option plan committee and the stock
purchase plan committee.
NON-EMPLOYEE DIRECTOR COMPENSATION
Directors who are not employees of the Company receive stock options
pursuant to the Company's 1995 Non-Employee Directors Stock Option Plan (the
"Directors Plan"). The Directors Plan provides for automatic grants of an option
to purchase 40,000 shares of Common Stock to the Company's eligible non-employee
directors upon their election to the Board of Directors of the Company. Each
eligible non-employee director is granted an additional option, subject to
certain restrictions, to purchase 15,000 shares of Common Stock on each
anniversary of his or her election so long as he or she remains an eligible
non-employee director of the Company. The exercise price of any options granted
under the Directors Plan is the fair market value of the Common Stock on the
date of grant. No more than 400,000 shares of Common Stock may be issued upon
exercise of options granted under the Directors Plan, subject to adjustment to
reflect stock splits, stock dividends and similar capital stock transactions.
Options may be granted under the Directors Plan until June 1, 2005. In 1998, no
options were granted under the Directors Plan. If the Amended Plan is confirmed
by the Bankruptcy Court, the Non-Employee Directors Plan will be inoperative.
In addition, non-employee directors of the Company receive an annual
retainer of $30,000 (the "Annual Retainer"), if chairman of a committee of the
Board of Directors, up to an additional $6,000, and are reimbursed for
reasonable expenses incurred in connection with attendance at Board of
Directors' meetings or committee meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1998, the Compensation Committee was comprised of Messrs.
Gould and Rademacher, neither of whom is an executive officer of the Company.
None of the executive officers of the Company served on the board of directors
or on the compensation committee of any other entity, any of whose officers
served on the Compensation Committee of the Company.
EXECUTIVE OFFICERS' COMPENSATION
The following table sets forth certain information concerning the annual
and long-term compensation earned by the Company's Chief Executive Officer and
each of the four other most highly compensated executive officers on December
31, 1998 whose annual salary and bonus during the fiscal years presented
exceeded $100,000 (the "Named Executive Officers").
74
<PAGE> 75
<TABLE>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
--------------------------------------- SECURITIES
NAME AND FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
------------------ -------- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Steven M. Miller 1998 $250,000 $600,000 $ -- -- $ --
President and 1997 201,923 -- -- 500,000 80,000(2)
Chief Executive 1996 -- -- -- -- --
Officer; Senior
Vice President
of CSC (1)
Robert C. Patent 1998 $244,277 $200,000 $ -- -- $ --
Executive Vice 1997 232,274 -- -- 20,000 --
President and 1996 226,174 884,665 -- -- 70,990(3)
Treasurer;
Executive Vice
President and
Treasurer of CSC
Jonah L. Goldstein 1998 $236,773 $200,000 $ -- -- $ --
General Counsel; 1997 215,720 -- -- 12,000 --
General Counsel 1996 180,235 378,287 -- -- 3,000(4)
of CSC
Peter Kucma 1998 $280,045 $275,000 $ -- -- $ --
President of CSC(1) 1997 160,577 25,000 42,563(5) 400,000 --
1996 -- -- -- -- --
Cheryl P. Carl 1998 $324,755 $200,000 $ -- -- $ --
Vice President 1997 215,720 -- -- 12,000 --
and Secretary; 1996 180,235 378,287 -- -- 3,000(4)
Executive Vice
President,
Treasurer and
Secretary of CSC
- - ------------------
</TABLE>
(1) Mr. Miller has been the President and Chief Executive Officer of the
Company since November 1997. Mr. Kucma has been President of CSC since
November 1997.
(2) Represents consulting fees paid to Mr. Miller prior to his joining the
Company.
(3) Represents premium payments of $67,990 made by the Company pursuant to a
split-dollar life insurance policy that provided a benefit of $2,100 and
$3,000 paid as qualified matching contributions under the Company's
employee benefit plan.
(4) Reflects amounts paid as qualified matching contributions under the
Company's employee benefit plan.
(5) Of this amount, $18,976 represents relocation benefits.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with three of the executive officers
of the Company. Each agreement requires the executive officer to devote his or
her full time and best efforts to the Company during the term of the agreement.
The employment agreement with Ms. Carl is for a term commencing May 31,
1998 and ending December 31, 1999. The agreement provides for an annual salary
of $275,000. Because of Ms. Carl's commitment to remain employed with the
Company during the Company's reorganization, the agreement also provided for the
payment of a stay bonus of $200,000, all of which was paid to Ms. Carl byJanuary
5, 1999. The agreement also provides for a bonus for 1998 of up to $75,000,
conditioned upon the attainment of certain performance objectives.
75
<PAGE> 76
The employment agreement with Mr. Kucma is for a term commencing May 31,
1998 and ending December 31, 1999. The agreement provides for an annual salary
of $300,000. Because of Mr. Kucma's commitment to remain employed with the
Company during the Company's reorganization, the agreement also provided for the
payment of a stay bonus of $250,000, all of which was paid to Mr. Kucma
byJanuary 5, 1999. The agreement also provides for a bonus for 1998 of up to
$450,000, of which entitlement to $200,000 will be determined by the Board of
Directors in its discretion and entitlement to up to $250,000 is conditioned
upon the attainment of certain performance objectives.
The employment agreement with Mr. Ledwick is for a term commencing May 31,
1998 and ending December 31, 1999. The agreement provides for an annual salary
of $210,000. Because of Mr. Ledwick's commitment to remain employed with the
Company during the Company's reorganization, the agreement also provided for the
payment of a stay bonus of $100,000, all of which was paid to Mr. Ledwick
byJanuary 5, 1999. The agreement also provides for a bonus for 1998 of up to
$40,000, conditioned upon the attainment of certain performance objectives.
EMPLOYEE STOCK PLANS
If the Amended Plan is confirmed by the Bankruptcy Court, the following
employee stock plans will be inoperative. However, set forth below are the terms
and payouts of such plans as of December 31, 1998.
Effective June 1995, the Board of Directors adopted, and the stockholders
of the Company approved, the Company's 1995 Stock Option Plan. No more than
3,600,000 shares of Common Stock may be issued upon exercise of options granted
under the 1995 Stock Option Plan, and no eligible person may receive options to
purchase more than 600,000 shares of Common Stock during any calendar year,
subject to adjustment to reflect stock splits, stock dividends, and similar
capital stock transactions. The 1995 Stock Option Plan is administered by a
committee of non-employee directors or the entire Board of Directors as a group
which has the authority to determine the terms and conditions of options granted
under the 1995 Stock Option Plan and to make all other determinations deemed
necessary or advisable for administering the 1995 Stock Option Plan, provided
that the exercise price of the options granted under the 1995 Stock Option Plan
cannot be less than the fair market value of the Common Stock on the date of
grant. As of December 31, 1998, there were 2,090,524 options outstanding under
the 1995 Stock Option Plan.
Effective December 1994, the Board of Directors adopted, and the
stockholders of the Company approved, the Company's Stock Purchase Plan. The
Stock Purchase Plan, and the right of participants to make purchases of the
Common Stock thereunder, is intended to qualify under the provisions of Section
421 and 423 of the Code (as defined below) and for persons subject to Section 16
of the Exchange Act, under the provisions of Rule 16b-3 of the Exchange Act. The
Stock Purchase Plan is generally administered by a committee appointed by the
Board of Directors of the Company which has the authority to make all
determinations, interpretations and rules deemed necessary or advisable for
administering the Stock Purchase Plan. The Stock Purchase Plan permits eligible
employees of the Company to purchase Common Stock through payroll deductions of
up to ten percent of their salary, up to a maximum of $25,000 in fair market
value of the stock (determined at the time such option is granted) for all
purchase periods ending within any calendar year. The price of Common Stock
purchased under the Stock Purchase Plan will be 85% of the lower of the fair
market value of a share of Common Stock on the commencement date or the
termination date of the relevant offering period. No more than 1,600,000 shares
of Common Stock may be issued upon exercise of options granted under the Stock
Purchase Plan and no more than 400,000 shares plus unissued shares from prior
offerings may be issued in each calendar year under the Stock Purchase Plan. To
date, 118,330 shares of Common Stock have been issued pursuant to the Stock
Purchase Plan.
Effective June 1997, the Board of Directors adopted, and the stockholders
of the Company approved, the Company's 1997 Stock Option Plan. No more than
1,500,000 shares of Common Stock may
76
<PAGE> 77
be issued upon exercise of options granted under the 1997 Stock Option Plan, and
no eligible person may receive options to purchase more than 500,000 shares of
Common Stock during any calendar year, subject to adjustment to reflect stock
splits, stock dividends, and similar capital stock transactions. The 1997 Stock
Option Plan is administered by a committee of non-employee directors or the
entire Board of Directors as a group which has the authority to determine the
terms and conditions of options granted under the 1997 Stock Option Plan and to
make all other determinations deemed necessary or advisable for administering
the 1997 Stock Option Plan, provided that the exercise price of the options
granted under the 1997 Stock Option Plan cannot be less than the fair market
value of the Common Stock on the date of grant. As of December 31, 1998, there
were no options outstanding under the 1997 Stock Option Plan.
OPTION GRANTS IN 1998
During 1998, there were no grants of options.
AGGREGATED OPTION EXERCISES IN 1998 AND 1998 YEAR-END OPTION VALUES (1)
The following table sets forth for the Chief Executive Officer and the
other Named Executive Officers, information with respect to unexercised options
and year-end option values, in each case with respect to options to purchase
shares of the Company's Common Stock:
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES HELD AS OF DECEMBER 31, 1998 AT DECEMBER 31, 1998 (2)
ACQUIRED ON VALUE ------------------------------ -------------------------------
NAME EXERCISE REALIZED EXERCISABLE NONEXERCISABLE EXERCISABLE NONEXERCISABLE
- - ---- -------- -------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Steven M. Miller -- $ -- 162,500 337,500 $ -- $ --
Robert C. Patent -- -- 20,000 -- -- --
Jonah L. Goldstein -- -- 162,000 -- -- --
Peter S. Kucma -- -- 100,000 300,000 -- --
Cheryl P. Carl -- -- 162,000 -- -- --
</TABLE>
- - ---------
(1) If the Plan is confirmed by the Bankruptcy Court as contemplated, the
Company's stock option plans will be inoperative.
(2) No options were in-the-money as of December 31, 1998.
401(K) PLAN
The Company sponsors a 401(k) plan, a savings and investment plan intended
to be qualified under Section 401 of the Internal Revenue Code of 1986, as
amended (the "Code"). Participating employees may make pre-tax contributions,
subject to limitations under the Code, of a percentage of their total
compensation. The Company, in its sole discretion, may make matching
contributions for the benefit of all participants with at least one year of
service who make pre-tax contributions. The Company made no contributions to the
plan of the year ended December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as to shares of Common Stock of
the Company owned as of March 22, 1999, by (i) each person who, to the extent
known to the Company, beneficially owned more than 5% of such outstanding Common
Stock; (ii) each director; and (iii) each Named Executive Officer of the
Company; and (iv) all directors and executive officers as a group.
77
<PAGE> 78
<TABLE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<CAPTION>
SHARES
BENEFICIALLY OWNED
-------------------------
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENT
--------------------------- ---------- ----------
<S> <C> <C>
Steven M. Miller (2) ............................. 275,000 *%
Robert C. Patent (3) ............................. 3,927,192 6.1
Robert Grosser (4) ............................... 3,762,284 5.8
Jonah L. Goldstein (5) ........................... 543,352 *
Arthur P. Gould .................................. -- --
Hollis W. Rademacher (6) ......................... 67,600 *
Peter S. Kucma (7) ............................... 200,000 *
Cheryl P. Carl (5) ............................... 518,200 *
All directors and executive
officers as a group (9 persons) (8) ............ 9,418,034 14.3
Elliott Associates, L.P. (9) ..................... 6,687,012 9.9
Westgate International, L.P. (10) ................ 6,687,012 9.9
East Barclay Capital Associates, Inc. (11) ....... 4,568,908 7.0
United Equities Commodities Company (12) ......... 5,687,783 8.8
</TABLE>
- - ------------------
* Less than one percent.
(1) Unless otherwise indicated and subject to community property laws where
applicable, each of the stockholders named in this table has sole voting
and investment power with respect to the shares shown as beneficially owned
by it. A person is deemed to be the beneficial owner of securities that can
be acquired by such person within 60 days from the date of this Report upon
the exercise of options and warrants. Each beneficial owner's percentage
ownership is determined by assuming that options that are held by such
person (but not those held by any other person) and that are exercisable
within 60 days from the date of this Report have been exercised. The table,
therefore, does not give effect to the conversions of the outstanding
shares of the Company's Preferred Stock (other than as indicated) and the
issuance of Common Stock upon such conversions.
(2) Represents options to purchase 275,000 shares granted pursuant to the 1995
Stock Option Plan.
(3) Includes 400 shares owned by Mr. Patent's spouse, with respect to all of
which Mr. Patent disclaims beneficial ownership, 40,800 shares owned by Mr.
Patent's two children and options to purchase 20,000 shares granted
pursuant to the 1995 Stock Option Plan. Mr. Patent's business address is
565 Taxter Road, Elmsford, New York 10523-2300.
(4) Includes 640 shares owned by Mr. Grosser's spouse, with respect to all of
which Mr. Grosser disclaims beneficial ownership and 3,200 shares owned by
Mr. Grosser's daughters. Mr. Grosser's business address is 565 Taxter Road,
Elmsford, New York 10523-2300.
(5) Includes options to purchase 162,000 shares granted pursuant to the 1995
Stock Option Plan.
(6) Includes options to purchase 61,000 shares granted pursuant to the
Directors Plan.
(7) Represents options to purchase 200,000 shares granted pursuant to the 1995
Stock Option Plan.
(8) See Notes (1) - (7)
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<PAGE> 79
(9) Limited to 9.9% of the outstanding shares of Common Stock. The address of
Elliott Associates, L.P. is 712 Fifth Avenue, 36th Floor, New York, New
York 10019. Elliott Associates, L.P., filed a Schedule 13G dated March 6,
1998, jointly with Westgate International, L.P. and Martley International,
Inc. which indicated that Elliott Associates, L.P. had sole voting and
dispositive power as to certain shares of Common Stock. The data presented
is based on information as of March 22, 1999, to the extent known by the
Company.
(10) Limited to 9.9% of the outstanding shares of Common Stock. The address of
Westgate International, L.P. is c/o Midland Bank Trust Corporation (Cayman)
Limited, P.O. Box 1109, Mary Street, Grand Cayman, Cayman Islands, B.W.I.
Westgate International, L.P. filed a Schedule 13G dated March 6, 1998,
jointly with Elliott Associates, L.P. and Martley International, Inc. which
indicated that Westgate International L.P. had shared voting and
dispositive power with Martley International, Inc. as to certain shares of
Common Stock. The data presented is based on information as of March 22,
1999, to the extent known by the Company.
(11) The address of East Barclay Associates, Inc. is 68 Frame Road, Briarcliff
Manor, New York 10510. The data presented is based on information as of
March 22, 1999, to the extent known by the Company.
(12) The address of United Equities Commodities Company is 160 Broadway, New
York, New York 10038. The data presented is based on information as of
March 22, 1999, to the extent known by the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1998, Samboy Financial Corp., a Minnesota corporation ("Samboy")
sold $64,000 of loans to the Company. Mr. Jonah Goldstein owns 20% of the
outstanding capital stock of Samboy.
The severance and consulting agreement with Mr. Grosser is for a term
commencing June 1, 1998 and ending June 1, 1999. The agreement obligates the
Company to pay $74,787.54 in settlement of its obligations under Mr. Grosser's
former employment agreement in exchange for Mr. Grosser's early resignation of
his employment with the Company. The agreement also provides for a monthly
payment by the Company of $20,000 in exchange for Mr. Grosser's reasonable
part-time consultation to the Company for a minimum of ten hours per week. The
consulting agreement with Mr. Grosser was terminated in January 1999.
Mr. Eric Goldstein, the son of Mr. Jonah Goldstein was employed as a Senior
Vice President of CSC. Mr. Eric Goldstein's employment with CSC was terminated
in September 1998. In connection with his employment agreement with the Company,
Mr. Eric Goldstein received $685,000 in severance. In addition, he is entitled
to receive, for a period of twelve months, a monthly car allowance of $847 plus
the Company's regular health and insurance benefits.
Mr. Paul Goldstein, the son of Mr. Jonah Goldstein, was employed as an
Assistant Vice President of CSC. During 1998, Mr. Paul Goldstein received
$142,810, including $115,915 in commissions. Mr. Paul Goldstein is no longer
employed by the Company.
The Company believes that the terms of the respective affiliated
transactions described in this section are at least as favorable to the Company
as those that could be obtained from an unaffiliated source.
79
<PAGE> 80
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements included in Item 8:
a) Cityscape Financial Corp. Financial Statements:
Report of Independent Auditors by KPMG LLP
Consolidated Statements of Financial Condition at
December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity
(Deficit) for the years ended December 31, 1998,
1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules: None
3. Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
3.1 Certificate of Incorporation of the Company, as amended,
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-4 filed with the Commission
on June 26, 1997
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
3.3 Certificate of Designation of 6% Convertible Preferred Stock,
Series A, incorporated by reference to Exhibit 4.1 to the
Company's Form 8-K filed with the Commission on April 11,
1997.
3.4 Certificate of Designation of 6% Convertible Preferred Stock,
Series B, incorporated by reference to Exhibit 4.1 to the
Company's Form 8-K filed with the Commission on September 17,
1997.
4.1 Indenture, dated as of May 7, 1996, between the Company and
The Chase Manhattan Bank, N.A., incorporated by reference to
Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q
filed with the Commission on May 15, 1996
80
<PAGE> 81
4.2 Indenture, dated as of May 14, 1997, among the Company, CSC
and The Chase Manhattan Bank, incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form
S-4 filed with the Commission on June 26, 1997
10.1 The Company's 1995 Stock Option Plan, incorporated by
reference to Exhibit 10.20 to the Company's Registration
Statement on Form S-1 as declared effective by the Commission
on December 20, 1995
10.2 The Company's 1995 Non-Employee Directors Stock Option Plan,
incorporated by reference to Exhibit 10.21 to the Company's
Registration Statement on Form S-1 as declared effective by
the Commission on December 20, 1995
10.3 Post-Petition Loan and Security Agreement, dated as of
October 12, 1998, between CSC and Greenwich Capital Financial
Products, Inc., incorporated by reference to Exhibit 10.1 to
the Company's Form 10-Q filed with the Commission on November
17, 1998.
10.4 Revolving Credit and Security Agreement dated as of October
12, 1998, between the Company and The CIT Group/Equipment
Financing, Inc., incorporated by reference to Exhibit 10.2 to
the Company's Form 10-Q filed with the Commission on November
17, 1998.
10.5 Employment Agreement, dated July 2, 1998, between CSC and
Cheryl P. Carl, incorporated by reference to Exhibit 10.4 to
the Company's Form 10-Q filed with the Commission on August
12, 1998.
10.6 Employment Agreement, dated July 2, 1998, between CSC and
Peter Kucma, incorporated by reference to Exhibit 10.5 to the
Company's Form 10-Q filed with the Commission on August 12,
1998.
10.7 Employment Agreement, dated July 2, 1998, between CSC and Tim
S. Ledwick, incorporated by reference to Exhibit 10.8 to the
Company's Form 10-Q filed with the Commission on August 12,
1998.
10.8* Sub-Tenant Estoppel Certificate, dated as of January 20,
1999, between CSC and Taxter Park Associates.
10.9* Surrender of Lease and Temporary Rental Agreement, dated as
of February 18, 1999, between CSC and Mack-Cali Mid-West
Realty Associates LLC.
10.10* Extension Agreement, dated as of February 28, 1999, between
CSC and Greenwich Capital Financial Products, Inc.
10.11* First Amendment to Revolving Credit and Security Agreement,
dated as of February 28, 1999, between CSC and the CIT
Group/Equipment Financing, Inc.
11.1* Computation of Earnings Per Share
21.1* Subsidiaries of the Company
23.1* Consent of KPMG LLP
27.1* Financial Data Schedule for the year ended December 31, 1998
99.1 Solicitation and Disclosure Statement dated August 28, 1998,
incorporated by reference to Exhibit 99.1 to the Company's
Form 8-K filed with the Commission on September 4, 1998.
81
<PAGE> 82
99.2* Debtor's First Amended Joint Disclosure Statement dated March
26, 1999 including: Exhibit A: the Company's and CSC's First
Amended Joint Plan of Reorganization dated as of March 26,
1999; Exhibit B: Examiners Report; Exhibit C: Balance Sheet
and Projected Financial Information and Exhibit D:
Liquidation Analysis
* Filed herewith.
(a) Reports on Form 8-K:
1. Form 8-K dated October 6, 1998 reporting that the Company
filed a joint prepackaged plan of reorganization pursuant to
chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the Southern District of New
York.
2. Form 8-K dated October 22, 1998 reporting that as part of its
restructuring plan that includes streamlining and downsizing
its operations, the Company reduced its work force by 243
employees, representing 53.5% of its work force, from 454
employees to 211 employees.
3. Form 8-K dated November 17, 1998 reporting that the Company
decided to suspend indefinitely all of its loan origination
and purchase activities.
82
<PAGE> 83
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
CITYSCAPE FINANCIAL CORP.
By: /s/Tim S. Ledwick
------------------------------------------
Tim S. Ledwick
Vice President and Chief Financial Officer
Date: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated.
Signature Title
--------- -----
/s/Steven M. Miller Chief Executive Officer, President and
------------------------------- Director (Principal Executive Officer)
Steven M. Miller
/s/Robert C. Patent Vice Chairman of the Board and Director
-------------------------------
Robert C. Patent
/s/Robert Grosser Chairman of the Board and Director
-------------------------------
Robert Grosser
/s/Jonah L. Goldstein Director
-------------------------------
Jonah L. Goldstein
/s/Arthur P. Gould Director
-------------------------------
Arthur P. Gould
/s/Hollis W. Rademacher Director
-------------------------------
Hollis W. Rademacher
/s/Tim S. Ledwick Vice President, Chief Financial Officer
------------------------------- (Principal financial officer and
Tim S. Ledwick principal accounting officer)
Date: March 31, 1999
83
<PAGE> 84
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
3.1 Certificate of Incorporation of the Company, as amended,
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-4 filed with the Commission
on June 26, 1997
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
3.3 Certificate of Designation of 6% Convertible Preferred Stock,
Series A, incorporated by reference to Exhibit 4.1 to the
Company's Form 8-K filed with the Commission on April 11,
1997.
3.4 Certificate of Designation of 6% Convertible Preferred Stock,
Series B, incorporated by reference to Exhibit 4.1 to the
Company's Form 8-K filed with the Commission on September 17,
1997.
4.1 Indenture, dated as of May 7, 1996, between the Company and
The Chase Manhattan Bank, N.A., incorporated by reference to
Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q
filed with the Commission on May 15, 1996
4.2 Indenture, dated as of May 14, 1997, among the Company, CSC
and The Chase Manhattan Bank, incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form
S-4 filed with the Commission on June 26, 1997
10.1 The Company's 1995 Stock Option Plan, incorporated by
reference to Exhibit 10.20 to the Company's Registration
Statement on Form S-1 as declared effective by the Commission
on December 20, 1995
10.2 The Company's 1995 Non-Employee Directors Stock Option Plan,
incorporated by reference to Exhibit 10.21 to the Company's
Registration Statement on Form S-1 as declared effective by
the Commission on December 20, 1995
10.3 Post-Petition Loan and Security Agreement, dated as of
October 12, 1998, between CSC and Greenwich Capital Financial
Products, Inc., incorporated by reference to Exhibit 10.1 to
the Company's Form 10-Q filed with the Commission on November
17, 1998.
10.4 Revolving Credit and Security Agreement dated as of October
12, 1998, between the Company and The CIT Group/Equipment
Financing, Inc., incorporated by reference to Exhibit 10.2 to
the Company's Form 10-Q filed with the Commission on November
17, 1998.
10.5 Employment Agreement, dated July 2, 1998, between CSC and
Cheryl P. Carl, incorporated by reference to Exhibit 10.4 to
the Company's Form 10-Q filed with the Commission on August
12, 1998.
10.6 Employment Agreement, dated July 2, 1998, between CSC and
Peter Kucma, incorporated by reference to Exhibit 10.5 to the
Company's Form 10-Q filed with the Commission on August 12,
1998.
84
<PAGE> 85
10.7 Employment Agreement, dated July 2, 1998, between CSC and Tim
S. Ledwick, incorporated by reference to Exhibit 10.8 to the
Company's Form 10-Q filed with the Commission on August 12,
1998.
10.8* Sub-Tenant Estoppel Certificate, dated as of January 20,
1999, between CSC and Taxter Park Associates.
10.9* Surrender of Lease and Temporary Rental Agreement, dated as
of February 18, 1999, between CSC and Mack-Cali Mid-West
Realty Associates LLC.
10.10* Extension Agreement, dated as of February 28, 1999, between
CSC and Greenwich Capital Financial Products, Inc.
10.11* First Amendment to Revolving Credit and Security Agreement,
dated as of February 28, 1999, between CSC and the CIT
Group/Equipment Financing, Inc.
11.1* Computation of Earnings Per Share
21.1* Subsidiaries of the Company
23.1* Consent of KPMG LLP
27.1* Financial Data Schedule for the year ended December 31, 1998
99.1 Solicitation and Disclosure Statement dated August 28, 1998,
incorporated by reference to Exhibit 99.1 to the Company's
Form 8-K filed with the Commission on September 4, 1998.
99.2* Solicitation and Disclosure Statement dated March 25,
1999Debtor's First Amended Joint Disclosure Statement dated
March 26, 1999 including: Exhibit A: the Company's and CSC's
First Amended Joint Plan of Reorganization dated as of March
26, 1999; Exhibit B: Examiners Report; Exhibit C: Balance
Sheet and Projected Financial Information and Exhibit D:
Liquidation Analysis
* Filed herewith.
85
<PAGE> 1
EXHIBIT 10.8
SCHEDULE 4(a)(II)
SUB-TENANT ESTOPPEL CERTIFICATE
January 20, 1999
Taxter Park Associates
130 Liberty Street
New York, NY 10006
Premises: Second Floor, 565 Taxter Road, Elmsford, NY (the "Property").
The undersigned, as sub-tenant under that certain sublease dated
December 5, 1994 (the "Sublease"), made with KLM Royal Dutch Airlines, as
sub-landlord ("Sub-landlord"), does hereby certify to the best of the
sub-tenant's knowledge and belief to Taxter Park Associates and its assigns and
successors (the "Purchaser") and to any lender or mortgagee of Purchaser with
respect to Purchaser's acquisition of the property of which the Demised Premises
(as hereinafter defined) form a part:
1. That the premises leased by Sub-tenant (the "Demised
Premises") pursuant to the Lease are described as:
7800 square feet on the 2nd floor, at the Property;
2. That the Lease has not been modified, changed, altered or
amended in any respect, except as set forth below, and is the
only Lease or agreement between the undersigned and the
Sub-landlord affecting the Demised Premises. A true and
complete copy of the Lease, together with any and all
modifications, amendments and/or assignments thereto, are
annexed hereto as Exhibit A. There are no subleases or other
agreements with respect to the occupancy of the Demised
Premises, or any portion thereof;
3. That the full name and current mailing address for Sub-tenant,
and the address for all notices to tenant, are set forth
below:
4. That the Demised Premises have been completed in accordance
with the terms of the Lease, that Sub-tenant has accepted
possession of the Demised Premises and that tenant now
occupies the same, and is open for business. All improvements,
alterations or additions to be constructed on the Demised
Premises by Sub-landlord pursuant to the Lease have been
completed and accepted by Sub-tenant and any other item of an
executory nature has been completed under the terms of the
Lease. All contributions required from Sub-landlord for
improvements to the Demised Premises have been paid in full to
Sub-tenant;
5. That the original Sublease term began on December 5, 1994 and
will expire on December 31, 1999; that Sub-tenant pays rent on
a current basis and rent has been paid through January 1999;
that no rent has been paid by Sub-tenant for more than one
month in advance; that the rent payable under the Lease is the
amount of
<PAGE> 2
fixed rent provided thereunder, which is annual fixed rent
payable to Sub-landlord per year of $137,018.00; that as of
the date hereof, additional rent of $1,462.50 is payable to
Sub-landlord on account of utility costs, real estate taxes
and operating expenses; that the base amount for such
additional rent is $ 0 ; that there is no claim or basis for
an adjustment thereto; and that the amounts of fixed and
additional rent are being paid on a current basis;
6. That Sub-tenant has not given the Sub-landlord any notice of
any claim arising under the Lease nor any notice of a default
on the part of the Sub-landlord under the Lease which has not
been cured. There are no defaults by Sub-landlord (to the best
of Sub-tenant's knowledge) under the Lease as of the date
hereof. As of the date hereof, the undersigned is entitled to
no credit, no free rent and no offset, counterclaim or
deduction in rent;
7. That the Lease is not in default and is now in full force and
effect and has not been amended, modified or assigned, and the
Lease is the only agreement between Sub-landlord and the
undersigned regarding the Demised Premises;
8. That Sub-tenant has paid to Sub-landlord a security deposit of
$ 0 , and Sub-tenant has no knowledge of any claim made by
Sub-landlord against the security deposit;
9. That Sub-tenant has no options(s) to renew the Sublease for a
period of --- years upon the terms set forth in the Sublease,
and that none of such options have been exercised except ---.
10. That Sub-tenant has no (i) option to expand into additional
space in the Property, (ii) right of first refusal of any
space in the Property; or (iii) option to acquire all or any
part of the property in which the Demised Premises are
located;
11. Except as set forth on Exhibit B, Sub-tenant does not use,
store, manufacture, generate, handle or dispose of at the
Property, any chemical, element or compound which is
identified or classified as a regulated substance, toxic
substance, hazardous substance, hazardous waste, pollution,
pollutant, toxic pollutant, contaminant, solid waste or
special waste ("Hazardous Materials") under any law,
ordinance, rule, regulation, order, directive or requirement
of any governmental authority ("Laws"), other than small
quantities of household cleaning and office supplies. To the
extent Hazardous Materials are set forth on Exhibit B, each of
such Hazardous Materials is used, stored, manufactured,
generated, handled and disposed of in accordance with Laws.
Dated January 20, 1999 SUB-TENANT:
Cityscape Corp.
By: /s/ Peter S. Kucma
-----------------------
Name: Peter S. Kucma
Title: President
<PAGE> 1
EXHIBIT 10.9
February 18, 1999
CITYSCAPE CORP.
Eight Skyline Drive
Hawthorne, New York 10532
Subject: Temporary Rental of approximately 30,910 square feet at Eight Skyline
Drive, Hawthorne, New York
Dear Gentlemen:
This is to confirm that we as "Owner" have agreed to lease to you, and you as
"Tenant" have agreed to hire from us, on a temporary basis, approximately 30,
910 square feet at Eight Skyline Drive, Hawthorne, New York as per the plan
attached hereto and made a part hereof ("Initial Premises") for a term
commencing February 1, 1999 and ending February 21, 1999. Owner has agreed to
lease to Tenant, on a temporary basis, a portion of the Initial Premises
consisting of approximately 5, 710 square feet ("Remaining Premises") for a term
commencing February 22, 1999 and ending June 30, 1999. The Initial Premises
shall be tendered to Tenant in their present "as is" condition. Owner shall
perform no service and do no work other than that which is specifically set
forth herein, and Tenant shall not make any alterations or additions without the
prior written permission of Owner. Tenant shall occupy the Initial Premises,
including the Remaining Premises for general office use only. Tenant shall
vacate the portion of the Initial Premises not included within the Remaining
Premises ("Surrendered Premises") on or before February 21, 1999 in reasonable
condition and repair, broom clean, and, on or before February 28, 1999, remove
Tenant's furniture, fixtures and rolling file system from the Surrendered
Premises. In any event, Owner shall have access to the Surrendered Premises
after February 21, 19999 to prepare the Surrendered Premises for occupancy by
the succeeding tenant, provided that Owner shall not damage Tenant's furniture,
fixtures and rolling file system. If Tenant fails to remove its furniture,
fixtures and rolling file system from the Surrendered Premises by February 28,
1999, Owner shall have the right to remove such furniture, fixtures and file
system and store same at Tenant's sole cost and expense. Tenant shall vacate the
Remaining Premises on or before June 30, 1999 in reasonable condition and
repair, broom clean, and shall remove Tenant's satellite dish and related
equipment and repair any damage to the building resulting from such removal.
Owner, at its sole cost and expense, shall relocate Tenant from the Surrendered
Premises to the Remaining Premises, in accordance with the attached schedule,
including furniture, files, telephone system, Davox system, satellite computer
equipment, (2) T-1 lines, and telecom/computer room. In addition, prior to
February 20, 1999, Owner, at its sole cost and expense, shall install electric
outlets and supplemental air-conditioning in the Remaining Premises to service
Tenant's telecommunications/data requirements, as shown on the attached plan.*
Tenant hereby agrees to pay to Owner as rent hereunder the sum of $102,780.00
per annum, payable in equal monthly installments at the rate of $8,565.00 per
month. Simultaneously with the execution of this Agreement, Tenant shall pay to
Owner one month's rent in advance and $63,921.14 as security. Upon the
expiration of this Agreement, the security shall be promptly refunded to Tenant,
minus such amounts as may be incurred to return the premises to a reasonable
condition and repair, broom clean, or to cure defaults incurred subject to the
terms herein.
The rental includes all utilities, real estate taxes, grounds and structural
maintenance (except window glass) and water for ordinary sanitary and janitorial
purposes. Tenant agrees to maintain the interior of the premises
<PAGE> 2
in good repair, and to contract for cleaning services and rubbish removal. Owner
shall maintain the heating, ventilation and air conditioning units servicing the
Temporary Premises. Tenant shall be liable for any damage to the premises or the
mechanical systems caused by Tenant or Tenant's agents, normal wear and tear
excepted. If Tenant fails reasonably to cure a default, Owner may do so for
Tenant and charge Tenant the reasonable cost thereof. Tenant shall not engage in
any activity which would prevent nearby tenants from having the quiet enjoyment
of their premises. Tenant shall comply with any rules or regulations promulgated
by Owner for the common areas, grounds, access roads and the building of which
the Initial Premises are a part.
Tenant shall have the use of not more than 34 parking spaces within a reasonable
and feasible distance of the Remaining Premises. Tenant shall not park vehicles
overnight nor use the loading docks for any purpose other than loading and
unloading.
Tenant agrees to occupy the Initial Premises and the Remaining Premises at
Tenant's sole risk, and will provide and keep in force during the term of this
Agreement comprehensive general public liability insurance against claims
arising out of the operation of the Initial Premises and the Remaining Premises,
as the case may be, in limits of not less than $2,000,000 combined bodily injury
and property damage, on an occurrence basis and shall submit to Owner evidence
of having covered such insurance prior to occupancy. Tenant shall hold Owner
harmless from any claims or injury caused as a result of Tenant's occupancy.
Tenant shall comply with the regulations of the Fire Department, the insurance
rating organization, and other authorities having jurisdiction. Tenant shall
promptly discharge or bond any mechanic's liens which are filed against either
party or the building as a result of any contracts or activities of Tenant.
Tenant shall not store any materials or engage in any practices which would have
the effect of increasing the insurance rates on the building or its contents
above what they would be if Tenant were not in occupancy of the Initial Premises
or the Remaining Premises, as the case may be. Tenant shall not store any
materials or rubbish outside the Initial Premises or the Remaining Premises.
Owner and Tenant mutually waive trial by jury in any action, proceeding brought
by either of the parties hereto against the other (except for personal injury or
property damage). It is further mutually agreed that in the event Owner
commences any summary proceeding for possession of the Initial Premises or the
Remaining Premises, Tenant will not interpose any counterclaim of whatever
nature.
During the term, Tenant will permit Owner reasonable access to the Initial
Premises and the Remaining Premises for the purposes of maintaining the
building, to perform construction work in the Initial Premises and the Remaining
Premises for Tenant's benefit or for the benefit of neighboring tenants and
future tenants, at times of emergency, for the showing of the initial Premises
and Remaining Premises to prospective tenants, and for other reasonable
purposes. Owner shall be given a key to the Initial Premises and Remaining
Premises, and in the event Tenant does not respond to reasonable notice, Owner
may use the key to enter the Initial Premises or the Remaining Premises, as the
case may be. Such entry into the Initial Premises and the Remaining Premises for
any of the aforementioned purposes shall not constitute an eviction,
constructive or otherwise, or entitle Tenant to any abatement of rent. Tenant
shall cooperate with Owner during the performance of any construction work in
the Initial Premises and the Remaining Premises by removing all wall hangings or
relocating any personnel, furniture or equipment, as necessary.
Tenant acknowledges that possession of the Surrendered Premises must be
surrendered on February 21, 1999, time being of the essence. The parties agree
that the damage to Owner resulting from failure by Tenant to surrender
possession of the Surrendered Premises on a timely basis will be extremely
substantial,
<PAGE> 3
will exceed the amount of rent payable hereunder and will be impossible of
accurate measurement. Tenant shall pay Owner, as liquidated damages for each
month and for any portion of a month during which Tenant holds over in the
Surrendered Premises after February 21, 1999, a sum equal to $51,516.67 per
month. Nothing contained herein shall be deemed to authorize Tenant to remain in
occupancy of the Surrendered Premises after February 21, 1999. If Tenant has
vacated the Surrendered Premises but Tenant has failed to remove all of its
fixtures, furniture and equipment ("F, F & E") from the Surrendered Premises,
then, instead of charging Tenant a holdover rental as set forth above, Owner
shall remove such F, F & E from the Surrendered Premises and store such F, F & E
all at Tenant's sole cost and expense.
Tenant acknowledges that possession of the Remaining Premises must be
surrendered at the expiration or sooner termination of the term, time being of
the essence. The parties agree that the damage to Owner resulting from failure
by Tenant to surrender possession of the Remaining Premises on a timely basis
will be extremely substantial, will exceed the amount of rent payable hereunder
and will be impossible of accurate measurement. Tenant shall pay Owner, as
liquidated damages for each month and for any portion of a month during which
Tenant holds over in the Remaining Premises after expiration or sooner
termination of the term of this Agreement, a sum equal to $17,130.00 per month.
Nothing contained herein shall be deemed to authorize Tenant to remain in
occupancy of the Remaining Premises after the expiration or sooner termination
of the term. If Tenant has vacated the Remaining Premises but Tenant has failed
to remove all of its F, F & E from the Remaining Premises, then, instead of
charging Tenant a holdover rental as set forth above, Owner may remove such F, F
& E from the Remaining Premises and store such F, F & E all at Tenant's sole
cost and expense.
Tenant may terminate this Agreement at any time upon not less than 15 days prior
notice to Owner. In such event, Tenant shall vacate the Initial Premises,
including the Remaining Premises, in accordance with the first paragraph of this
Agreement and Tenant's obligation to pay rent shall cease upon the effective
date of such termination.*
Tenant, at Tenant's sole cost and expense, shall provide, keep and maintain fire
extinguishers and any other nonstructural fire safety equipment required by laws
and requirements of public authorities. At the expiration or earlier termination
of the term of this Temporary Lease, Tenant may remove from the Initial Premises
any fire extinguishers provided by Tenant.
Tenant and Tenant's invitees shall observe and comply with the Rules and
Regulations attached hereto, and such additional Rules and Regulations as Owner
or Owner's agents may from time to time adopt. Notice of additional Rules and
Regulations shall be given to Tenant. Owner shall have no duty or obligation to
enforce the Rules and Regulations or the terms, covenants or conditions in any
other lease, against any other tenant of the Building or in the Park, if
applicable, and Owner shall not be liable to Tenant for violation of the same by
any other tenant or its invitees. In the event of a conflict between the Rules
and Regulations and the provisions of this Agreement, the provisions of this
Agreement shall prevail.
This Agreement is subject and subordinate to all present and future mortgages or
other encumbrances affecting the Initial Premises or the property of which the
Initial Premises are a part. This provision is self-operative and no further
instrument shall be required to effect such subordination.
Tenant shall look solely to the interest of the Owner in the building for the
satisfaction of Tenant's remedies, and no other property or assets of the Owner
shall be subject to levy, execution or other enforcement procedure for the
satisfaction of Tenant's remedies.
<PAGE> 4
The Tenant represents that it has dealt with no broker in connection with this
Temporary Lease Agreement.
This Agreement shall not bind the Owner unless and until it has been executed by
the Owner and delivered to the Tenant or Tenant's attorney.
This Agreement is subject to the approval of the United States Bankruptcy Court
having jurisdiction over Tenant.
If the foregoing meets with your approval, please sign all three copies of this
letter and return them to us together with the first month's rent and the
security stipulated herein. Upon being countersigned, we will return one copy to
you for your files.
MACK-CALI MID-WEST REALTY
ASSOCIATES L.L.C.
By: Mack-Cali Realty L.P.,
Member
By: Mack-Cali Realty
Corporation, General
Partner
By: /s/ Michael A. Grossman
---------------------------
Vice President
Agreed and consented to
CITYSCAPE CORP.
By:/s/ Peter S. Kucma
--------------------------
Authorized Signature
Owner shall make all efforts to ensure that Tenant's operation is not disrupted
due to Owner's relocation from the surrendered premises to the Remaining
Premises. In the event of such disruption, Owner shall make all efforts to
remediate such interruptions as expeditiously as possible. In the event that
Owner delays the relocation from the surrendered premises to the remaining
premises, the February 28, 1999 vacate date shall be extended a day for a day.
<PAGE> 1
EXHIBIT 10.10
EXECUTION COPY
EXTENSION AMENDMENT
EXTENSION AMENDMENT (this "Amendment"), dated as of February
28, 1999, made by and between CITYSCAPE CORP., a New York corporation (the
"Borrower") and GREENWICH CAPITAL FINANCIAL PRODUCTS, INC., a Delaware
corporation (the "Lender").
RECITALS
The Borrower and the Lender are parties to the Post-Petition
Loan and Security Agreement, dated as of the date hereof, (as amended,
supplemented or otherwise modified prior to the date hereof, the "Existing Loan
Agreement"; after giving effect to this Amendment, the "Loan Agreement"),
pursuant to which the Lender has agreed, subject to the terms and conditions of
the Loan Agreement, to make revolving credit loans to the Borrower to finance
certain mortgage assets owned by the Borrower.
The Borrower has requested a sixty day extension of the
Termination Date set forth in the Existing Loan Agreement.
The Lender and the Borrower desire to extend the Existing Loan
Agreement.
The Borrower does not presently intend to make new loans
during the pendency of its bankruptcy case and has no need for further
borrowings.
Accordingly, the Borrower and the Lender hereby agree that,
subject to the terms and conditions hereof, the Existing Loan Agreement is
hereby amended as follows:
SECTION 1. Definitions. Unless otherwise defined herein, all
capitalized terms shall have the respective meanings assigned to such terms in
the Existing Loan Agreement.
SECTION 2. Amendments.
(a) The Existing Loan Agreement is hereby amended by adding
the following new definition:
"'Extension Amendment Effective Date' shall mean February 28,
1999."
(b) The Existing Loan Agreement is hereby amended by deleting
the definition of "Termination Date" and substituting in lieu thereof the
following new definition:
"'Termination Date' shall mean April 30, 1999."
<PAGE> 2
(c) Section 7.16(b) of the Existing Loan Agreement is hereby
amended by deleting such section in its entirety and substituting in lieu
thereof the following new section to read as follows:
"(b) Maintenance of Liquidity. The Borrower shall maintain
cash and cash equivalents, subject to no Lien or other encumbrance other then
the Liens in favor of CIT or the Lender, of at least $10,000,000."
SECTION 3. Interest Rate. The Borrower and the Lender hereby
agree that, from and after the Extension Amendment Effective Date until the
Loans are paid in full, interest on the unpaid principal amount of each Loan
shall accrue at a rate per annum equal to the Prime Rate plus 2.50%; provided,
that, notwithstanding any provision to the contrary in the Existing Loan
Agreement, such accrued interest shall be due and payable monthly on the 25th
calendar day of each month and on the Termination Date.
SECTION 4. Extension Fee. On or prior to the date on which the
Bankruptcy Court approves this Amendment and the order approving this Amendment
is entered on the docket, the Borrower agrees to pay to the Lender an extension
fee (the "Extension Fee") in an amount equal to the product of (a) 0.50% and (b)
the amount outstanding ($17,336,996.55) under the Existing Loan Agreement.
SECTION 5 Acknowledgement of Debt; Reduction of Commitment.
(a) The Borrower is not aware of any defense to the
Loan Agreement or the DIP Obligations thereunder or to the validity,
priority or perfection of the Lender's Lien on the collateral for the
Loan Agreement.
(b) The Borrower hereby agrees that it shall not
borrow additional Loans pursuant to the Loan Agreement after the date
hereof.
(c) The Lender and the Borrower agree that the
Maximum Credit is hereby reduced from time to time to the sum of (i)
the aggregate outstanding principal amount of the Loans at such time
and (ii) the aggregate outstanding principal amount of the Purchased
Loans that have not been resold by the Lender and with respect to which
the Borrower has not yet transferred servicing rights to a successor
servicer.
SECTION 6. Conditions to Effectiveness of Amendment.
(a) Conditions Precedent. This Amendment shall become
effective on the date on which the following conditions precedent have
been satisfied, which effectiveness shall be retroactive to and as of
February 28, 1999:
(i) The Lender shall have received this
Amendment, executed and delivered by a duly
authorized officer of the Borrower and the Lender;
and
(ii) The CIT Facility shall have been
extended on terms substantially similar to those set
forth on Exhibit A, to which such extension the
Lender hereby consents.
(b) Condition Subsequent. The continuing
effectiveness of this Amendment shall be conditioned upon the
satisfaction of the following condition subsequent;
-2-
<PAGE> 3
the failure of which to satisfy shall result in this Amendment to be
deemed never to have been effective:
(i) This Amendment shall have been approved
by the Bankruptcy Court in an order not later than 25
days from the date hereof and such order shall not
have been revoked, reversed, stayed or otherwise
modified after entry thereof;
(ii) On or prior to the date on which the
Bankruptcy Court approves this Amendment and the
order approving this Amendment is entered on the
docket, the Lender shall have received the Extension
Fee and shall have been reimbursed for any
outstanding fees and expenses of counsel to the
Lender relating to the Loan Agreement or this
Amendment; and
(iii) On the date on which the Bankruptcy
Court approves this Amendment, the aggregate
outstanding principal amount of the Loans shall not
exceed the Borrowing Base.
SECTION 7. Limited Effect. Except as expressly amended and
modified by this Amendment, the Existing Loan Agreement shall continue to be,
and shall remain, in full force and effect in accordance with its terms. The
Lender hereby waives any Default or Event of Default which may exist on the date
hereof based solely on such facts described in the notification letter, dated as
of February 28, 1999, from the Borrower to the Lender. Except as expressly
provided herein, nothing in this Amendment shall be deemed to constitute a
waiver with respect to any Default or Event of Default.
SECTION 8. Counterparts. This Amendment may be executed by the
parties hereto on any number of separate counterparts, each of which shall be an
original and all of which taken together shall constitute one and the same
instrument.
SECTION 9. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK, EXCEPT AS
PREEMPTED BY BANKRUPTCY LAW.
[SIGNATURE PAGE FOLLOWS]
-3-
<PAGE> 4
IN WITNESS WHEREOF, the Borrower and the Lender have caused
this Amendment to be duly executed by their duly authorized officers, all as of
the day and year first above written.
CITYSCAPE CORP.
By /s/ Cheryl P. Carl
-------------------------------
Name: Cheryl P. Carl
Title: Executive Vice Preside
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
By /s/ Paul Stevelman
-------------------------------
Name: Paul Stevelman
Title: SVP
ACKNOWLEDGED AND CONSENTED TO:
CITYSCAPE FINANCIAL CORP.
By /s/ Steven M. Miller
--------------------------
Name: Steven M. Miller
Title: President
<PAGE> 1
EXHIBIT 10.11
FIRST AMENDMENT
TO
REVOLVING CREDIT AND SECURITY AGREEMENT
First Amendment, dated as of February 28, 1999 to the
Revolving Credit and Security Agreement, dated as of October 12, 1998 (the
"Agreement"), among Cityscape Corp., a New York corporation (the "Borrower"),
Cityscape Financial Corp., a Delaware corporation (the "Guarantor"), the
financial institutions party thereto (each a "Lender" and collectively, the
"Lenders"), and The CIT Group/Equipment Financing, Inc., as agent for the
Lenders (in such capacity, the "Agent").
The Borrower, the Guarantor, the Lenders and the Agent desire
to amend certain terms of the Agreement. Accordingly, the Borrower, the
Guarantor, the Agent and the Lenders hereby agree as follows:
1. Definitions. All capitalized terms used herein and not
otherwise defined herein are used herein as defined in the Agreement.
2. Termination Date. Clause (5) of Section 2.01 of the
Agreement is hereby amended by deleting the date "March 1, 1999" and
substituting in lieu thereof the following:
"(5) March 31, 1999 (the "Termination Date");
provided, that the Borrower may extend the date set forth in Clause (5)
of this Section to a date seven calendar days after such date and each
successive seven calendar day period thereafter until April 30, 1999,
by (i) delivering written notice to the Agent, given no less than two
Business Days before the then scheduled Termination Date, of the
Borrower's intention to extend the Termination Date for an additional
seven calendar day period, and (ii) paying to the Agent, for the
account of each Lender in accordance with such Lender's Pro Rata Share,
a non-refundable extension fee of $5,000 but only in connection with
the delivery of an extension notice described in clause (i) relating to
the third and fourth calendar weeks of April, 1999."
3. Interest Rate. The Borrower and the Lenders hereby agree
that, from and after February 28, 1999, until the Loans are paid in full,
interest on the unpaid principal amount of each Loan shall accrue at a rate per
annum equal to the Prime Rate plus 2.00%; provided, that, notwithstanding any
provision to the contrary in the Agreement, such accrued interest shall be due
and payable monthly on the first calendar day of each month and on the
Termination Date.
4. Commitment; Acknowledgement of Debt. (a) Pursuant to
Section 2.06(a) of the Agreement, the Borrower elects to reduce from time to
time, and the Lenders acknowledge the reduction of, the Total Commitment from
$40,000,000 to an amount equal to the aggregate
<PAGE> 2
unpaid principal amount of the Loans from time to time, effective as of March 5,
1999. From and after March 5, 1999, no Unused Line Fee shall accrue.
(b) The Borrower hereby agrees that it shall not borrow
additional Loans pursuant to the Agreement after the Amendment Effective Date.
5. Conditions to Effectiveness. This Amendment shall become
effective only upon satisfaction in full of the following conditions precedent
(the first date upon which all such conditions shall have been satisfied being
herein called the "Amendment Effective Date"):
(i) The representations and warranties contained in
this Amendment and in Article VI of the Agreement shall be true and
correct on and as of the Amendment Effective Date as though made on and
as of such date (except where such representations and warranties
relate to an earlier date in which case such representations and
warranties shall be true and correct as of such earlier date); no Event
of Default or Default shall have occurred and be continuing on the
Amendment Effective Date, or result from this Amendment becoming
effective in accordance with its terms, except as otherwise disclosed
to the Lenders in accordance with Section 6(a) hereof.
(ii) The Agent shall have received counterparts of
this Amendment which bear the signatures of the Borrower, the Guarantor
and each of the Lenders.
(iii) This Amendment shall have been submitted to the
Bankruptcy Court for approval on or before March 5, 1999.
(iv) This Amendment shall have been approved by the
Bankruptcy Court.
(v) The Borrower shall have paid to the Agent, for
the account of each Lender in accordance with such Lender's Pro Rata
Share, a non-refundable amendment fee of $50,000.
(vi) All legal matters incident to this Amendment
shall be satisfactory to the Agent and its counsel.
6. Waiver, Consent and Agreement. (a) The Lenders hereby
consent to and waive any Default or Event of Default existing on or prior to the
Amendment Effective Date but only to the extent (i) the Lenders have knowledge
that such Default or Event of Default exists on the Amendment Effective Date and
(ii) the Borrower has delivered to the Agent and each Lender, pursuant to
Section 7.08(7) of the Agreement, written notice setting forth the details of
such Default or Event of Default and the action, if any, proposed to be taken by
the Borrower with respect thereto.
(b) In addition, pursuant to Section 8.01(E) of the Agreement,
the Agent hereby consents to the amendment of the Greenwich DIP Facility,
substantially on the terms and conditions set forth in the draft of the
Extension Amendment attached hereto as Exhibit A.
-2-
<PAGE> 3
(c) The Lenders' consent and waiver of any Event of Default in
accordance with paragraph (a) above and the Agent's consent set forth in
paragraph (b) above (i) shall become effective as of the date set forth above
when signed by the Lenders, (ii) shall be effective only in this specific
instance and for the specific purposes set forth herein, and (iii) does not
allow for any other or further departure from the terms and conditions of the
Agreement or any other Loan Documents, which terms and conditions shall continue
in full force and effect.
7. Representations and Warranties. Each of the Borrower and
the Guarantor represents and warrants to the Lenders as follows:
(a) Each Loan Party (i) is duly organized, validly
existing and in good standing under the laws of the state of its organization
and (ii) has all requisite power, authority and legal right to execute, deliver
and perform this Amendment and to perform the Agreement, as amended hereby,
subject to the prior approval of the Bankruptcy Court.
(b) The execution, delivery and performance by the
Loan Parties of this Amendment and the performance by the Borrowers of the
Agreement as amended hereby (i) have been duly authorized by all necessary
action, subject to the prior approval of the Bankruptcy Court, (ii) do not and
will not violate or create a default under any Loan Party's organizational
documents, any applicable law or any contractual restriction binding on or
otherwise affecting any Loan Party or any of such Loan Party's properties,
subject to the prior approval of the Bankruptcy Court, and (iii) except as
provided in the Loan Documents, do not and will not result in or require the
creation of any Lien, upon or with respect to any Loan Party's property.
(c) No authorization or approval or other action by,
and no notice to or filing with, any Governmental Authority or other regulatory
body is required in connection with the due execution, delivery and performance
by any Loan Party of this Amendment and the performance by the Loan Parties of
the Agreement as amended hereby, subject to the prior approval of the Bankruptcy
Court.
(d) This Amendment and the Agreement, as amended
hereby, constitute the legal, valid and binding obligations of the Borrower and
the Guarantor party thereto, subject to the prior approval of the Bankruptcy
Court, enforceable against such Persons in accordance with their terms except to
the extent the enforceability thereof may be limited by any applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws from time to
time in effect affecting generally the enforcement of creditors' rights and
remedies and by general principles of equity.
(e) The representations and warranties contained in
Article VI of the Agreement are correct on and as of the Amendment Effective
Date as though made on and as of the Amendment Effective Date (except to the
extent such representations and warranties expressly relate to an earlier date),
and no Event of Default or Default, has occurred and is continuing on and as of
the Amendment Effective Date, except as otherwise disclosed to the Lenders in
accordance with Section 6(a) hereof.
-3-
<PAGE> 4
8. Continued Effectiveness of Agreement. Each of the Borrower
and the Guarantor hereby (i) confirms and agrees that each Loan Document to
which it is a party is, and shall continue to be, in full force and effect and
is hereby ratified and confirmed in all respects except that on and after the
Amendment Effective Date of this Amendment all references in any such Loan
Document to "the Agreement", "thereto", "thereof", "thereunder" or words of like
import referring to the Agreement shall mean the Agreement as amended by this
Amendment, and (ii) confirms and agrees that to the extent that any such Loan
Document purports to assign or pledge to the Agent, or to grant to the Agent a
Lien on any collateral as security for the Obligations of the Borrower from time
to time existing in respect of the Agreement and the Loan Documents, such
pledge, assignment and/or grant of a Lien is hereby ratified and confirmed in
all respects.
9. Miscellaneous.
(a) This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which shall be deemed to be an original, but all of which taken together shall
constitute one and the same agreement.
(b) Section and paragraph headings herein are
included for convenience of reference only and shall not constitute a part of
this Amendment for any other purpose.
(c) This Amendment shall be governed by, and
construed in accordance with, the laws of the State of New York.
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their respective officers thereunto duly authorized
as of the day and year first above written.
CITYSCAPE CORP.
By: /s/ Cheryl P. Carl
------------------------------------
Name: Cheryl P. Carl
Title: Executive Vice President
CITYSCAPE FINANCIAL CORP.
By: /s/ Steven M. Miller
------------------------------------
Name: Steven M. Miller
Title: President
AGENT AND LENDER
THE CIT GROUP/EQUIPMENT FINANCING, INC.
By: /s/ Jim Conheeney
------------------------------------
Name: Jim Conheeney
Title: VP
LENDER
NOMURA ASSET CAPITAL CORPORATION
By: /s/ Jim Lieblich
------------------------------------
Name: Jim Lieblich
Title: Managing Director
-5-
<PAGE> 1
Exhibit 11.1
CITYSCAPE FINANCIAL CORP.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1998 (1) 1997 (1) 1996 (2)
------------- ------------- -----------
<S> <C> <C> <C>
Earnings (loss) from continuing operations ($220,749,943) ($118,505,912) $23,875,285
Preferred stock dividends (20,326,936) (4,547,061) --
------------- ------------- -----------
EARNINGS (LOSS) APPLICABLE TO COMMON STOCK (241,076,879) (123,052,973) 23,875,285
Earnings (loss) from discontinued operations (245,906,000) 26,805,597
Loss from disposal of discontinued operations -- (49,939,996) --
Extraordinary item -- -- --
------------- ------------- -----------
NET EARNINGS (LOSS) APPLICABLE TO COMMON STOCK ($241,076,879) ($418,898,969) $50,680,882
------------- ------------- -----------
ADJUSTMENT TO NET EARNINGS (LOSS):
Add: After-tax interest expense from Convertible
Debentures -- -- --
Preferred stock dividends -- -- --
------------- ------------- -----------
TOTAL ADJUSTMENTS -- -- --
------------- ------------- -----------
Earnings (loss) applicable to common stock ($241,076,879) ($123,052,973) $23,875,285
Earnings (loss) from discontinued operations -- (245,906,000) 26,805,597
Loss from disposal of discontinued operations -- (49,939,996) --
Extraordinary item -- -- --
------------- ------------- -----------
ADJUSTED NET EARNINGS (LOSS) APPLICABLE TO COMMON STOCK ($241,076,879) ($418,898,969) $50,680,882
============= ============= ===========
WEIGHTED AVERAGE COMMON SHARES 58,661,544 33,244,212 29,404,557
Effect of dilutive securities:
Warrants -- -- --
Stock options -- -- 1,133,434
Convertible preferred stock -- -- --
Convertible Debentures -- -- --
------------- ------------- -----------
ADJUSTED WEIGHTED AVERAGE COMMON SHARES 58,661,544 33,244,212 30,537,991
============= ============= ===========
EARNINGS (LOSS) PER COMMON SHARE:
BASIC
Continuing operations ($4.11) ($3.70) $0.81
Discontinued operations -- (7.40) 0.91
Disposal of discontinued operations -- (1.50) --
Extraordinary item -- -- --
------------- ------------- -----------
NET (LOSS) EARNINGS ($4.11) ($12.60) $1.72
============= ============= ===========
DILUTED
Continuing operations ($4.11) ($3.70) $0.78
Discontinued operations -- (7.40) 0.88
Disposal of discontinued operations (1.50) --
Extraordinary item -- -- --
------------- ------------- -----------
NET (LOSS) EARNINGS ($4.11) ($12.60) $1.66
============= ============= ===========
</TABLE>
(1) For the years ended December 31, 1998 and 1997, 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 year ended December 31, 1996, the effect of the Convertible
Debentures is antidilutive and is not included in the computation of
diluted EPS. Earnings from continuing operations is used as the "control
number" in determining whether these potential common shares are dilutive
or antidilutive.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF CITYSCAPE FINANCIAL CORP.
DECEMBER 31, 1998
The following is a list of the Company's subsidiaries which are all owned 100%
by Cityscape Financial Corp. who is the ultimate or immediate parent:
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY INCORPORATED IN
- - ------------------ ---------------
<S> <C>
A. Cityscape Corp. New York
1. Cityscape Funding Corporation Delaware
2. Cityscape Funding Corporation II Delaware
3. Cityscape Funding Corporation III Delaware
4. Cityscape Funding Corporation IV Delaware
5. Cityscape Funding Corporation V Delaware
6. City Mortgage Corporation Limited United Kingdom
a. City Mortgage Servicing Limited United Kingdom
b. City Mortgage Financial Services Limited United Kingdom
c. J&J Securities Limited United Kingdom
d. City Mortgage Collateral Reserve No. 1 Limited United Kingdom
e. Greyfriars Group Limited United Kingdom
I. Greyfriars Financial Services Limited United Kingdom
i. Assured Funding Corporation Limited United Kingdom
ii. Cityscape (UK) Limited United Kingdom
iii. Midland Continuation Limited United Kingdom
iv. Home and Family Finance Limited United Kingdom
v. Home Funding Corporation Limited United Kingdom
vi. Home Mortgage Corporation Limited United Kingdom
vii. Home Mortgages Limited United Kingdom
viii. Homestead Finance Limited United Kingdom
ix. Homeowners Capital Plan Limited United Kingdom
x. Mortgage Management Limited United Kingdom
xi. Secured Funding Limited United Kingdom
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Cityscape Financial Corp.:
We consent to the incorporation by reference in the registration statement No.
333-1348 on Form S-8, registration statement No. 333-11383 on Form S-3,
registration statement No. 333-28467 on Form S-3, registration statement No.
333-36573 on Form S-3, registration statement No. 333-36055 on Form S-8 and
registration statement No. 333-28465 on Form S-3 of Cityscape Financial Corp. of
our report dated March 31, 1999, relating to the consolidated statements of
financial condition of Cityscape Financial Corp. and Subsidiary as of December
31, 1998 and 1997, and the related consolidated statements of operations,
stockholder's equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 1998, which report appears in the December
31, 1998 Annual Report on Form 10-K of Cityscape Financial Corp.
Our report dated March 31, 1999, does not express an opinion on the 1998 and
1997 consolidated financial statements of the Company as the Company has
suffered significant net losses for the years ended December 31, 1998 and 1997,
and has a net capital deficiency as of December 31, 1998 and 1997. At December
31, 1998 and 1997, these circumstances raise substantial doubt about the
entity's ability to continue as a going concern. The 1998 and 1997 consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
New York, New York KPMG LLP
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 18,405,426
<SECURITIES> 33,660,930
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 123,345,783
<CURRENT-ASSETS> 0<F1>
<PP&E> 38,686
<DEPRECIATION> 0
<TOTAL-ASSETS> 209,337,961
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
52
<COMMON> 649,489
<OTHER-SE> (396,925,410)
<TOTAL-LIABILITY-AND-EQUITY> 209,337,961
<SALES> 0
<TOTAL-REVENUES> (50,663,640)
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 91,729,739
<LOSS-PROVISION> 8,267,267
<INTEREST-EXPENSE> 46,438,779
<INCOME-PRETAX> (220,711,676)
<INCOME-TAX> 38,267
<INCOME-CONTINUING> (220,749,943)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (241,076,879)<F2>
<EPS-PRIMARY> (4.11)
<EPS-DILUTED> (4.11)
<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 commom stock.
</FN>
</TABLE>
<PAGE> 1
THIS IS NOT A SOLICITATION OF ACCEPTANCE OR REJECTION OF THE FIRST AMENDED JOINT
PLAN OF REORGANIZATION OF CITYSCAPE FINANCIAL CORP. AND CITYSCAPE CORP.
ACCEPTANCES OR REJECTIONS MAY NOT BE SOLICITED BY THE DEBTORS UNTIL A DISCLOSURE
STATEMENT HAS BEEN APPROVED BY THE BANKRUPTCY COURT. THIS DISCLOSURE STATEMENT
IS BEING SUBMITTED FOR APPROVAL BUT HAS NOT YET BEEN APPROVED BY THE BANKRUPTCY
COURT.
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
____________________________________x
:
In re: : Chapter 11
:
CITYSCAPE FINANCIAL CORP., : Case Nos. 98-13-22569 (ASH)
and CITYSCAPE CORP., : and 98-B-22570 (ASH)
: Jointly Administered
:
Debtors. :
:
____________________________________x
DEBTORS' FIRST AMENDED JOINT DISCLOSURE
STATEMENT PURSUANT TO SECTION 1125
OF THE BANKRUPTCY CODE
Dated: March 26,1999
LATHAM & WATKINS
885 Third Avenue
New York, New York 10022
(212) 906-1200
Robert J. Rosenberg (RJR 9585)
A. Brent Truitt (ABT 3799)
Rachael Fink (RF 3321)
Attorneys for Cityscape Financial Corp.
and Cityscape Corp.
Debtors and Debtors-in-Possession
IMPORTANT: THIS DISCLOSURE STATEMENT CONTAINS INFORMATION THAT MAY BEAR UPON
YOUR DECISION TO ACCEPT OR REJECT THE DEBTORS' PROPOSED FIRST AMENDED JOINT PLAN
OF REORGANIZATION. PLEASE READ THIS DOCUMENT WITH CARE.
<PAGE> 2
TABLE OF CONTENTS
Page
----
I. INTRODUCTION ..............................................................3
II. PLAN SUMMARY AND KEY CONSIDERATIONS ......................................5
A. Plan Summary ........................................................5
B. Recommendation .....................................................10
C. Certain Risk Factors ...............................................10
D. Voting Instructions ................................................11
III. GENERAL INFORMATION ....................................................13
A. The Debtors ........................................................13
B. Events Leading to the Chapter 11 Filing ............................14
C. Significant Events During the Chapter 11 Cases .....................16
IV. THE PLAN OF REORGANIZATION ..............................................22
A. Overview of the Plan ...............................................22
B. Treatment of Claims and Interests Under the Plan ...................25
C. Waiver of Conditions to Confirmation and Effective Date ............34
D. The Reorganized Company ............................................35
E. Issuance of New Common Stock .......................................37
F. Distributions Under the Plan .......................................39
G. General Information Concerning the Plan ............................44
V. CONFIRMATION AND CONSUMMATION PROCEDURES .................................50
A. Solicitation of Acceptances ........................................50
B. Confirmation Hearing ...............................................51
C. Confirmation .......................................................51
D. Consummation .......................................................55
E. Conditions to Effective Date .......................................55
VI. CERTAIN RISK FACTORS ....................................................56
A. Risks Relating to the Projections ..................................56
B. Assumptions Regarding Value of Cityscape's and CSC's Assets ........56
C. Business and Competition ...........................................56
D. Nature of Mortgages ................................................57
E. Environmental Risks ................................................58
F. Certain Other Legal Considerations Regarding Loans .................58
G. Sale of CSC-UK .....................................................59
H. Certain Federal Income Tax Considerations; Reduction and
Limitation of Corporate Tax Benefits ............................59
I. Certain Risks of Non-Confirmation ..................................59
J. Government Regulations .............................................60
K. Restrictions on Resale of New Common Stock of the Reorganized
Company .........................................................60
L. Lack of Trading Market; Volatility .................................60
M. Possible Dilution of New Common Stock ..............................60
N. Assumption Regarding Business of the Reorganized Company ...........61
i
<PAGE> 3
Page
----
VII. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS ..............................61
VIII. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN .............67
A. Alternative Chapter 11 Plans .......................................67
B. Liquidation Under Chapter 7 ........................................67
IX. CONCLUSION AND RECOMMENDATION ...........................................68
EXHIBITS
Page
Exhibit A First Amended Joint Plan of Reorganization of Cityscape
Financial Corp. and Cityscape Corp. Under Chapter 11 of
the Bankruptcy Code ............................................A-1
Exhibit B Examiner Report Pursuant to Order of October 20, 1998 ..........B-1
Exhibit C Unaudited Proforma Consolidated Balance Sheet and
Projected Financial Information ................................C-1
Exhibit D Liquidation Analysis ...........................................D-1
ii
<PAGE> 4
I. INTRODUCTION
On October 6, 1998, Cityscape Financial Corp. ("Cityscape") and Cityscape
Corp. ("CSC" together with Cityscape, the "Debtors") filed voluntary petitions
for relief under chapter 11 of title 11 of the United States Code (the
"Bankruptcy Code"). The Debtors hereby submit this First Amended Joint
Disclosure Statement Pursuant to Section 1125 of the Bankruptcy Code (the
"Disclosure Statement") in connection with their solicitation of acceptances of
their First Amended Joint Plan of Reorganization (the "Plan"), a copy of which
is annexed hereto as Exhibit A. The purpose of this Disclosure Statement, in
accordance with the requirements of Section 1125 of the Bankruptcy Code, is to
provide "adequate information" concerning the Plan, of a kind and in sufficient
detail to enable a hypothetical, reasonable investor, typical of holders of the
classes of claims or interests being solicited, to make an informed judgment
whether to accept or reject the Plan. This Disclosure Statement should be read
in conjunction with the Plan and the other exhibits to this Disclosure Statement
and to the Plan.
The Plan is being distributed, with Ballots, to holders of Claims in
Classes 4, 4a, 5, 5a, 6 and 6a, the Classes of Claims that are Impaired and
entitled to vote under the Plan, in order to solicit their acceptance of the
Plan. Holders of Claims in Classes 1, 2a et seq. and 3 are deemed to have
accepted the Plan because their respective Claims are not Impaired, and such
Holders are therefore not entitled to vote on the Plan. Accordingly, the votes
of Holders of Claims in such Classes are not being solicited. For a description
of the Classes of Claims and Interests and their treatment under the Plan, see
Section IV, "THE PLAN OF REORGANIZATION -- Treatment of Claims and Interests
Under the Plan."
The Debtors are seeking the acceptance of the Plan by Holders of Claims in
Classes 4, 4a, 5, 5a, 6 and 6a. The Debtors have prepared this Disclosure
Statement in connection with their solicitation of acceptances of the Plan. The
Bankruptcy Court has entered an order dated ____ ___, 1999 approving this
Disclosure Statement as containing information of a kind and in sufficient
detail to enable a hypothetical, reasonable investor, typical of each of the
holders of Classes of Claims being solicited, to make an informed judgment
whether to accept the Plan. Such approval by the Bankruptcy Court does not
constitute a recommendation of the Plan by the Bankruptcy Court.
Section 1129(a) of the Bankruptcy Code allows the Bankruptcy Court to
confirm a plan if certain conditions have been met and if each class of claims
and interests that is impaired under the plan has voted to accept the plan.
Under Section 1126(c) of the Bankruptcy Code, a class of claims has accepted a
plan if such plan has been accepted by creditors in that class that hold at
least two-thirds in dollar amount and more than one-half in number of the
allowed claims of such class held by creditors that have voted to accept or
reject such plan, excluding holders whose acceptances or rejections were found
not to be in good faith. Under Section 1126(d) of the Bankruptcy Code, a class
of equity interests has accepted a plan if such plan has been accepted by
holders of such interests that hold at least two-thirds in amount of the allowed
interests of such class held by holders of such interests that have voted to
accept or reject such plan, excluding holders whose acceptances or rejections
were found not to be in good faith.
Under the Bankruptcy Code, only those Claims, the holders of which vote to
accept or reject the Plan, will be counted for purposes of determining
acceptance or rejection by any Impaired Class of Claims. Therefore, the Plan
could be approved by any Impaired Class of Claims with the affirmative vote of
significantly less than two-thirds in total dollar amount and one-half in total
number of such Claims. However, even if the Holders of all Claims in Classes
Impaired and entitled to vote under the Plan accept or are deemed to have
accepted the Plan, the Plan is subject to certain requirements under the
Bankruptcy Code and might not be confirmed by the Bankruptcy Court. Any voting
class that fails to accept the Plan will be deemed to have rejected the Plan.
Section 1129(b) of the Bankruptcy Code permits the confirmation of a plan
notwithstanding the non-acceptance of such plan by one or more of the classes of
claims or interests impaired thereunder if (i) at least one impaired class of
claims accepts the plan (such acceptance to be determined without giving effect
to any acceptances of "insiders," as such term is defined in Section 101 of the
Bankruptcy Code) and (ii) the Bankruptcy Court finds that, with respect to the
non-accepting class or classes, the plan does not discriminate unfairly and is
fair and equitable. The Debtors reserve the right to seek confirmation of the
Plan under Section 1129(b) of the Bankruptcy Code if any class of Claims
entitled to vote on the Plan votes to reject the Plan.
3
<PAGE> 5
The Debtors are soliciting votes for the acceptance of the Plan from the
Holders of Claims in Classes 4, 4a, 5, 5a, 6 and 6a. The Debtors believe that
the Plan provides the best possible result for all Holders of Claims. The
Debtors believe further that, under the Plan, Holders of Claims will receive a
greater recovery than such Holders would receive if the Debtors' chapter 11
cases were converted to cases under chapter 7 of the Bankruptcy Code or if the
Debtors' assets were sold incident to a chapter 11 plan.
All capitalized terms contained in this Disclosure Statement shall, unless
otherwise defined herein, have the meanings ascribed to such capitalized terms
in the Plan.
IMPORTANT INFORMATION
TO BE COUNTED, YOUR BALLOT MUST BE RECEIVED BY 5:00 P.M. NEW YORK CITY
TIME, ON [____ ___,] 1999. BALLOTS SHOULD BE MAILED OR DELIVERED TO: CITYSCAPE
FINANCIAL CORP. AND CITYSCAPE CORP., C/O [___].
THE DEBTORS BELIEVE THAT THE PLAN PROVIDES THE BEST POSSIBLE RESULT FOR
ALL HOLDERS OF CLAIMS AND INTERESTS.
THIS DISCLOSURE STATEMENT DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN
ANY STATE OF OTHER JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED.
THIS DISCLOSURE STATEMENT IS PROVIDED FOR USE SOLELY BY HOLDERS OF CLAIMS
AND INTERESTS, AND THEIR ADVISORS, IN CONNECTION WITH THEIR DETERMINATION TO
ACCEPT OR REJECT THE PLAN.
NONE OF THE NEW COMMON STOCK TO BE ISSUED ON THE EFFECTIVE DATE HAS BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR
BY ANY STATE SECURITIES COMMISSION OR SIMILAR PUBLIC, GOVERNMENTAL OR REGULATORY
AUTHORITY, AND NEITHER THE SEC NOR ANY SUCH AUTHORITY HAS PASSED UPON THE
ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT
OR UPON THE MERITS OF THE PLAN. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
HOLDERS OF CLAIMS AND INTERESTS SHOULD NOT CONSTRUE THE CONTENTS OF THIS
DISCLOSURE STATEMENT AS PROVIDING ANY LEGAL, BUSINESS, FINANCIAL OR TAX ADVICE.
EACH SUCH HOLDER SHOULD, THEREFORE, CONSULT WITH HIS, HER OR ITS OWN LEGAL,
BUSINESS, FINANCIAL AND/OR TAX ADVISORS AS TO ANY SUCH MATTERS CONCERNING THE
PLAN AND THE TRANSACTIONS CONTEMPLATED THEREBY.
THE SUMMARY OF THE PLAN CONTAINED HEREIN DOES NOT PURPORT TO BE COMPLETE AND IS
SUBJECT, AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, THE PROVISIONS OF THE
PLAN, WHICH IS ATTACHED HERETO AS EXHIBIT A.
4
<PAGE> 6
II. PLAN SUMMARY AND KEY CONSIDERATIONS.
The following summary is qualified in its entirety by reference to the
more detailed information appearing elsewhere in this Disclosure Statement, to
the Plan and to the exhibits to this Disclosure Statement and to the Plan. This
summary does not purport to be complete and should not be relied upon for voting
purposes. A more complete description of the Plan is provided in Section IV,
"THE PLAN OF REORGANIZATION."
All Holders of Claims whose votes are being solicited are hereby advised
and encouraged to read this Disclosure Statement, the Plan and the exhibits to
this Disclosure Statement and to the Plan in their entirety before voting to
accept or reject the Plan.
A. Plan Summary
As described more fully below, the Plan provides for substantive
consolidation of the assets of Cityscape and CSC and for distributions to
creditors as summarized below. Estimated recoveries are based upon (i) principal
of and accrued and unpaid interest on Old Senior Notes and Old Subordinated
Debentures as of the Petition Date, and (ii) an estimated, aggregate amount of
Allowed Claims in Classes 5 and 5a of $10,000,000.
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
Estimated
Class Description Treatment Recovery
- - ----- ----------- --------- --------
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
N/A Administrative Claims Each Holder will be paid Cash 100%
(Unclassified) equal to the full amount of its
Claim on, or as soon as
practicable after, the later of
the Effective Date and the day
on which such Claim becomes an
Allowed Claim, unless (i) the
Holder and the Debtors or the
Reorganized Company agree to
other treatment, or (ii) an
order of the Bankruptcy Court
provides for other terms.
- - --------------------------------------------------------------------------------
N/A Priority Tax Claims Each Holder will receive, at the 100%
(Unclassified) sole option of the Reorganized
Company (i) Cash equal to the
unpaid portion of such Holder's
Claim, or (ii) equal quarterly
cash payments in an aggregate
amount equal to such Claim,
together with interest at a
fixed annual rate to be
determined by the Bankruptcy
Court or otherwise agreed to by
the Holder and the Reorganized
Company over a period through
the sixth anniversary of the
date of assessment of such
Claim, or upon other terms
approved by the Bankruptcy
Court.
- - --------------------------------------------------------------------------------
1 Bank Claims Unimpaired. To the extent there 100%
are any Allowed Bank Claims as
of the Effective Date, each
Holder of an Allowed Bank Claim
will be paid in full in Cash on
the Effective Date. Class 1 is
Unimpaired and, accordingly, is
not entitled to vote on the
Plan.
- - --------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 7
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
Estimated
Class Description Treatment Recovery
- - ----- ----------- --------- --------
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
2a et Other Secured Claims Unimpaired. Either (i) the Claim 100%
seq. (other than Secured will be left unaltered, (ii) any
Claims in Class 1) default with respect thereto
(other than a default of a kind
specified in Section 365(b)(2)
of the Bankruptcy Code) will be
cured, the maturity thereof will
be reinstated and the Holder
thereof will be compensated for
any damages, or (iii) the Claim
will receive such other
treatment to which the Holder
consents. Class 2a et seq. is
Unimpaired and, accordingly, is
not entitled to vote on the
Plan.
- - --------------------------------------------------------------------------------
3 Priority Claims Unimpaired. Each Holder will 100%
receive cash equal to the amount
of such Claim, or such other
treatment, as determined by the
Bankruptcy Court, required to
render such Claim Unimpaired.
Class 3 is Unimpaired and,
accordingly, is not entitled to
vote on the Plan.
- - --------------------------------------------------------------------------------
4 and Senior Note Claims Impaired. Each Holder of an 18.9%
4a and Small Senior Note Allowed Class 4 Claim will
Claims receive a Pro Rata portion of
6,288,564 shares of New Common
Stock (i.e., one share of New
Common Stock for every $52.88 in
principal of and accrued
interest on such Holder's Old
Senior Notes). Each Holder of a
Class 4a Claim (i.e., Claims
represented by Old Senior Notes
of a principal amount of $5,000
or less) will receive Cash in an
amount equal to (i) $10.00,
multiplied by (ii) the number of
shares of New Common Stock that
such Holder would have been
entitled to receive as a Holder
of an Allowed Class 4 Claim;
provided, however, that any
Holder of a Class 4a Claim may
elect on a Ballot or otherwise
in writing to receive the
treatment afforded by Class 4
(i.e., New Common Stock) rather
than Class 4a (i.e., Cash).
Class 4 and Class 4a are
Impaired and, accordingly,
Holders of such Claims will be
entitled to vote on the Plan.
- - --------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 8
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
Estimated
Class Description Treatment Recovery
- - ----- ----------- --------- --------
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
5 and General Unsecured Claims Impaired. Each Holder of an 14.2%
5a and Small Unsecured Allowed Class 5 Claim will
Claims receive on account of such
Allowed Claim one share of New
Common Stock for every $70.47 of
such Holder's Allowed Claim.
Each Holder of an Allowed Class
5a Claim (i.e., General
Unsecured Claims of $8,000 or
less) will receive Cash in an
amount equal to (i) $10.00,
multiplied by (ii) the number of
shares of New Common Stock that
such Holder would have been
entitled to receive as a Holder
of an Allowed Class 5 Claim;
provided, however, that any
Holder of a Class 5a Claim may
elect on a Ballot or otherwise
in writing to receive the
treatment afforded by Class 5
(i.e., New Common Stock) rather
than Class 5a (i.e., Cash).
Class 5 and Class 5a are
Impaired and, accordingly,
Holders of such Claims will be
entitled to vote on the Plan.
- - --------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 9
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
Estimated
Class Description Treatment Recovery
- - ----- ----------- --------- --------
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
6 and Subordinated Debenture Impaired. Each Holder of an 2.7%
6a Claims and Small Allowed Class 6 Claim will
Subordinated Debenture receive a Pro Rata portion of
Claims 369,524 shares of New Common
Stock (i.e., one share of New
Common Stock for every $369.82
in principal of and accrued
interest on such Holder's Old
Subordinated Debentures);
provided, however, that if Class
6 and Class 6a do not accept the
Plan, no New Common Stock (or
any other property) will be
distributed to Holders of
Allowed Class 6 Claims and any
New Common Stock that would have
been distributed to the Holders
of Class 6 Claims will be
distributed Pro Rata to the
Holders of Class 4 Claims. Each
Holder of an Allowed Class 6a
Claim (i.e., Claims represented
by Old Subordinated Debentures
of a principal amount of $50,000
or less) will receive Cash in an
amount equal to (i) $10.00,
multiplied by (ii) the number of
shares of New Common Stock that
such Holder would have been
entitled to receive as a Holder
of an Allowed Class 6 Claim;
provided, however, that (i) any
Holder of a Class 6a Claim may
elect on a Ballot or otherwise
in writing to receive the
treatment afforded by Class 6
(i.e., New Common Stock) rather
than Class 6a (i.e., Cash), and
(ii) if Class 6 and Class 6a do
not accept the Plan, no Cash (or
any other property) will be
distributed to Holders of
Allowed Class 6a Claims. Class 6
and Class 6a are Impaired and,
accordingly, Holders of such
Claims will be entitled to vote
on the Plan.
- - --------------------------------------------------------------------------------
7 Old Debt Securities Impaired. Holders will not 0%
Claims receive or retain any interest
or property under the Plan and
are, therefore, deemed to have
rejected the Plan. Accordingly,
Class 7 will not be entitled to
vote on the Plan.
- - --------------------------------------------------------------------------------
8 Interests of Holders Impaired. Holders will not 0%
of Old Series A receive or retain any interest
Preferred Stock or property under the Plan and
are, therefore, deemed to have
rejected the Plan. Accordingly,
Class 8 will not be entitled to
vote on the Plan.
- - --------------------------------------------------------------------------------
9 Old Series A Preferred Impaired. Holders will not 0%
Stock Securities Claims receive or retain any interest
or property under the Plan and
are, therefore, deemed to have
rejected the Plan. Accordingly,
Class 9 will not be entitled to
vote on the Plan.
- - --------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 10
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
Estimated
Class Description Treatment Recovery
- - ----- ----------- --------- --------
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
10 Interests of Holders of Impaired. Holders will not receive 0%
Old Series B Preferred or retain Plan and are,
Stock therefore, deemed to have any
interest or property under the
rejected the Plan. Accordingly,
Class 10 will not be entitled to
vote on the Plan.
- - --------------------------------------------------------------------------------
11 Old Series B Preferred Impaired. Holders will not 0%
Stock Securities Claims receive or retain any interest
or property under the Plan and
are, therefore, deemed to have
rejected the Plan. Accordingly,
Class 11 will not be entitled to
vote on the Plan.
- - --------------------------------------------------------------------------------
12 Interests of Holders of Impaired. Holders will not 0%
Old Cityscape Common receive or retain any interest
Stock or property under the Plan and
are, therefore, deemed to have
rejected the Plan. Accordingly,
Class 12 will not be entitled to
vote on the Plan.
- - --------------------------------------------------------------------------------
13 Interests of Holders of Impaired. Holders will not 0%
Old Stock Rights in receive or retain any interest
Cityscape and all Claims or property under the Plan and
Arising Out of Such Old are, therefore, deemed to have
Stock Rights rejected the Plan. Accordingly,
Class 13 will not be entitled to
vote on the Plan.
- - --------------------------------------------------------------------------------
14 Old Cityscape Common Stock Impaired. Holders will not 0%
and Old Warrant Securities receive or retain any interest
Claims or property under the Plan and
are, therefore, deemed to have
rejected the Plan. Accordingly,
Class 14 will not be entitled to
vote on the Plan.
- - --------------------------------------------------------------------------------
</TABLE>
Other Terms of the Plan
The Plan provides for certain releases by the Debtors of claims against
various parties (including the Debtors' officers and directors) which claims
relate in any way to Cityscape, CSC, the Company's trust indentures, the CIT
Facility (defined below), the Greenwich Facility (defined below), the DIP
Facilities (defined below), the Debtors, the Reorganization Cases, the Plan or
the Disclosure Statement. The Plan also provides for releases of such claims by
Holders of Class 4, 4a, 6 and 6a Claims provided that such Classes vote to
accept the Plan.
It is anticipated that the Board of Directors of Reorganized Cityscape
will consist of one to ten members. The Debtors have been advised by the
Unofficial Senior Noteholders' Committee that the members of the Board of
Directors will include D. Richard Thompson, Mark Lasry and Mark A. Neporent. Mr.
Thompson is a principal of Moulton (defined below) which is currently providing
consulting services to the Debtors, and a principal of Aegis Mortgage
Corporation, a mortgage banking firm headquartered in Houston, Texas. Mr. Lasry
is executive vice president at New York-based Amroc Investments. Mr. Neporent is
a former partner of the law firm of Schulte Roth & Zabel LLP ("Schulte Roth")
and is currently the Chief Operating Officer of Cerberus Capital Management L.P.
Schulte Roth has represented and continues to represent, Cerberus Partners,
L.P., a member of the Unofficial Senior Noteholders' Committee, in various
matters. The Debtors have been advised that Mr. Thompson has performed services
on behalf of Cerberus Partners, L.P. pursuant to a contractual relationship
between the parties. It is anticipated that the Board of Directors of
Reorganized CSC will consist of no less than one member. The Debtors have been
advised by the Unofficial Senior Noteholders' Committee that the members will be
the same as the members of Reorganized Cityscape's Board of Directors.
9
<PAGE> 11
The Debtors presently intend to seek to consummate the Plan and to cause
the Effective Date to occur on or about May 31, 1999. There can be no assurance,
however, as to when the Effective Date actually will occur Procedures for the
distribution of securities pursuant to the Plan, including matters that are
expected to affect the timing of the receipt of distributions by Holders and
that could affect the amount of distributions ultimately received by such
Holders, are described in Section IV.F, "THE PLAN OF REORGANIZATION --
Distributions Under the Plan."
Except as set forth in this paragraph, none of the Directors, executive
officers or affiliates of the Debtors or holders of 5% or more of the Old
Cityscape Common Stock, to the knowledge of the Company, hold any Old Senior
Notes, Old Subordinated Debentures or Old Cityscape Preferred Stock.
In making investment decisions, Holders of Claims in Classes 4, 4a, 5, 5a,
6 and 6a must rely on their own examination of the Debtors and the terms of the
reorganization, including the merits and risks involved. Each Holder in a
Solicited Class should consult with its own legal, business, financial and tax
advisors with respect to any such matters concerning this Disclosure Statement,
the Plan and the transactions contemplated hereby and thereby.
B. Recommendation
The Debtors and the Unofficial Committees strongly recommend that each
entity entitled to vote on the Plan vote to accept the Plan.
The Debtors and the Unofficial Committees believe that:
1. the Plan provides the best possible result for the Holders of Claims
and Interests;
2. with respect to each Impaired Class of Claims and Interests, the
distributions under the Plan are the same as or greater than the amounts that
would be received if the Debtors were liquidated under chapter 7 of the
Bankruptcy Code; and
3. acceptance of the Plan is in the best interests of the Holders of
Claims and Interests.
C. Certain Risk Factors
Prior to deciding whether to vote in favor of the Plan, Holders of Claims
in the Solicited Classes should consider carefully all of the information
contained in this Disclosure Statement, especially the factors mentioned in the
following paragraph and more fully described in Section VI "CERTAIN RISK
FACTORS."
Holders should consider that: (i) the projections contained herein (in
Exhibit C) are forward-looking and, as such, are inherently uncertain and,
although considered reasonable by management as of the date hereof, are subject
to significant risks that could cause actual results to differ materially from
those projected; (ii) upon consummation of the Plan and the transactions
contemplated thereby, the financial conditions and operating results of the
Reorganized Company may not be comparable to that reflected in the Debtors'
historical financial statements; (iii) the Debtors' loan origination, purchasing
and sale operations, if and when recommenced, and servicing operations, if
continued, are subject to substantial competition from a variety of national,
regional and local companies, some of which have substantially greater financial
resources than the Debtors; (ix) the Debtors' loan origination, purchasing and
sale operations, if and when recommenced, and servicing operations, if
continued, are subject to changes in interest rates, national, regional and
local economic conditions and demographic trends; (v) there is no existing
market for the New Common Stock and no assurance that one will develop following
the reorganization; (vi) the Debtors are highly regulated in each state in which
they do business and there can be no assurance that they will be allowed to
continue to do business in all such states; (vii) there are various factors that
could adversely affect the value of the properties securing the mortgages held
by the Debtors or held by the securitization trusts in which the Debtors hold
residual interests including various environmental risks; (viii) the sale of the
UK operations (described below) did not include the assumption of all
liabilities and, therefore, there may be claims asserted against the Debtors in
the future arising out of the former UK operations; and (ix) the value of
10
<PAGE> 12
distributions to Holders of Allowed Class 4, 4a, 5, 5a, 6 and 6a Claims
estimated herein could be diluted if more than $10,000,000 Class 5 and 5a Claims
are ultimately Allowed by the Bankruptcy Court.
D. Voting Instructions
The Debtors are seeking the acceptance of the Plan by holders of Senior
Note Claims (Class 4), General Unsecured Claims (Class 5) and Subordinated
Debenture Claims (Class 6).
A Ballot (Senior Note Claims -- [blue] ballot; General Unsecured Claims --
[pink] ballot; Subordinated Debenture Claims -- [gray] ballot), to be used to
accept or reject the Plan has been enclosed with all copies of this Disclosure
Statement mailed to Holders of Claims whose Claims are Impaired by provisions of
the Plan and who are entitled to vote on the Plan. Accordingly, this Disclosure
Statement (and the exhibits hereto), together with the accompanying Ballot and
the related materials delivered together herewith, are being furnished to
Holders of Senior Note Claims, General Unsecured Claims and Subordinated
Debenture Claims and may not be relied upon or used for any purpose other than
to determine whether or not to vote to accept or reject the Plan.
Notwithstanding the foregoing, any Claim that is the subject of an objection
filed on or before the Voting Deadline (defined below), which Claim has not been
determined or estimated for voting purposes by the Bankruptcy Court shall be
disallowed, for voting purposes, except to the extent and in the manner that the
Debtors indicate in their objection the Claim should be allowed for voting or
other purposes.
Ballots with respect to the Plan will be accepted by the Debtors until
5:00 p.m., New York City Time, on ____ __, 1999 (the "Voting Deadline"). Except
to the extent the Debtors so determine or as permitted by the Bankruptcy Court
pursuant to Bankruptcy Rule 3018, Ballots that are received after the Voting
Deadline will not be accepted or used by the Debtors in connection with the
Debtors' request for confirmation of the Plan.
The Debtors have retained [_____] as their voting and tabulation agent in
connection with the Plan (the "Voting Agent").
Consistent with the provisions of Rule 3018 of the Bankruptcy Rules, the
Debtors have fixed the Voting Record Date (the close of business, New York City
Time, on ____ _, 1999) as the time and date for the determination of Holders of
record of Claims in Classes 4, 4a, 6 and 6a who are entitled to vote on the
Plan. If the Holder of record of any Claim is not also the beneficial owner of
such Claim or Interest, the vote to accept or reject the Plan must be cast by
the beneficial owner of such Claim of Interest.
For purposes of voting by Classes 4, 4a, 6 and 6a to accept or reject the
Plan, the term "Holder" means a beneficial owner of Old Senior Notes or Old
Subordinated Debentures on the Record Date. A "beneficial owner" is the person
who enjoys the benefits of ownership of the securities (i.e., has a pecuniary
interest in the securities) even though title of the securities may be in
another name. The term "Holder" with respect to other Claims and Interests means
the person who holds such Claim or Interest in such Person's capacity as the
holder of such Claim or Interest. Only beneficial owners (or their authorized
signatories) of the Old Senior Notes and the Old Subordinated Debentures
(collectively, the "Voting Securities") and Holders of Class 5 and Class 5a
Claims as of the Petition Date (or transferees thereof) are eligible to vote on
the Plan.
All votes to accept or reject the Plan must be cast by using a Ballot.
Votes which are cast in any manner other than by using a Ballot will not be
counted.
Procedures For Classes 4, 4a, 6 and 6a:
For purposes of voting to accept or reject the Plan, if you hold Voting
Securities in physical certificated form that are registered in your own name,
you can vote on the Plan by completing the information requested on the ballot,
signing, dating, and indicating your vote on the ballot, and returning the
completed original ballot in the enclosed, pre-addressed, postage-paid envelope
so that it is actually received by the Voting Agent before the Voting Deadline.
Any beneficial owner holding Voting Securities in "street name" can vote on the
Plan in one of the two following ways:
11
<PAGE> 13
If your ballot has already been signed (or "prevalidated") by your nominee
(your broker, banker, bank, other nominee or their agent): You can vote on the
Plan by completing the information requested on the ballot, indicating your vote
on the ballot, and returning the completed original ballot in the enclosed,
preaddressed, postage-paid envelope so that it is actually received by the
Voting Agent before the Voting Deadline.
If your ballot has NOT been signed (or "prevalidated") by your nominee
(broker, bank, other nominee, or their agent): You can vote on the Plan by
completing the information requested on the ballot, signing, dating and
indicating your vote on the ballot, and returning the completed original ballot
to your nominee in sufficient time for your nominee then to forward your vote to
the Voting Agent so that it is actually received by the Voting Agent before the
Voting Deadline.
With respect to Voting Securities that are bearer securities held through
Euroclear (as defined below) or Cedel (as defined below), see the special
procedures for such Voting Securities set forth below.
If you are a brokerage firm, commercial bank, trust company or other
nominee which is the registered holder of Voting Securities, please forward a
copy of this Disclosure Statement, the appropriate ballot or ballots, and any
other enclosed materials to each beneficial owner, AND;
If you have signed (or "prevalidated") the ballot, the ballot should be
completed by the beneficial owner and returned by the beneficial owner directly
to the Voting Agent so that such ballot is actually received by the Voting Agent
before the Voting Deadline.
If you have NOT signed (or "prevalidated") the ballot, you must collect
the ballot and complete the master ballot, and deliver the completed original
master ballot to the Voting Agent so that it is actually received by the Voting
Agent before the Voting Deadline.
With respect to Voting Securities that are bearer securities held through
Euroclear or Cedel, see the special procedures for such Voting Securities set
forth below.
The Voting Agent will distribute Disclosure Statements, ballots, and other
materials to Euroclear and Cedel with a request that such Clearing Systems (as
defined below) distribute such materials to the beneficial owners of Voting
Securities through the participant firms holding accounts in such Clearing
Systems.
Participants in Euroclear and Cedel should generally follow the procedures
set forth in the immediately preceding section ("Brokerage Firms, Banks and
Other Nominees") by either "prevalidating" ballots or using master ballots, with
two exceptions, as follows:
(i) The party executing the ballot or master ballot (either the Clearing
System participant or the beneficial owner) should send the original
signed copy of the ballot, upon execution, by overnight courier and a copy
by telecopy to the Voting Agent. However, to be counted for purposes of
acceptance or rejection of the Plan the original of the ballot or master
ballot (not merely a telecopy thereof) must be actually received by the
Voting Agent before the Voting Deadline. The party executing the ballot
should retain a copy of the ballot.
(ii) Each participant in Euroclear and Cedel should also send a custody
instruction to Euroclear or Cedel, as applicable, that repeats the
substance of the information contained in each executed ballot. Euroclear
and Cedel will forward summaries of the substance of such custody
instructions to the Voting Agent thus confirming the validity of the
signed ballots.
Clearing Systems should arrange for their respective participants to vote
by executing an omnibus proxy, assignment letter form, or similar document, in
such participants' favor.
If your Ballot is damaged or lost, or if you do not receive a Ballot, you
may request a replacement by contacting:
[CONTACT INFORMATION FOR VOTING AGENT TO BE INSERTED]
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General Instructions for Classes 4, 4a, 5, 5a, 6 and 6a:
After carefully reviewing the Plan, including all exhibits thereto, and
this Disclosure Statement and its exhibits, please indicate your vote on the
enclosed Ballot and return it in the envelope provided. In voting to accept or
reject the Plan, please use only the Ballot sent to you with this Disclosure
Statement. Please complete and sign your Ballot in accordance with the
instructions set forth on the Ballot and return it in the enclosed envelope.
Any Ballot received which does not indicate either an acceptance or
rejection of the Plan or which indicates both an acceptance and rejection of the
Plan shall be deemed to be an acceptance of the Plan.
This Disclosure Statement has been approved by order of the Bankruptcy
Court dated _______ ___, 1999, as containing information of a kind and in
sufficient detail to enable a hypothetical, reasonable investor, typical of a
holder of a Claim, to make an informed judgment whether to accept or reject the
Plan. Approval of this Disclosure Statement by the Bankruptcy Court does not
constitute a ruling as to the fairness or merits of the Plan.
No statements or information concerning the Debtors or the Reorganized
Company or any of the assets or the business of the Debtors may be made or
should be relied upon, other than as set forth in this Disclosure Statement or
as may hereafter be authorized by the Bankruptcy Court. The statements and
information about the Debtors in this Disclosure Statement have been prepared by
the Debtors.
The Bankruptcy Court will hold a confirmation hearing at which the
Bankruptcy Court will consider objections to confirmation, if any, commencing at
__ __.m., New York City Time, on ______ __, 1999, United States Bankruptcy
Court, Southern District of New York, 300 Quarropas Street, White Plains, New
York 10601 (the "Confirmation Hearing"). The Confirmation Hearing may be
adjourned from time to time without notice other than the announcement of an
adjourned date at the Confirmation Hearing. Objections to Confirmation of the
Plan, if any, must be in writing and served and filed as described in Section
V.B, "CONFIRMATION AND CONSUMMATION PROCEDURES -- Confirmation Hearing."
IN ORDER FOR YOUR BALLOT TO BE COUNTED, YOUR BALLOT MUST BE COMPLETED AS
SET FORTH ABOVE AND RECEIVED BY THE VOTING DEADLINE (5:00 P.M., NEW YORK CITY
TIME, ON _____ __, 1999). BALLOTS SHOULD BE MAILED TO:
[______]
OR IF DELIVERED BY COURIER OR BY HAND, TO:
[______]
THE FOREGOING IS A SUMMARY. THIS DISCLOSURE STATEMENT AND THE EXHIBITS
HERETO SHOULD BE READ IN THEIR ENTIRETY BY ALL HOLDERS OF CLAIMS IN DETERMINING
WHETHER TO ACCEPT OR REJECT THE PLAN.
III. GENERAL INFORMATION
The Debtors have prepared this Disclosure Statement in connection with
their solicitation of acceptances of the Plan. No statements or information
concerning the Debtors or the Reorganized Company or their operations, or with
respect to the distributions to be made under the Plan, may be made or should be
relied upon other than as set forth in this Disclosure Statement or as may
hereafter be authorized by the Bankruptcy Court.
A. The Debtors
Cityscape is a consumer finance company that has been engaged in the
business of originating, purchasing, selling and servicing mortgage loans
secured primarily by one- to four-family residences. Through its wholly-owned
subsidiary CSC, Cityscape is licensed or registered to do business in 46 states
and the District of Columbia.
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The majority of Cityscape's loans were made to owners of single family
residences who used the loan proceeds for such purposes as debt consolidation
and financing of home improvements and educational expenditures, among others.
Cityscape was incorporated under the laws of the state of Delaware in
December 1988. CSC, Cityscape's principal operating subsidiary, was incorporated
under the laws of the state of New York in 1985. In January 1994, CSC acquired
Astrum Funding Corp. ("Astrum") which had operated as a mortgage banker in 11
states. In April 1994, Cityscape acquired all of the capital stock of CSC in an
acquisition in which the shareholders of CSC acquired beneficial ownership of
approximately 92% of the common stock (the "Old Cityscape Common Stock") of
Cityscape (the "CSC Acquisition"). In connection with the CSC Acquisition, the
Company changed its name to Cityscape Financial Corp.
The Debtors' principal executive offices are located at 565 Taxter Road,
Elmsford, New York 10523-2300. The Debtors' telephone number is (914) 592-6677.
B. Events Leading to the Chapter 11 Filing
In December 1997, the Debtors hired Jay Alix & Associates as their
restructuring consultants to review their business operations including
immediate liquidity needs. With the assistance of Jay Alix & Associates and the
Debtors' other professionals, the Debtors began a number of initiatives and
strategic alternatives to improve the Debtors' cash flow and liquidity which had
been adversely affected by their inability to issue debt securities and to
access the capital markets in general. These initiatives included the disposal
of loans through whole loan sales and an increased focus on the Debtors' higher
margin product lines. The Debtors also began to implement a restructuring plan
that included streamlining and downsizing their operations.
In order to raise cash to continue funding operations, the Debtors
completed the divestiture of certain of their interest-only and residual
certificates in January 1998. Additionally, and with the assistance of its
advisors, the Debtors negotiated and secured a new revolving credit facility
with The CIT Group/Equipment Financing, Inc. (as amended, the "CIT Facility") to
finance the origination and purchase of mortgage loans, repay certain
indebtedness and, subject to certain limitations, fund other general corporate
obligations. The CIT Facility was in addition to a secured "warehouse" credit
facility (the "Greenwich Facility") already provided by Greenwich Capital
Financial Products, Inc., an affiliate of Greenwich Capital Markets, Inc.
(together with any such affiliates, "Greenwich")
In addition, as a result of liquidity constraints, the Debtors adopted a
plan in March 1998 to sell the assets of City Mortgage Corporation Limited
("CSC-UK"), an English Corporation that originated, sold and serviced loans in
England, Scotland and Wales. 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 Debtors 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 the UK operations
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 Debtors or the Reorganized Company in the
future arising out of the former UK operations. Such claims could have a
material adverse effect on the Debtors or Reorganized 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)249.6 million, the acquisition by Ocwen Asset
of CSC-UK's securitized loan residuals for a price of (pound)33.7 million and
the assumption by Ocwen of (pound)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, cash and the assumed liabilities. As a
result of the sale, the Debtors received net proceeds at the time of the closing
of $83.8 million, net of closing costs and other fees.
In addition, the Debtors and CSC-UK had included in their net receivables
approximately $10 million due from Ocwen under the terms of the UK Sale
Agreement. Cityscape and CSC-UK, however, received a letter from Ocwen in which
Ocwen took the position that it was owed approximately $21.4 million in
connection with the transaction. The Debtors, CSC-UK and Ocwen have reached a
proposed settlement of the dispute, which proposed settlement provides for
distribution of approximately (pound)3.5 million, which was held back from the
purchase price
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under the U.K. Sale Agreement, as follows: (pound)1.5 million plus interest to
Ocwen and (pound)2.0 million to CSC-UK (in addition to (pound)1,744,228.71
already paid by Ocwen to CSC-UK in connection with the settlement of their
disputes). [The proposed settlement has been submitted to the Bankruptcy Court
for approval.]
While the foregoing actions might have enhanced the short-term financial
position of the Debtors, management concluded that the best alternative for
recapitalizing the Debtors over the long-term and maximizing the recovery for
creditors and senior equity interest holders was through a prepackaged plan. As
a result, the Debtors conducted intensive negotiations with various creditors in
an effort to enable the Debtors to restructure their indebtedness through a
prepackaged plan.
In connection with such negotiations, in April and May of 1998, three
Holders of the Old Senior Notes, (i) MacKay-Shields Financial Corporation, as
investment advisor to various funds, (ii) Cerberus Partners, L.P., and (iii)
Franklin Mutual Advisers, Inc., formed an informal group which became the
Unofficial Senior Noteholders' Committee. As of the date hereof, Franklin Mutual
Advisers, Inc. is no longer a member of the Unofficial Senior Noteholders'
Committee. The Unofficial Senior Noteholders' Committee retained Kasowitz,
Benson, Torres & Friedman LLP to serve as its special legal counsel. Throughout
May 1998, the Debtors engaged in discussions and negotiations with the
Unofficial Senior Noteholders' Committee on the terms of a proposed
restructuring for the Debtors. The Debtors were assisted in preparing for such
discussions and negotiations by Latham & Watkins (its restructuring counsel);
Gibson Dunn & Crutcher LLP (its corporate and litigation counsel); Jay Alix &
Associates (its consultant); and CIBC Oppenheimer (its financial advisor).
During the period of negotiations with the Unofficial Senior Noteholders'
Committee, the Debtors entered into agreements with members of the Unofficial
Senior Noteholders' Committee providing, among other things, that the Debtors
would supply the committee and its counsel with confidential information and
that the committee members would maintain the confidentiality of such
information. Negotiations between the Debtors and the Unofficial Senior
Noteholders' Committee culminated in the members' entering into a non-binding
letter of intent (the Letter of Intent") that outlined the terms of a plan of
reorganization that would be acceptable to the committee. The Debtors disclosed
the terms of the Letter of Intent to the public on June 1, 1998.
Immediately upon entering into the Letter of Intent, the Debtors entered
into negotiations concerning the restructuring with representatives of the Old
Subordinated Debentures, who formed the Unofficial Subordinated
Debentureholders' Committee. The Unofficial Subordinated Debentureholders'
Committee consisted of (i) Forest Investment Management, (ii) Bear, Stearns &
Co. Inc., (iii) KA Management (now known as Deephaven Market Neutral Trading
Limited), (iv) Tamar Securities Inc., (v) Aristeia Capital LLC, (vi) Zazove
Associates, LLC, (vii) J. Robbins Securities, LLC, (viii) RAS Securities Corp.,
(ix) D.A. Davidson & Co., (x) Donaldson, Lufkin & Jenrette Securities
Corporation, (xi) Mercantile Bank, (xii) Mellon Bank, as trustee for General
Motors Employees Domestic Group Pension Trust, and (xiii) Ramat Securities Ltd.
As of the date hereof, Zazove Associates, LLC is no longer a member of the
Unofficial Subordinated Debentureholders' Committee. The Unofficial Subordinated
Debentureholders' Committee retained Kramer Levin Naftalis & Frankel LLP to
serve as its special legal counsel. As with the Unofficial Senior Noteholders'
Committee, the Debtors entered into agreements with members of the Unofficial
Subordinated Debentureholders' Committee providing, among other things, that the
Debtors would supply the committee and its counsel with confidential information
and that the committee members would maintain the confidentiality of such
information.
After extensive negotiations among various combinations of the Unofficial
Subordinated Debentureholders' Committee, the Unofficial Senior Noteholders'
Committee and the Debtors, the three parties achieved agreement on the terms of
a restructuring for the Debtors which formed the basis for the original plan of
reorganization (the "Original Plan"). That agreement was reflected in the
Agreement Concerning Voting dated as of July 29, 1998 by and between the
Debtors, each member of the Unofficial Senior Noteholders' Committee and each
member of the Unofficial Subordinated Debentureholders' Committee which
agreement provided for, among other things, the support by the members of such
committees for a plan of reorganization embodying the agreed upon terms. The
Debtors agreed to reimburse both Unofficial Committees for the reasonable fees
and expenses of their respective counsel.
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<PAGE> 17
The Debtors' objective was to recapitalize the Debtors through a
prepackaged chapter 11 bankruptcy filing in which all necessary consents would
be solicited and received in accordance with applicable law prior to commencing
the chapter 11 cases. Accordingly, the Debtors prepared a Solicitation and
Disclosure Statement dated August 28, 1998. On August 29, 1998, the Debtors
commenced a solicitation of votes on the Original Plan (the "Prepetition
Solicitation"). After receiving overwhelming acceptance of the Original Plan by
all but one of the classes entitled to vote on the Original Plan, the Debtors
filed the reorganization cases and requested that the Court schedule a hearing
on confirmation of the Original Plan as soon as possible. The Court granted the
relief requested and set a hearing on confirmation of the Original Plan for
November 13, 1998 (the "Original Confirmation Hearing"). Although the Debtors
and other parties with an economic stake in the reorganization anticipated that
the Original Plan would be confirmed at the Original Confirmation Hearing,, the
Original Plan was not confirmed due primarily to fluctuating market conditions
and the Debtors' inability to obtain necessary exit financing to allow them to
emerge from chapter 11. As a result, the Debtors have revised the Original Plan,
as reflected in the First Amended Joint Plan of Reorganization attached as
Exhibit A hereto.
In accordance with an agreement with CIBC Oppenheimer, effective January
15, 1998, and in contemplation of and shortly before the commencement of the
Prepetition Solicitation, the Debtors paid a success fee to CIBC Oppenheimer of
$1,132,000 (in addition to prior payment of a fee in connection with the UK Sale
of $768,000, payment of monthly advisory fees totaling $800,000 since January
15, 1998 and reimbursement of out-of-pocket expenses). In addition, the Debtors'
agreement with Jay Alix & Associates ("JA&A"), dated December 19, 1997, provided
for payment of a success fee under certain circumstances (in addition to
periodic payment of fees at their normal hourly rates and reimbursement of their
out-of-pocket expenses. The success fee was based upon (i) reduction in domestic
operating expenses, (ii) the elimination of the need for funding Cityscape's
U.K. operations, and/or (iii) confirmation of a plan of reorganization within
twelve months. In settlement of any claim JA&A might have had with respect to
any and all components of the success fee (which claim could have exceeded $1.25
million), JA&A agreed to accept $450,000 prior to the filing of the chapter 11
cases (which amount has been paid) and to defer payment of an additional
$450,000, which claim was assigned to System Advisory Group, LLC, a wholly-owned
subsidiary of JA&A.
Prior to the filing of the chapter 11 cases, the Debtors entered into a
consulting agreement with Moulton, Inc. ("Moulton"). The agreement provides that
Moulton will assist the Debtors by providing consulting services related to the
Debtors' mortgage banking operations. Such services are being provided by the
principal of Moulton, D. Richard Thompson. While performing under the terms of
the agreement, Moulton devotes a substantial portion of its full time and
attention to the business and affairs of the Debtors. Pursuant to the agreement,
the Debtors pay Moulton a $50,000 per month consulting fee plus reimbursement
for reasonable expenses actually incurred in accordance with the Debtors'
standard policies. In addition, services of Karen Thompson, Mr. Thompson's
associate who is also his wife, as well as-other associates, are billed at
additional, appropriate hourly rates.
C. Significant Events During the Chapter 11 Cases
Filing of the Chapter Ii Petitions
Cityscape and CSC filed voluntary petitions for relief under chapter 11 of
the Bankruptcy Code on October 6, 1998 in the United States Bankruptcy Court for
the Southern District of New York. The Bankruptcy Court has ordered that
Cityscape's and CSC's cases be jointly administered for procedural purposes.
Retention of Professionals by the Debtors
The Debtors have retained the following professionals to represent and
advise them in connection with their chapter 11 cases:
Bankruptcy Counsel
Latham & Watkins
885 Third Avenue, Suite 1000
New York, New York 10022
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Special Litigation and Corporate Counsel
Gibson, Dunn & Crutcher LLP
200 Park Avenue
New York, NY 10166
Restructuring Advisors
Jay Alix & Associates
575 Fifth Avenue, 21st Floor
New York, NY 10017
(not currently providing services)
- and -
Independent Auditors
(Proposed but not yet approved by the Bankruptcy Court)
[KPMG LLP
757 Third Avenue
New York, NY 10017]
Appointment of Official Committees
To date, no official committees have been appointed in the Debtors'
chapter 11 cases. However, two unofficial committees have been participating in
these cases, including in the negotiations of the terms of the Plan. The members
of the unofficial committees and their respective attorneys, as of the date of
the filing of this Disclosure Statement, are set forth below:
Unofficial Senior Noteholders' Committee
MacKay Shields Financial Corp.,
as advisor to The Main Stay Funds
9 West 57th Street
New York, NY 10019
Cerberus Partners, L.P.
450 Park Avenue
28th Floor
New York, New York 10022
Attorneys
Kasowitz, Benson, Torres & Friedman, LLP
1301 Avenue of the Americas
New York, NY 10019
Unofficial Subordinated Debentureholders' Committee
Aristeia Capital LLC
277 Park Avenue, 27th Fl.
New York, NY 10172
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Bear Stearns
245 Park Avenue
New York, NY 10167
Commonwealth Associates
830 Third Avenue
New York, NY 10022
D.A. Davidson & Co.
P.O. Box 423
Spokane, WA 99210
Donaldson, Lufkin & Jenrette
277 Park Avenue
New York, NY 10172
Forest Investment Management
53 Forest Avenue
Old Greenwich, CT 06870
J. Robbins Securities, LLC
5353 N. 16th Street, #19
Phoenix, AZ 85016
Deephaven Market Neutral Trading Limited
1712 Hopkins Crossroad
Minnetonka, MN 55305
Mellon Bank Trustee for General
Motors Employees Domestic Group Pension Trust
767 Fifth Avenue
New York, NY 10153
Mercantile Bank
P.O. Box 524
St. Louis, MO 63166
Mercantile Bank
Tram 20-4
Seventh & Washington
St. Louis, MO 63101
Ramat Securities Ltd.
23811 Chagrin Blvd.
Suite 200
Beachwood, OH 44122
RAS Securities Corp.
50 Broadway
New York, NY 10004
Tamar Securities Inc.
23811 Chagrin Blvd., Suite 200
Beachwood, OH 44122
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Attorneys
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, New York 10022
The DIP Facilities
The Debtors received separate commitments for debtor-in-possession
financing in the aggregate amount of up to $250 million from two lenders.
Greenwich committed to provide up to $100 million and CIT (together with Nomura
Securities International, Inc.) committed to provide up to $150 million in the
form of two separate revolving credit facilities. On October 27, 1998, the
Bankruptcy Court signed final orders approving the two debtor-in-possession
financing facilities. The Debtors used the funds provided by Greenwich to repay
all amounts outstanding under the prepetition Greenwich Facility and to operate
their business during the pendency of the Reorganization Cases. The Debtors used
the funds provided by CIT to repay all amounts outstanding under the prepetition
CIT Facility and to operate their business during the pendency of the
Reorganization Cases.
Under each DIP Facility, the borrower was CSC with its obligations
guaranteed by Cityscape. The obligations under each DIP Facility were secured
and constituted an allowed administrative expense of the Reorganization Cases
having priority over all administrative expenses of the kind specified in
Sections 503(b) or 507(b) of the Bankruptcy Code and all unsecured claims other
than a "carve-out" for certain expenses pertaining to the administration the
Reorganization Cases, such carve-out to be limited in dollar amount after the
occurrence and during the continuance of an event of default under the
applicable DIP Facility (the "Carve-Out"). As to priority of payment, the DIP
Facilities rank pari passu with each other. The DIP Facilities provided to the
Debtors, in the case of CIT, an amount not to exceed $150 million and, in the
case of Greenwich, an amount not to exceed $100 million on a revolving basis
with the amount available under either facility calculated based upon separate
borrowing base formulas which each took into account the quality and amount of
the collateral available to secure the obligations thereunder. Each DIP Facility
was secured by liens on substantially all of the assets of the Debtors (as well
as the capital stock of CSC held by Cityscape), subject to the Carve-Out and to
pre-existing valid and perfected liens (including the liens securing the
Greenwich Facility and the CIT Facility). The relative priority of Greenwich and
CIT with respect to the various elements of collateral was the subject of
intercreditor arrangements between Greenwich and CIT. The DIP Facilities also
contained covenants and events of default that are customarily found in credit
agreements involving mortgage lenders and debtors-in-possession.
After the Debtors suspended originating loans on or about December 18,
1998 (discussed below), their need for drawing on the DIP Facilities diminished.
Thereafter, as the Debtors sold their "warehoused" loans, they used the proceeds
to repay their indebtedness under the DIP Facilities and anticipate repaying
such indebtedness in full prior to the time of the Confirmation Hearing.
Suspension of Loan Originations
On November 17, 1998, the Debtors decided to suspend indefinitely all of
their loan origination and purchase activities. The Debtors notified their
brokers that they had ceased funding mortgage loans, other than loans that were
in their origination pipeline for which they had issued commitments. The
Debtors' decision was based upon their determination, following discussions with
potential lenders regarding post-reorganization "warehouse" financing, that
adequate sources of such financing were not available. With no adequate sources
of such financing, the Debtors determined that they were unable to continue to
originate and purchase mortgage loans. On or about December 18, 1998, the
Debtors funded the last of the mortgage loans for which they had issued
commitments as of November 17, 1998.
Other Relief Granted
In addition to obtaining Bankruptcy Court approval of the
debtor-in-possession financing, the Debtors, in conjunction with filing their
petitions, filed various motions seeking orders that were entered by the
Bankruptcy Court. The relief sought included:
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<PAGE> 21
Application for Order Authorizing the Debtors to Honor their Prepetition
Commitments to Fund Customer Loans, Granting Superpriority Administrative
Expense Status to Amounts Advanced by CIT to Honor Obligations to Customers, and
Authorizing Debtors to Continue Certain Interest Advance/Repayment Procedures,
to Sell Portfolios of Loans and to Honor Customary Representations and
Warranties Given by the Debtors in Connection with the Sale of Loans: The
Bankruptcy Court entered an order authorizing the Debtors, among other things,
to honor their prepetition commitments to fund customer loans, to sell
portfolios of loans and to honor customary representations and warranties given
by the Debtors in connection with the sale of loans in the ordinary course of
business.
Application for Authority to Pay Prepetition Trade Creditors in the
Ordinary Course: The Debtors obtained authority from the Bankruptcy Court to pay
Trade Claims in the ordinary course of their business with respect to those
vendors that continued to ship goods on customary trade terms.
Assumption and Rejection of Executory Contracts and Unexpired Leases
Since the Petition Date, the Debtors have undertaken a comprehensive
review and evaluation of their various unexpired, nonresidential real property
leases and various executory contracts. Based on this review and because of the
substantial downsizing of the Debtors' business, the Debtors have rejected four
leases of nonresidential real property and six leases relating to equipment,
maintenance and information systems software. In the likely event the Debtors
determine, in their business judgment, that they no longer need other leases and
contracts, the Debtors will file the appropriate motion(s) to reject such leases
and contracts with the Bankruptcy Court.
Deadline to File Proofs of Claim
On February 11, 1999, the Debtors filed a motion requesting that the
Bankruptcy Court enter an order (the "Bar Date Order") setting March 22, 1999,
at 5:00 p.m., New York City Time (the "Bar Date"), as the date and time by which
proofs of claim against the Debtors' chapter 11 estates had to be filed, which
order was granted on February 22, 1999. The Bar Date Order required each person
or entity (including, without limitation, each individual, partnership, joint
venture, corporation, estate, trust and governmental unit) that asserted a
"claim" (as such term is defined in Section 101(5) of the Bankruptcy Code)
against one or both of the Debtors which claim arose on or prior to the Petition
Date to file an original written proof of claim so as to be received on or
before March 22, 1999, at 5:00 p.m. New York City Time by the Clerk of the
United States Bankruptcy Court for the Southern District of New York (the "Clerk
of the Court"), United States Courthouse, 300 Quarropas Street, 2nd Floor, White
Plains, New York 10601-5008.
The Bar Date Order further provides that the following persons or entities
were not required to file a proof of claim by the Bar Date: (i) any person or
entity whose claim already has been fully paid by the Debtors; (ii) any person
or entity that already has filed a proof of claim against the Debtors with the
Clerk of the United States Bankruptcy Court for the Southern District of New
York, using a form which conforms substantially to Official Form Number 10;
(iii) any person or entity whose claim has already been allowed by order of the
Court entered on or before the Bar Date; (iv) any person or entity whose claim
is listed on the Debtors' schedules filed with the Court which claim is not
listed as "contingent," "unliquidated," or "disputed," and who does not dispute
the listed amount or priority of such claim; (v) any person or entity whose
claim has arisen from the Debtors' rejection of an executory contract or
unexpired lease (the assertion of which claims has been or will be subject to
separate orders of the Court); (vi) any person or entity holding a claim for an
administrative expense, as such term is used in Sections 503(b) and 507(a)(1) of
the Bankruptcy Code; (vii) any holder of a claim against the Debtors that, if
allowed, would fall within Class A7 (Old Debt Securities Claims), Class A9 (Old
Series A Preferred Stock Securities Claims), Class A11 (Old Series B Preferred
Stock Securities Claims), Class A13 (Claims Arising Out of Old Stock Rights)
and Class A14 (Old Cityscape Common Stock and Old Warrant Securities Claims)
under the Original Plan; and (viii) any Holder of Old Senior Notes, or Old
Subordinated Debentures whose claim is based upon the principal of or accrued
interest on such Holders' Old Senior Notes or Old Subordinated Debentures.
At the beginning of the chapter 11 cases, the Debtors requested the entry
of an order setting the last day for filing proofs of claim by any holder of a
claim against the Debtors that, if allowed, would fall within Class A7 (Old Debt
Securities Claims), Class A9 (Old Series A Preferred Stock Securities Claims),
Class A11 (Old Series B
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Preferred Stock Securities Claims), Class A13 (Claims Arising Out of Old Stock
Rights) and Class A14 (Old Cityscape Common Stock and Old Warrant Securities
Claims) under the Original Plan. The Bankruptcy Court signed such an order on or
about October 9, 1998, setting November 9, 1998 as the last day for filing
proofs of such claims.
Appointment of Examiner
On October 7, 1998 Elliott Associates, L.P. and Westgage International,
L.P. (together "Elliott") moved, pursuant to Section 1104(c) of the Bankruptcy
Code for entry of an order appointing an examiner. On October 20, 1998, the
Bankruptcy Court held a hearing and entered an order authorizing the appointment
of an examiner setting guidelines and time limits for the examiner's
investigation ("Examiner Order").
Pursuant to the Examiner Order, the examiner was charged with conducting
an investigation and reporting on the following issues by 5:00 p.m. New York
City time on November 9, 1998:
(a) Whether the facts relating to the Debtors' restatements of their
financial statements and write-downs of assets for the period beginning
with the quarter ended June 30, 1996 may give rise to potential claims of
the Debtors' Estates against certain parties, (or any other of the
Debtors' current and former officers and directors) and/or the Debtors'
financial advisors and other professionals (a "Potential Claim");
(b) The results of any investigations with regard to the
restatements of the Debtor's financial statements and writedowns of assets
performed by the Debtors, any special committee of the Debtors' boards of
directors or any independent third-party;
(c) The extent to which, if at all, any person who may be liable on
a Potential Claim and who is being released under the Plan is contributing
to the Plan;
(d) The facts and circumstances with respect to alleged short sales
of the Debtors' common stock during 1997 and 1998 by certain parties (or
any other of the Debtors' current and former officers and directors)
and/or the Debtors' financial advisors and other professionals;
(e) The extent to which the proceeds of insurance policies of the
Debtors that might cover a Potential Claim are being used to fund payments
under the Plan
(f) The extent to which the proceeds of insurance policies of the
Debtors might be available to satisfy Potential Claims.
On October 22, 1998 the Court approved the appointment of Harrison J.
Goldin as Examiner. The Examiner issued a report on November 9, 1998. A copy of
the "Examiner Report Pursuant to Order of October 20, 1998" is attached hereto
as Exhibit "B".
Inability to Confirm Original Plan
Although the Debtors and other parties with an economic stake in the
Debtors' reorganization anticipated that the Original Plan would be confirmed at
a confirmation hearing originally scheduled for November 13, 1998, the Original
Plan was not confirmed, due primarily to fluctuating market conditions and the
Debtors' inability to obtain necessary exit financing to allow them to emerge
from chapter 11. As a result, the Debtors have revised the Original Plan, as
reflected in the First Amended Joint Plan of Reorganization attached as Exhibit
A hereto.
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IV. THE PLAN OF REORGANIZATION
A. Overview of the Plan
Brief Explanation of Chapter 11
Chapter 11 is the principal business reorganization chapter of the
Bankruptcy Code. Under chapter 11 of the Bankruptcy Code, a debtor is authorized
to reorganize its business for the benefit of itself and its creditors and
stockholders. In addition to permitting rehabilitation of the debtor, another
goal of chapter 11 is to promote equality of treatment of creditors and equity
security holders, respectively, who hold substantially similar claims or
interests with respect to the distribution of the value of a debtor's assets. In
furtherance of these two goals, upon the filing of a petition for relief under
chapter 11, Section 362 of the Bankruptcy Code generally provides for an
automatic stay of substantially all acts and proceedings against the debtor and
its property, including all attempts to collect claims or enforce liens that
arose prior to the commencement of the debtor's chapter 11 case.
The consummation of a plan of reorganization is the principal objective of
a chapter 11 case. A plan of reorganization sets forth the means for satisfying
claims against and interests in a debtor. Confirmation of a plan of
reorganization by the Bankruptcy Court makes the plan binding upon the debtor,
any issuer of securities under the plan, any person or entity acquiring property
under the plan and any creditor of or equity security holder in the debtor,
whether or not such creditor or equity security holder (i) is impaired under or
has accepted the plan or (ii) receives or retains any property under the plan.
Subject to certain limited exceptions and other than as provided in the plan
itself or the confirmation order, the confirmation order discharges the debtor
from any debt that arose prior to the date of confirmation of the plan and
substitutes therefor the obligations specified under the confirmed plan, and
terminates all rights and interests of prepetition equity security holders.
The following is an overview of certain material provisions of the Plan of
the Debtors, which is attached hereto as Exhibit A. The following summaries of
the material provisions of the Plan do not purport to be complete and are
qualified in their entirety by reference to all the provisions of the Plan,
including all exhibits thereto, all documents described therein and the
definitions therein of certain terms used below. Wherever defined terms of the
Plan not otherwise defined in this Disclosure Statement are used, such defined
terms shall have the meanings assigned to them in the Plan.
Solicitation of Acceptances of the Plan
Under the Plan, all Claims and Interests have been separated into fourteen
(14) classes, and each Class has been determined to be either Impaired or
Unimpaired by the Plan's terms. Except as discussed below under Section V.C,
"CONFIRMATION AND CONSUMMATION PROCEDURES -- Confirmation," as a condition to
confirmation, Section 1129(a) of the Bankruptcy Code requires that (i) each
impaired class of claims and interests that receives or retains property under a
plan of reorganization vote to accept the plan and (ii) the plan meets the other
requirements of Section 1129(a). Classes of claims and interests that do not
receive or retain any property under a plan on account of such claims and
interests are deemed to have rejected the plan and are not entitled to vote, and
classes of claims and interests that are not impaired under a plan are deemed to
have accepted the plan and are not entitled to vote. Therefore, acceptances of
the Plan are being solicited only from those who hold Claims in an Impaired
Class that is receiving a distribution under the Plan. An Impaired Class of
Claims will be deemed to have accepted the Plan if it is accepted by Holders of
at least two-thirds in dollar amount and a majority in number of Claims of such
class held by Holders who cast timely votes with respect to the Plan. Holders of
Claims or Interest who fail to vote or who abstain from voting on the Plan are
not counted for purposes of determining either acceptance or rejection of the
Plan by any Impaired Class of Claims or Interests. Therefore, the Plan could be
accepted by any Impaired Class of Claims with the affirmative vote of
significantly less than two-thirds in dollar amount and a majority in number of
the Class of Claims.
If at least one Impaired Class of Claims votes to accept a plan of
reorganization (not counting the votes of insiders), the Plan may be confirmed
despite rejection by the other impaired Classes if the "cramdown" provisions of
Section 1129(b) of the Bankruptcy Code are satisfied. The "cramdown" provisions
of Section 1129(b) essentially
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provide that a plan may be confirmed over the rejection of an impaired class of
claims or interests if the plan "does not discriminate unfairly" and is "fair
and equitable" with respect to such rejecting impaired class.
Pooling of Assets and Liabilities and Cancellation of Intercompany Claims
On the Effective Date, the assets and liabilities of the Debtors will be
pooled to the extent specified in the Plan. The legal rights and priorities of
each Holder of a Claim will be treated as having a single recourse against such
pooled assets. Each Holder of a Claim who has asserted a Claim against both of
the Debtors arising from or related to the same underlying obligation or cause
of action, whether the basis for the asserted liability of the Debtors arises by
contract, guarantee (including CSC's guarantee of Cityscape's obligations under
the Old Senior Notes), or by operation of law, will likewise be treated as
having a single Claim against the assets of the pooled estate.
On the Effective Date, as part of such pooling, each of the Debtors will
be deemed to have fully and finally compromised and settled all Intercompany
Claims. As a result of giving effect to such pooling of assets and liabilities
and such compromise and settlement, all Intercompany Claims will be treated as
extinguished immediately upon the Effective Date and will receive no
distribution pursuant to the Plan.
The pooling of assets and liabilities provided for under Section III of
the Plan will be only for purposes of distributions under the Plan. Nothing in
this Plan or the Confirmation Order will effect a merger or any other
combination of Cityscape and CSC, or Reorganized Cityscape and Reorganized CSC.
The Reorganized Company
In general, the Plan provides that (i) Administrative Claims, Priority Tax
Claims, Bank Claims, Other Secured Claims and Priority Claims will be paid in
full, (ii) holders of Old Senior Notes, General Unsecured Claims and (provided
that they vote to accept the Plan) Old Subordinated Debentures will receive all
of the New Common Stock in the Reorganized Company (with Holders of such Claims
in relatively small amounts having the option to receive cash in lieu of New
Common Stock). Based upon the Debtors' estimate of $10,000,0000 in claims that
will ultimately be Allowed Claims in Classes 5 and 5a, the New Common Stock (in
the aggregate of approximately 6,800,000 shares) would be distributed as
follows: (i) 92.48% to Holders of Old Senior Notes (or 97.91% if Class 6 or
Class 6a votes to reject the Plan); (ii) 2.09% to holders of General Unsecured
Claims; and (iii) 5.43% to holders of Old Subordinated Debentures (or 0% if
Class 6 or Class 6a votes to reject the Plan).
As reflected in the projected financial information contained in Exhibit C
hereto (the "Projections"), the Debtors estimate that the Reorganized Company
will have net assets with an approximate carrying value of $68 million,
consisting primarily of mortgage residual certificates, receivables related to
such certificates and cash.
It is assumed that the Reorganized Company will invest such cash and
operate its business in such a manner that it will not be required to register
as an investment company under the Investment Company Act of 1940, and the rules
and regulations thereunder. While a plan as to the use of the Reorganized
Company's cash and other assets has not been formed, such assets will be
available for general corporate purposes as determined by the Board of Directors
of the Reorganized Company, including investments, acquisitions, joint ventures
and dividends and other distributions on equity securities, all as determined by
the Board of Directors to be in the best interests of the Reorganized Company.
There are no present plans for the Reorganized Company to pay dividends on
its New Common Stock. Any such dividends will be determined by the Board of
Directors of the Reorganized Company in light of the financial condition, cash
flow, results of operations, and legal dividend capacity of the Reorganized
Company, and other factors. Following the Effective Date, it is expected that
the Reorganized Company will invest its available cash and manage its business
with a view to maximizing values to holders of its equity securities. It is
expected that the Reorganized Company should be able to invest such available
cash in a manner which will create higher returns than the 5% rate assumed in
the Projections. However, there is no assurance that this will be the case or
that such investments, if made, will create returns sufficient to allow the
Reorganized Company to pay dividends at any time in the future.
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It is expected that the Reorganized Company will reenter the mortgage loan
origination business at some time in the future, based on prevailing industry
conditions and the general business climate. Because the Reorganized Company
will be relatively liquid, it is expected that management of the Reorganized
Company will examine various acquisition prospects in the subprime and high-LTV
organization and servicing markets. Due to a deterioration of the capital
markets supporting the subprime and high-LTV origination businesses, a number of
potential acquisition or merger candidates may be available. However, there can
be no assurance that the Reorganized Company will identify suitable acquisition
or merger candidates, or that if such candidates are identified, acceptable
business transactions will be structured and concluded.
Specifically, Aegis Mortgage Corporation ("Aegis") may be a potential
acquisition or merger candidate. Aegis is owned solely by D. Richard Thompson,
the prospective Chairman and Chief Executive Officer of the Reorganized Company.
Aegis is involved principally in the origination and servicing of single-family
mortgage loans, concentrating primarily on the conforming marketplace for FRA,
VA, and conventional mortgages. In the year concluding December 31, 1998, Aegis
originated approximately $875 million of single-family mortgage loans. At
December 31, 1998, Aegis serviced approximately $150 million in mortgage loans
from its Oklahoma City location. Aegis is headquartered in Houston, Texas, and
maintains wholesale and retail production offices in seven states. In 1998,
Aegis originated mortgage loans in a total of 28 states. The Debtors have been
advised that, in December 1998, to facilitate Mr. Thompson's purchase of 62.5%
of the capital stock of Aegis from certain individuals, Cerberus Partners, L.P.
loaned $2.25 million to Mr. Thompson, $1.7 million of which Mr. Thompson
simultaneously loaned to Aegis as subordinated debt, and Mr. Thompson pledged
Aegis' note to him for $1.7 million to Cerberus Partners, L.P. as collateral to
secure his payment obligation to Cerberus Partners, L.P.
Aegis may be an attractive acquisition or merger candidate because of its
efficient loan production operation and management synergies. The Reorganized
Company could expand Aegis's loan production operations through application of
capital to support additional branch facilities and warehouse lines.
A number of obstacles could impede the acquisition or merger of Aegis with
the Reorganized Company. First, an acquisition or merger with Aegis represents a
conflict of interest for Mr. Thompson, and if such an acquisition or merger is
considered, Mr. Thompson would be required not to participate in any discussions
or from representing the Reorganized Company with respect to any resulting
transaction with Aegis. Accordingly, the Reorganized Company may be at a
disadvantage in discussing, structuring or concluding any such transaction.
Second, pricing and terms are integral to any acquisition or merger transaction,
and there can be no assurance that Aegis and the Reorganized Company can reach
agreement on mutually agreeable pricing and terms of any proposed acquisition or
merger transaction. Third, the disinterested management and directors of the
Reorganized Company may feel that companies with subprime and/or high-LTV
origination and servicing operations represent more attractive acquisition or
merger candidates than does Aegis.
Summary of Classes and Treatment of Claims and Interests
Section 1123 of the Bankruptcy Code provides that a plan of reorganization
shall classify the claims and interests of a debtor's creditors and equity
interest holders. In compliance therewith, the Plan divides Claims and Interests
into Classes and sets forth the treatment for each Class. In accordance with
Section 1123(a)(1), Administrative Claims and Priority Tax Claims have not been
classified. The Debtors also are required, under Section 1122 of the Bankruptcy
Code, to classify Claims against and Interests in Cityscape and CSC into Classes
that contain Claims and Interests that are substantially similar to the other
Claims and Interests in such Classes.
The classification of Claims and Interests and the nature of distributions
to Holders of Impaired Claims or Impaired Interests in each Class are summarized
below. See Section IV.B, "Additional Information Regarding Treatment of Certain
Claims - Allocation of New Common Stock Among Classes 4, 5 and 6" for a
description of the manner in which the number of shares of New Common Stock will
be determined and Section VI, "CERTAIN RISK FACTORS" for a discussion of various
other factors that could materially affect the value of the New Common Stock
distributed pursuant to the Plan.
In consideration for the distributions and other benefits provided under
the Plan, the provisions of the Plan will constitute a good faith compromise and
settlement of all claims or controversies relating to amounts and
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allowability of: (i) Senior Note Claims and Small Senior Note Claims (Classes 4
and 4a), (ii) General Unsecured Claims and Small Unsecured Claims (Classes 5 and
5a) and (iii) Subordinated Debenture Claims and Small Subordinated Debenture
Claims (Classes 6 and 6a), and a good faith compromise and settlement of all
claims or controversies relating to the termination of all contractual, legal,
and equitable subordination rights that a Holder of a Claim or Interest may have
with respect to any Allowed Claim or Interest, or any distribution to be made
pursuant to the Plan on account of such Claim or Interest. The entry of the
Confirmation Order will constitute the Bankruptcy Court's approval of the
compromise or settlement of all such claims or controversies and the Bankruptcy
Court's finding that such compromise or settlement is in the best interests of
the Company, Reorganized Cityscape, Reorganized CSC and their respective
property and Claim and Interest Holders, and is fair, equitable and reasonable.
Except for Disputed Claims, distributions will be made on the Effective
Date or as soon as practicable thereafter. See Section IV.F, "THE PLAN OF
REORGANIZATION -- Distributions Under the Plan" for a discussion of Plan
provisions that may affect the timing of distributions under the Plan.
Distributions on account of Claims that become Allowed Claims after the
Effective Date will be made pursuant to Section V.B of the Plan (relating to
timing and calculation of amounts to be distributed under the Plan) and Section
V.H of the Plan (relating to distributions on account of Disputed Claims once
they are allowed). See Section IV.B, "THE PLAN OF REORGANIZATION --
Distributions Under the Plan Timing and Methods of Distribution."
The treatment of Claims described below is subject to the Plan provisions
described in Section IV, "THE PLAN OF REORGANIZATION -- Treatment of Claims and
Interests Under the Plan -- Additional Information Regarding Treatment of
Certain Claims."
B. Treatment of Claims and Interests Under the Plan
Description of Claims or Interests
Unclassified Claims
Administrative Claims. Subject to certain additional requirements for
professionals and certain other entities, each Holder of an Allowed
Administrative Claim will receive on account of its Administrative Claim and in
full satisfaction thereof, Cash equal to the amount of such Allowed
Administrative Claim on, as soon as practicable after, the later of the
Effective Date and the day on which such Claim becomes an Allowed Claim, unless
the Holder and the Debtors or the Reorganized Company agree or will have agreed
to other treatment of such Claim, or an order of the Bankruptcy Court provides
for other terms; provided, that if incurred in the ordinary course of business
or otherwise assumed by the Debtors pursuant to the Plan (including
Administrative Claims of governmental units for taxes), an Allowed
Administrative Claim will be assumed on the Effective Date and paid, performed
or settled by the Reorganized Company when due in accordance with the terms and
conditions of the particular agreement(s) governing the obligation in the
absence of the Reorganization Cases. In addition, on or before the Effective
Date, all fees payable pursuant to 28 U.S.C. ss.1930, as determined by the
Bankruptcy Court at the Confirmation Hearing, will be paid in Cash equal to the
amount of such Administrative Claim.
The Debtors are not currently in a position to determine the amount of
Administrative Claims, Priority Tax Claims and other Priority Claims for which
they will be liable as of the Effective Date. However, solely for purposes of
preparing the projections attached hereto as Exhibit C and the liquidation
analysis attached hereto as Exhibit D and of estimating recoveries for creditors
under the Plan, they have assumed (they believe conservatively) that the
aggregate amount of such Claims will not exceed $10,000,000.
Priority Tax Claims. Unless otherwise agreed to by the Debtors or the
Reorganized Company and the Holder of a Priority Tax Claim, each Holder of an
Allowed Priority Tax Claim will receive, at the sole option of the Reorganized
Company (i) Cash equal to the unpaid portion of such Allowed Priority Tax Claim
on the later of the Effective Date and the date on which such Claim becomes an
Allowed Priority Tax Claim, or as soon thereafter as is practicable, or (ii)
equal quarterly cash payments in an aggregate amount equal to such Allowed
Priority Tax Claim, together with interest at a fixed annual rate to be
determined by the Bankruptcy Court or otherwise agreed to by the Reorganized
Company and such Holder, over a period through the sixth anniversary of the date
of assessment of
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such Allowed Priority Tax Claim, or upon such other terms determined by the
Bankruptcy Court to provide the Holder of such Allowed Priority Tax Claim
deferred cash payments having a value, as of the Effective Date, equal to such
Allowed Priority Tax Claim.
The Debtors are not currently in a position to determine the amount of
Administrative Claims, Priority Tax Claims and other Priority Claims for which
they will be liable as of the Effective Date. However, solely for purposes of
preparing the projections attached hereto as Exhibit C and the liquidation
analysis attached hereto as Exhibit D and of estimating recoveries for creditors
under the Plan, they have assumed (they believe conservatively) that the
aggregate amount of such Claims will not exceed $10,000,000.
Classified Claims Against and Interests In Cityscape
Class 1 -- Bank Claims. Class 1 consists of all Allowed Bank Claims, if
any, against the Debtors arising from the Prepetition Credit Facilities
including all Claims arising pursuant to any guarantee thereof and any pledge of
assets as security therefor. Pursuant to the Financing Orders, proceeds from the
DIP Facilities have been used, among other things, to pay all Allowed Bank
Claims against the Debtors in full in Cash. Therefore, it is contemplated that
there will not be any Bank Claims in Class 1 as of the Effective Date. However,
to the extent that there are any Bank Claims in Class 1 as of the Effective
Date, (i) each such Claim will be deemed allowed as an Allowed Class 1 Claim in
the aggregate amount equal to the sum of (A) the unpaid principal and interest
as of the Petition Date less all payments thereon received and retained by the
respective Holder thereof during the period from the Petition Date to the
Effective Date, (B) all accrued and unpaid interest from the Petition Date
through and including the Effective Date at the rates provided for in the
Financing Orders, and (C) all other amounts due and owing as of the Effective
Date in respect of the respective Bank Claims pursuant to the Financing Orders
and pursuant to the Greenwich Facility or the CIT Facility, as the case may be,
and (ii) on the Effective Date, each Holder will receive, on account thereof, a
payment in Cash by wire transfer equal to the amount of such Allowed Class 1
Claim. Therefore, Class 1 is Unimpaired and, accordingly, is not entitled to
vote on the Plan.
The Debtors expect that there will be no Allowed Bank Claims against the
Debtors as of the Effective Date.
Class 2a et seq. -- Other Secured Claims. All Allowed Secured Claims
against the Debtors that are not included in Class 1 (defined in the Plan as
"Other Secured Claims") are classified in Class 2a et seq. These Classes will be
further divided into subclasses designated by letters of the alphabet (Class 2a,
Class 2b, and so on) so that each Holder of any Other Secured Claim against the
Debtors is in a Class by itself, except to the extent that there are Other
Secured Claims that are substantially similar to each other and may be included
within a single Class. The Debtors will File a schedule of each Other Secured
Claim, if any, against the Debtors on or before ten (10) days prior to the
commencement of the Confirmation Hearing. Each Allowed Other Secured Claim
against the Debtors will be treated as follows: either (a) the Plan will leave
unaltered the legal, equitable and contractual rights to which such Claim
entitles the Holder; (b)(i) the Debtors will cure any default with respect to
such Claim that occurred before or after the Petition Date (other than a default
of a kind specified in Section 365(b)(2) of the Bankruptcy Code), (ii) the
maturity of such Claim will be reinstated as such maturity existed before any
such default, (iii) the Holder of such Claim will be compensated for any damages
incurred as a result of any reasonable reliance by the Holder on any right to
accelerate its Claim, and (iv) the legal, equitable, and contractual rights of
such Holder will not otherwise be altered; or (c) such Claim will receive such
other treatment to which the Holder consents. The Holder of each Allowed Other
Secured Claim against the Debtors which is treated as set forth in clause (a),
(b) or (c) of this paragraph will be Unimpaired and will not be entitled to vote
for or against the Plan. Cityscape is not aware of any Class 2a Claims.
The Debtors expect that there will be no Allowed Other Secured Claims
against the Debtors as of the Effective Date.
Class 3 -- Priority Claims. Class 3 Claims are Unimpaired. Class 3
consists of the Allowed Priority Claims against the Debtors. A Priority Claim is
a Claim for an amount entitled to priority under Sections 507(a)(3), 507(a)(4),
507(a)(5), 507(a)(6), 507(a)(7), or 507(a)(9) of the Bankruptcy Code, and does
not include any Priority Tax Claim. These unsecured Priority Claims include,
among others: (a) unsecured Claims for accrued employee compensation earned
within 90 days prior to the Petition Date, to the extent of $4,000 per employee;
(b)
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contributions to employee benefit plans arising from services rendered within
180 days prior to the Petition Date, but only to the extent of (i) the number of
employees covered by such plans multiplied by $4,000, less (ii) the aggregate
amount paid to such employees under Section 507(a)(3) of the Bankruptcy Code,
plus the aggregate amount paid by the estate on behalf of such employees to any
other employee benefit plan.
The Plan provides that unless otherwise agreed to by the parties, each
Holder of an Allowed Class 3 Claim will be entitled to receive (i) Cash equal to
the amount of such Claim on the latest of (a) the Effective Date or as soon as
practicable thereafter, (b) the date such Claim becomes an Allowed Priority
Claim, and (c) the date that such Claim would be paid in accordance with any
terms and conditions of any agreements or understandings relating thereto
between the Debtors and the Holder of such Claim, and/or (ii) such other
treatment, as determined by the Bankruptcy Court, required to render such Claim
Unimpaired. Allowed Claims in Class 3 are Unimpaired under the Plan and Holders
of Allowed Claims in Class 3 will be deemed to have accepted the Plan.
The Debtors are not currently in a position to determine the amount of
Administrative Claims, Priority Tax Claims and other Priority Claims for which
they will be liable as of the Effective Date. However, solely for purposes of
preparing the projections attached hereto as Exhibit C and the liquidation
analysis attached hereto as Exhibit D and of estimating recoveries for creditors
under the Plan, they have assumed (they believe conservatively) that the
aggregate amount of such Claims will not exceed $10,000,000.
Class 4 -- Senior Note Claims and Class 4a -- Small Senior Note Claims.
Class 4 consists of the Allowed Unsecured Claims against the Debtors of Holders
of Old Senior Notes (including all Claims and causes of action arising therefrom
or in connection therewith and all guarantees related thereto). The Claim of
each Holder of Old Senior Notes (including Holders of Small Senior Note Claims)
as of the Distribution Record Date will be allowed in the aggregate amount of
the unpaid principal of such Holder's Old Senior Notes plus unpaid interest
(calculated in accordance with the provisions of the indenture governing the Old
Senior Notes) which accrued prior to the Petition Date. Class 4 is Impaired and,
accordingly, Holders of Allowed Class 4 Claims are entitled to vote on the Plan.
On the Effective Date or as soon as practicable thereafter, each Holder of
an Allowed Class 4 Claim will receive on account of such Allowed Claim a Pro
Rata portion of 6,288,564 shares of New Common Stock (i.e., one share of New
Common Stock for every $52.88 in principal of and accrued interest on such
Holder's Old Senior Notes).
Class 4a consists of the Allowed Small Senior Note Claims, which are
Allowed Senior Note Claims whose principal amounts are equal to or less than
$5,000.00 or whose Holders agree on a Ballot or otherwise in writing to reduce
the principal amounts of such Allowed Senior Note Claims to $5,000.00 and to
release and waive any further or additional Claims against the Debtors. Class 4a
is Impaired and, accordingly, Holders of Allowed Class 4a Claims are entitled to
vote on the Plan. On the Effective Date or as soon as practicable thereafter,
each Holder of an Allowed Class 4a Claim will receive on account of such Allowed
Claim Cash in an amount equal to (i) $10.00, multiplied by (ii) the number of
shares of New Common Stock that such Holder would have been entitled to receive
as a Holder of an Allowed Class 4 Claim (after giving effect to the voluntary
reduction by the Holder of a Class 4 Claim of the principal amount of such
Holder's Claim to $5,000.00); provided, however, that any Holder of a Class 4a
Claim may elect on a Ballot or otherwise in writing to receive the treatment
afforded by Class 4 (i.e., New Common Stock) rather than this Class 4a (i.e.,
Cash).
To the extent, if any, that the classification and manner of satisfying
Claims and Interests under the Plan do not take into consideration all
contractual, legal and equitable subordination rights that Holders of Allowed
Class 4 and Class 4a Claims may have against Holders of Claims or Interests with
respect to distributions made pursuant to this Plan, each Holder of an Allowed
Class 4 or Class 4a Claim will be deemed, upon the Effective Date, to have
waived all contractual, legal or equitable subordination rights that such Holder
might have, including, without limitation, any such rights arising out of the
Old Senior Notes, the Old Subordinated Debentures, the indentures governing such
Old Securities or otherwise.
(For a description of how amounts of New Common Stock to be distributed
under the Plan to Holders of Allowed Claims in Classes 4, 5 and 6 were
calculated, see "Additional Information Regarding Treatment of Certain Claims -
Allocation of New Common Stock Among Classes 4, 5 and 6" below.)
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There will be approximately $332,512,500 in Allowed Class 4 and Class 4a
Claims as of the Effective Date.
Class 5 -- General Unsecured Claims and Class 5a -- Small Unsecured
Claims. Class 5 consists of all Allowed General Unsecured Claims against the
Debtors, including, but not limited to, Claims resulting from the rejection of
leases or executory contracts (other than such Claims that fall within Class 5a
or Class 13). Class 5 is Impaired and, accordingly, Holders of Allowed Class 5
Claims are entitled to vote on the Plan.
On the Effective Date, or as soon as practicable thereafter, each Holder
of an Allowed Class 5 Claim will receive on account of such Allowed Claim one
share of New Common Stock for every $70.47 of such Holder's Allowed Claim.
Class 5a consists of the Allowed Small Unsecured Claims, which are Allowed
General Unsecured Claims that are equal to or less than $8,000.00 or whose
Holders agree on a Ballot or otherwise in writing to reduce such Allowed
Unsecured Claims to $8,000.00 and to release and waive any further or additional
Claims against the Debtors. Class 5a is Impaired and, accordingly, Holders of
Allowed Class 5a Claims are entitled to vote on the Plan. On the Effective Date
or as soon as practicable thereafter, each Holder of an Allowed Class 5a Claim
will receive on account of such Allowed Claim Cash in an amount equal to (i)
$10.00, multiplied by (ii) the number of shares of New Common Stock that such
Holder would have been entitled to receive as a Holder of an Allowed Class 5
Claim (after giving effect to the voluntary reduction by the Holder of a Class 5
Claim of such Holder's Claim to $8,000.00); provided, however, that any Holder
of a Class 5a Claim may elect on a Ballot or otherwise in writing to receive the
treatment afforded by Class 5 (i.e., New Common Stock) rather than this Class 5a
(i.e., Cash).
Classes 5 and 5a also includes Trade Claims. At the outset of their
chapter 11 cases, the Debtors sought and obtained Bankruptcy Court approval to
pay in the ordinary course of business all outstanding Trade Claims to trade
creditors who continue to provide normal trade credit terms to, or have
reinstated normal trade credit terms for, the Debtors or who have previously
agreed to compromise their Claims in a manner acceptable to the Debtors. To the
extent that any payments made by the Debtors to Holders of Trade Claims pursuant
to such Order resulted in such Holders' receiving greater distributions on
account of their Trade Claims than that to which they are entitled under Section
V.B.5 of the Plan, any claim of the Debtors for recovery of such overpayments to
such Holders will be assigned by the Debtors to Reorganized Cityscape or
Reorganized CSC, as applicable, pursuant to Section XI.F of the Plan.
(For a description of how amounts of New Common Stock to be distributed
under the Plan to Holders of Allowed Claims in Classes 4, 5 and 6 were
calculated, see "Additional Information Regarding Treatment of Certain Claims -
Allocation of New Common Stock Among Classes 4, 5 and 6" below.)
The Debtors expect that there will be approximately $8.0 million in
Allowed Class 5 and Class 5a Claims but, for purposes of estimating recoveries
for Holders of Allowed Claims under the Plan, have assumed that Allowed Class 5
and 5a Claims will total $10,000,000.
Class 6 -- Subordinated Debenture Claims and Class 6a -- Small
Subordinated Debenture Claims. Class 6 consists of Allowed Unsecured Claims
against Cityscape of Holders of Old Subordinated Debentures (including all
Claims and causes of action arising therefrom or in connection therewith). The
Claim of each Holder of Old Subordinated Debentures (including Holders of Small
Subordinated Debenture Claims) as of the Distribution Record Date will be
allowed in the aggregate amount of the unpaid principal of such Holder's Old
Subordinated Debentures plus unpaid interest (calculated in accordance with the
provisions of the indenture governing the Old Subordinated Debentures) which
accrued prior to the Petition Date. Class 6 is Impaired and, accordingly,
Holders of Allowed Class 6 Claims are entitled to vote on the Plan.
On the Effective Date or as soon as practicable thereafter, each Holder of
an Allowed Class 6 Claim will receive on account of such Allowed Claim a Pro
Rata portion of 369,524 shares of New Common Stock (i.e., one share of New
Common Stock for every $369.82 in principal of and accrued interest on such
Holder's Old Subordinated Debentures); provided, however, that if Class 6 and
Class 6a do not accept the Plan, no New Common Stock (or any other property)
will be distributed to Holders of Allowed Class 6 Claims pursuant to the Plan,
and any
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New Common Stock that would have been distributed to the Holders of Class 6
Claims will be distributed Pro Rata to the Holders of Class 4 Claims as part of
their distribution pursuant to Section V.B.4 of the Plan.
Class 6a consists of the Allowed Small Subordinated Debenture Claims,
which are Allowed Subordinated Debenture Claims whose principal amounts are
equal to or less than $50,000.00 or whose Holders agree on a Ballot or otherwise
in writing to reduce the principal amounts of such Allowed Subordinated
Debenture Claims to $50,000.00 and to release and waive any further or
additional Claims against the Debtors. Class 6a is Impaired and, accordingly,
Holders of Allowed Class 6a Claims are entitled to vote on the Plan. On the
Effective Date or as soon as practicable thereafter, each Holder of an Allowed
Class 6a Claim will receive on account of such Allowed Claim Cash in an amount
equal to (i) $10.00, multiplied by (ii) the number of shares of New Common Stock
that such Holder would have been entitled to receive as a Holder of an Allowed
Class 6 Claim (after giving effect to the voluntary reduction by the Holder of a
Class 6 Claim of the principal amount of such Holder's Claim to $50,000.00);
provided, however, that (i) any Holder of a Class 6a Claim may elect on a Ballot
or otherwise in writing to receive the treatment afforded by Class 6 (i.e., New
Common Stock) rather than this Class 6a (i.e., Cash), and (ii) if Class 6 and
Class 6a do not accept the Plan, no Cash (or any other property) will be
distributed to Holders of Allowed Class 6a Claims pursuant to the Plan.
(For a description of how amounts of New Common Stock to be distributed
under the Plan to Holders of Allowed Claims in Classes 4, 5 and 6 were
calculated, see "Additional Information Regarding Treatment of Certain Claims -
Allocation of New Common Stock Among Classes 4, 5 and 6" below.)
There will be approximately $136,658,720 in Allowed Class 6 and Class 6a
Claims as of the Effective Date.
Class 7 -- Old Debt Securities Claims. Class 7 consists of all Allowed
Securities Claims on account of Old Debt against the Debtors. The Holders of
Allowed Class 7 Claims, if any, will not receive or retain any interest or
property under the Plan and, therefore, Class 7 is Impaired and is deemed to
have rejected the Plan. Accordingly, votes of Holders of Allowed Class 7 Claims
are not being solicited. If there are any Allowed Class 7 Claims, the Debtors
intend to seek to confirm the Plan pursuant to the "cramdown" provisions of
Section 1129(b) of the Bankruptcy Code.
Class 8 -- Interests of Holders of Old Series A Preferred Stock. Class 8
consists of Allowed Interests (aggregating 626 shares) of Old Series A Preferred
Stock. The Holders of Allowed Class 8 Interests will not receive or retain any
interest or property under the Plan and, therefore, Class 8 is Impaired and is
deemed to have rejected the Plan. Accordingly, votes of Holders Allowed Class 8
Interests are not being solicited. The Debtors intend to seek to confirm the
Plan as to Class 8 pursuant to the "cramdown" provisions of Section 1129(b) of
the Bankruptcy Code.
Class 9 -- Old Series A Preferred Stock Securities Claims. Class 9
consists of all Allowed Securities Claims on account of Old Series A Preferred
Stock against the Debtors. The Holders of Allowed Class 9 Claims, if any, will
not receive or retain any interest or property under the Plan and, therefore,
Class 9 is Impaired and is deemed to have rejected the Plan. Accordingly, votes
of Holders of Allowed Class 9 Claims are not being solicited. If there are any
Allowed Class 9 Claims, the Debtors intend to seek to confirm the Plan pursuant
to the "cramdown" provisions of Section 1129(b) of the Bankruptcy Code.
Class 10 -- Interests of Holders of Old Series B Preferred Stock. Class 10
consists of Allowed Interests (aggregating 4,551 shares) of Holders of Old
Series B Preferred Stock. The Holders of Allowed Class 10 Interests will not
receive or retain any interest or property under the Plan and, therefore, Class
10 is Impaired and is deemed to have rejected the Plan. Accordingly, votes of
Allowed Class 10 Interests are not being solicited. The Debtors intend to seek
to confirm the Plan as to Class 10 pursuant to the "cramdown" provisions of
Section 1129(b) of the Bankruptcy Code.
Class 11 -- Old Series B Preferred Stock Securities Claims. Class 11
consists of all Allowed Securities Claims on account of Old Series B Preferred
Stock against the Debtors. The Holders of Allowed Class 11 Claims, if any, will
not receive or retain any interest or property under the Plan and, therefore,
Class 11 is Impaired and is
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<PAGE> 31
deemed to have rejected the Plan. Accordingly, votes of Holders of Allowed Class
11 Claims are not being solicited. If there are any Allowed Class A11 Claims,
the Debtors intend to seek to confirm the Plan pursuant to the "cramdown"
provisions of Section 1129(b) of the Bankruptcy Code.
Class 12 -- Interests of Holders of Old Cityscape Common Stock. Class 12
consists of the Allowed Interests of Holders of Old Cityscape Common Stock. The
Holders of Allowed Class 12 Interests will not receive or retain any interest or
property under the Plan and, therefore, Class 12 is Impaired and is deemed to
have rejected the Plan. Accordingly, votes of Holders of Allowed Class A12
Interests are not being solicited. The Debtors intend to seek to confirm the
Plan as to Class 12 pursuant to the "cramdown" provisions of Section 1129(b) of
the Bankruptcy Code.
Class 13 -- Interests of Holders of Old Stock Rights in Cityscape and all
Claims Arising Out of Such Old Stock Rights. Class 13 consists of all Allowed
Interests in Cityscape of Holders of Old Stock Rights and all Allowed Claims
arising out of any such Old Stock Rights, including, without limitation, all
Claims arising out of the rejection of Old Stock Rights. The Holders of Allowed
Class 13 Interests and Claims will not receive or retain any interest or
property under the Plan and, therefore, Class 13 is Impaired and is deemed to
have rejected the Plan. Accordingly, votes of Holders of Allowed Class 13
Interests and Claims are not being solicited. The Debtors intend to seek to
confirm the Plan as to Class 13 pursuant to the "cramdown" provisions of Section
1129(b) of the Bankruptcy Code.
Class 14 -- Old Cityscape Common Stock and Old Warrant Securities Claims.
Class 14 consists of all Allowed Securities Claims on account of Old Cityscape
Common Stock or Old Warrants against the Debtors. The Holders of Allowed Class
14 Claims, if any, will not receive or retain any interest or property under the
Plan and, therefore, Class 14 is Impaired and is deemed to have rejected the
Plan. Accordingly, votes of Holders of Allowed Class 14 Claims are not being
solicited. If there are any Allowed Class 14 Claims, the Debtors intend to seek
to confirm the Plan pursuant to the "cramdown" provisions of Section 1129(b) of
the Bankruptcy Code.
Additional Information Regarding Treatment of Certain Claims
Allocation of New Common Stock Among Classes 4,5 and 6
Background and Assumptions
As of the Effective Date, there will be (i) approximately $332,512,500 in
Allowed Class 4 Claims, and (ii) approximately $136,658,720 in Allowed Class 6
Claims (each including principal and accrued and unpaid interest as of the
Petition Date). The Debtors have estimated that there will ultimately be
$8,000,000 in Allowed Class 5 Claims; however, for purposes of performing the
following calculations and estimating recoveries for Holders of Allowed Claims
in Classes 4, 5 and 6, they have assumed (conservatively) that Allowed Class 5
Claims will ultimately total $10,000,000.
For purposes of making distributions required under the Plan and based
upon, among other things, the Debtors' estimate that Allowed Class 5 Claims will
total $10,000,000, the Debtors have estimated that approximately 6,800,000
shares of New Common Stock will be issued by Reorganized Cityscape, although the
certificate of incorporation of Reorganized Cityscape will authorize the
issuance of a number of shares significantly in excess of that amount.
The Plan reflects a distribution of 94.45% (6,288,564 shares) and 5.55%
(369,524 shares) of the New Common Stock to the Holders of Allowed Claims in
Classes 4 and 6, respectively, before giving effect to any distributions of New
Common Stock on account of Allowed Class 5 Claims. (The 5.55% of the New Common
Stock to be distributed to Class 6 represents New Common Stock that would have
otherwise been distributed to Class 4, but which Class 4 is, in effect,
contributing to Class 6.) Thus, for every dollar of Claim that is allowed in
Class 5, the percentages of New Common Stock held by Holders of Claims in
Classes 4 and 6 will be diluted in proportionate amounts. The calculations set
forth below reflect the effect of such dilution when Allowed Claims in Class 5
equal the estimated amount of $10,000,000.
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For purposes of the following calculations, the Debtors have assumed that
no Holders of Allowed Claims in Classes 4, 5 and 6 elect to receive Cash in lieu
of New Common Stock and that, therefore, there are no Allowed Claims in Classes
4a, 5a and 6a.
Class 4 Distribution
Of the estimated 6,800,000 shares of New Common Stock to be issued,
Holders of Old Senior Notes will be entitled to a distribution of 6,288,564
shares, calculated as follows:
Allowed Amount of Class 4 Claims ($332,512,500) +
Allowed Amount of Class 6 Claims ($136,658,720)
-----------------------------------------------
Allowed Amount of Class 4 Claims ($332,512,500)+
Allowed Amount of Class 6 Claims ($136,658,720)+
Allowed Amount of Class 5 Claims (estimated at $10,000,000)
x 6,800,000 shares
- Amount of shares contributed by Class 4 to Class 6 (as set forth
above) (369,524 shares)
= 6,288,564 shares (or 92.48% of the 6,800,000 shares).
Based upon the aggregate, allowed amount of Class 4 Claims (approximately
$332,512,500), this means that each Holder of a Class 4 Claim will receive one
share of New Common Stock for each $52.88 of the amount of such Holder's Claim
(including both principal and unpaid interest as of the Petition Date).
Note that if Class 6 or Class 6a votes to reject the Plan, Class 4 will
receive an additional 369,524 shares that would otherwise have been distributed
to Class 6.
Class 6 Distribution
Of the estimated 6,800,000 shares of New Common Stock to be issued,
Holders of Old Subordinated Debentures will be entitled to a distribution of
369,524 shares, or 5.43% of the 6,800,000 shares (provided that Classes 6 and 6a
vote to accept the Plan). Based upon the aggregate, allowed amount of Class 6
Claims (approximately $136,658,720), this means that each Holder of a Class 6
Claim will receive one share of New Common Stock for each $369.82 of the amount
of such Holder's Claim (including both principal and unpaid interest as of the
Petition Date).
Note that if Class 6 or Class 6a votes to reject the Plan, Class 6 will
not receive any shares of New Common Stock.
Class 5 Distribution
Of the estimated 6,800,000 shares of New Common Stock to be issued,
Holders of Allowed General Unsecured Claims will be entitled to a distribution
of approximately 141,912 shares, calculated as follows:
Allowed Amount of Class 5 Claims (estimated at $10,000,000)
-----------------------------------------------------------
Allowed Amount of Class 4 Claims ($332,512,500) +
Allowed Amount of Class 6 Claims ($136,658,720) +
Allowed Amount of Class 5 Claims (estimated at $10,000,000)
x 6,800,000 shares
= 141,912 shares (or 2.09% of the 6,800,000 shares).
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Based upon the estimated, allowed amount of Class 5 Claims ($l0,000,000),
this means that each Holder of a Class 5 Claim will receive one share of New
Common Stock for each $70.47 of such Holder's Allowed Claim.
Effect of Variations in Aggregate Class 5 Claim Amount
In the event Allowed Class 5 Claims total less than $10,000,000, fewer
than 141,912 shares will be distributed to Class 5, and the percentages of the
outstanding New Common Stock held by each of Class 4 and Class 6 will exceed
92.48% and 5.43%, respectively, in proportionate amounts. In the event Allowed
Class 5 Claims total more than $10,000,000, (a) more than 6,800,000 shares of
New Common Stock will be issued and outstanding (in an amount equal to (i) the
aggregate amount of Allowed Class 5 Claims in excess of $10,000,000, divided by
(ii) $70.47), (b) such excess shares will distributed to the Holders of Allowed
Class 5 Claims at the rate of one share per $70.47 in Allowed Claim amount, and
(c) the percentages of the outstanding New Common Stock held by each of Class 4
and Class 6 will be diluted below 92.48% and 5.43%, respectively, in
proportionate amounts.
Treatment of Unclassified Claims
The Bankruptcy Code does not require classification of certain priority
claims against a debtor. In this case, these unclassified claims include
Administrative Claims and Priority Tax Claims. All distributions referred to
below that are scheduled for the Effective Date will be made on the Effective
Date or as soon as practicable thereafter.
Administrative Claims. An "Administrative Claim" is a claim for payment of
an administrative expense of a kind specified in Section 503(b) of the
Bankruptcy Code and referred to in Section 507(a)(1) of the Bankruptcy Code,
including, without limitation, the actual and necessary costs and expenses
incurred after the commencement of a chapter 11 case of preserving the estate or
operating the business of the company (including wages, salaries and commissions
for services), loans and advances to the company made after the petition date,
compensation for legal and other services and reimbursement of expenses awarded
or allowed under Section 330(a) or 331 of the Bankruptcy Code, certain retiree
benefits, certain reclamation claims, and all fees and charges against the
estate under Section 1930 of title 28, United States Code. Under the Plan, each
Holder of an Allowed Administrative Claim will receive on account of its
Administrative Claim and in full satisfaction thereof, Cash equal to the amount
of such Allowed Administrative Claim on, as soon as practicable after, the later
of the Effective Date and the day on which such Claim becomes an Allowed Claim,
unless the Holder and the Debtors or the Reorganized Company agree or will have
agreed to other treatment of such Claim, or an order of the Bankruptcy Court
provides for other terms; provided, that if incurred in the ordinary course of
business or otherwise assumed by the Debtors pursuant to the Plan (including
Administrative Claims of governmental units for taxes), an Allowed
Administrative Claim will be assumed on the Effective Date and paid, performed
or settled by the Reorganized Company, when due in accordance with the terms and
conditions of the particular agreement(s) governing the obligation in the
absence of the Reorganization Cases. Except as provided below for (i) non-tax
liabilities incurred in the ordinary course of business by the Debtors, (ii)
Post-Petition Tax Claims, and (iii) DIP Claims, requests for payment of
Administrative Claims must be Filed and served on counsel for the Debtors and
the Reorganized Company no later than (x) sixty (60) days after the Effective
Date, or (y) such later date, if any, as the Bankruptcy Court orders upon
application made prior to the end of such 60-day period. Holders of
Administrative Claims (including, without limitation, professionals requesting
compensation or reimbursement of expenses and the Holders of any Claims for
federal, state or local taxes) that are required to File a request for payment
of such Claims and that do not File such requests by the applicable bar date
will be forever barred from asserting such Claims against the Debtors, the
Reorganized Company, or any of their respective properties. No request for
payment will be required in connection with the DIP Claims, which,
notwithstanding anything to the contrary in the Plan, will be paid in full in
Cash on the Effective Date, as provided in the DIP Facilities and the Financing
Orders.
Claims by Professionals. Professionals or other Persons requesting
compensation or reimbursement of expenses pursuant to Section 327, 328, 330,
331, 503(b) or 1103 of the Bankruptcy Code for services rendered on or before
the Effective Date (including, without limitation, any compensation requested
pursuant to Section 503(b)(4) of the Bankruptcy Code by any professional or
other entity for making a substantial contribution in the Reorganization Cases)
shall file and serve on the Reorganized Company and counsel for the Reorganized
Company, an application for final allowance of compensation and reimbursement of
expenses no later than
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(i) 60 days after the Effective Date, or (ii) such later date, if any, as the
Bankruptcy Court orders order upon application made prior to the end of such
60-day period; provided, however, that any professional who may receive
compensation or reimbursement of expenses pursuant to the Ordinary Course
Professionals' Order without having filed an application may continue to receive
compensation or reimbursement for services rendered before the Effective Date
without further Bankruptcy Court review or approval to the extent provided in
the Ordinary Course Professionals' Order. Objections to applications of
professionals or other Persons for compensation or reimbursement of expenses
must be Filed and served on the Reorganized Company, counsel for the Reorganized
Company and the requesting professional or other Person on or before the later
of (x) ninety (90) days after the Effective Date and (y) thirty (30) days after
such date as the Bankruptcy Court establishes as the deadline for Filing such
applications. The professionals of the Debtors and any Committee shall be
entitled to reasonable compensation by, and reimbursement of expenses from, the
Reorganized Company for services rendered or costs incurred by such
professionals after the Effective Date promptly after submission of appropriate
invoices to the Reorganized Company. In the event of a dispute over any such
invoices, the Reorganized Company will promptly pay any amount not in dispute
and, if such dispute cannot be resolved among the parties, such dispute will be
resolved by the Bankruptcy Court.
Subject to the approval of the Bankruptcy Court, unpaid fees and expenses
of counsel to each of the Unofficial Committees incurred through and including
the Effective Date will be paid on or as soon as practicable after the Effective
Date. The Debtors acknowledge that the Unofficial Committees and their counsel
have made a substantial contribution to the Debtors' chapter 11 cases and will
support applications for payment of the reasonable fees and expenses of counsel
to each of the Unofficial Committees.
Claims by Indenture Trustees. On or as soon as practicable after the
Effective Date, the Reorganized Company will pay the contractual claims of the
Indenture Trustees for their fees and expenses including their reasonable
attorneys' fees and expenses. To the extent, after being furnished with normal
supporting documents for such fees and expenses, the Reorganized Company
disputes the reasonableness of any such fees and expenses, the Reorganized
Company will pay such fees and expenses as are not disputed, and will submit to
the Indenture Trustee a written list of specific fees and expenses viewed by the
Reorganized Company as not being reasonable. To the extent that the Reorganized
Company and the Indenture Trustee are unable to resolve the dispute, the dispute
will be resolved by the Bankruptcy Court. Pending the resolution of any such
dispute by consent or by Final Order of the Bankruptcy Court, an amount of Cash
equal to the disputed portion of the Indenture Trustee's request for fees and
expenses will be held in trust in one or more segregated bank accounts in the
name of the applicable Disbursing Agent for the benefit of the applicable
Indenture Trustee, accounted for separately, and paid to the Indenture Trustee
and/or returned to the Reorganized Company, as required by the agreement of the
Reorganized Company and the Indenture Trustee or the Final Order of the
Bankruptcy Court, as the case may be. The Indenture Trustees will not attach or
set off any of their fees and expenses against distributions to Holders of Old
Senior Notes or Old Subordinated Debentures and will not otherwise withhold or
delay any such distributions.
Priority Tax Claims. A Priority Tax Claim is a claim for an amount
entitled to priority under Section 507(a)(8) of the Bankruptcy Code. Unless
otherwise agreed to by the Debtors or the Reorganized Company and a Holder of a
Priority Tax Claim, each Holder of an Allowed Priority Tax Claim will receive,
at the sole option of the Reorganized Company, (i) Cash equal to the unpaid
portion of such Allowed Priority Tax Claim on the later of the Effective Date
and the date on which such Claim becomes an Allowed Priority Tax Claim or as
soon thereafter as is practicable, or (ii) equal quarterly cash payments in an
aggregate amount equal to such Allowed Priority Tax Claim, together with
interest at a fixed annual rate to be determined by the Bankruptcy Court or
otherwise agreed to by the Reorganized Company, and such Holder, over a period
through the sixth anniversary of the date of assessment of such Allowed Priority
Tax Claim, or upon such other terms determined by the Bankruptcy Court to
provide the Holder of such Allowed Priority Tax Claim deferred cash payments
having a value, as of the Effective Date, equal to such Allowed Priority Tax
Claim. The foregoing treatment of Allowed Priority Tax Claims is consistent with
the provisions of Section 1129(a)(9)(C) of the Bankruptcy Code, and the Holders
of Allowed Priority Tax Claims are not entitled to vote on the Plan. Pursuant to
Section 1123(a)(1) of the Bankruptcy Code, Priority Tax Claims are not
designated as a Class of Claims for purposes of the Plan.
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<PAGE> 35
Cramdown
The so-called "cramdown" provisions of Section 1129(b) of the Bankruptcy
Code permit confirmation of a chapter 11 plan of reorganization in certain
circumstances even if the plan is not accepted by all impaired classes of claims
and interests. In the event that at least one impaired Class of Claims votes to
accept the Plan (and at least one impaired Class either votes to reject the Plan
or is deemed to have rejected the Plan), the Debtors reserve the right to
request that the Bankruptcy Court confirm the Plan under the cramdown provisions
of the Bankruptcy Code. In that event, the Debtors have reserved the right to
modify the Plan to the extent, if any, that Confirmation pursuant to Section
1129(b) of the Bankruptcy Code requires or permits modification of the Plan.
At a minimum, the Debtors will request Confirmation of the Plan over the
deemed rejection of Classes 7, 8, 9, 10, 11, 12, 13 and 14 under the Plan.
Sources of Cash to Make Plan Distributions
Except as otherwise provided in the Plan or the Confirmation Order, all
cash necessary for the Reorganized Company to make the payments pursuant to the
Plan will be obtained from the Reorganized Company's cash balances or the
operations of the Debtors or the Reorganized Company.
Conditions Precedent to Confirmation and Consummation of the Plan
Conditions to Confirmation
Confirmation of the Plan cannot occur until all of the substantive
confirmation requirements under the Bankruptcy Code have been satisfied pursuant
to Section 1129 of the Bankruptcy Code. In addition, the Bankruptcy Court will
not enter the Confirmation Order unless the Confirmation Order is acceptable in
form and substance to the Debtors and the Confirmation Order expressly
authorizes and directs the Debtors, Reorganized Cityscape and Reorganized CSC to
perform those actions specified in the Plan. Finally, it will be a condition to
Confirmation that each of the events and actions required by the Plan to occur
or to be taken prior to Confirmation will have occurred or been taken, or the
Debtors, or the party whose obligations are conditioned upon such occurrences or
actions, as applicable, have waived such occurrences or actions and the
Bankruptcy Court confirms the Plan without such occurrence or action.
Conditions to Effective Date
The Effective Date will not occur and the Plan will not be consummated
unless and until each of the following conditions has been satisfied or waived
by the Debtors:
(i) The Confirmation Order authorizes and directs that the Debtors,
Reorganized Cityscape and Reorganized CSC take all actions necessary or
appropriate to enter into, implement and consummate the contracts,
instruments, releases, leases and other agreements or documents created in
connection with the Plan, including those actions contemplated by the
provisions of the Plan set forth in Section XI of the Plan.
(ii) The statutory fees owing the U.S. Trustee have been paid in
full.
(iii) All other actions and documents necessary to implement the
provisions of the Plan have been effected or executed or, if waivable,
waived by the Person or Persons entitled to the benefit thereof.
C. Waiver of Conditions to Confirmation and Effective Date
Each of the conditions to Confirmation and the Effective Date, other than
the condition set forth in Section X.B.2 of the Plan (requiring payment in full
of statutory fees owed to the U.S. Trustee), may be waived in whole or in part
by Cityscape and CSC at any time, without notice or an Order of the Bankruptcy
Court. The failure to satisfy or to waive any condition may be asserted by
Cityscape and CSC regardless of the circumstances giving rise to the failure of
such condition to be satisfied (including any action or inaction by Cityscape
and CSC). The
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<PAGE> 36
failure of Cityscape and CSC to exercise any of the foregoing rights will not be
deemed a waiver of any other rights and each such right will be deemed an
ongoing right that may be asserted at any time.
Modification or Revocation of the Plan; Severability
The Debtors reserve the right to modify the Plan at any time prior to the
Confirmation Date in the manner provided for by Section 1127 of the Bankruptcy
Code or as otherwise permitted by law without additional disclosure pursuant to
Section 1125 of the Bankruptcy Code, except as the Bankruptcy Court may
otherwise order. The potential impact of any such amendment or modification on
the Holders of Claims and Interests cannot presently be foreseen, but may
include a change in the economic impact of the Plan on some or all of the
Classes or a change in the relative rights of such Classes.
The Debtors reserve the right after the Confirmation Date and before the
Effective Date to modify the terms of the Plan or waive any conditions to the
effectiveness thereof if and to the extent the Debtors determine that such
modifications or waivers are necessary or desirable in order to consummate the
Plan. The Debtors will give such Holders of Claims and Interests notice of such
modifications or waivers as may be required by applicable law and the Bankruptcy
Court, and any such modifications will be subject to the approval of the
Bankruptcy Court to the extent required by, and in accordance with, Section 1127
of the Bankruptcy Code. The Debtors will give notice to any Committee, each of
the Unofficial Committees and each of the DIP Lenders of any modification of the
Plan.
The Debtors reserve the right to revoke or withdraw the Plan prior to the
Confirmation Date. If the Debtors revoke or withdraw the Plan, or if
Confirmation does not occur, then the Plan will be null and void, and all of the
Debtors' respective obligations with respect to the Claims and Interest will
remain unchanged and nothing contained in the Plan or in this Disclosure
Statement will be deemed an admission or statement against interest or
constitute a waiver or release of any claims by or against either Debtor or any
other Person or to prejudice in any manner the rights of either Debtor or any
Person in any further proceedings involving either Debtor or any Person in any
further proceedings involving either Debtor of any Person.
If, prior to Confirmation, any term or provision of the Plan is held by
the Bankruptcy Court to be invalid, void or unenforceable, the Bankruptcy Court
will have the power, upon the request of the Company, to alter and interpret
such term or provision to make it valid or enforceable to the maximum extent
practicable, consistent with the original purpose of the term or provision held
to be invalid, void or unenforceable, and such term or provision will then be
applicable as altered or interpreted. Notwithstanding any such holding,
alteration or interpretation, the remainder of the terms and provisions of the
Plan will remain in full force and effect and will in no way be affected,
impaired or invalidated by such holding, alteration or interpretation. The
Confirmation Order will constitute a judicial determination and will provide
that each term and provision of the Plan, as it may have been altered or
interpreted in accordance with the foregoing, is valid and enforceable pursuant
to its terms.
D. The Reorganized Company
A description of various matters relating to the Reorganized Company
including (i) information relating to the business to be conducted by
Reorganized Cityscape and Reorganized CSC following the Effective Date, (ii) the
proposed management of Reorganized Cityscape and Reorganized CSC and proposed
compensation and other arrangements relating thereto, and (iii) certain
corporate governance matters, is set forth or referenced below.
Corporate Structure
On the Effective Date, Cityscape will become Reorganized Cityscape, CSC
will become Reorganized CSC, and Reorganized CSC will be a wholly-owned
subsidiary of Reorganized Cityscape.
Business of the Reorganized Company
Following the Effective Date, the Debtors estimate that the Reorganized
Company will have net assets with an approximate carrying value of $68 million,
consisting primarily of mortgage residual certificates, receivables related to
such certificates, and cash. The use of such assets (including the possibility
of reentering the mortgage
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loan origination business and/or combining with one or more other businesses)
will be left to the discretion of the Boards of Directors of the Reorganized
Company
Directors and Management of Reorganized Cityscape and Reorganized CSC
Board of Directors
It is anticipated that the Board of Directors of Reorganized Cityscape
will consist of one to ten members. The Debtors have been advised by the
Unofficial Senior Noteholders' Committee that the members of the Board of
Directors will include D. Richard Thompson, Mark Lasry and Mark A. Neporent. Mr.
Thompson is a principal of Moulton, which is currently providing consulting
services to the Debtors, and a principal of Aegis Mortgage Corporation, a
mortgage banking firm headquartered in Houston Texas. Mr. Lasry is executive
vice president at New York-based Amroc Investments. Mr. Neporent is a former
partner of the law firm of Schulte Roth and is currently the Chief Operating
Officer of Cerberus Capital Management, L.P. Schulte Roth has represented and
continues to represent, Cerberus Partners, L.P., a member of the Unofficial
Senior Noteholders' Committee, in various matters. The Debtors have been advised
that Mr. Thompson has performed services on behalf of Cerberus Partners, L.P.
pursuant to a contractual relationship between the parties.
It is anticipated that the Board of Directors of Reorganized CSC will
consist of no less than one member. The Debtors have been advised by the
Unofficial Senior Noteholders' Committee that the members will be the same as
the members of Reorganized Cityscape's Board of Directors.
Executive Officers
The initial officers of Reorganized Cityscape will be selected by the
Board of Directors of Reorganized Cityscape. The Debtors have been advised by
the Unofficial Senior Noteholders' Committee that D. Richard Thompson will be
the chief executive of Reorganized Cityscape. Mr. Thompson is currently
President of Aegis Mortgage Corporation, a mortgage banking firm headquartered
in Houston, Texas that originates and services loans. Prior to his involvement
in the business side of the mortgage banking industry, Mr. Thompson practiced
corporate law with the Houston law firm of Liddell, Sapp & Zivtey where he
specialized in thrift and mortgage banking matters. In 1987, Mr. Thompson began
working for North American Mortgage Company and, since then, has served as
President of Troy & Nichols and First Gibraltar Mortgage. Currently Mr. Thompson
is secretary and treasurer of the Texas Mortgage Bankers Association. To the
extent that initial officers have been selected, their names will be disclosed
in a schedule to be Filed with the Bankruptcy Court on or prior to the
Confirmation Date. Reorganized Cityscape will negotiate compensation packages
with its officers that are consistent with the compensation packages in the
industry. The compensation packages are expected to include a base salary and
possibly incentive compensation, each in accordance with industry norms.
The initial officers of Reorganized CSC will be selected by the Board of
Directors of Reorganized CSC. The Debtors have been advised by the Unofficial
Senior Noteholders' Committee that D. Richard Thompson will also be the chief
executive of Reorganized CSC. To the extent that initial officers have been
selected, their names will be disclosed in a schedule to be Filed with the
Bankruptcy Court on or prior to the Confirmation Date. Reorganized CSC will
negotiate compensation packages with its officers that are consistent with the
compensation packages in the industry. The compensation packages are expected to
include a base salary and possibly incentive compensation, each in accordance
with industry norms.
Certain Corporate Governance Matters
Reorganized Cityscape Certificate of Incorporation and Reorganized
Cityscape Bylaws
The forms of the Reorganized Cityscape Certificate of Incorporation and
the Reorganized Cityscape Bylaws are attached to the Plan as Exhibits "A" and
"B", respectively.
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Reorganized CSC Certificate of Incorporation and Reorganized CSC Bylaws
The forms of the Reorganized CSC Certificate of Incorporation and the
Reorganized CSC Bylaws are attached to the Plan as Exhibits "C" and "D",
respectively.
E. Issuance of New Common Stock
On the Effective Date or as soon as practicable thereafter, Reorganized
Cityscape will, in accordance with the Plan, issue the New Common Stock to
Holders of Allowed Class 4, 5 and 6 Claims. On the Effective Date, all
securities, instruments and agreements entered into pursuant to the Plan,
including, without limitation the New Common Stock and any security, instrument
or agreement entered into in connection therewith, will become effective and
binding in accordance their respective terms and conditions upon the parties
thereto without further act or action under applicable law, regulation, order or
rule, and will be deemed to become effective simultaneously.
Applicability of Federal and Other Securities Laws
In reliance upon the exemption provided by Section 1145(a)(1) of the
Bankruptcy Code, the Debtors have not filed a registration statement under the
Securities Act or any other federal or state securities laws with respect to the
New Common Stock that will be offered pursuant to the Plan.
Section 1145(a)(1). Section 1145(a)(1) exempts the offer or sale of
securities pursuant to a plan of reorganization from the registration
requirements of Section 5 of the Securities Act and from registration under
state and local securities laws if the following conditions are satisfied: (i)
the securities are issued by a debtor (or its affiliate or successor) under a
plan of reorganization; (ii) the recipients of the securities hold claims
against, interests in, or claims for administrative expenses against, the
debtor; and (iii) the securities are issued in exchange for the recipients'
claims against or interests in the debtor, or principally in such exchange and
partly for cash or property.
The New Common Stock issued pursuant to the Plan will not be "restricted
securities" within the meaning of Rule 144 under the Securities Act and may be
freely transferred by Holders of Allowed Class 4, Class 5 and Class 6 Claims
under the Securities Act and their successors and assigns. Accordingly, all
resales and subsequent transactions in the New Common Stock are exempt from
registration under the Securities Act pursuant to Section 4(1) of the Securities
Act, unless the Holder is deemed to be an "underwriter" with respect to such
securities or an "affiliate" of an issuer. Section 1145(b) of the Bankruptcy
Code defines four types of "underwriters":
(i) persons who purchase a claim against, an interest in, or a claim
for administrative expense against the debtor with a view to distributing
any security received in exchange for such a claim or interest;
(ii) persons who offer to sell securities offered under a plan for
the holders of such securities;
(iii) persons who offer to buy securities from the holders of such
securities, if the offer to buy is (a) with a view to distributing such
securities and (b) made under a distribution agreement; and
(iv) a person who is an issuer" with respect to the securities, as
the term "issuer" is defined in Section 2(11) of the Securities Act.
Under Section 2(11) of the Securities Act, an "issuer" includes any
"affiliate" of the issuer, which means any person directly or indirectly through
one or more intermediaries controlling, controlled by or under common control
with the issuer. Any Holder of an Allowed Claim or Interest (or group of Holders
of such Claims and/or Interests who act in concert) who receives a substantial
amount of New Common Stock pursuant to the Plan may be deemed to be an
"affiliate" of an issuer and therefore an "issuer" and therefore an
"underwriter" under the foregoing definitions.
Whether or not any particular person would be deemed to be an
"underwriter" or an "affiliate" with respect to any security to be issued
pursuant to the Plan would depend upon various facts and circumstances
applicable to
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that person. Accordingly, the Debtors express no view as to whether any person
would be an "underwriter" or an "affiliate" with respect to any security to be
issued pursuant to the Plan.
GIVEN THE COMPLEX NATURE OF THE QUESTION OF WHETHER A PARTICULAR PERSON
MAY BE AN UNDERWRITER OR AN AFFILIATE, THE DEBTORS MAKE NO REPRESENTATIONS
CONCERNING THE RIGHT OF ANY PERSON TO TRADE IN THE SECURITIES TO BE TRANSFERRED
PURSUANT TO THE PLAN. THE DEBTORS RECOMMEND THAT HOLDERS OF ALLOWED CLAIMS
CONSULT THEIR OWN COUNSEL CONCERNING WHETHER THEY MAY FREELY TRADE SUCH
SECURITIES.
Rule 144A, promulgated under the Securities Act, provides a non-exclusive
safe harbor exemption from the registration requirements of the Securities Act
for resales to certain "qualified institutional buyers" of securities which are
"restricted securities" within the meaning of the Securities Act, irrespective
of whether the seller of such securities purchased its securities with a view
towards reselling such securities under the provisions of Rule 144A. Under Rule
144A, a "qualified institutional buyer" is defined to include, among other
persons (e.g., "dealers" registered as such pursuant to Section 15 of the
Exchange Act and "banks" as defined in Section 3(a)(2) of the Securities Act),
any entity which purchases securities for its own account or for the account of
another qualified institutional buyer and which (in the aggregate) owns and
invests on a discretionary basis at least $100 million in the securities of
unaffiliated issuers. Subject to certain qualifications, Rule 144A does not
exempt the offer or sale of securities which, at the time of their issuance,
were securities of the same class of securities then listed on a national
securities exchange (registered as such under Section 6 of the Exchange Act) or
quoted in a U.S. automated interdealer quotation system (e.g., Nasdaq). Holders
of such securities who are deemed to be "underwriters" within the meaning of
Section 1145(b)(1) of the Bankruptcy Code or who may otherwise be deemed to be
"underwriters" of, or to exercise "control" over, the Company within the meaning
of Rule 405 of Regulation C under the Securities Act should, assuming that all
other conditions of Rule 144A are met, be entitled to avail themselves of the
safe harbor resale provisions thereof.
To the extent that Rule 144A is unavailable, holders may, under certain
circumstances, be able to sell their securities pursuant to the more limited
safe harbor resale provisions of Rule 144 under the Securities Act. Generally,
Rule 144 provides that if certain conditions are met (e.g., volume limitations,
manner of sale, availability of current information about the issuer, etc.), any
"affiliate" of the issuer of the securities sought to be resold will not be
deemed to be an "underwriter" as defined in Section 2(11) of the Securities Act.
Under paragraph (k) of Rule 144, the aforementioned conditions to resale will no
longer apply to restricted securities sold for the account of a holder who is
not an affiliate of the Company at the time of such resale and who has not been
such during the three-month period next preceding such resale, so long as a
period of at least two years has elapsed since the later of (i) the Effective
Date and (ii) the date on which such holder acquired his or its securities from
an affiliate of the Company.
THE NEW COMMON STOCK TO BE ISSUED ON THE EFFECTIVE DATE HAS NOT BEEN
APPROVED OR DISAPPROVED BY THE SEC OR BY ANY STATE SECURITIES COMMISSION OR
SIMILAR PUBLIC, GOVERNMENTAL OR REGULATORY AUTHORITY AND NEITHER THE SEC NOR
SUCH AUTHORITY HAS PASSED UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DISCLOSURE STATEMENT OR UPON THE MERITS OF THE PLAN. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
F. Distributions Under the Plan
General
Except as otherwise provided in the Plan with respect to any particular
Class or Claim, property to be distributed under the Plan on account of Allowed
Claims and Allowed Interests in an Impaired Class (a) will be distributed on the
Effective Date or as soon as practicable thereafter to each Holder of an Allowed
Claim or an Allowed Interest in that Class that is an Allowed Claim or an
Allowed Interest as of the Effective Date, and (b) will be distributed to each
Holder of an Allowed Claim or an Allowed Interest of that Class that becomes an
Allowed Claim or Allowed Interest after the Effective Date, as soon as
practicable after the Order of the Bankruptcy Court allowing such Claim or
Interest becomes a Final Order. Except as otherwise provided in the Plan with
respect to any
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particular Class or Claim, property to be distributed under the Plan on account
of Claims in a Class that are not Impaired or on account of an Administrative
Claim will be distributed on the later of (i) the Effective Date or as soon as
practicable thereafter, or if any Claim is not an Allowed Claim as of the
Effective Date, on the date the Order allowing such Claim becomes a Final Order
or as soon as practicable thereafter, and (ii) the date on which the
distribution to the Holder of the Claim would have been due and payable in the
ordinary course of business or under the terms of the Claim.
Except as otherwise provided in the Plan or the Confirmation Order, all
cash necessary for Reorganized Cityscape and Reorganized CSC to make payments
pursuant to the Plan will be obtained from Cityscape's and CSC's existing cash
balances or the operations of the Debtors or the Reorganized Company, as
applicable. See Section IV.A, "THE PLAN OF REORGANIZATION -- Overview of the
Plan -- Summary of Classes and Treatment of Claims and Interests" and "--
Overview of the Plan -- Sources of Cash to Make Plan Distributions." Reorganized
Cityscape, Reorganized CSC or such Person(s) as Cityscape and CSC may employ in
their sole discretion, will serve as Disbursing Agent(s). Each Disbursing Agent
will make all distributions of Cash and securities required to be distributed
under the applicable provisions of the Plan. Any Disbursing Agent may employ or
contract with other entities to assist in or make the distributions required by
the Plan. Each Disbursing Agent will serve without bond, and each Disbursing
Agent, other than Reorganized Cityscape or Reorganized CSC, will receive,
without further Bankruptcy Court approval, reasonable compensation for
distribution services rendered pursuant to the Plan and reimbursement of
reasonable out-of-pocket expenses incurred in connection with such services from
the Reorganized Company on terms acceptable to the Reorganized Company.
Cash payments made pursuant to the Plan will be in U.S. dollars. Cash
payments to foreign creditors may be made, at the option of Cityscape and CSC or
the Reorganized Company, in such funds and by such means as are necessary or
customary in a particular foreign jurisdiction. Cash payments made pursuant to
the Plan in the form of checks issued by Reorganized Cityscape or Reorganized
CSC will be null and void if not cashed within 90 days of the date of the
issuance thereof. Requests for reissuance of any check will be made directly to
the Disbursing Agent as set forth below and in Section VI.G of the Plan. All
payments in respect of Bank Claims will be by wire transfer.
The Plan provides that the Disbursing Agent will make all distributions
required under the applicable provisions of the Plan. No distributions under the
Plan will be made to or on behalf of any Holder of any Allowed Claim or Allowed
Interest evidenced by the instruments, securities or other documentation
canceled pursuant to Section IX.B.1 of the Plan, unless such Holder first
tenders the applicable instruments, securities or other documentation to the
Disbursing Agent. See "THE PLAN OF REORGANIZATION -- Distributions Under the
Plan -- Surrender of Canceled Voting Securities and Exchange for New Securities"
below.
Timing and Methods of Distributions
Transfers of New Common Stock
Notwithstanding any other provision of the Plan, only whole numbers of
shares of New Common Stock will be issued or transferred, as the case may be,
pursuant to the Plan. When any distribution on account of an Allowed Claim
pursuant to the Plan would otherwise result in the issuance or transfer of a
number of shares of New Common Stock that is not a whole number, the actual
distribution of such New Common Stock will be rounded to the next higher or
lower whole number as follows: (a) fractions of 1/2 or greater will be rounded
to the next higher whole number and (b) fractions of less than 1/2 will be
rounded to the next lower whole number. The total number of shares of New Common
Stock to be distributed to a Class of Claims will be adjusted as necessary to
account for the rounding provided for in Section VI.C.2 of the Plan. No
consideration will be provided in lieu of fractional shares that are rounded
down (including in connection with calculating the amount of Cash that a Holder
of an Allowed Class 4a, 5a or 6a Claim is entitled to receive).
Compliance With Tax Requirements
In connection with the Plan, to the extent applicable, the Disbursing
Agent must comply with all tax withholding and reporting requirements imposed on
it by any governmental unit, and all distributions pursuant to the Plan will be
subject to such withholding and reporting requirements. The Disbursing Agent
will be authorized to
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take any and all actions that may be necessary or appropriate to comply with
such withholding and reporting requirements. Notwithstanding any other provision
of the Plan: (i) each Holder of an Allowed Claim that is to receive a
distribution of Cash or New Common Stock pursuant to the Plan will have sole and
exclusive responsibility for the satisfaction and payment of any tax obligations
imposed by any governmental unit, including income, withholding and other tax
obligations, on account of such distribution; and (ii) no distribution will be
made to or on behalf of such Holder pursuant to the Plan unless and until such
Holder has made arrangements reasonably satisfactory to the Disbursing Agent for
the payment and satisfaction of such tax obligations. Any Cash or New Common
Stock to be distributed pursuant to the Plan will, pending the implementation of
such arrangements, be treated as an undeliverable distribution pursuant to
Section VI.G of the Plan.
Distribution Record Date
As of the close of business on the Distribution Record Date, the transfer
registers for the Old Securities maintained by the Debtors, or their respective
agents, will be closed. The Disbursing Agent and its respective agents and the
Indenture Trustees will have no obligation to recognize the transfer of the Old
Securities occurring after the Distribution Record Date, and will be entitled
for all purposes relating to the Plan to recognize and deal only with those
Holders of record as of the close of business on the Distribution Record Date.
Surrender of Cancelled Voting Securities and Exchange for New Securities
Tender of Voting Securities
The mechanism by which Holders of Allowed Claims in Class 4 or 6 surrender
their Voting Securities and exchange such Voting Securities for New Common Stock
will be determined based upon the manner in which the Voting Securities were
issued and the mode in which they are held, as set forth below.
Voting Securities Held in Book-Entry Form. Voting Securities held in
book-entry form through bank and broker nominee accounts will be mandatorily
exchanged for the New Common Stock through the facilities of such nominees and
the systems of the applicable securities depository or Clearing System (as
described below and in Section VI.F.2 of the Plan) holding such Voting
Securities on behalf of the brokers or banks.
Voting Securities in Physical, Registered, Certificated Form. Each Holder
of Voting Securities in physical, registered, certificated form will be
required, promptly after the Confirmation Date, to deliver his, hers or its
physical certificates (the "Tendered Certificates") to the Disbursing Agent,
accompanied by a properly executed letter of transmittal, to be distributed by
the Information Agent or Disbursing Agent, as the case may be, promptly after
the Confirmation Date and containing such representations and warranties as are
described herein (a "Letter of Transmittal"). Any New Common Stock to be
distributed pursuant to the Plan on account of any Allowed Claim in Class 4 or 6
represented by a Voting Security held in physical, registered, certificated form
will, pending such surrender, be treated as an undeliverable distribution
pursuant to Section VI.G of the Plan.
Signatures on a Letter of Transmittal must be guaranteed by an Eligible
Institution (as defined below), unless the Voting Securities tendered pursuant
thereto are tendered for the account of an Eligible Institution. If signatures
on a Letter of Transmittal are required to be guaranteed, such guarantees must
be by a member firm of a registered national securities exchange in the United
States, a member of the National Association of Securities Dealers, Inc., or a
commercial bank or trust company having an office or a correspondent in the
United States (each of which is an "Eligible Institution"). If Voting Securities
are registered in the name of a Person other than the Person signing the Letter
of Transmittal, the Voting Securities, in order to be tendered validly, must be
endorsed or accompanied by a properly completed power of authority, with
signature guaranteed by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt), and acceptance of Letters of Transmittal and Tendered Certificates
will be resolved by the applicable Disbursing Agent, whose determination will be
final and binding, subject only to review by the Bankruptcy Court upon
application with due notice to any affected parties in interest. Cityscape
reserves the right, on behalf of itself and the Disbursing Agent, to reject any
and all Letters of Transmittal and Tendered Certificates not in proper form, or
Letters of Transmittal and Tendered
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Certificates, the Disbursing Agent's acceptance of which would, in the opinion
of the Disbursing Agent or its counsel, be unlawful.
Voting Securities in Bearer Form Held Through a Broker or Bank Participant
in a Clearing System. Voting Securities held in bearer form through a broker or
bank participant in a Clearing System will be mandatorily exchanged for the New
Common Stock through the facilities of such nominees and the securities
depositary holding such Voting Securities on behalf of the broker or bank.
Delivery of New Securities in Exchange for Voting Securities
On the Effective Date, Reorganized Cityscape or the Disbursing Agent will
issue and authenticate the New Common Stock and will apply to DTC (as defined
below) to make the New Common Stock eligible for deposit at DTC. With respect to
Holders of Voting Securities who hold such Voting Securities through nominee
accounts at bank and broker participants in DTC, Euroclear and Cedel
(collectively, the "Clearing Systems"), the Disbursing Agent will deliver the
New Common Stock to DTC or to the registered address specified by the Clearing
Systems. The Clearing System (or its depositary) will return the applicable
Voting Securities to the Disbursing Agent for cancellation. The Disbursing Agent
will request that DTC effect a mandatory exchange of the applicable Voting
Securities for the applicable New Common Stock by crediting the accounts of its
participants with the New Common Stock in exchange for the Voting Securities. On
the effective date of such exchange, each DTC participant will effect a similar
exchange for accounts of the beneficial owners holding Voting Securities through
such firms. Neither the Reorganized Company nor the Disbursing Agent will have
any responsibility or liability in connection with the Clearing Systems' or such
participants' effecting, or failure to effect, such exchanges.
Holders of Voting Securities holding such Voting Securities outside a
Clearing System will be required to surrender their Voting Securities by
delivering them to the Disbursing Agent, along with properly executed Letters of
Transmittal (as described above and in Section VI.F.1.b of the Plan). The
Disbursing Agent will forward applicable New Common Stock on account of such
Voting Securities to such Holders.
Other Matters with Respect to the Surrender of Voting Securities
By participating in any of the above procedures, each Holder of the Voting
Securities will be representing and warranting (and the Letters of Transmittal
will so provide) that, among other things, the Holder has full power and
authority to tender, exchange, sell, assign and transfer the Voting Securities
and that when such Voting Securities are accepted for exchange by the Debtors or
the Reorganized Company, the Debtors or the Reorganized Company will acquire
good, marketable and unencumbered title thereto, free and clear of all liens,
restrictions, charges and encumbrances and that the Voting Securities are not
subject to any adverse claims or proxies. The Holder also agrees that he, she or
it will, upon request, execute and deliver any additional documents deemed by
the Disbursing Agent, the Debtors or the Reorganized Company to be necessary or
desirable to complete the exchange, sale, assignment and transfer of the Voting
Securities exchanged. All authority conferred by participating in the above
procedures will survive the death or incapacity of the Holder, and all
obligations of the Holder will be binding upon the heirs, personal
representatives, successors and assigns of the Holder.
The surrender of Voting Securities pursuant to any one of the procedures
described in this Solicitation Statement, upon the Debtors' or the Reorganized
Company's acceptance for exchange of such Voting Securities, constitutes a
binding agreement between the Holder and the Debtors or the Reorganized Company
upon the terms, and subject to the conditions, of the Plan.
Special Procedures for Lost, Stolen, Mutilated or Destroyed Instruments
Any Holder of a Claim or Interest evidenced by an Instrument that has been
lost, stolen, mutilated or destroyed will, in lieu of surrendering such
Instrument, deliver to the Disbursing Agent: (a) an affidavit of loss or other
evidence reasonably satisfactory to the Disbursing Agent of the loss, theft,
mutilation or destruction; and (b) such security or indemnity as may reasonably
be required by the Disbursing Agent to hold the Disbursing Agent harmless from
any damages, liabilities or costs incurred in treating such individual as a
Holder of an Instrument. Upon compliance with Section V.F.3 of the Plan, the
Holder of a Claim or Interest evidenced by such an Instrument
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will, for all purposes under the Plan and notwithstanding anything to the
contrary contained herein, be deemed to have surrendered such Instrument.
Failure to Surrender Canceled Instrument
Any Holder of Voting Securities holding such Voting Securities in
physical, registered or certificated form who has not properly completed and
returned to the Disbursing Agent a Letter of Transmittal, together with the
applicable Tendered Certificates, within two years after the Effective Date will
have its claim for a distribution pursuant to the Plan on account of such
Instrument discharged and will be forever barred from asserting any such claim
against Reorganized Cityscape, Reorganized CSC or their properties. In such
cases, any New Common Stock held for distribution on account of such claim will
be disposed of pursuant to the provisions of Section VI.G of the Plan.
Delivery of Distributions; Undeliverable or Unclaimed Distributions
Any Person that is entitled to receive a Cash distribution under the Plan
but that fails to cash a check within 90 days of its issuance will be entitled
to receive a reissued check from Reorganized Cityscape or Reorganized CSC, as
the case may be, for the amount of the original check, without any interest, if
such Person requests the Disbursing Agent to reissue such check and provides the
Disbursing Agent with such documentation as the Disbursing Agent reasonably
requests to verify that such Person is entitled to such check, prior to the
second anniversary of the Effective Date. If a Person fails to cash a check
within 90 days of its issuance and fails to request reissuance of such check
prior to the second anniversary of the Effective Date, such Person will not be
entitled to receive any distribution under the Plan.
Subject to Bankruptcy Rule 9010, all distributions to any Holder of an
Allowed Claim or an Allowed Interest will be made to the address of such Holder
on the books and records of Cityscape and CSC or their agents, unless either
Debtor, Reorganized Cityscape or Reorganized CSC, as applicable, has been
notified in writing of a change of address. If the distribution to any Holder of
an Allowed Claim or Allowed Interest is returned to a Disbursing Agent as
undeliverable, such Disbursing Agent will use reasonable efforts to determine
the current address of such Holder, but no distribution will be made to such
Holder unless and until the applicable Disbursing Agent has determined or is
notified in writing of such Holder's then-current address, at which time such
distribution will be made to such Holder without interest. Undeliverable
distributions will remain in the possession of the Disbursing Agent pursuant to
Section VI.A of the Plan until such time as a distribution becomes deliverable.
Undeliverable cash will be held in trust in segregated bank accounts in the name
of the Disbursing Agent for the benefit of the potential claimants of such
funds, and will be accounted for separately. Any Disbursing Agent holding
undeliverable cash will invest such cash in a manner consistent with Cityscape's
and CSC's investment and deposit guidelines. Any interest paid, and any other
amounts earned, with respect to such undeliverable Cash pending its distribution
in accordance with the Plan shall be property of Reorganized Cityscape or
Reorganized CSC, as the case may be. Undeliverable New Common Stock will be held
in trust for the benefit of the potential claimants of such securities by the
Disbursing Agent in principal amounts or numbers of shares or warrants
sufficient to fund the unclaimed amounts of such securities and will be
accounted for separately. Any unclaimed or undeliverable distributions
(including Cash and New Common Stock) will be deemed unclaimed property under
Section 347(b) of the Bankruptcy Code at the expiration of two years after the
Effective Date and, after such date, all such unclaimed property will revert to
Reorganized Cityscape or Reorganized CSC, as the case may be, and the Claim or
Interest of any Holder with respect to such property will be discharged and
forever barred.
Pending the distribution of any New Common Stock, pursuant to the Plan,
the Disbursing Agent will cause the New Common Stock held by it in its capacity
as Disbursing Agent to be: (A) represented in person or by proxy at each meeting
of the stockholders of Reorganized Cityscape; and (B) voted with respect to any
matter of Reorganized Cityscape, proportionally with the votes cast by other
stockholders of Reorganized Cityscape.
Procedures for Treating Disputed Claims
Except insofar as a Claim or Interest is allowed under the Plan,
Reorganized Cityscape and Reorganized CSC will be entitled and reserve the right
to object to Claims and Interests. Except as otherwise provided in
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Section VI.H.3 of the Plan and except as may otherwise be ordered by the
Bankruptcy Court, objections to any Claim or Interest, including, without
limitation, Administrative Claims will be Filed and served upon the Holder of
such Claim or Interest no later than the later of (a) 60 days after the
Effective Date, and (b) 60 days after a proof of claim, request for payment of
such Claim or proof of interest is Filed, unless such period is extended by the
Bankruptcy Court, which extension may be granted on an ex parte basis without
notice or hearing. After the Confirmation Date, only Cityscape, CSC, Reorganized
Cityscape and Reorganized CSC will have the authority to File, settle,
compromise, withdraw or litigate to judgment objections to Claims and Interests.
From and after the Confirmation Date, Cityscape, CSC, Reorganized Cityscape and
Reorganized CSC may settle or compromise any Disputed Claim or Disputed Interest
without approval of this Bankruptcy Court. Except as (i) specified otherwise in
the Plan, or (ii) ordered by the Bankruptcy Court, all Disputed Claims or
Disputed Interests will be resolved by the Bankruptcy Court.
Among other things, either Debtor may elect, at its sole option, to object
or seek estimation under Section 502 of the Bankruptcy Code with respect to any
proof of claim filed by or on behalf of a Holder of a Claim or a proof of
interest filed by or on behalf of a Holder of an Interest.
All Tort Claims are Disputed Claims. Any unliquidated Tort Claim that is
not otherwise settled or resolved pursuant to Section VI.H.1.a of the Plan will
be determined and liquidated in the Bankruptcy Court. Any Tort Claim determined
and liquidated pursuant to a judgment obtained in accordance with Section
VI.H.1.b of the Plan that is no longer subject to appeal or other review will be
deemed to be an Allowed Claim in Class 5 or Class 5a in such liquidated amount
and satisfied in accordance with this Plan. Nothing contained in Section
VI.H.1.b of the Plan will constitute or be deemed a waiver of any claim, right
or cause of action that the Debtors or the Reorganized Company may have against
any Person in connection with or arising out of any Tort Claim, including,
without limitation, any rights under Section 157(b) of title 28, United States
Code.
Except as otherwise ordered by the Bankruptcy Court, objections to the
Claims of professionals will be governed by the provisions of Section V.A.3.b of
the Plan. Objections to Administrative Claims based on ordinary course
liabilities, Trade Claims and Employee Claims will be governed by applicable
law.
Within 30 days after the end of each calendar quarter following the
Effective Date, the applicable Disbursing Agent will make all distributions on
account of any Disputed Claim or Disputed Interest that has become an Allowed
Claim or Allowed Interest during the preceding calendar quarter. Such
distributions will be made pursuant to the provisions of the Plan governing the
applicable Class. Holders of Disputed Claims or Disputed Interests that are
ultimately allowed will also be entitled to receive, on the basis of the amount
ultimately allowed: (i) matured and payable interest, if any, at the rate
provided for the Class to which such Claim belongs; and (ii) any dividends or
other payments made on account of New Common Stock, if any, provided to the
Class to which such Claim or Interest belongs, but held pending distribution.
Set offs
Except with respect to Claims allowed pursuant to the Plan or claims of
Cityscape, CSC, Reorganized Cityscape or Reorganized CSC released pursuant to
the Plan or any contract, instrument, release, indenture or other agreement or
document created in connection with the Plan, Cityscape, CSC, Reorganized
Cityscape or Reorganized CSC, as the case may be, may, pursuant to Section 553
of the Bankruptcy Code or applicable nonbankruptcy law, set off against any
Allowed Claim and the distributions to be made pursuant to the Plan on account
of such Claim (before any distribution is made on account of such Claim), the
claims, rights and causes of action of any nature that Cityscape, CSC,
Reorganized Cityscape or Reorganized CSC may hold against the Holder of such
Allowed Claim; provided, however, that neither the failure to effect such a
setoff nor the allowance of any Claim under the Plan will constitute a waiver or
release by Cityscape, CSC, Reorganized Cityscape or Reorganized CSC of any such
claims, rights and causes of action that Cityscape, CSC, Reorganized Cityscape
or Reorganized CSC may possess against such Holder.
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Termination of Subordination
The classification and manner of satisfying all Claims and Interests under
the Plan and the distributions thereunder take into consideration all
contractual, legal and equitable subordination rights, whether arising under any
agreement, general principles of equitable subordination, Section 510(c) of the
Bankruptcy Code or otherwise, that a Holder of a Claim or Interest may have
against other Claim or Interest Holders with respect to any distribution made
pursuant to the Plan. On the Effective Date, all contractual, legal or equitable
subordination rights that such Holder may have with respect to any distribution
to be made pursuant to the Plan will be deemed to be waived, discharged and
terminated, and all actions related to the enforcement of such subordination
rights will be permanently enjoined. Accordingly, distributions pursuant to the
Plan to Holders of Allowed Claims and Allowed Interests will not be subject to
payment to a beneficiary of such terminated subordination rights, or to levy,
garnishment, attachment or other legal process by any beneficiary of such
terminated subordination rights.
G. General Information Concerning the Plan
The following is a summary of certain additional information concerning
the Plan. This summary is qualified in its entirety by reference to the
provisions of the Plan. For a discussion of the classification and treatment of
Claims and Interests under the Plan, see Section IV.A, "THE PLAN OR
REORGANIZATION -- Overview of the Plan -- Summary of Classes and Treatment of
Claims and Interests."
Treatment of Executory Contracts and Unexpired Leases
Under Section 365 of the Bankruptcy Code, the Debtors have the right,
subject to Bankruptcy Court approval, to assume or reject any executory
contracts or unexpired leases. If an executory contract or unexpired lease
entered into before the Petition Date is rejected by the Debtors, it will be
treated as if the Debtors breached such contract or lease on the date
immediately preceding the Petition Date, and the other party to the agreement
may assert an Unsecured Claim for damages incurred as a result of the rejection.
In the case of the rejection of employment agreements and real property leases,
damages are subject to certain limitations imposed by Sections 365 and 502 of
the Bankruptcy Code.
Assumptions
To the extent that any of the contracts listed on a schedule to be Filed
and served on the parties thereto prior to the Confirmation Hearing is an
executory contract, the Debtors will assume each such contract pursuant to
Section 365 of the Bankruptcy Code on the Effective Date. Listing a contract or
lease on such schedule does not constitute an admission by the Debtors,
Reorganized Cityscape or Reorganized CSC that such contract or lease is an
executory contract or unexpired lease or that the Debtors, Reorganized Cityscape
or Reorganized CSC has any liability thereunder. The Confirmation Order will
constitute an Order of the Bankruptcy Court approving the assumptions described
in Section VII.A of the Plan, pursuant to Section 365 of the Bankruptcy Code, as
of the Effective Date.
Cure of Defaults in Connection with Assumption
Any monetary amounts by which each executory contract and unexpired lease
to be assumed pursuant to the Plan is in default will be satisfied, pursuant to
Section 365(b)(1) of the Bankruptcy Code, at the option of Cityscape, CSC,
Reorganized Cityscape or Reorganized CSC: (a) by payment of the default amount
in cash on the Effective Date or (b) on such other terms as are agreed to by the
parties to such executory contract or unexpired lease. If there is a dispute
regarding: (i) the amount of any cure payments; (ii) the ability of Reorganized
Cityscape or Reorganized CSC, as the case may be, to provide "adequate assurance
of future performance" (within the meaning of Section 365 of the Bankruptcy
Code) under the contract or lease to be assumed; or (iii) any other matter
pertaining to assumption, the cure payments required by Section 365(b)(1) of the
Bankruptcy Code will be made following the entry of a Final Order of the
Bankruptcy Court resolving the dispute and approving the assumption.
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Rejections
Except as otherwise provided in (i) Section VII.A of the Plan (providing
for the filing and service of a schedule of contracts to be assumed), (ii) any
previous Orders authorizing the assumption or rejection of any of the Debtors'
executory contracts or unexpired leases or (iii) or in any contract, instrument,
release, indenture or other agreement or document entered into in connection
with the Plan, on the Effective Date, pursuant to Section 365 of the Bankruptcy
Code, Cityscape and CSC will reject each of the executory contracts and
unexpired leases to which either of them is a party. The Confirmation Order will
constitute an Order of the Bankruptcy Court approving such rejections, pursuant
to Section 365 of the Bankruptcy Code, as of the Effective Date.
Bar Date for Rejection Damages
If the rejection of an executory contract or unexpired lease pursuant to
Section VII.C of the Plan gives rise to a Claim by the other party or parties to
such contract or lease, such Claim will be forever barred and will not be
enforceable against Cityscape, CSC, Reorganized Cityscape, Reorganized CSC,
their respective successors or their respective assets or properties unless (a)
a stipulation with respect to the amount and nature of such claim has been
entered into by any of Cityscape, CSC, Reorganized Cityscape or Reorganized CSC,
as applicable, and the Holder of such Claim in connection with the rejection of
such executory contract or unexpired lease or (b) a proof of Claim is filed and
served on Reorganized Cityscape or Reorganized CSC, as the case may be, and
counsel for Reorganized Cityscape or Reorganized CSC, as the case may be, within
30 days after the Effective Date or such earlier date as established by the
Bankruptcy Court. Unless otherwise ordered by the Bankruptcy Court, all Allowed
Claims arising from the rejection of executory contracts and unexpired leases
will be treated as Claims in Class 5 or 13 as applicable.
Continuation of Certain Retirement and Other Benefits
All employment, retirement and other related agreements and incentive
compensation programs to which Cityscape or CSC is a party are treated as
executory contracts under the Plan and will be assumed or rejected pursuant to
Section VII of the Plan and Sections 365 and 1123 of the Bankruptcy Code.
Executory Contracts and Unexpired Leases Entered Into and Other
Obligations Incurred After the Petition Date
Executory contracts and unexpired leases entered into and other
obligations incurred after the Petition Date by the Debtors will be performed by
the Debtors or the Reorganized Company, in the ordinary course of their
businesses. Accordingly, such executory contracts, unexpired leases and other
obligations will survive and remain unaffected by entry of the Confirmation
Order.
Legal Effects of the Plan
Continued Corporate Existence; Vesting of Assets in Reorganized Cityscape
and Reorganized CSC
Reorganized Cityscape will exist after the Effective Date as a separate
corporate entity, with all the powers of a corporation under the general
corporate law of Delaware. Reorganized CSC will exist after the Effective Date
as a separate corporate entity, with all the powers of a corporation under the
general corporate law of New York. Except as otherwise provided in the Plan or
the Confirmation Order, on the Effective Date, all property of Cityscape's
Estate will vest in Reorganized Cityscape and all property of CSC's Estate will
vest in Reorganized CSC, all free and clear of all Claims, liens, encumbrances
and Interests of Holders of Claims and Holders of Old Securities and Old Stock
Rights. From and after the Effective Date, Reorganized Cityscape and Reorganized
CSC may operate their business and use, acquire, and dispose of property and
settle and compromise claims or interests arising on or after the Effective Date
without supervision by the Bankruptcy Court and free of any restrictions of the
Bankruptcy Code, the Bankruptcy Rules or the Local Bankruptcy Rules, other than
those restrictions expressly imposed by the Plan or the Confirmation Order.
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Cancellation of Old Securities and Related Agreements
On the Effective Date, all securities, instruments and agreements
governing any Claims or Interests Impaired by the Plan, including, without
limitation, (i) the Old Securities, (ii) the indentures governing the Old Debt,
(iii) the agreements governing the Old Warrants and (iv) any security,
instrument or agreement entered into in connection with any of the foregoing, in
each case will be deemed terminated, cancelled and extinguished, and except as
otherwise provided in the Plan, Cityscape and CSC, on the one hand, and the
Indenture Trustees, on the other hand, will be released from any and all
obligations under the applicable indenture except with respect to the payments
required to be made to each such Indenture Trustee as provided in the Plan or
with respect to such other rights of such Indenture Trustee that, pursuant to
the terms of such indenture, survive the termination of such indenture.
Termination of the indentures will not impair the rights of the Holders of Old
Debt to receive distributions on account of Old Debt pursuant to the Plan.
Preservation of Rights of Action Held by Cityscape, CSC, Reorganized
Cityscape or Reorganized CSC
Except as provided in the Plan, or in any contract, instrument, release or
other agreement entered into in connection with the Plan, in accordance with
Section 1123(b) of the Bankruptcy Code, Reorganized Cityscape and Reorganized
CSC will retain (and may enforce) any claims, rights and causes of action that
the Debtors or their Estates may hold against any Person, including, among other
things, (i) any claims, rights or causes of action under Sections 544 through
550 of the Bankruptcy Code or any similar provisions of State law, or any other
statute or legal theory, and (ii) any claims for recovery against present or
former Holders of Trade Claims who received payments from the Debtors during the
pendency of the Debtors' chapter 11 cases on account of Trade Claims to the
extent that such payments resulted in such Holders' receiving greater
distributions on account of their Trade Claims than that to which they are
entitled under Section V.B.5 of the Plan; provided, however, that (i) in the
event that Class 4 and Class 4a vote to accept the Plan, any such claims, rights
or causes of action against Holders of Allowed Claims in such Class (solely in
their capacities as such) will be released, discharged and extinguished on the
Effective Date, whether or not then pending, and (ii) in the event that Class 6
and Class 6a vote to accept the Plan, any such claims, rights or causes of
action against Holders of Allowed Claims in such Class (solely in their
capacities as such) will be released, discharged and extinguished on the
Effective Date, whether or not then pending.
Discharge of Debtors and Injunction
Except as otherwise provided in the Plan or the Confirmation Order: (i) on
the Effective Date, the Debtors will be deemed discharged and released to the
fullest extent permitted by Section 1141 of the Bankruptcy Code from all Claims
and Interests, including, but not limited to, demands, liabilities, Claims and
Interests that arose before the Effective Date and all debts of the kind
specified in Sections 502(g), 502(h) or 502(i) of the Bankruptcy Code, whether
or not (A) a proof of Claim or proof of Interest based on such debt or Interest
is Filed or deemed Filed pursuant to Section 501 of the Bankruptcy Code, (B) a
Claim or Interest based on such debt or Interest is allowed pursuant to Section
502 of the Bankruptcy Code, or (C) the Holder of a Claim or Interest based on
such debt or Interest has accepted the Plan; and (ii) all Persons will be
precluded from asserting against Reorganized Cityscape, Reorganized CSC, their
respective successors, or their respective assets or properties any other or
further Claims or Interests based upon any act or omission, transaction, or
other activity of any kind or nature that occurred prior to the Effective Date.
Except as otherwise provided in the Plan or the Confirmation Order, the
Confirmation Order will act as a discharge of any and all Claims against and all
debts and liabilities of the Debtors, as provided in Sections 524 and 1141 of
the Bankruptcy Code, and such discharge will void any judgment against the
Debtors at any time obtained to the extent that it relates to a Claim
discharged.
Except as otherwise provided in the Plan or the Confirmation Order, on and
after the Effective Date, all Persons who have held, currently hold or may hold
a debt, Claim or Interest discharged pursuant to the terms of the Plan are
permanently enjoined from taking any of the following actions on account of any
such discharged debt, Claim or Interest: (i) commencing or continuing in any
manner any action or other proceeding against the Debtors, Reorganized Cityscape
or Reorganized CSC, or their respective successors or their respective
properties; (ii) enforcing, attaching, collecting or recovering in any manner
any judgment, award, decree or order against the Debtors, Reorganized Cityscape
or Reorganized CSC, or their respective successors or their respective
properties;
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(iii) creating, perfecting or enforcing any lien or encumbrance against the
Debtors, Reorganized Cityscape or Reorganized CSC, or their respective
successors or their respective properties; and (iv) commencing or continuing any
action, in any manner, in any place that does not comply with or is inconsistent
with the provisions of the Plan or the Confirmation Order. Any Person injured by
any willful violation of such injunction will recover actual damages, including
costs and attorneys' fees, and, in appropriate circumstances, may recover
punitive damages, from the willful violator.
Limitation of Liability
None of the Debtors, Reorganized Cityscape, Reorganized CSC, the members
of the Unofficial Senior Noteholders' Committee, the members of the Unofficial
Subordinated Debentureholders' Committee, the members of the Creditors'
Committee, the Indenture Trustees or any of their respective employees,
officers, directors, agents, or representatives, or any professional persons
employed by any of them (including, without limitation, their respective
Designated Professionals), will have any responsibility, or have or incur any
liability, to any Person whatsoever (i) for any matter expressly approved or
directed by the Confirmation Order or (ii) under any theory of liability (except
for any claim based upon willful misconduct or gross negligence) for any act
taken or omission made in good faith directly related to formulating,
implementing, confirming, or consummating the Plan, the Disclosure Statement, or
any contract, instrument, release, or other agreement or document created in
connection with the Plan; provided, that nothing in Section XI.B of the Plan
will limit the liability of any Person for breach of any express obligation it
has under the terms of the Plan or under any agreement or other document entered
into by such Person either post-Petition Date or in accordance with the terms of
the Plan (except to the extent expressly provided in the Confirmation Order) or
for any breach of a duty of care owed to any other Person occurring after the
Effective Date.
The limitation of liability described above is in addition to the
so-called "safe harbor" provision of Section 1125(e) of the Bankruptcy Code.
Section 1125(e) provides in general that a person who, in good faith and in
compliance with the applicable provisions of the Bankruptcy Code, either (i)
solicits acceptance or rejection of a plan of reorganization, or (ii)
participates in the offer, issuance, sale or purchase of a security under a
plan, is not liable on account of such solicitation or participation for
violation of any applicable law governing solicitation of acceptance or
rejection of a plan of reorganization or the offer, issuance, sale or purchase
of securities under a plan.
Releases
On the Effective Date, each of the Debtors will release unconditionally
(i) each of the Debtors' then-current and former officers, directors,
shareholders, employees, consultants, attorneys, accountants, financial advisors
and other representatives (solely in their capacities as such) (collectively,
the "Debtor Releasees"), (ii) the Creditors' Committee and, solely in their
capacity as members or representatives of the Creditors' Committee, each member,
consultant, attorney, accountant or other representative of the Creditors'
Committee (including, without limitation, their respective Designated
Professionals), (iii) the Unofficial Senior Noteholders' Committee and, solely
in their capacity as members or representatives of the Unofficial Senior
Noteholders' Committee, each member, consultant, attorney, accountant or other
representative of the Unofficial Senior Noteholders' Committee (including,
without limitation, their respective Designated Professionals), (iv) the
Unofficial Subordinated Debentureholders' Committee and, solely in their
respective capacity as members or representatives of the Unofficial Subordinated
Debentureholders' Committee, each member, consultant, attorney, accountant or
other representative of the Unofficial Subordinated Debentureholders' Committee
(including, without limitation, their respective Designated Professionals), (v)
the Indenture Trustees, in their respective capacities as Indenture Trustee, and
each of their then-current and former officers, directors, shareholders,
employees, consultants, attorneys, accountants, financial advisors and other
representatives (solely in their capacities as such) from any and all claims,
obligations, suits, judgments, damages, rights, causes of action and liabilities
whatsoever, whether known or unknown, foreseen or unforeseen, existing or
hereafter arising, in law, equity or otherwise, based in whole or in part upon
any act or omission, transaction, event or other occurrence taking place on or
prior to the Effective Date in any way relating to Cityscape, CSC, the Company's
trust indentures, the CIT Facility, the Greenwich Facility, the DIP Facilities,
the Debtors, the Reorganization Cases, the Plan or the Disclosure Statement.
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On the Effective Date, (i) provided that Class 4 and Class 4a vote to
accept the Plan, each Holder of a Class 4 or Class 4a Claim, and (ii) provided
that Class 6 and Class 6a vote to accept the Plan, each Holder of a Class 6 or
Class 6a Claim will be deemed to have unconditionally released the Debtor
Releasees from any and all claims, obligations, suits, judgments, damages,
rights, causes of action and liabilities whatsoever which any such Holder may be
entitled to assert, whether known or unknown, foreseen or unforeseen, existing
or hereafter arising, in law, equity or otherwise, based in whole or in part
upon any act or omission, transaction, event or other occurrence taking place on
or prior to the Effective Date in any way relating to Cityscape, CSC, the
Company's trust indentures, the Debtors, the Reorganization Cases, the Plan or
the Disclosure Statement.
Indemnification
The Debtors will fully indemnify and Reorganized Cityscape or Reorganized
CSC, as the case may be, will assume the Debtors' obligations to indemnify any
person by reason of the fact that he or she is or was a director officer,
employee, agent, Designated Professional, member, or other authorized
representative (in each case, as applicable) of either of the Debtors, the
Creditors' Committee, the Unofficial Senior Noteholders' Committee, the
Unofficial Subordinated Debentureholders' Committee or the Indenture Trustees
(collectively, the "Indemnitees") against any claims, liabilities, actions,
suits, damages, fines, judgments or expenses (including reasonable attorney's
fees and expenses), arising during the course of, or otherwise in connection
with or in any way related to, the negotiation, preparation, formulation,
solicitation, dissemination, implementation, confirmation and consummation of
the Plan and the transactions contemplated thereby and the Disclosure Statement
in support thereof; provided, however, that the foregoing indemnification will
not apply to any liabilities arising from the gross negligence or willful
misconduct of any Indemnitee. If any claim, action or proceeding is brought or
asserted against an Indemnitee in respect of which indemnity may be sought from
Reorganized Cityscape or Reorganized CSC, the Indemnitee will promptly notify
Reorganized Cityscape or Reorganized CSC, as the case may be, in writing and
Reorganized Cityscape or Reorganized CSC, as the case may be, will assume the
defense thereof including the employment of counsel reasonably satisfactory to
the Indemnitee, and the payment of all expenses of such Indemnitee. The
Indemnitee will have the right to employ separate counsel in any such claim,
action or proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel will be at the expense of the Indemnitee unless (a)
Reorganized Cityscape or Reorganized CSC, as the case may be, has agreed to pay
the fees and expenses of such counsel, or (b) Reorganized Cityscape or
Reorganized CSC, as the case may be, will have failed to assume promptly the
defense of such claim, action or proceeding or to employ counsel reasonably
satisfactory to the Indemnitee in any such claim, action or proceeding, or (c)
the named parties in any such claim, action or proceeding (including any
impleaded parties) include both the Indemnitee and Reorganized Cityscape or
Reorganized CSC, as the case may be, and the Indemnitee believes, in the
exercise of its business judgment and in the opinion of its legal counsel,
reasonably satisfactory to Reorganized Cityscape or Reorganized CSC, as the case
may be, that the joint representation of Reorganized Cityscape or Reorganized
CSC, as the case may be, and the Indemnitee will likely result in a conflict of
interest (in which case, if the Indemnitee notifies Reorganized Cityscape or
Reorganized CSC, as the case may be, in writing that it elects to employ
separate counsel at the expense of Reorganized Cityscape or Reorganized CSC,
Reorganized Cityscape or Reorganized CSC, as the case may be, will not have the
right to assume the defense of such action or proceeding on behalf of the
Indemnitee). In addition, neither Reorganized Cityscape nor Reorganized CSC will
effect any settlement or release from liability in connection with any matter
for which the Indemnitee would have the right to indemnification from
Reorganized Cityscape or Reorganized CSC unless such settlement contains a full
and unconditional release of the Indemnitee, or a release of the Indemnitee
reasonably satisfactory in form and substance to the Indemnitee.
Retention of Bankruptcy Court Jurisdiction
To the maximum extent permitted by the Bankruptcy Code or other applicable
law, the Bankruptcy Court will have jurisdiction of all matters arising out of,
and related to, the Reorganization Cases and the Plan pursuant to, and for the
purpose of, Sections 105(a) and 1142 of the Bankruptcy Code, including, without
limitation, jurisdiction to:
(i) Allow, disallow, determine, liquidate, classify, estimate or
establish the priority or secured or unsecured status of any Claim or
Interest, including the resolution of any request for payment of
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any Administrative Claim, the resolution of any objections to the
allowance or priority of Claims or Interests and the resolution of any
dispute as to the treatment necessary to reinstate a Claim pursuant to the
Plan;
(ii) Grant or deny any applications for allowance of compensation or
reimbursement of expenses authorized pursuant to the Bankruptcy Code or
the Plan, for periods ending before the Effective Date;
(iii) Resolve any matters related to the assumption or rejection of
any executory contract or unexpired lease to which Cityscape or CSC is a
party or with respect to which Cityscape or CSC may be liable, and to
hear, determine and, if necessary, liquidate any Claims arising therefrom;
(iv) Ensure that distributions to Holders of Allowed Claims or
Allowed Interests are accomplished pursuant to the provisions of the Plan;
(v) Decide or resolve any motions, adversary proceedings, contested
or litigated matters and any other matters and grant or deny any
applications involving Cityscape, CSC, Reorganized Cityscape or
Reorganized CSC that may be pending on the Effective Date;
(vi) Enter such Orders as may be necessary or appropriate to
implement or consummate the provisions of the Plan and all contracts,
instruments, releases, indentures and other agreements or documents
created in connection with the Plan, the Solicitation Statement or the
Confirmation Order, except as otherwise provided herein;
(vii) Resolve any cases, controversies, suits or disputes that may
arise in connection with the consummation, interpretation or enforcement
of the Plan or the Confirmation Order, including the release and
injunction provisions set forth in and contemplated by the Plan and the
Confirmation Order, or any entity's rights arising under or obligations
incurred in connection with the Plan or the Confirmation Order;
(viii) Subject to any restrictions on modifications provided in the
Plan or in any contract, instrument, release, indenture or other agreement
or document created in connection with the Plan, modify the Plan before or
after the Effective Date pursuant to Section 1127 of the Bankruptcy Code
or modify the Solicitation Statement, the Confirmation Order or any
contract, instrument, release, indenture or other agreement or document
created in connection with the Plan, the Solicitation Statement or the
Confirmation Order; or remedy any defect or omission or reconcile any
inconsistency in any Bankruptcy Court Order, the Plan, the Solicitation
Statement, the Confirmation Order or any contract, instrument, release,
indenture or other agreement or document created in connection with the
Plan, the Solicitation Statement or the Confirmation Order, in such manner
as may be necessary or appropriate to consummate the Plan, to the extent
authorized by the Bankruptcy Code;
(ix) Issue injunctions, enter and implement other Orders or take
such other actions as may be necessary or appropriate to restrain
interference by any entity with consummation, implementation or
enforcement of the Plan or the Confirmation Order;
(x) Enter and implement such Orders as are necessary or appropriate
if the Confirmation Order is for any reason modified, stayed, reversed,
revoked or vacated;
(xi) Except as otherwise provided in the Plan, or with respect to
specific matters, in the Confirmation Order or any other Order entered in
connection with the Reorganization Cases, determine any other matters that
may arise in connection with or relating to the Plan, the Solicitation
Statement, the Confirmation Order or any contract, instrument, release,
indenture or other agreement or document created in connection with the
Plan, the Solicitation Statement or the Confirmation Order;
(xii) Hear and dispose of any claims assigned to, and asserted by,
Reorganized Cityscape or Reorganized CSC pursuant to Section XI.F of the
Plan;
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(xiii) Resolve any disputes relating to the Indenture Trustees'
requests for payment of their fees and expenses, as provided in Section
V.A.3.b of the Plan;
(xiv) Resolve any disputes over invoices submitted by professionals
to the Reorganized Company for compensation for services rendered or
reimbursement of expenses incurred after the Effective Date, as provided
in Section V.A.3.b of the Plan; and
(xv) Enter an Order or Orders closing the Reorganization Cases.
V. CONFIRMATION AND CONSUMMATION PROCEDURES
A. Solicitation of Acceptances
As permitted by the Bankruptcy Code, the Debtors are soliciting, in good
faith and in compliance with the applicable provisions of the Bankruptcy Code,
the acceptance of the Plan by all Classes of Claims that are "Impaired" under
the Plan and that are entitled to vote on the Plan. The solicitation of
acceptances from Holders of Claims in unimpaired Classes is not required under
the Bankruptcy Code. The following Classes are Impaired and are entitled to vote
on the Plan:
Class 4 and 4a - Senior Note Claims and Small Senior Note Claims;
Class 5 and 5a - General Unsecured Claims and Small Unsecured Claims; and
Class 6 and 6a - Subordinated Debenture Claims and Small Subordinated
Debenture Claims.
A plan is accepted by an impaired class of claims if holders of at least
two-thirds in dollar amount and more than one-half in number of claims of that
class vote to accept the plan. Only those holders of claims or interests who
actually vote count in these tabulations.
In addition to this voting requirement, Section 1129 of the Bankruptcy
Code requires that a plan be accepted by each holder of a claim or interest in
an impaired class or that the plan otherwise be found by the bankruptcy court to
be in the best interests of each holder of a claim or interest in such class. In
addition, each impaired class must accept the plan for the plan to be confirmed
without application of the "fair and equitable" and "unfair discrimination"
tests in Section 1129(b) of the Bankruptcy Code discussed below.
Any Holder of an Impaired Claim in Class 5 or Class 5a (i) whose Claim has
been scheduled by the Debtors in the schedules of assets and liabilities filed
with the Bankruptcy Court (provided that such Claim has not been scheduled as
disputed, contingent or unliquidated) or (ii) who has file a proof of Claim on
or before the deadline for filing proofs of claim, as applicable to such Claim,
with respect to which the Debtors' have not filed an objection on or before the
Voting Deadline or the amount of which has been determined or estimated for
voting purposes by the Bankruptcy Court is entitled to accept or reject the Plan
(unless such Claim has been disallowed by the Bankruptcy Court for purposes of
accepting or rejecting the Plan). Class 4, 4a, 6 and 6a Claims are deemed
allowed pursuant to the Plan. The Voting Record Date for determining which
Holders of Claims in Classes 4, 4a, 6 and 6a are entitled to accept or reject
the Plan is __________ ___, 1999, which is the date that the order approving
this Disclosure Statement was entered.
B. Confirmation Hearing
The Bankruptcy Code requires the Bankruptcy Court, after notice, to hold a
hearing on the Confirmation of the Plan. The Confirmation Hearing has been
scheduled for __:__ __, New York City Time, on _________ __, 1999. The
Confirmation Hearing may be adjourned from time to time by the Bankruptcy Court
without further notice other than an announcement of the adjourned date made at
the Confirmation Hearing. Any objection to Confirmation of the Plan must be made
in writing and filed with the Bankruptcy Court and served upon the following or
before __:__ __,New York City Time, on _______ ___, 1999:
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LATHAM & WATKINS
Attorneys for the Debtors
885 Third Avenue, Suite 1000
New York, NY 10027
Attn.: Robert J. Rosenberg, Esq.
CITYSCAPE FINANCIAL CORP.
CITYSCAPE CORP.
565 Taxter Road
Elmsford, NY 10523-2300
Attn.: Steven M. Miller
KASOWITZ, BENSON, TORRES & FRIEDMAN, LLP
Attorneys for the Unofficial Senior Noteholders' Committee
1301 Avenue of the Americas
New York, NY 10019
Attn.: David M. Friedman, Esq.
KRAMER LEVIN NAFTALIS & FRANKEL LLP
Attorneys for the Unofficial Subordinated Debentureholders' Committee
919 Third Avenue
New York, NY 10022
Attn.: Kenneth H. Eckstein, Esq.
OFFICE OF THE UNITED STATES TRUSTEE
33 Whitehall Street, 21st Floor
New York, New York 10004
C. Confirmation
At the Confirmation Hearing, the Bankruptcy Court will confirm the Plan
only if the Plan satisfies all of the requirements of Section 1129 of the
Bankruptcy Code. The requirements, in relevant part, are the following:
a) The Plan and the Debtors must comply with the applicable
provisions of the Bankruptcy Code.
b) The Plan must have been proposed in good faith and not by any
means forbidden by law.
c) Any payment made or to be made by the Debtors, or by an entity
issuing securities, or acquiring property under the Plan, for services or
for costs and expenses in, or in connection with, the chapter 11 cases or
in connection with the Plan and incident to the chapter 11 cases must have
been approved by or be subject to, the approval of the Bankruptcy Court as
reasonable.
d) The Debtors must have disclosed the identity and affiliations of
any individual proposed to serve, after the Confirmation of the Plan, as a
director or officer of the Debtors under the Plan, and the appointment to
or continuance in such office by such individual must be consistent with
the interests of creditors and equity security holders and with public
policy. The Debtors must have disclosed the identity of any "insider" (as
defined in Section 101 of the Bankruptcy Code) who will be employed or
retained by Reorganized Cityscape and Reorganized CSC and the nature of
any compensation for such insider.
e) Any government regulatory commission with jurisdiction, after the
Confirmation Date, over the rates of the Debtors has approved any rate
change provided for in the Plan, or such rate change is expressly
conditioned upon such approval.
f) With respect to each Impaired Class of Claims or Interests, each
Holder of a Claim or Interest in such class must either accept the Plan or
receive or retain under the Plan on account of such Claim or Interest,
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property of a value, as of the Effective Date that is not less than the
amount that such Holder would receive or retain if the Debtors were
liquidated on the Effective Date under chapter 7 of the Bankruptcy Code.
g) Each Class of Claims or Interests must either accept the Plan or
not be Impaired under the Plan. If this requirement is not met, the Plan
may still be confirmed pursuant to Section 1129(b) of the Bankruptcy Code.
h) Except to the extent that the Holder of a particular Claim has
agreed to a different treatment of such Claim, the Plan must provide that
(i) Administrative Expenses will be paid in full in Cash on the Effective
Date, (ii) Priority Claims will be paid in full in Cash on the Effective
Date, or if the Class of Priority Claims accepts the Plan, the Plan may
provide for deferred Cash payments, of a value, as of the Effective Date,
equal to the Allowed amount of such Priority Claims, and (iii) the Holder
of a Priority Tax Claim will receive on account of such Claim deferred
Cash payments over a period not exceeding six (6) years after the date of
assessment of such Claim, of a value as of the Effective Date, equal to
the Allowed amount of such Claim.
i) If a class of Claims is Impaired under the Plan, at least one
Class of Claims that is Impaired by the Plan must accept the Plan, such
acceptance to be determined without giving effect to any acceptance of the
Plan by an "insider."
j) Confirmation of the Plan must not be likely to be followed by the
liquidation, or the need for further financial reorganization, of the
Debtors or any successor of the Debtors under the Plan.
k) All fees payable under Section 1930 of title 28, United States
Code, as determined by the Bankruptcy Court at the Confirmation Hearing,
must have been paid or the Plan must provide for the payment of all such
fees on the Effective Date.
l) The Plan provides for the continuation after the Effective Date
of payment of all retiree benefits, as that term is defined in Section
1114 of the Bankruptcy Code, and at the level established pursuant to
Section 1114, at any time prior to the Confirmation Date, for the duration
of the period the Debtors have obligated themselves to provide such
benefits.
The Debtors believe that the Plan satisfies all of the statutory
requirements of chapter 11 of the Bankruptcy Code. Certain of these requirements
are discussed in greater detail below.
Best Interests Test. In order to the meet the "best interests" test of
Section 1129(a)(7) of the Bankruptcy Code, the Debtors must establish that each
holder of a Claim or Interest in an Impaired class either (A) has accepted the
Plan or (B) will receive or retain under the Plan in respect of its Claim or
Interest, property of a value, as of the Effective Date, that is not less than
the amount such holder would receive or retain if the Debtors were liquidated
under chapter 7 of the Bankruptcy Code.
To determine the recovery that Creditors and Holders of Interests would
receive if the Debtors were to be liquidated, the Bankruptcy Court must
determine the amount of cash that would be generated from the liquidation of the
assets and properties of the Debtors in a chapter 7 liquidation case. The dollar
amount that would be available for satisfaction of Claims and Interests would
consist of the proceeds resulting from the disposition of the assets of the
Debtors in a liquidation case plus the cash held by the Debtors at the time of
the commencement of the liquidation case and any interest earned on the
investment thereof minus the costs and expenses of the liquidation and any
additional administrative and priority claims that may result from the
termination of the Debtors' business and the completion of its liquidation under
chapter 7.
The Debtors' costs of liquidation under chapter 7 of the Bankruptcy Code
would include the fees payable to a trustee (or trustees) in bankruptcy and to
any additional attorneys and other professionals engaged by such trustee (or
trustees) plus any unpaid expenses incurred by the Debtors during the chapter 11
cases including compensation to and reimbursement of expenses of, attorneys,
financial advisors and accountants and costs and expenses of members of the
Unofficial Committees that are allowed. The foregoing types of Claims and such
other Claims as may arise in the liquidation case or result from the chapter 11
cases would be paid in full from the
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liquidation proceeds before the balance of those proceeds would be available to
pay Unsecured Claims. In addition, additional Claims would arise by reason of
the rejection of unexpired leases and executory contracts.
Under the "best interest" test, all entities holding Unsecured Claims in a
particular class having the same rights upon liquidation would be treated as a
single class for purposes of determining the potential distribution of the
proceeds from the liquidation of the assets of the Debtors under chapter 7. The
distributions payable to each of the creditors in a Class from the liquidation
proceeds would be calculated pro rata according to the amount of the Claim in
such Class held be each Creditor. The Debtors believe that the most likely
outcome of liquidation proceeding under chapter 7 would be the application of
the rule of absolute priority of distributions. Under this rule, (A) no holders
of Unsecured Claims would receive any distribution until all holders of
Administrative Expenses, Priority Claims and Priority Tax Claims were paid in
full with interest and (B) no holder of an Interest would receive any
distribution until all Holders of General Unsecured Claims were paid in full
with interest.
The Debtors have carefully considered the probable effects of liquidation
under chapter 7 of the Bankruptcy Code on the ultimate proceeds available for
distribution to creditors and holders of Interests, including the following:
a) the probable costs and expenses of such liquidation;
b) the possible adverse effect of liquidation under chapter 7 on the
realizable values of the Debtors' assets and properties;
c) the possible adverse effect of liquidation under chapter 7 on the
salability of the Debtors' business on a going-concern basis as a result
of the possible loss of key employees, the goodwill of customers, vendors
and suppliers and the negative effect on the Debtors' reputation; and
d) the possible substantial increase in Claims which would rank
prior to or on a parity with those of unsecured creditors.
After considering these factors, among others, the Debtors have prepared
an analysis, "The Liquidation Analysis" (set forth in Exhibit D attached
hereto), of the projected proceeds of a hypothetical chapter 7 liquidation and
the resulting distributions of such proceeds to the various Classes of Claims
and Holders of Interests. The Liquidation Analysis demonstrates that the value
of the distributions to each Class of Claims and Interests pursuant to the Plan
is equal to or greater than the value of the distributions to such Class in a
chapter 7 liquidation.
Although the Liquidation Analysis assumes that full distributions to
creditors of the liquidation proceeds would occur within five months of the
commencement of the hypothetical chapter 7 case, the Debtors also believe that
distributions of the proceeds of the liquidation could be delayed for a
significantly greater period, because of the time necessary to complete the
liquidation, the possibility of litigation among the Holders of various Classes
of Claims of Interests and the additional time required thereafter to litigate
and resolve Disputed Claims and prepare for distributions. If such further delay
were to occur, the present value of future distributions to creditors under
chapter 7 would be further reduced.
Feasibility. In order to meet the "feasibility" test under Section
1129(a)(11) of the Bankruptcy Code, the Debtors must establish that Confirmation
of the Plan is not likely to be followed by the liquidation, or the need for
further financial reorganization, of the Debtors. To determine whether the Plan
meets this requirement, the Debtor has prepared projected financial statements
for Reorganized Cityscape and Reorganized CSC through fiscal year 2003 which are
attached hereto as Exhibit C.
In preparing the Projections, the Debtors have assumed for clarity of
presentation that the Plan will be confirmed by the Bankruptcy Court and that
the Effective Date will occur on or before May 31, 1999; however, the Debtors
believe that its operating results will not vary materially from the Projections
as a result of the Effective Date occurring earlier or later than May 31, 1999.
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Although the Projections are based upon the Debtors' best estimates, no
representations are made with respect to the accuracy thereof or the ability of
Reorganized Cityscape and Reorganized CSC to achieve the Projections. The
Projections are based upon a number of assumptions, many of which are subject to
substantial uncertainty. Some assumptions inevitably will not materialize and
unanticipated events and circumstances occurring subsequent to the date of
preparation of the Projections may affect actual results. Therefore, actual
operating results may vary materially from the projected operating results set
forth in the Projections.
In addition, the Projections were prepared based upon the Debtors'
unaudited financial information as of November 30, 1998; the 1998 year-end audit
had not been completed as of the time the Projections were prepared.
Consequently, the actual audited operating results and financial information for
the Debtors may materially differ from the unaudited financial information upon
which the Projections are based because of, among other things, adjustments, if
any, resulting from completion of a 1998 year-end audit of the Debtors.
Based upon the Projections, the Debtors believe the Plan is feasible and
will be prepared to so demonstrate at the Confirmation Hearing.
Each creditor is urged to carefully examine the Projections and the
related assumptions in evaluating the feasibility of the Plan.
Confirmation Over a Dissenting Class
The Bankruptcy Code contains provisions authorizing the confirmation of a
plan even if it is not accepted by all impaired classes, as long as at least one
impaired class of claims (without including any acceptance of the plan by an
insider) has accepted it. These so-called "cramdown" provisions are set forth in
Section 1129(b) of the Bankruptcy Code. As indicated above, a plan may be
confirmed under the cramdown provisions if, in addition to satisfying the other
requirements of Section 1129 of the Bankruptcy Code, it (i) is "fair and
equitable" and (ii) "does not discriminate unfairly" with respect to each class
of claims or interests that is impaired under, and has not accepted, the plan.
The "fair and equitable" standard, also known as the "absolute priority rule,"
requires, among other things, that unless a dissenting class of claims or a
class of interests receives full compensation for its allowed claims or allowed
interests, no holder of claims or interests in any junior class may receive or
retain any property on account of such claims. The Bankruptcy Code establishes
different "fair and equitable" tests for secured creditors, unsecured creditors
and equity holders, as follows:
Secured Creditors: either (i) each impaired secured creditor retains
its liens securing its secured claim and receives on account of its
secured claim deferred cash payments having a present value equal to the
amount of its allowed secured claim, (ii) each impaired secured creditor
realizes the "indubitable equivalent" of its allowed secured claim, or
(iii) the property securing the claim is sold free and clear of liens with
such liens to attach to the proceeds, and the liens against such proceeds
are treated in accordance with clause (i) or (ii) of this subparagraph
(a).
Unsecured Creditors: either (i) each impaired unsecured creditor
receives or retains under the plan of reorganization property of a value
equal to the amount of its allowed claim, or (ii) the holders of claims
and equity interests that are junior to the claims of the nonaccepting
class do not receive any property under the plan of reorganization on
account of such claims and equity interests.
Equity Holders: either (i) each equity holder will receive or retain
under the plan of reorganization property of a value equal to the greater
of (a) the fixed liquidation preference or redemption price, if any, of
such stock or (b) the value of the stock, or (ii) the holders of interests
that are junior to the nonaccepting class will not receive any property
under the plan of reorganization.
The "fair and equitable" standard has also been interpreted to prohibit
any class senior to a dissenting class from receiving under a plan more than
100% of its allowed claims. The requirement that a plan not "discriminate
unfairly" means, among other things, that a dissenting class must be treated
substantially equally with respect to other classes of equal rank.
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The Debtors believe that, if necessary, the Plan may be crammed down over
the dissent of Classes of certain Claims and Interests, in view of the treatment
proposed for such Classes. See Section IV.B, "THE PLAN OF REORGANIZATION --
Treatment of Claims and Interests Under the Plan" for information concerning the
treatment of various Classes depending on which Classes vote to accept or reject
the Plan. If necessary and appropriate, the Debtors intend to amend the Plan to
permit cramdown of dissenting Classes of Claims or Interests. There can be no
assurance, however, that the requirements of Section 1129(b) of the Bankruptcy
Code would be satisfied even if the Plan treatment provisions were amended or
withdrawn as to one or more Classes. The Debtors believe that the treatment
under the Plan of the Holders of Allowed Claims and Allowed Interests, if any,
in each of Class 7, 8, 9, 10, 11, 12, 13 and 14 will satisfy the "fair and
equitable" test because, although no distribution will be made in respect of
Claims and Interests in such Classes and, as a result, such Classes will be
deemed, pursuant to Section 1126 of the Bankruptcy Code, to have rejected the
Plan, no Class junior to any such non-accepting Class will receive or retain any
property under the Plan.
In addition, the Debtors do not believe that the Plan unfairly
discriminates against any Class that may not accept or otherwise consent to the
Plan. A plan of reorganization "does not discriminate unfairly" if (i) the legal
rights of a nonaccepting class are treated in a manner that is consistent with
the treatment of other classes whose legal rights are similarly situated to
those of the nonaccepting class, and (ii) no class receives payments in excess
of that which it is legally entitled to receive for its claims or equity
interests. The Company believes the Plan does not discriminate unfairly.
THE DEBTORS RESERVE THE ABSOLUTE RIGHT TO SEEK CONFIRMATION OF THE PLAN
UNDER SECTION 1129(B) OF THE BANKRUPTCY CODE IN THE EVENT THE PLAN IS NOT
ACCEPTED BY ALL IMPAIRED CLASSES. AT A MINIMUM, THE DEBTORS WILL SEEK
CONFIRMATION OF THE PLAN PURSUANT TO SECTION 1129(B) OF THE BANKRUPTCY CODE AS
TO CLASSES 7 THROUGH 14 AS SUCH CLASSES WILL NOT RECEIVE OR RETAIN ANY INTEREST
OR PROPERTY UNDER THE PLAN AND WILL, THEREFORE, BE DEEMED TO HAVE REJECTED THE
PLAN.
Subject to the conditions set forth in the Plan, a determination by the
Bankruptcy Court that the Plan is not confirmable, pursuant to Section 1129 of
the Bankruptcy Code, will not limit or affect the Debtors' ability to modify the
Plan to satisfy the Confirmation requirements of Section 1129 of the Bankruptcy
Code.
D. Consummation
If the Plan is confirmed, the Plan will be consummated and distributions
will be made on or shortly after the Effective Date, except as otherwise
provided in the Plan.
E. Conditions to Effective Date
The Effective Date will not occur and the Plan will not be consummated
unless and until each of the following conditions has been satisfied or waived
by the Debtors:
1. The Confirmation Order shall authorize and direct that the Debtors,
Reorganized Cityscape and Reorganized CSC take all actions necessary or
appropriate to enter into, implement and consummate the contracts,
instruments, releases, leases and other agreements or documents created in
connection with the Plan, including those actions contemplated by the
provisions of this Plan set forth in Section XI hereof.
2. The statutory fees owing the U.S. Trustee shall have been paid in full.
3. All other actions and documents necessary to implement the provisions
of the Plan shall have been effected or executed or, if waivable, waived
by the Person or Persons entitled to the benefit thereof.
The foregoing conditions, other than those set forth in clause 2, may be
waived by the Debtors at any time, without notice, without leave or order of the
Bankruptcy Court and without any formal action other than proceeding to
consummate the Plan.
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VI. CERTAIN RISK FACTORS
The New Common Stock to be issued pursuant to the Plan is subject to a
number of material risks, including those enumerated below. The risk factors
enumerated below generally assume the confirmation and consummation of the Plan
and all transactions contemplated thereby, and, except as indicated, do not
generally include matters that could prevent or delay confirmation. See Section
IV.B, "THE PLAN OF REORGANIZATION -- Treatment of Claims and Interests Under the
Plan -- Conditions Precedent to Confirmation and Consummation of the Plan" and
"-- Voting and Confirmation of the Plan" for a discussion of such matters. Prior
to deciding whether and how to vote on the Plan, each Holder of a Claim in a
solicited class should carefully consider all of the information contained in
this Disclosure Statement, especially the factors mentioned in the following
paragraphs.
A. Risks Relating to the Projections
The management of the Debtors have prepared the projected financial
information attached to this Disclosure Statement as Exhibit C relating to
Reorganized Cityscape and Reorganized CSC (the "Projections") in connection with
the development of the Plan and in order to present the anticipated effects of
the Plan and the transactions contemplated thereby. The Projections assume the
Plan and the transactions contemplated thereby will be implemented in accordance
with their terms and represent management's best estimate of the results of the
Reorganized Company's operations following the Effective Date. The assumptions
and estimates underlying such Projections are forward-looking and, as such, are
inherently uncertain and, although considered reasonable by management as of the
date hereof, are subject to significant business, economic and competitive risks
and uncertainties that could cause actual results to differ materially from
those projected, including, among others, (1) interest rate volatility; (2) the
ability of the Company to staff an adequate number and mix of employees; (3)
adverse economic conditions and competition; and (4) the Company's ability to
regain the confidence of; among others, investors, borrowers, correspondents,
vendors and mortgage bankers and brokers. Accordingly, the Projections are not
necessarily indicative of the future financial condition or results of
operations of Reorganized Cityscape and Reorganized CSC. Consequently, the
projected financial information contained herein should not be regarded as a
representation by the Debtors, the Debtors' advisors or any other person that
the Projections can or will be achieved.
B. Assumptions Regarding Value of Cityscape's and CSC's Assets
It has been generally assumed in the preparation of the Pro Forma
Financial Statements and the Projections that the book value of the Debtors'
assets approximates the fair value thereof; except for specific adjustments. For
financial reporting purposes, the fair value of the assets of the Debtors must
be determined as of the Effective Date. Such determination will be based on an
independent valuation. Although such valuation is not presently expected to
result in values that are materially greater or less than the values assumed in
the preparation of such Pro Forma Financial Statements and the Projections,
there can be no assurance with respect thereto.
C. Business and Competition
As a consumer finance company, the Debtors face intense competition.
Negative recent developments within the Debtors (including the suspension of
their loan origination and purchase business) have caused the Debtors to be
competitively disadvantaged. Competitors use information about the Debtors'
losses and market valuation to attract customers away from the Debtors.
Traditional competitors in the financial services business include other
mortgage banking companies, commercial banks, credit unions, thrift
institutions, credit card issuers and finance companies. Many of these
competitors in the consumer finance business are substantially larger and have
considerably greater financial, technical and marketing resources than the
Debtors. In addition, many financial service organizations have formed national
networks for loan originations substantially similar to the Debtors' loan
programs. Furthermore, certain large national finance companies and conforming
mortgage originators have announced their intention to adapt their conforming
origination programs and allocate resources to the origination of non-conforming
loans. In addition, certain of these larger mortgage companies and commercial
banks have begun to offer products similar to those offered by the Debtors,
targeting customers similar to those of the Debtors (if the Debtors recommence
originating loans). Competition can take many forms including convenience in
obtaining a loan, customer service, marketing and distribution channels, amount
and term of the loan and interest rates.
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D. Nature of Mortgages
There are several factors that could adversely affect the value of
properties securing the mortgages owned by the Debtors or held by the
securitization trusts in which the Debtors hold residual interests (the
"Properties") such that the outstanding balance of the related loans, together
with any senior financing on the Properties, if applicable, would equal or
exceed the value of the Properties. Among the factors that could adversely
affect the value of the Properties are an overall decline in the residential
real estate market in the areas in which the Properties are located or a decline
in the general condition of the Properties as a result of the failure of
borrowers to maintain adequately the Properties or of natural disasters that are
not necessarily covered by insurance, such as earthquakes and floods. In the
case of closed-end and/or home equity loans secured primarily by subordinate
liens on one- to four-family residential properties (the "Home Equity Loans"),
such decline could extinguish the value of the interest of a junior mortgagee in
the Property before having any effect on the interest of the related senior
mortgagee. If such a decline occurs, the actual rates of delinquencies,
foreclosures and losses on all loans could be higher than those currently
experienced in the mortgage lending industry in general.
Even assuming that the Properties provide adequate security for the loans,
substantial delays could be encountered in connection with the liquidation of
defaulted loans and corresponding delays in the receipt of related proceeds by
the Debtors could occur. An action to foreclose on a Property securing a loan is
regulated by state statutes and rules and is subject to many of the delays and
expenses of other lawsuits if defenses or counterclaims are interposed,
sometimes requiring several years to complete. Furthermore, in some states an
action to obtain a deficiency judgment is not permitted following a nonjudicial
sale of a property. In the event of a default by a borrower, these restrictions,
among other things, may impede the ability of the party servicing the loan to
foreclose on or sell the Property or to obtain liquidation proceeds sufficient
to repay all amounts due on the related loan. In addition, the party servicing
the loan will be entitled to deduct from related liquidation proceeds all
expenses reasonably incurred in attempting to recover amounts due on defaulted
loans and not yet repaid, including payments to senior lienholders, legal fees
and costs of legal action, real estate taxes and maintenance and preservation
expenses.
Liquidation expenses with respect to defaulted loans do not necessarily
vary directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted loan having a small remaining principal balance as it would in
the case of a defaulted loan having a large remaining principal balance, the
amount realized after expenses of liquidation would be smaller as a percentage
of the outstanding principal balance of the small loan than would be the case
with the defaulted loan having a large remaining principal balance. Since the
mortgages and deeds of trust securing the Home Equity Loans are primarily junior
liens subordinate to the rights of the mortgagee under the related senior
mortgage(s) or deed(s) of trust, the proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the outstanding balance of
such junior lien only to the extent that the claims of such senior mortgagees
have been satisfied in full, including any related foreclosure costs. In
addition, a junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to any senior mortgage, in which case it
must either pay the entire amount due on any senior mortgage to the related
senior mortgagee at or prior to the foreclosure sale or undertake the obligation
to make payments on any such senior mortgage in the event the mortgagor is in
default thereunder.
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures and require licensing of certain originators and
servicers of loans. In addition, most states have other laws, public policy and
general principles of equity relating to the protection of consumers, unfair and
deceptive practices and practices which may apply to the origination, servicing
and collection of the loans. Depending on the provisions of the applicable law
and the specific facts and circumstances involved, violations of these laws,
policies and principles may limit the ability of the party servicing the loans
to collect all or part of the principal of or interest on the loans, may entitle
the borrower to a refund of amounts previously paid and, in addition, could
subject the party servicing the loans to damages and administrative sanctions.
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E. Environmental Risks
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect health, safety and the environment.
In certain circumstances, these laws and regulations impose obligations on
owners or operators of residential properties such as those subject to the
loans. The failure to comply with such laws and regulations may result in fines
and penalties.
Under various federal, state and local laws and regulations, an owner or
operator of real estate may be liable for the costs of addressing hazardous
substances on, in or beneath such property and related costs. Such liability
could exceed the value of the property and the aggregate assets of the owner or
operator. In addition, persons who transport or dispose of hazardous substances,
or arrange for the transportation, disposal or treatment of hazardous
substances, at off-site locations may also be held liable if there are releases
or threatened releases of hazardous substances at such off-site locations.
Under the laws of some states and under the federal Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), contamination
of property may give rise to a lien on the property to assure the payment of the
costs of clean-up. In several states, such a lien has priority over the lien of
an existing mortgage against such property.
Under the laws of some states, and under CERCLA and the federal Solid
Waste Disposal Act, there is a possibility that a lender may be held liable as
an "owner" or "operator" for costs of addressing releases or threatened releases
of hazardous substances at a property, or releases of petroleum from an
underground storage tank, under certain circumstances.
F. Certain Other Legal Considerations Regarding Loans
Loans may also be subject to federal laws, including: (i) the Federal
Truth in Lending Act and Regulation Z promulgated thereunder, which require
certain disclosures to the borrowers regarding the terms of loans; (ii) the
Equal Credit Opportunity Act and Regulation B promulgated thereunder, which
prohibit discrimination on the basis of age, race, color, sex, religion, marital
status, national origin, receipt of public assistance or the exercise of any
right under the Consumer Credit Protection Act, in the extension of credit;
(iii) the Fair Credit Reporting Act, which regulates the use and reporting of
information related to the borrower's credit experience; and (iv) for loans that
were originated or closed after November 7, 1989, the Home Equity Loan Consumer
Protection Act of 1988, which requires additional application disclosures,
limits changes that may be made to the loan documents without the borrower's
consent and restricts a lender's ability to declare a default or to suspend or
reduce a borrower's credit limit to certain enumerated events.
The Riegle Act. Certain mortgage loans are subject to the Riegle Community
Development and Regulatory Improvement Act of 1994 (the "Riegle Act") which
incorporates the Home Ownership and Equity Protection Act of 1994. These
provisions impose additional disclosure and other requirements on creditors with
respect to nonpurchase money mortgage loans with high interest rates or high
up-front fees and charges. The provisions of the Riegle Act apply on a mandatory
basis to all mortgage loans originated on or after October 1, 1995. These
provisions can impose specific statutory liabilities upon creditors who fail to
comply with their provisions and may affect the enforceability of the related
loans. In addition, any assignee of the creditor would generally be subject to
all claims and defenses that the consumer could assert against the creditor,
including, without limitation, the right to rescind the mortgage loan.
Home improvement installment sales contracts and installment loan
agreements that are either unsecured or secured primarily by subordinate liens
on one- to four-family residential properties or by purchase money security
interests in the home improvements financed thereby are subject to the
Preservation of Consumers' Claims and Defenses regulations of the Federal Trade
Commission and other similar federal and state statutes and regulations
(collectively, the "Holder in Due Course Rules"), which protect the homeowner
from defective craftsmanship or incomplete work by a contractor. These laws
permit the obligor to withhold payment if the work does not meet the quality and
durability standards agreed to by the homeowner and the contractor. The Holder
in Due Course Rules
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have the effect of subjecting any assignee of the seller in a consumer credit
transaction to all claims and defenses which the obligor in the credit sale
transaction could assert again St the seller of the goods.
Violations of certain provisions of these federal laws may limit the
ability of the party servicing the loans to collect all or part of the principal
of or interest on the loans and in addition could subject the Reorganized
Company to damages and administrative enforcement.
C. Sale of CSC-UK
The sale of CSC-UK to Ocwen 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 Debtors or the Reorganized Company in the future
arising out of the former CSC-UK operations. Such claims could have a material
adverse effect on the Debtors' or the Reorganized Company's financial condition
and results of operations.
H. Certain Federal Income Tax Considerations; Reduction and Limitation of
Corporate Tax Benefits
Generally, Holders of Old Senior Notes should not recognize any gain or
loss for federal income tax purposes upon their receipt of New Common Stock
pursuant to the Plan (except to the extent such New Common Stock is attributable
to accrued but unpaid interest, which generally will be treated as a payment of
interest includible in income in accordance with the Holder's method of
accounting for tax purposes). Holders of Small Senior Note Claims who receive
Cash should recognize gain or loss in an amount equal to the difference between
the amount of Cash received and their tax basis in the Old Senior Notes
exchanged therefor. Holders of Old Subordinated Debentures should not recognize
any gain or loss for federal income tax purposes upon their receipt of New
Common Stock pursuant to the Plan (except to the extent such New Common Stock is
attributable to accrued but unpaid interest, which generally will be treated as
a payment of interest includible in income in accordance with the Holder's
method of accounting for tax purposes). Holders of Small Subordinated Debenture
Claims who receive Cash should recognize gain or loss in an amount equal to the
difference between the amount of cash received and their tax basis in the Old
Subordinated Debentures exchanged therefor. Holders of other Claims should
generally recognize gain or loss in an amount equal to the difference between
the value of any property received pursuant to the Plan and their tax basis in
their Claims exchanged therefor.
The Debtors will not recognize any cancellation of indebtedness income
upon consummation of the Plan but will be required to reduce certain of their
separate tax attributes (including, to the extent applicable, net operating and
capital losses and loss carryforwards, tax credits and tax basis in assets) by
the amount of their cancellation of indebtedness income not recognized as
taxable income (subject to certain modifications). As a result, the Debtors
believe that most, if not all, of Cityscape's net operating losses and loss
carryforwards (and certain other losses, credits and carryforwards, if any) will
be eliminated upon consummation of the Plan. In addition, Reorganized Cityscape
may be required to reduce its tax basis in its assets as of the beginning of the
taxable year following consummation of the Plan (but not below the amount of
liabilities (if any) remaining immediately after the consummation of the Plan)
to the extent that Cityscape's cancellation of indebtedness income exceeds the
amount of net operating losses and any other losses, credits and carryovers so
reduced (subject to certain modifications). CSC will also have to reduce its net
operating losses (if any, and possibly certain other losses, credits, carryovers
and tax basis in assets) by the amount of its cancellation of indebtedness
income not recognized as taxable income (subject to certain modifications).
Consummation of the Plan should trigger an "ownership change" of the Company
consolidated group for purposes of Section 382 of the Internal Revenue Code of
1986, as amended, so that, if the Reorganized Company retains any pre-ownership
change net operating losses and loss carryforwards after the Effective Date, its
use of such losses and carryforwards will be limited annually to a statutorily
prescribed amount. See "Certain Federal Income Tax Considerations."
I. Certain Risks of Non-Confirmation
Even if the requisite acceptances are received, there can be no assurance
that the Bankruptcy Court will confirm the Plan. If the Bankruptcy Court were to
determine that the disclosure and the balloting procedures and results were
appropriate, the Bankruptcy Court could still decline to confirm the Plan if it
were to find that any statutory conditions to confirmation had not been met.
Section 1129 of the Bankruptcy Code sets forth the
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requirements for confirmation and requires, among other things, a finding by the
Bankruptcy Court that the confirmation of the Plan is not likely to be followed
by a liquidation or a need for further financial reorganization and that the
value of distributions to non-accepting creditors and Interest Holders will not
be less than the value of distributions such creditors and Interest Holders
would receive if the Debtors were liquidated under chapter 7 of the Bankruptcy
Code. While there can be no assurance that the Bankruptcy Court will conclude
that these requirements have been met, the Debtors believe that the Plan will
not be followed by a need for further financial reorganization and that
non-accepting creditors and Interest Holders will receive distributions at least
as great as would be received following a liquidation pursuant to chapter 7 of
the Bankruptcy Code.
J. Government Regulations
The Debtors' business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of its operations. The Debtors' consumer lending
activities are subject to the Federal Truth-in-Lending Act and Regulation Z
(including the Home Ownership and Equity Protection Act of 1994), the Federal
Equal Credit Opportunity Act and Regulation B, as amended, the Fair Credit
Reporting Act of 1970, as amended, the Federal Real Estate Settlement Procedures
Act, and Regulation X, the Home Mortgage Disclosure Act, the Federal Debt
Collection Practices Act and the National Housing Act of 1934, as well as other
federal and state statutes and regulations affecting the Debtors' activities.
The Debtors are also subject to the rules and regulations of, and examinations
by, the Department of Housing and Urban Development and state regulatory
authorities with respect to originating, purchasing, processing, underwriting,
selling, securitizing and servicing loans. These rules and regulations, among
other things, impose licensing obligations on the Debtors, establish eligibility
criteria for mortgage loans, prohibit discrimination, provide for inspections
and appraisals of properties, require credit reports on loan applicants,
regulate assessment, collection, foreclosure and claims handling, investment and
interest payments on escrow balances and payment features, mandate certain
disclosures and notices to borrowers and, in some cases, fix maximum interest
rates, fees and mortgage loan amounts. Failure to comply with these requirements
can lead to loss of approved status, termination or suspension of servicing
contracts without compensation to the servicer, demands for indemnifications or
mortgage loan repurchases, certain rights of rescission for mortgage loans,
class action lawsuits and administrative enforcement actions.
K. Restrictions on Resale of New Common Stock of the Reorganized Company
Any person (or group of persons who act in concert) who receives a
substantial amount of New Common Stock of the Reorganized Company pursuant to
the Plan may be deemed to be an "affiliate." Absent registration under the
Securities Act, any person deemed to be an affiliate of the Reorganized Company
or an underwriter would be subject to the resale restrictions imposed by the
Commission's Rule 144, under the Securities Act, which would allow affiliates
and underwriters to sell, exchange, transfer or otherwise dispose of only
specified limited quantities of securities of the Reorganized Company, and only
subject to compliance with the other requirements imposed on "affiliates" under
Rule 144.
L. Lack of Trading Market; Volatility
There can be no assurance that an active market for the New Common Stock
will develop or, if any such market does develop, that it will continue to
exist, or as to the degree of price volatility in any such market that does
develop. Accordingly, no assurance can be given as to the liquidity of the
market for any of the New Common Stock or the price at which any sales may
occur.
M. Possible Dilution of New Common Stock
In the event Allowed Class 5 Claims total more than $10,000,000 (the
amount assumed for calculating distributions for Classes 4, 5 and 6 under the
Plan in Section IV.B above and for estimating recoveries by such Classes in the
chart set forth in Section 11 above), the percentages of the outstanding New
Common Stock held by each of Class 4 and Class 6 will be diluted below 92.48%
and 5.43%, respectively, in proportionate amounts. In addition, the value per
share of New Common Stock distributed to Holders of Allowed Claims in Classes 4,
5 and 6 (estimated at $10.00 per share based upon 6,800,000 issued and
outstanding shares) will be less than $10.00 per
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share if Allowed Class 5 Claims total more than $10,000,000. There can be no
assurance that the aggregate amount of Allowed Class 5 Claims will not exceed
$10,000,000.
N. Assumption Regarding Business of the Reorganized Company
For the purpose of the Plan and this Disclosure Statement and the
information contained therein and herein including, but not limited to, the
projected financial information, the Debtors have defined their business as
mortgage banking and related operating and investment activities, including but
not limited to the origination, ownership, sale, and servicing of mortgage
loans. Although it is expected that the Reorganized Company will reenter the
mortgage loan origination business at some time in the future based on
prevailing industry conditions and the general business climate, there can be no
assurance of such reentry. Because the Reorganized Company will be relatively
liquid, it is expected that management of the Reorganized Company will examine
various consumer finance acquisition prospects including, but not limited to,
those in the subprime and high-LTV origination and servicing markets. Because of
a deterioration of the capital markets supporting the subprime and high-LTV
origination businesses, a number of potential acquisition or merger candidates
may be available. However, there can be no assurance that the Reorganized
Company will identify suitable acquisition or merger candidates, or that if such
candidates are identified, acceptable business transactions will be structured
and concluded. All decisions concerning reentry into the mortgage loan
origination business, as well as all other business transactions including, but
not limited to, investments, acquisitions, joint ventures and the declaration of
dividends and other distributions on equity securities, will be made by the
Boards of Directors of the Reorganized Company, as determined to be in the best
interests of the Reorganized Company. Consequently, there can be no certainty as
to the business decisions that will be made by the Boards of Directors of the
Reorganized Company.
VII. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
consequences expected to result from the consummation of the Plan. This
discussion is based on current provisions of the Internal Revenue Code of 1986,
as amended (the "Tax Code"), applicable Treasury Regulations, judicial authority
and current administrative rulings and pronouncements of the Internal Revenue
Service (the "Service"). There can be no assurance that the Service will not
take a contrary view, and no ruling from the Service has been or will be sought.
Legislative, judicial or administrative changes or interpretations may be
forthcoming that could alter or modify the statements and conclusions set forth
herein. Any such changes or interpretations may or may not be retroactive and
could affect the tax consequences to Holders, the Company and the Reorganized
Company. It cannot be predicted at this time whether any tax legislation will be
enacted or, if enacted, whether any tax law changes contained therein would
affect the tax consequences to the Holders, the Company and the Reorganized
Company.
The following summary is for general information only. The tax treatment
of a Holder may vary depending upon such Holder's particular situation. This
discussion assumes that Holders of Old Securities have held such property as
"capital assets" within the meaning of Section 1221 of the Tax Code (generally,
property held for investment) and will also hold the New Common Stock as
"capital assets." This summary does not address all of the tax consequences that
may be relevant to a Holder, nor does it address the federal income tax
consequences to Holders subject to special treatment under the federal income
tax laws, such as brokers or dealers in securities or currencies, certain
securities traders, tax-exempt entities, financial institutions, insurance
companies, foreign corporations, Holders who are not citizens or residents of
the United States, Holders that hold the Old Securities as a position in a
"straddle" or as part of a "synthetic security," "hedging,"" conversion" or
other integrated instrument, Holders that have a "functional currency" other
than the United States dollar and Holders that have acquired Old Securities or
Old Stock Rights in connection with the performance of services. EACH HOLDER
SHOULD CONSULT ITS TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO IT OF
THE PLAN, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN
TAX LAWS.
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Federal Income Tax Consequences to the Company
Cancellation of Indebtedness and Reduction of Tax Attributes
Cityscape and CSC generally will each realize cancellation of indebtedness
("COI") income to the extent that the fair market value of any property
(including New Common Stock) received by holders of indebtedness of such entity
is less than the adjusted issue price (plus the amount of any accrued but unpaid
interest) of such indebtedness discharged thereby. Under Section 108 of the Tax
Code, however, COI income will not be recognized if the COI income occurs in a
case brought under the Bankruptcy Code, provided the taxpayer is under the
jurisdiction of a court in such case and the cancellation of indebtedness is
granted by the court or is pursuant to a plan approved by the court.
Accordingly, because the cancellation of the indebtedness of the Debtors will
occur in a case brought under the Bankruptcy Code, the Debtors will each be
under the jurisdiction of the court in such case and the cancellation of the
indebtedness will be pursuant to the Plan, the Debtors should not be required to
recognize any COI income realized as a result of the implementation of the Plan.
Under Section 108(b) of the Tax Code, the Debtors will be required to
reduce certain tax attributes, including net operating losses and loss
carryforwards ("NOLs") (and certain other losses, credits and carryforwards, if
any) and tax basis in assets (but not below the amount of liabilities remaining
immediately after the discharge of indebtedness), in an amount equal to the
amount of COI income excluded from income as described in the preceding
paragraph (subject to certain modifications). Any reduction in tax attributes
should occur on a separate company basis even though Cityscape and CSC file a
federal consolidated income tax return. The Service has held in private letter
rulings that where a member of a consolidated group is permitted to exclude from
income COI income pursuant to Section 108 of the Tax Code, Section 108(b) only
requires that such member reduce its own separate company tax attributes without
having to reduce the tax attributes of any other member of the consolidated
group. Although such rulings may not be relied upon by other taxpayers as
binding authority, they do provide some indication of the Service's position
regarding an issue. In addition, there does not appear to be any contrary
authority with respect to this issue. Thus, although not entirely free from
doubt, because the Old Senior Notes and Old Subordinated Debentures are
obligations of Cityscape (although guaranteed by CSC), only Cityscape's separate
company tax attributes should have to be reduced pursuant to Section 108(b) of
the Tax Code with regard to the debt forgiveness relating to the Old Senior
Notes and Old Subordinated Debentures. Similarly, only CSC's separate company
attributes should have to be reduced with regard to CSC's COI.
The Company believes that at the Effective Date the Debtors may have NOLs
remaining from their 1997 tax years (the use of most of which the Company has
determined is subject to a significant annual limitation under Section 382 of
the Tax Code as a result of an "ownership change" of the Company in October of
1997) and that the Debtors may have generated additional NOLs for their 1998 tax
years and for the portion of their 1999 tax years that will precede the
Effective Date. Any such NOLs, however, are subject to audit and possible
challenge by the Service.
As a result of the application of Section 108(b) of the Tax Code, the
Company believes that most, if not all, of Cityscape's NOLs (and certain other
losses, credits and carryforwards, if any) will be eliminated after consummation
of the Plan, and Reorganized Cityscape may be required to reduce its tax basis
in its assets as of the beginning of the taxable year following consummation of
the Plan (but not below the amount of liabilities (if any) remaining immediately
after the consummation of the Plan) to the extent that Cityscape's COI income
exceeds the amount of NOLs and any other losses, credits and carryovers so
reduced (subject to certain modifications). In addition, as a result of the
Plan, CSC will have to reduce its NOLs (if any, and possibly certain other
losses, credits and carryforwards, if any, and its tax basis in assets) by the
amount of its COI income that is excluded from income.
Section 382 Limitations on NOLs
Under Section 382 of the Tax Code, if a corporation with NOLs (a "Loss
Corporation") undergoes an "ownership change," the use of such NOLs (and certain
other tax attributes) will generally be subject to an annual limitation as
described below. In general, an "ownership change" occurs if the percentage of
the value of the Loss Corporation's stock owned by one or more direct or
indirect "five percent shareholders" has increased by more than 50 percentage
points over the lowest percentage of that value owned by such five percent
shareholder or
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shareholders at any time during the applicable "testing period" (generally, the
shorter of (i) the three-year period preceding the testing date or (ii) the
period of time since the most recent ownership change of the corporation).
A Loss Corporation's use of NOLs (and certain other tax attributes) after
an "ownership change" will generally be limited annually to the product of the
long-term tax-exempt rate (published monthly by the Service) and the value of
the Loss Corporation's outstanding stock immediately before the ownership change
(excluding certain capital contributions) (the "Section 382 Limitation").
However, the Section 382 Limitation for a taxable year any portion of which is
within the five-year period following the Effective Date will be increased by
the amount of any "recognized built-in gains" for such taxable year. The
increase in a year cannot exceed the "net unrealized built-in gain" (if such
gain exists immediately before the "ownership change" and exceeds a
statutorily-defined threshold amount) reduced by recognized built-in gains from
prior years ending during such five-year period. In addition, any "recognized
built-in losses" for a taxable year any portion of which is within the five-year
period following the Effective Date will be subject to limitation in the same
manner as if such loss was an existing NOL to the extent such recognized
built-in losses do not exceed the "net unrealized built-in loss" (if such loss
exists immediately before the "ownership change" and exceeds a
statutorily-defined threshold amount) reduced by recognized built-in losses for
prior taxable years ending during such five-year period. At this time, the
Company is unable to predict whether it will have a "net unrealized built-in
gain" or a "net unrealized built-in loss" that will exceed the
statutorily-defined threshold amount at the Effective Date. Finally, if the
Reorganized Company does not continue the Company's historic business or use a
significant portion of the Company's business assets in a new business for two
years after the "ownership change," the Section 382 Limitation would be zero
(except as increased by recognized built-in gains, as described above).
Two alternative bankruptcy exceptions for Loss Corporations undergoing an
ownership change pursuant to a bankruptcy proceeding are provided for in the Tax
Code. The first exception, Section 382(1)(5) of the Tax Code, applies where
qualified (so-called "old and cold") creditors of the debtor receive at least
50% of the vote and value of the stock of the reorganized debtor in a case under
the Bankruptcy Code. Under this exception, a debtor's prechange NOLs are not
subject to the Section 382 Limitation but are instead reduced by the amount of
any interest deductions allowed during the three taxable years preceding the
taxable year in which the ownership change occurs, and during the part of the
taxable year prior to and including the effective date of the bankruptcy
reorganization, in respect of the debt converted into stock in the
reorganization. Moreover, if this exception applies, any further ownership
change of the debtor within a two-year period will preclude the debtor's
utilization of any pre-change losses at the time of the subsequent ownership
change against future taxable income.
An "old and cold" creditor includes a creditor who has held the debt of
the debtor for at least eighteen months prior to the date of the filing of the
case or who has held "ordinary course indebtedness" at all times it has been
outstanding. However, any debt owned immediately before an ownership change by a
creditor who does not become a direct or indirect 5% shareholder of the
reorganized debtor generally will be treated as always having been owned by such
creditor, except in the case of any creditor whose participation in formulating
the plan of reorganization makes evident to the debtor that such creditor has
not owned the debt for such period. Because the Old Senior Notes have been
outstanding for less than eighteen months before the Petition Date and because
such Old Senior Notes do not appear to constitute "ordinary course
indebtedness," the Company should not be eligible to use the Section 382(1)(5)
exception.
The second bankruptcy exception, Section 382(1)(6) of the Tax Code,
requires no reduction of preownership change NOLs but provides relief in the
form of a relaxed computation of the Section 382 Limitation. In that regard,
Section 382(1)(6) of the Tax Code provides that the value of the Loss
Corporation's outstanding stock for purposes of computing the Section 382
Limitation will be increased to reflect the cancellation of indebtedness in the
bankruptcy case (but the value of such stock as adjusted may not exceed the
value of the Company's gross assets immediately before the ownership change
(subject to certain adjustments)).
The Plan should trigger an ownership change of the Company consolidated
group on the Effective Date. Due to the inapplicability of Section 382(1)(5),
the Company intends to apply Section 382(1)(6) to such "ownership change."
Accordingly, the Reorganized Company's use of pre-ownership change NOLs and
certain other tax attributes (if any), to the extent remaining after the
reduction thereof as a result of the cancellation of indebtedness
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of the Debtors, will be limited and generally will not exceed each year the
product of the long-term tax-exempt rate and the value of the Reorganized
Company's stock increased to reflect the cancellation of indebtedness pursuant
to the Plan.
Federal Income Tax Consequences to Holders of Old Senior Notes
Exchange of Old Senior Notes for New Common Stock
Whether the exchange of Old Senior Notes for New Common Stock pursuant to
the Plan will be a nontaxable recapitalization under the Tax Code will depend in
part upon whether the Old Senior Notes are considered to be "securities" within
the meaning of the provisions of the Tax Code governing reorganizations. The
test as to whether a debt instrument is a "security" involves an overall
evaluation of the nature of the debt instrument, with the term of the debt
instrument usually regarded as one of the most significant factors. Generally,
debt instruments with a term of five years or less have not qualified as
"securities," whereas debt instruments with a term often years or more generally
have qualified as "securities."
Although the treatment of the Old Senior Notes is not entirely certain
because the stated term of such instrument is less than ten years, the Old
Senior Notes should be treated as "securities" for federal income tax purposes.
Accordingly, the exchange of Old Senior Notes for New Common Stock should
constitute a recapitalization for federal income tax purposes and, as a result,
exchanging Holders should not recognize any gain or loss (except to the extent
the New Common Stock is attributable to accrued but unpaid interest on the Old
Senior Notes, in which event Holders would generally be required to treat such
amounts as payment of interest includible in income in accordance with the
Holder's method of accounting for tax purposes (see "-- Accrued Interest"
below)). A Holder's adjusted tax basis in the New Common Stock will be equal to
the Holder's adjusted tax basis in the Old Senior Notes. The Holder's holding
period for the New Common Stock will include the Holder's holding period for the
Old Senior Notes.
If the Old Senior Notes were determined not to constitute "securities" for
federal income tax purposes, then an exchanging Holder would recognize gain or
loss equal to the difference between the fair market value of the New Common
Stock received and the Holder's adjusted tax basis in the Old Senior Notes
exchanged therefor. Any such gain or loss would generally be long-term capital
gain or loss (subject to the market discount rules discussed below) if the Old
Senior Notes had been held for more than one year. In this event, a Holder's tax
basis in the New Common Stock would be equal to its fair market value on the
Effective Date, and the holding period for the New Common Stock would begin on
the day immediately after the Effective Date.
Holders of Small Senior Note Claims who receive Cash instead of New Common
Stock should recognize gain or loss equal to the difference between the amount
of Cash received and a Holder's adjusted tax basis in the Old Senior Notes
exchanged therefor. Any such gain or loss would generally be long-term capital
gain or loss (subject to the market discount rules discussed below) if the Old
Senior Notes had been held for more than one year.
Market Discount
The Tax Code generally requires holders of "market discount bonds" to
treat as ordinary income any gain realized on the disposition of such bonds
(including in certain non-recognition transactions, such as a gift) to the
extent of the market discount accrued during the holder's period of ownership. A
"market discount bond" is a debt obligation purchased at a market discount
subject to a statutorily-defined de minimis exception. For this purpose, a
purchase at a market discount includes a purchase at or after the original issue
at a price below the stated redemption price at maturity of the debt instrument,
or, in the case of a debt instrument issued with original issue discount, at a
price below (i) its "issue price," plus (ii) the amount of original issue
discount includible in income by all prior holders of the debt instrument, minus
(iii) all cash payments (other than payments constituting qualified stated
interest) received by such previous holders.
A holder of a debt instrument acquired at a market discount may elect to
include the market discount in income as the discount accrues, either on a
straight line basis or, if elected, on a constant interest rate basis. If a
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holder of a market discount bond elects to include market discount in income on
a current basis, the foregoing rule with respect to the recognition of ordinary
income on a sale or other disposition of such bond would not apply.
In the case of certain non-recognition transactions, such as the exchange
of the Old Senior Notes for the New Common Stock (and the exchange of the Old
Subordinated Debentures for the New Common Stock), special rules apply. Any
accrued (but unrecognized) market discount on the Old Debt will not have to be
recognized as income at the time of the non-recognition transaction, however, on
a subsequent taxable disposition of the stock received in such non-recognition
transaction, gain is treated as ordinary income to the extent of market discount
accrued prior to the non-recognition transaction.
New Common Stock
Dividends
A Holder generally will be required to include in gross income as ordinary
dividend income the amount of any distributions paid on the New Common Stock to
the extent that such distributions are paid out of the Reorganized Company's
current or accumulated earnings and profits as determined for federal income tax
purposes. Distributions in excess of such earnings and profits will reduce the
Holder's tax basis in its New Common Stock and, to the extent such excess
distributions exceed such tax basis, will be treated as gain from a sale or
exchange of such New Common Stock. Corporate Holders may be entitled to a
dividends received deduction (generally at a 70% rate) with respect to
distributions out of earnings and profits and are urged to consult their tax
advisors in this regard.
Sale or Other Taxable Disposition
Upon the sale or other disposition of New Common Stock, a Holder generally
will recognize capital gain or loss equal to the difference between the amount
of cash and fair market value of any property received on the sale and such
Holder's adjusted tax basis in the New Common Stock. Capital gain or loss
recognized upon the disposition of the New Common Stock will be long-term if, at
the time of the disposition, the holding period for the New Common Stock exceeds
one year.
However, pursuant to Section 108(e)(7) of the Tax Code, a creditor that
receives stock in exchange for debt is required, to the extent that gain is
recognized upon a subsequent disposition of such stock, to "recapture" as
ordinary income any bad debt deductions taken by the creditor with respect to
such debt and any ordinary loss claimed by the creditor upon the receipt of the
stock in satisfaction of such debt, reduced by any amount included in income
upon the receipt of the stock. In addition, as discussed above, if any Old Debt
held by a Holder has accrued (but unrecognized) market discount at the Effective
Date, then any gain recognized by such Holder upon the disposition of New Common
Stock would have to be treated as ordinary income to the extent of such accrued
market discount on the Effective Date.
Federal Income Tax Consequences to Holders of Old Subordinated Debentures
Exchange of Old Subordinated Debentures for New Common Stock
Whether the exchange of Old Subordinated Debentures for New Common Stock
pursuant to the Plan will be a nontaxable recapitalization under the Tax Code
will depend in part upon whether the Old Subordinated Debentures are considered
to be "securities" within the meaning of the provisions of the Tax Code
governing reorganizations. The test as to whether a debt instrument is a
"security" involves an overall evaluation of the nature of the debt instrument,
with the term of the debt instrument usually regarded as one of the most
significant factors. Generally, debt instruments with a term of five years or
less have not qualified as "securities," whereas debt instruments with a term
often years or more generally have qualified as "securities."
Because the term of the Old Subordinated Debentures exceeds ten years, the
Old Subordinated Debentures should be treated as "securities" for federal income
tax purposes. Accordingly, the exchange of Old Subordinated Debentures for New
Common Stock should constitute a recapitalization for federal income tax
purposes and, as a
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result, exchanging Holders should not recognize any gain or loss (except to the
extent the New Common Stock is attributable to accrued but unpaid interest on
the Old Subordinated Debentures, in which event Holders would generally be
required to treat such amounts as payment of interest includible in income in
accordance with the Holder's method of accounting for tax purposes (see "--
Accrued Interest" below)). A Holder's adjusted tax basis in the New Common Stock
will be equal to the Holder's adjusted tax basis in the Old Subordinated
Debentures. The Holder's holding period for the New Common Stock will include
the Holder's holding period for the Old Subordinated Debentures.
If the Old Subordinated Debentures were determined not to constitute
"securities" for federal income tax purposes, then an exchanging Holder would
recognize gain or loss equal to the difference between the fair market value of
the New Common Stock received and the Holder's adjusted tax basis in the Old
Subordinated Debentures exchanged therefor. Any such gain or loss generally
would be (subject to the market discount rules discussed above) long-term
capital gain or loss if the Old Subordinated Debentures had been held for more
than one year. In this event, a Holder's tax basis in the New Common Stock
received would be equal to its fair market value on the Effective Date, and the
holding period for the New Common Stock would begin for a Holder on the day
immediately after the Effective Date.
Holders of Small Subordinated Debenture Claims who receive Cash instead of
New Common Stock should recognize gain or loss equal to the difference between
the amount of cash received and a Holder's adjusted tax basis in the Old
Subordinated Debentures exchanged therefor. Any such gain or loss would
generally be long-term capital gain or loss (subject to the market discount
rules discussed above) if the Old Subordinated Debentures had been held for more
than one year.
New Common Stock
For the tax consequences of holding and disposing of New Common Stock, see
generally " -- Federal Income Tax Consequences to Holders of Old Senior Notes --
New Common Stock" above.
Federal Income Tax Consequences to Holders of Other Claims
A Holder of a Claim in a Class not discussed above should generally
recognize gain or loss equal to the amount of any Cash received (plus the fair
market value of any other property received, including New Common Stock) with
respect to its Claim (other than for accrued but unpaid interest) less its
adjusted basis in its Claim (other than for accrued but unpaid interest). The
character of such gain or loss as long-term or short-term capital gain or loss
or as ordinary income or loss will be determined by a number of factors,
including the tax status of the Holder, whether the Claim constitutes a capital
asset in the hands of the Holder, whether the Claim has been held for more than
one year, whether the Claim was purchased at a discount, and whether and to what
extent the Holder had previously claimed a bad debt deduction or a worthless
security deduction.
Accrued Interest
Holders will be treated as receiving a payment of interest (includible in
income in accordance with the Holder's method of accounting for tax purposes) to
the extent that any Cash or other property received pursuant to the Plan is
attributable to accrued but unpaid interest, if any, on such Claims. The extent
to which the receipt of Cash or other property should be attributable to accrued
but unpaid interest is unclear. The Company intends to take the position that
such Cash or property distributed pursuant to the Plan will first be allocable
to the principal amount of a Claim and then, to the extent necessary, to any
accrued but unpaid interest thereon. Each Holder should consult its own tax
advisor regarding the determination of the amount of consideration received
under the Plan that is attributable to interest (if any). A Holder generally
will be entitled to recognize a loss to the extent any accrued interest was
previously included in its gross income and is not paid in full.
If any property received pursuant to the Plan is considered attributable
to accrued but unpaid interest, a Holder's basis in such property should be
equal to the amount of interest income treated as satisfied by the receipt of
such property. The holding period in such property should begin on the day
immediately after the Effective Date.
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Backup Withholding and Information Reporting
A Holder of New Common Stock may be subject to backup withholding at the
rate of 31% with respect to dividends paid on, and gross proceeds from a sale
of, the New Common Stock unless (i) such Holder is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact or
(ii) provides a correct taxpayer identification number, certifies as to no loss
of exemption from backup withholding and complies with applicable requirements
of the backup withholding rules. A Holder of New Common Stock who does not
provide the Reorganized Company (or its paying agent) with his or her correct
taxpayer identification number may be subject to penalties imposed by the
Service. Amounts withheld under the backup withholding rules may be credited
against a Holder's tax liability, and a Holder may obtain a refund of any excess
amounts withheld under the backup withholding rules by filing the appropriate
claim for refund with the Service.
The Reorganized Company will report to Holders of the New Common Stock and
to the Service the amount of any "reportable payments" on, and any amount
withheld with respect to, the New Common Stock during the calendar year.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSIDERATIONS IS
FOR GENERAL INFORMATION PURPOSES ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH
HOLDER SHOULD CONSULT ITS TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES OF
THE PLAN DESCRIBED HEREIN AND THE CONTINUING OWNERSHIP AND DISPOSITION OF THE
NEW COMMON STOCK AND THE APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS.
NEITHER THE PROPONENTS NOR THEIR PROFESSIONALS SHALL HAVE ANY LIABILITY TO ANY
PERSON OR HOLDER ARISING FROM OR RELATED TO THE FEDERAL, STATE OR LOCAL TAX
CONSEQUENCES OF THE PLAN OR THE FOREGOING DISCUSSION.
VIII. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN
If the Plan is not confirmed and consummated, the alternatives include (a)
preparation and presentation of an alternative chapter 11 plan or (b) conversion
of the chapter 11 case to a liquidation under chapter 7 of the Bankruptcy Code.
A. Alternative Chapter 11 Plans
If the Plan is not confirmed, the Debtors or any other party in interest,
could attempt to formulate an alternative chapter 11 plan or plans. In
formulating and developing the Plan, the Debtors have explored numerous other
alternatives and engaged in negotiations with various parties holding disparate
interests. The consideration of these plan alternatives resulted in the
formulation of the Plan. The Debtors believe that the Plan deals fairly with the
rights of Holders of the various classes of Claims and enables creditors to
realize the greatest recovery possible under the circumstances. The Debtors
further believe that rejection of the Plan in favor of some alternative method
of restructuring the Claims of the various classes will not result in a better
recovery for any Class and will require, at the very least, an extensive and
time-consuming negotiation process.
B. Liquidation Under Chapter 7
Another alternative to confirmation and consummation of the Plan is
liquidation of the Debtors under chapter 7 of the Bankruptcy Code. Section
1129(a) of the Bankruptcy Code provides that the Bankruptcy Court may confirm a
plan only if the requirements contained in such section are met. One of these
requirements is that each non-accepting holder of an allowed claim or an allowed
interest in an impaired class must receive or retain under the plan on account
of such claim or interest property having a value as of the effective date of
the plan at least equal to the value that such holder would receive if the
debtor were liquidated under chapter 7 of the Bankruptcy Code on the effective
date of the Plan. The Debtors have prepared the Liquidation Analysis attached
hereto as Exhibit D. Based upon such Liquidation Analysis and after taking into
account the settlements and compromises contained in the Plan, the Debtors do
not believe that Holders of Claims and Interests would receive greater
recoveries if the Debtor were to be liquidated under chapter 7 of the Bankruptcy
Code.
67
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IX. CONCLUSION AND RECOMMENDATION
The Debtors believe that confirmation and implementation of the Plan is
preferable to any of the alternatives described above because it will provide
the greatest recoveries to Holders of Claims. In addition, other alternatives
would involve significant delay, uncertainty and substantial additional
administrative costs. The Debtors and the Unofficial Committees urge Holders of
Impaired Claims in Classes 4, 4a, 5, 5a, 6 and 6a to vote in favor of the Plan.
Dated: March 26, 1999
Respectfully submitted,
CITYSCAPE FINANCIAL CORP.,
a Delaware Corporation
By: /s/ Steven M. Miller
--------------------------------------------
Name: Steven M. Miller
Title: President and Chief Executive Officer
CITYSCAPE CORP.,
a New York corporation
By: /s/ Steven M. Miller
--------------------------------------------
Name: Steven M. Miller
Title: Senior Vice President
LATHAM & WATKINS
By: /s/ Robert J. Rosenberg
--------------------------------------------
Robert J. Rosenberg (RJR 9585)
885 Third Avenue, Suite 1000
New York, New York 10022
(212) 906-1200
Counsel for the Debtors
and Debtors-in-Possession
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Exhibit A to Debtors' First Amended Joint Disclosure Statement
Pursuant to Section 1125 of the Bankruptcy Code
First Amended Joint Plan of Reorganization of Cityscape Financial
Corp. and Cityscape Corp. Under Chapter 11 of the Bankruptcy Code
<PAGE> 71
LATHAM & WATKINS
885 Third Avenue
New York, New York 10022
(212) 906-1200
Robert J. Rosenberg (RJR 9585)
A. Brent Truitt (ABT 3799)
Rachael Fink (RF 3321)
Counsel for Debtors
and Debtors-in-Possession
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
- - ------------------------------------X
In re: : Chapter 11
:
CITYSCAPE FINANCIAL CORP., : Case Nos. 98-B-22569 (ASH)
and CITYSCAPE CORP., : and 98-B-22570 (ASH)
: Jointly Administered
:
Debtors. :
- - ------------------------------------X
CITYSCAPE FINANCIAL CORP.'S AND
CITYSCAPE CORP.'S FIRST AMENDED JOINT PLAN
OF REORGANIZATION DATED AS OF MARCH 26, 1999
Dated: March 26, 1999
<PAGE> 72
TABLE OF CONTENTS
I. INTRODUCTION ...........................................................1
II. DEFINITIONS, INTERPRETATION AND RULES OF CONSTRUCTION ..................1
A. Definitions .........................................................1
B. Interpretation and Computation of Time .............................12
1. Defined Terms ................................................12
2. Rules of Interpretation ......................................12
3. Time Periods .................................................12
III. POOLING OF ASSETS AND LIABILITIES AND CANCELLATION OF
INTERCOMPANY CLAIMS ...................................................12
IV. DESIGNATION OF CLASSES OF CLAIMS AND INTERESTS ........................13
V. GENERAL PROVISIONS FOR TREATMENT OF CLAIMS AND INTERESTS ..............15
A. Unclassified Claims ..........................................15
1. Administrative Claims ..................................15
2. Priority Tax Claims ....................................16
3. Bar Date for Administrative Claims .....................16
B. Treatment of Claims and Interests ............................18
1. Class 1 (Bank Claims) ..................................18
2. Class 2a et seq. (Other Secured Claims) ................19
3. Class 3 (Priority Claims) ..............................19
4. Class 4 (Senior Note Claims) and Class 4a (Small
Senior Note Claims) .................................19
5. Class 5 (General Unsecured Claims) and Class 5a
(Small Unsecured Claims) ............................20
6. Class 6 (Subordinated Debenture Claims) and Class 6a
(Small Subordinated Debenture Claims) ...............21
7. Class 7 (Old Debt Securities Claims) ...................22
8. Class 8 (Interests of Holders of Old Series A
Preferred Stock) ....................................22
9. Class 9 (Old Series A Preferred Stock Securities
Claims) .............................................22
10. Class 10 (Interests of Holders of Old Series B
Preferred Stock) ....................................22
11. Class 11 (Old Series B Preferred Stock Securities
Claims) .............................................22
12. Class 12 (Interests of Holders of Old Cityscape
Common Stock) .......................................23
13. Class 13 (Interests of Holders of Old Stock Rights in
Cityscape and all Claims Arising Out of Such Old
Stock Rights) .......................................23
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14. Class 14 (Old Cityscape Common Stock and Old Warrant
Securities Claims) ..................................23
C. Modification of Treatment of Claims ..........................23
VI. DISTRIBUTIONS UNDER THE PLAN ..........................................24
A. Disbursing Agent .............................................24
B. Timing of Distributions ......................................24
C. Methods of Distributions .....................................24
1. Cash Payments 24 ......................................24
2. Issuance and Transfers of New Common Stock .............25
3. Compliance with Tax Requirements .......................25
D. Pro Rata Distribution ........................................25
E. Distribution Record Date .....................................26
F. Surrender of Cancelled Voting Securities and Exchange
for New Securities ...........................................26
1. Tender of Voting Securities ............................26
2. Delivery of New Common Stock in Exchange for
Voting Securities ...................................27
3. Special Procedures for Lost, Stolen, Mutilated
or Destroyed Instruments ............................28
4. Failure to Surrender Cancelled Instrument ..............28
G. Delivery of Distributions; Undeliverable or Unclaimed
Distributions .............................................28
H. Procedures for Treating Disputed Claims Under Plan of
Reorganization ............................................29
1. Disputed Claims and Objections to Claims and
Interests ...........................................29
2. Professionals, Administrative Claims, Trade Claims
and Employee Claims .................................30
3. No Distributions Pending Allowance .....................30
4. Distributions on Account of Disputed Claims and
Interests Once They are Allowed .....................30
I. Setoffs ......................................................31
J. Termination of Subordination .................................31
VII. TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES .................31
A. Assumptions ..................................................31
B. Cure of Defaults in Connection with Assumption ...............32
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C. Rejections ...................................................32
D. Bar Date for Rejection Damages ...............................32
VIII. ACCEPTANCE OR REJECTION OF THIS PLAN ..................................33
A. Voting Classes ...............................................33
B. Presumed Acceptances of Plan .................................33
C. Presumed Rejections of Plan ..................................33
D. Voting Instructions ..........................................33
E. Voting Deadline and Extensions ...............................33
F. Confirmability of Plan and Cramdown ..........................33
IX. MEANS FOR EXECUTION AND IMPLEMENTATION OF THE PLAN ....................34
A. Corporate Structure ..........................................34
B. Corporate Action .............................................34
1. Cancellation of Old Securities and Related
Agreements ..........................................34
2. Certificate of Incorporation and Bylaws for
Reorganized Cityscape ...............................34
3. Certificate of Incorporation and Bylaws for
Reorganized CSC .....................................34
4. Directors and Management of Reorganized Cityscape ......35
5. Directors and Management of Reorganized CSC ............35
C. Implementation ...............................................36
D. Other Documents and Actions ..................................36
E. Payment of Statutory Fees ....................................36
F. Payment of Fees and Expenses of Unofficial Committees'
Counsel ...................................................36
G. Term of Injunctions or Stays .................................36
H. No Interest ..................................................36
I. Retiree Benefits .............................................36
J. Issuance of New Common Stock .................................37
X. CONFIRMATION AND EFFECTIVE DATE CONDITIONS ............................37
A. Conditions to Confirmation ...................................37
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B. Conditions to Effective Date .................................37
C. Waiver of Conditions to Confirmation and Effective Date ......38
XI. EFFECTS OF PLAN CONFIRMATION ..........................................38
A. Discharge of Debtors and Injunction ..........................38
B. Limitation of Liability ......................................39
C. Releases .....................................................39
D. Indemnification ..............................................40
E. Vesting of Assets ............................................41
F. Preservation of Causes of Action .............................41
G. Retention of Bankruptcy Court Jurisdiction ...................42
H. Failure of Bankruptcy Court to Exercise Jurisdiction .........43
I. Committees ...................................................44
XII. MISCELLANEOUS PROVISIONS ..............................................44
A. Final Order ..................................................44
B. Modification of the Plan .....................................44
C. Revocation of the Plan .......................................45
D. Severability of Plan Provisions ..............................45
E. Successors and Assigns .......................................45
F. Saturday, Sunday or Legal Holiday ............................45
G. Post-Effective Date Effect of Evidences of Claims or
Interests .................................................45
H. Governing Law ................................................46
I. No Liability for Solicitation or Participation ...............46
J. No Admissions or Waiver of Objections ........................46
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I.
INTRODUCTION
Cityscape Financial Corp. (defined herein as "CITYSCAPE") and its
wholly-owned subsidiary Cityscape Corp. (defined herein as "CSC" and,
collectively with Cityscape, as "DEBTORS") hereby propose the following First
Amended Plan of Reorganization (defined herein as the "PLAN") for the resolution
of the Debtors' outstanding creditor claims and equity interests and request
Confirmation of the Plan pursuant to Section 1129 of the Bankruptcy Code.
All Holders of Claims and Interests are encouraged to read the Plan
and the accompanying solicitation materials in their entirety.
No materials, other than the accompanying solicitation materials and
any exhibits and schedules attached thereto or referenced therein, have been
approved by the Debtors for use in soliciting acceptances or rejections of the
Plan.
NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, ALL STATEMENTS IN
THIS PLAN AND THE ACCOMPANYING SOLICITATION MATERIALS CONCERNING THE HISTORY OF
THE DEBTORS' BUSINESSES, THE PAST OR PRESENT FINANCIAL CONDITION OF THE DEBTORS,
TRANSACTIONS TO WHICH THE DEBTORS WERE OR ARE PARTY, OR THE EFFECT OF
CONFIRMATION OF THE PLAN ON SECURED CREDITORS, UNSECURED CREDITORS OR EQUITY
SECURITY HOLDERS ARE ATTRIBUTABLE EXCLUSIVELY TO THE DEBTORS AND NOT TO ANY
OTHER PARTY.
II.
DEFINITIONS, INTERPRETATION AND RULES OF CONSTRUCTION
A. Definitions.
In addition to such other terms as are defined in other sections of
the Plan, the following terms (which appear in the Plan as capitalized terms)
have the following meanings as used in the Plan:
1. "ADMINISTRATIVE CLAIM" means a Claim for payment of an administrative expense
of a kind specified in Section 503(b) of the Bankruptcy Code and referred to in
Section 507(a)(1) of the Bankruptcy Code, including, without limitation, the
actual and necessary costs and expenses incurred after the commencement of a
chapter 11 case of preserving the estate or operating the business of the
Company (including wages, salaries and commissions for services), loans and
advances to the Company made after the Petition Date, compensation for legal and
other services and reimbursement of expenses awarded or allowed under Section
330(a) or 331 of the Bankruptcy Code, certain retiree benefits, certain
reclamation claims (if any), and all fees and charges against the estate under
Section 1930 of title 28, United States Code.
<PAGE> 77
2. "ALLOWED CLAIM" or "ALLOWED INTEREST" means a Claim against or Interest in
the Debtors:
(1) to the extent that a proof of such Claim or Interest was timely Filed
and served upon the Debtors and no objection to the Claim or Interest, or
motion to estimate the Claim or Interest for purposes of allowance, is
Filed within the time fixed by the Bankruptcy Court for such objections;
or
(2) to the extent that a proof of such Claim or Interest is deemed Filed
under applicable law or pursuant to a Final Order of the Bankruptcy Court
and no objection to the Claim or Interest is Filed within the time fixed
by the Bankruptcy Court for such objections; or
(3) that is allowed pursuant to this Plan; or
(4) to the extent that a proof of such Claim or Interest is allowed
pursuant to the following sentence of this definition.
If the Debtors File an objection to a proof of Claim or Interest within a time
fixed by the Bankruptcy Court, the Claim or Interest shall be Allowed to the
extent of:
(1) any amount of such Claim or Interest to which the Debtors did not
object;
(2) any amount otherwise authorized by Final Order or the Plan; and
(3) any amount temporarily allowed by an Order for purposes of voting on
the Plan (which amount shall not be binding with respect to distributions
to which the Holder of such Claim or Interest shall be entitled under the
Plan).
"ALLOWED ADMINISTRATIVE CLAIM," "ALLOWED PRIORITY TAX CLAIM," "ALLOWED SECURED
CLAIM" and "ALLOWED UNSECURED CLAIM" have correlative meanings.
3. "ALLOWED CLASS ... CLAIM" means an Allowed Claim in the particular Class
described.
4. "ALLOWED CLASS ... INTEREST" means an Allowed Interest in the particular
Class described.
5. "BALLOT" means a ballot or master ballot to be used for voting to accept or
reject the Plan.
6. "BANK CLAIMS" means all Claims represented by, relating to or arising under
or in connection with the Greenwich Facility or the CIT Facility.
7. "BANKRUPTCY CODE" means title 11 of the United States Code, as now in effect
or hereafter amended if such amendments are made applicable to the
Reorganization Cases.
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8. "BANKRUPTCY COURT" means the United States Bankruptcy Court for the Southern
District of New York, or such other court or adjunct thereof that exercises
jurisdiction over the Reorganization Cases.
9. "BANKRUPTCY RULES" means the Federal Rules of Bankruptcy Procedure, as
applicable from time to time in the Reorganization Cases.
10. "BUSINESS DAY" means any day other than a Saturday, a Sunday or a "LEGAL
HOLIDAY" (as defined in Bankruptcy Rule 9006(a)).
11. "CASH" means currency, a certified check, a cashier's check or a wire
transfer of immediately available funds from any source, or a check drawn on a
domestic bank from Reorganized Cityscape, Reorganized CSC or other Person making
any distribution under the Plan.
12. "CEDEL" means Cedel Bank, societe anonyme.
13. "CIT FACILITY" means that certain revolving credit facility entered into by
CSC with The CIT Group/Equipment Financing, Inc. on February 3, 1998, as amended
through the date hereof, which facility is guaranteed by Cityscape.
14. "CITYSCAPE" means Cityscape Financial Corp., a Delaware corporation.
15. "CLAIM" means a claim against either of the Debtors, whether or not asserted
or allowed, as defined in Section 101(5) of the Bankruptcy Code, including,
without limitation, Administrative Claims.
16. "CLASS" means a class of Claims or Interests designated pursuant to the
Plan.
17. "CLEARING SYSTEMS" shall have the meaning ascribed to such term in Section
VI.F.2 of the Plan.
18. "CLERK" means the Clerk of the Bankruptcy Court.
19. "COMMITTEE" means any statutory committee of creditors or equity interest
Holders of the Debtors appointed by the United States Trustee pursuant to
Section 1102 of the Bankruptcy Code, including the Creditors' Committee, if one
is appointed.
20. "COMPANY" means Cityscape and CSC, collectively and individually as
appropriate from the context, as Debtors.
21. "CONFIRMATION" means the entry by the Bankruptcy Court of the Confirmation
Order.
22. "CONFIRMATION DATE" means the date on which the Clerk enters the
Confirmation Order on the Docket.
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23. "CONFIRMATION HEARING" means the hearing on confirmation of the Plan, as the
Plan may be modified hereafter.
24. "CONFIRMATION ORDER" means the Order of the Bankruptcy Court confirming the
Plan under Section 1129 of the Bankruptcy Code.
25. "CREDITORS' COMMITTEE" means any Official Committee of Creditors of
Cityscape and/or CSC appointed by the United States Trustee pursuant to Section
1102 of the Bankruptcy Code.
26. "CSC" means Cityscape Corp., a New York corporation and wholly-owned
subsidiary of Cityscape.
27. "DEBTOR RELEASEES" shall have the meaning ascribed to such term in Section
XI.C. of the Plan.
28. "DEBTORS" means, collectively, Cityscape and CSC, as debtors and Debtors In
Possession.
29. "DEBTORS IN POSSESSION" means the Debtors, when acting in the capacity of
representatives of the Estates in the Reorganization Cases.
30. "DESIGNATED PROFESSIONAL" means: (i) Latham & Watkins; (ii) Gibson, Dunn &
Crutcher LLP; (iii) Kasowitz, Benson, Torres & Friedman; (iv) Kramer Levin
Naftalis & Frankel LLP and (v) Jay Alix & Associates.
31. "DIP CLAIMS" means all Claims arising under the DIP Facilities.
32. "DIP FACILITIES" means the debtor in possession credit agreements and any
related agreements between the Debtors and the DIP Lenders.
33. "DIP LENDERS" means, collectively, The CIT Group/Equipment Financing, Inc.,
Greenwich Capital Financial Products, Inc. and any other lenders participating
in the DIP Facilities.
34. "DISBURSING AGENT" means, collectively, one or more Persons responsible for
making distributions under the Plan. The Reorganized Company or such Person(s)
as the Debtors may employ in their sole discretion will serve as Disbursing
Agent.
35. "DISCLOSURE STATEMENT" means the disclosure statement (including any prior
version thereof) pursuant to Section 1125 of the Bankruptcy Code with respect to
the Plan (and all exhibits and schedules annexed thereto or referred to
therein), as it may be amended or supplemented from time to time.
36. "DISPUTED CLAIM" means a Claim, not otherwise Allowed or paid pursuant to
the Plan, to the extent such Claim is the subject of a pending application,
motion, complaint, objection or other legal proceeding seeking to disallow,
subordinate or estimate such Claim.
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37. "DISPUTED INTEREST" means an Interest to the extent such Interest is the
subject of a pending application, motion, complaint, objection or other legal
proceeding seeking to disallow, subordinate or estimate such Interest.
38. "DISTRIBUTION RECORD DATE" means the date or dates fixed by the Bankruptcy
Court as the record date for determining the Holders of Old Senior Notes and Old
Subordinated Debentures, respectively, who are entitled to receive distributions
under this Plan and, if no such date is fixed, means the Confirmation Date.
39. "DOCKET" means the docket or dockets in the Reorganization Cases maintained
by the Clerk.
40. "DTC" means The Depository Trust Company.
41. "EFFECTIVE DATE" means the first Business Day, as determined by the Debtors,
on which (i) all conditions to the Effective Date set forth herein have been
satisfied or, if permitted, waived by the Debtors, and on which no stay of the
Confirmation Order is in effect, and (ii) the Plan has been "substantially
consummated," as such term is defined in Section 1101(2) of the Bankruptcy Code.
42. "ELIGIBLE INSTITUTION" shall have the meaning ascribed to such term in
Section V.F.1.b of the Plan.
43. "EMPLOYEE CLAIMS" means Claims which are asserted by employees of the
Debtors in connection with their employment, including, without limitation,
Claims arising from or relating to salaries or wages, accrued paid vacation,
health-related benefits, severance benefits, field management and
executive/administrative management incentive plans and similar employee
benefits.
44. "ESTATES" means the estates created in the Debtors' Reorganization Cases
under Section 541 of the Bankruptcy Code.
45. "EUROCLEAR" means Morgan Guaranty Trust Company of New York, as operator of
the Euroclear system.
46. "FILE," "FILED" or "FILING" means filed, or filing, with the Bankruptcy
Court in the Reorganization Cases.
47. "FINAL ORDER" means an order or judgment of the Bankruptcy Court, as entered
on the Docket in the Reorganization Cases, which has not been reversed, stayed,
modified or amended, and as to which (a) the time to appeal, seek certiorari or
request reargument or further review or rehearing has expired and no appeal,
petition for certiorari or request for reargument or further review or rehearing
has been timely filed, or (b) any appeal that has been or may be taken or any
petition for certiorari or request for reargument or further review or rehearing
that has been or may be filed has been resolved by the highest court to which
the order or judgment was appealed, from which certiorari was sought or to which
the request was made.
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48. "FINANCING ORDERS" means, collectively, the interim and final orders entered
by the Bankruptcy Court in connection with the DIP Facilities.
49. "GENERAL UNSECURED CLAIMS" shall have the meaning ascribed to such term in
Article IV of the Plan.
50. "GREENWICH FACILITY" means that certain Master Loan and Security Agreement
dated as of January 1, 1997 between CSC and Greenwich Capital Financial
Products, Inc., as subsequently extended, amended or otherwise modified from
time to time through the date hereof, which facility is guaranteed by Cityscape.
51. "HOLDER" means a Person who holds a Claim or Interest in such Person's
capacity as the holder of such Claim or Interest. Where the identity of the
Holder of a Claim or Interest is set forth on a register or other record
maintained by or at the direction of the Debtors, the Holder of such Claim or
Interest shall be deemed to be the Holder as identified on such register or
record unless the Debtors are otherwise notified in a writing authorized by such
Holder.
52. "IMPAIRED" shall have the definition given to it in Section 1124 of the
Bankruptcy Code. Section 1124 states in principal part:
[A] class of claims or interests is impaired under a plan unless,
with respect to each claim or interest of such class, the plan --
(1) leaves unaltered the legal, equitable, and contractual rights to
which such claim or interest entitles the holder of such claim or
interest; or
(2) notwithstanding any contractual provision or applicable law that
entitles the holder of such claim or interest to demand or receive
accelerated payment of such claim or interest after the occurrence
of a default --
(A) cures any such default that occurred before of after the
commencement of the case under this title, other than a default of a
kind specified in section 365(b)(2) of this title;
(B) reinstates the maturity of such claim or interest as such
maturity existed before such default;
(C) compensates the holder of such claim or interest for any damages
incurred as a result of any reasonable reliance by such holder on
such contractual provision or such applicable law; and
(D) does not otherwise alter the legal, equitable, or contractual
rights to which such claim or interest entitles the holder of such
claim or interest.
An Impaired Class is entitled to vote on the Plan; provided, however, that
Classes of Claims and Interests that do not receive or retain any property under
the Plan on account of such Claims and Interests are deemed to have rejected the
Plan and are not entitled to vote.
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53. "INDEMNITEES" shall have the meaning ascribed to such term in Section XI.D
of the Plan.
54. "INDENTURE TRUSTEES" means (i) The Chase Manhattan Bank, as original
indenture trustee for the Old Senior Notes, (ii) Norwest Bank of Minnesota,
N.A., as successor indenture trustee for the Old Senior Notes, or any successor
thereto, and (iii) The Chase Manhattan Bank, N.A., as indenture trustee for the
Old Subordinated Debentures, or any successor thereto.
55. "INSTRUMENT" means any share of stock, security, promissory note or other
"INSTRUMENT," within the meaning of that term, as defined in Section 9-105(1)(i)
of the UCC.
56. "INTERCOMPANY CLAIMS" means any and all Claims and causes of action which
either of the Debtors holds against the other Debtor.
57. "INTEREST" means the interest of any equity security Holder of the Debtors,
whether or not asserted, as defined in Section 101(17) of the Bankruptcy Code.
58. "LETTER OF TRANSMITTAL" shall have the meaning ascribed to such term in
Section VI.F.1.b of the Plan.
59. "LOCAL BANKRUPTCY RULES" means the local rules of the Bankruptcy Court, as
applicable from time to time in the Reorganization Cases.
60. "NEW COMMON STOCK" means common stock of Reorganized Cityscape, par value
$0.01 per share, which may be issued by Reorganized Cityscape on and after the
Effective Date pursuant to the Plan or otherwise.
61. "OLD CITYSCAPE COMMON STOCK" means the common stock of Cityscape, par value
$.0l per share.
62. "OLD CITYSCAPE PREFERRED STOCK" means Old Series A Preferred Stock and the
Old Series B Preferred Stock.
63. "OLD DEBT" means, collectively, the Old Senior Notes and Old Subordinated
Debentures.
64. "OLD SECURITIES" means, collectively, the Old Debt, the Old Cityscape Common
Stock, the Old Cityscape Preferred Stock and the Old Warrants.
65. "OLD SENIOR NOTES" means the 12 3/4% Series A Senior Notes due 2004 issued
by Cityscape.
66. "OLD SERIES A PREFERRED STOCK" means Cityscape's 6% Convertible Preferred
Stock, Series A, with an initial liquidation preference of $10,000 per share, of
which 626 shares remain outstanding as of the date hereof.
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67. "OLD SERIES B PREFERRED STOCK" means Cityscape's 6% Convertible Preferred
Stock, Series B, with an initial liquidation preference of $10,000 per share, of
which 4,551 shares remain outstanding as of the date hereof.
68. "OLD SERIES A WARRANTS" means the five-year warrants (which relate to the
Old Series A Preferred Stock) to purchase 500,000 shares of Old Cityscape Common
Stock with an exercise price of $20.625 per share.
69. "OLD SERIES B WARRANTS" means the five-year warrants (which relate to the
Old Series B Preferred Stock) to purchase 500,000 shares of Old Cityscape Common
Stock with an exercise price per share equal to the lesser of (i) $14.71 and
(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 such warrants.
70. "OLD STOCK RIGHTS" means, collectively, any Old Warrants, and any other
rights or options, to purchase or otherwise acquire Old Securities, and any
stock appreciation or similar rights relating to Old Securities, existing prior
to the Effective Date, including, without limitation, such rights under
Cityscape's 1995 Non-Employee Directors Stock Option Plan, Cityscape's 1995
Stock Option Plan, Cityscape's Stock Purchase Plan, Cityscape's 1997 Stock
Option Plan, and Cityscape's Stock Option Program for certain executive
officers, and registration rights granted by Cityscape to Franklin Mutual
Advisers, Inc. "Old Stock Rights" do not include any rights arising out of the
ownership of Old Securities other than the Old Warrants.
71. "OLD SUBORDINATED DEBENTURES" means the 6% Convertible Subordinated
Debentures due 2006 issued by Cityscape.
72. "OLD WARRANTS" means the Old Series A Warrants and the Old Series B
Warrants.
73. "ORDER" means an order or judgment of the Bankruptcy Court as entered on the
Docket.
74. "ORDINARY COURSE PROFESSIONALS' ORDER" means the order which, if entered by
the Clerk, will authorize the Debtors to (a) retain and employ various
professionals who are not working directly to implement the Reorganization Cases
and (b) pay such professionals without need for application, hearing and Final
Order.
75. "OTHER SECURED CLAIM" means any Allowed Secured Claim not classified in
Class 1. Other Secured Claims are classified in Class 2a et seq.
76. "PERSON" means any individual, corporation, general partnership, limited
partnership, limited liability partnership, limited liability company,
association, joint stock company, joint venture, government or political
subdivision, official committee appointed by the United States Trustee,
unofficial committee of creditors or equity Holders, or other "entity" (as
defined in the Bankruptcy Code).
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77. "PETITION DATE" means October 6, 1998, the date on which the Reorganization
Cases were Filed.
78. "PLAN" means this plan of reorganization (including any prior version
thereof) for the Debtors in the Reorganization Cases and all exhibits and
schedules annexed hereto, as such may be amended, modified or supplemented from
time to time.
79. "POST-PETITION TAX CLAIMS" means Administrative Claims and other Claims by a
governmental unit for taxes (and for interest and/or penalties related to such
taxes) for any tax year or period, to the extent such Claim accrues within the
period from and including the Petition Date through and including the Effective
Date.
80. "PREPETITION CREDIT FACILITIES" means the CIT Facility and the Greenwich
Facility.
81. "PRIORITY CLAIM" means an Allowed Claim entitled to priority under Sections
507(a)(3) through 507(a)(7) or 507(a)(9) of the Bankruptcy Code, but excludes
Priority Tax Claims.
82. "PRIORITY TAX CLAIM" means an Allowed Claim for an amount entitled to
priority under Section 507(a)(8) of the Bankruptcy Code.
83. "PRO RATA" means proportionately so that, with respect to any Class, the
ratio of (a) the amount of consideration distributed on account of a particular
Allowed Claim or Allowed Interest to (b) the amount of such particular Allowed
Claim or Allowed Interest, is the same as the ratio of (x) the amount of
consideration distributed on account of all Allowed Claims or Allowed Interests
of the Class in which the particular Allowed Claim or Allowed Interest is
included to (y) the aggregate amount of all Allowed Claims or Allowed Interests
of that Class.
84. "REINSTATED," means, with respect to any Allowed Claim or Allowed Interest,
that such Claim or Interest shall be treated as Unimpaired as of the Effective
Date.
85. "REORGANIZATION CASES" means the Debtors' cases under chapter 11 of the
Bankruptcy Code.
86. "REORGANIZED CITYSCAPE" means Cityscape, as it will be reorganized as of the
Effective Date in accordance with this Plan and having such name as shall be
determined prior to the Confirmation Date by the Board of Directors of
Cityscape.
87. "REORGANIZED CITYSCAPE BYLAWS" means the amended and restated bylaws of
Reorganized Cityscape that will be effective on the Effective Date, in
substantially the form annexed as Exhibit "B" hereto.
88. "REORGANIZED CITYSCAPE CERTIFICATE OF INCORPORATION" means the amended and
restated certificate of incorporation of Reorganized Cityscape that will be
effective on the Effective Date, in substantially the form annexed as Exhibit
"A" hereto.
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89. "REORGANIZED CSC" means CSC, as it will be reorganized as of the Effective
Date in accordance with this Plan and having such name as shall be determined
prior to the Confirmation Date by the Board of Directors of CSC.
90. "REORGANIZED CSC BYLAWS" means the amended and restated bylaws of
Reorganized CSC that will be effective on the Effective Date, in substantially
the form annexed as Exhibit "D" hereto.
91. "REORGANIZED CSC CERTIFICATE OF INCORPORATION" means the amended and
restated certificate of incorporation of Reorganized CSC that will be effective
on the Effective Date, in substantially the form annexed as Exhibit "C" hereto.
92. "REORGANIZED COMPANY" means Reorganized Cityscape and Reorganized CSC,
collectively and individually, as appropriate from the context.
93. "SECURED CLAIM" means any Claim that is secured by a lien on property in
which the Estates have an interest or that is subject to setoff under Section
553 of the Bankruptcy Code, to the extent of the value of the Claim Holder's
interest in the Estates' interest in such property or to the extent of the
amount subject to setoff, as applicable, as determined pursuant to Section
506(a) or 1111(b) of the Bankruptcy Code.
94. "SECURITIES CLAIM" means (a) any Claim arising from rescission of a purchase
or sale of Old Securities or for damages arising from the purchase or sale of
Old Securities, or (b) any Claim for indemnity, reimbursement, or contribution
on account of any such Claim.
95. "SENIOR NOTE CLAIMS" means Claims arising from the Old Senior Notes
(including all Claims and causes of action arising therefrom or in connection
therewith).
96. "SMALL SENIOR NOTE CLAIMS" shall have the meaning ascribed to such term in
Article IV of the Plan.
97. "SMALL SUBORDINATED DEBENTURE CLAIMS" shall have the meaning ascribed to
such term in Article IV of the Plan.
98. "SMALL UNSECURED CLAIMS" shall have the meaning ascribed to such term in
Article IV of the Plan.
99. "SUBORDINATED DEBENTURE CLAIMS" means Claims arising from the Old
Subordinated Debentures (including all Claims and causes of action arising
therefrom or in connection therewith).
100. "TENDERED CERTIFICATES" shall have the meaning ascribed to such term in
Section VI.F.1.b of the Plan.
101. "TORT CLAIM" means any Claim related to personal injury, property damage or
loss, products liability or other similar Claims against either Debtor, and
shall not include Securities Claims or Claims arising under, based upon or
related to Old Stock Rights.
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102. "TRADE CLAIMS" means any unsecured Claim against either Cityscape or CSC
arising from (i) the delivery of goods or services in the ordinary course of
business or (ii) insurance-related service (including insurance premiums).
"Trade Claim" excludes (i) Claims arising under Section 502(e) or 502(g) of the
Bankruptcy Code, (ii) Claims of the type described in Section 726(a)(4) of the
Bankruptcy Code, and (iii) Tort Claims.
103. "UCC" means the Delaware Uniform Commercial Code, as in effect at any
relevant time.
104. "UNIMPAIRED" means, with reference to a Class of Claims or Interests, that
the Class is not Impaired. An Unimpaired Class is not entitled to vote on the
Plan.
105. "UNOFFICIAL COMMITTEES" means the Unofficial Senior Noteholders' Committee
and the Unofficial Subordinated Debentureholders' Committee.
106. "UNOFFICIAL SENIOR NOTEHOLDERS' COMMITTEE" means (i) MacKay-Shields
Financial Corporation, as investment advisor to various funds, (ii) Cerberus
Partners, L.P., and such other representatives of the Senior Note Claims as may
be designated from time to time.
107. "UNOFFICIAL SUBORDINATED DEBENTUREHOLDERS' COMMITTEE" means (i) Forest
Investment Management, (ii) Bear, Stearns & Co. Inc., (iii) Deephaven Market
Neutral Trading Limited (f/k/a KA Management), (iv) Tamar Securities Inc., (v)
Aristeia Capital LLC, (vi) J. Robbins Securities, LLC, (vii) RAS Securities
Corp., (viii) D.A. Davidson & Co., (ix) Donaldson, Lufkin & Jenrette Securities
Corporation, (x) Mercantile Bank, (xi) Mellon Bank, as trustee for General
Motors Employees Domestic Group Pension Trust, (xii) Ramat Securities Ltd., and
such other representatives of the Subordinated Debenture Claims as may be
designated from time to time.
108. "UNSECURED CLAIM" means any Claim that is not an Administrative Claim,
Priority Claim, Priority Tax Claim or Secured Claim.
109. "VOTING AGENT" shall have the meaning ascribed to such term in Section
VIII.E of the Plan.
110. "VOTING DEADLINE" means the date on which Ballots must be received by the
Voting Agent at the address set forth on the applicable Ballot. For purposes of
the Plan, the Voting Deadline is 5:00 p.m., New York City Time, _______________,
1999.
111. "VOTING RECORD DATE" means _____.
112. "VOTING SECURITIES" means, collectively, the Old Senior Notes and the Old
Subordinated Debentures.
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B. Interpretation and Computation of Time.
1. Defined Terms.
Any term used in the Plan that is not defined in the Plan, either in
Article II (Definitions) or elsewhere, but that is defined in the Bankruptcy
Code, the Bankruptcy Rules or the Local Bankruptcy Rules, shall have the meaning
assigned to that term in the Bankruptcy Code, the Bankruptcy Rules or the Local
Bankruptcy Rules, as the case may be.
2. Rules of Interpretation.
For purposes of the Plan: (a) whenever it appears appropriate from
the context, each term, whether stated in the singular or the plural, shall
include both the singular and the plural; (b) any reference in the Plan to a
contract, instrument, release or other agreement or document being in a
particular form or on particular terms and conditions means that such document
shall be substantially in such form or substantially on such terms and
conditions; provided, however, that any change to such form, terms, or
conditions which is material to a party to such document shall not be made
without such party's consent; (c) any reference in the Plan to an existing
document or exhibit Filed or to be Filed means such document or exhibit, as it
may have been or (to the extent otherwise permitted, hereafter) may be amended,
modified or supplemented from time to time; (d) unless otherwise specified in a
particular reference, all references in the Plan to paragraphs, sections,
articles and exhibits are references to paragraphs, sections, articles and
exhibits of or to the Plan; (e) the words "herein," "hereof" "hereto,"
"hereunder" and others of similar import refer to the Plan in its entirety
rather than to a particular portion of the Plan only; (f) captions and headings
to articles and paragraphs are inserted for convenience of reference only and
are not intended to be a part of or to affect the interpretations of the Plan;
(g) the rules of construction set forth in Section 102 of the Bankruptcy Code
shall apply; and (h) all exhibits to the Plan are incorporated into the Plan,
and shall be deemed to be included in the Plan.
3. Time Periods.
In computing any period of time prescribed or allowed by the Plan,
the provisions of Bankruptcy Rule 9006(a) shall apply.
III.
POOLING OF ASSETS AND LIABILITIES AND
CANCELLATION OF INTERCOMPANY CLAIMS
On the Effective Date, the assets and liabilities of the Debtors
shall be pooled to the extent specified in this Plan. The legal rights and
priorities of each Holder of a Claim shall be treated as having a single
recourse against such pooled assets. Each Holder of a Claim who has asserted a
Claim against both of the Debtors arising from or related to the same underlying
obligation or cause of action, whether the basis for the asserted liability of
the Debtors arises by contract, guarantee (including CSC's guarantee of
Cityscape's obligations under the Old Senior
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Notes), or by operation of law, shall likewise be treated as having a single
Claim against the assets of the pooled estate.
On the Effective Date, as part of such pooling, each of the Debtors
shall be deemed to have fully and finally compromised and settled all
Intercompany Claims. As a result of giving effect to such pooling of assets and
liabilities and such compromise and settlement, all Intercompany Claims shall be
treated as extinguished immediately upon the Effective Date and shall receive no
distribution pursuant to this Plan.
The pooling of assets and liabilities provided for under this
Article III shall be only for purposes of distributions under this Plan. Nothing
in this Plan or the Confirmation Order shall effect a merger or any other
combination of Cityscape and CSC, or Reorganized Cityscape and Reorganized CSC.
IV.
DESIGNATION OF CLASSES OF CLAIMS AND INTERESTS
The following is a designation of the Classes of Claims and
Interests under the Plan. In accordance with Section 1123(a)(1) of the
Bankruptcy Code, Administrative Claims and Priority Tax Claims have not been
classified and are excluded from the following Classes. A Claim or Interest is
classified in a particular Class only to the extent that the Claim or Interest
qualifies within the description of that Class, and is classified in another
Class or Classes to the extent that any remainder of the Claim or Interest
qualifies within the description of such other Class or Classes. A Claim or
Interest is classified in a particular Class only to the extent that the Claim
or Interest is an Allowed Claim or Allowed Interest in that Class and has not
been paid, released or otherwise satisfied before the Effective Date; a Claim or
Interest which is not an Allowed Claim or Allowed Interest is not in any Class.
A Disputed Claim or Disputed Interest, to the extent that it subsequently
becomes an Allowed Claim or Allowed Interest, shall be included in the Class for
which it would have qualified had it not been disputed. Notwithstanding anything
to the contrary contained in the Plan, no distribution shall be made on account
of any Claim or Interest to the extent such Claim or Interest is not an Allowed
Claim or an Allowed Interest.
Class 1--Bank Claims Class 1 consists of all Allowed Bank
Claims against the Debtors.
Class 2a et seq.--Other Secured Claims Class 2 consists of all Allowed Secured
Claims against the Debtors other than
Secured Claims specified in Class 1.
Class 3--Priority Claims Class 3 consists of all Allowed Priority
Claims against the Debtors.
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Class 4--Senior Note Claims and Class 4 consists of all Allowed Claims
Class 4a--Small Senior Note Claims against the Debtors of Holders of Old
Senior Notes, including Claims based
upon CSC's guarantee of Cityscape's
obligations under the Old Senior Notes.
Class 4a consists of each Allowed Senior
Note Claim whose principal amount is
equal to or less than $5,000.00 or whose
Holder agrees on a Ballot or otherwise
in writing to reduce the principal
amount of such Allowed Senior Note Claim
to $5,000.00 and to release and waive
any further or additional Claim(s)
against the Debtors ("SMALL SENIOR NOTE
CLAIMS").
Class 5--General Unsecured Claims and Class 5 consists of all Allowed
Class 5a--Small Unsecured Claims Unsecured Claims against the Debtors
other than the Unsecured Claims in
Classes 4, 4a, 6, 6a, 7, 9, 11, 13 and
14 ("GENERAL UNSECURED CLAIMS"). Class
5a consists of each Allowed General
Unsecured Claim that is equal to or less
than $8,000.00 or whose Holder agrees on
a Ballot or otherwise in writing to
reduce such Allowed Unsecured Claim to
$8,000.00 and to release and waive any
further or additional Claim(s) against
the Debtors ("SMALL UNSECURED CLAIMS").
Class 6--Subordinated Debenture Claims Class 6 consists of all Allowed Claims
and against the Debtors of Holders of Old
Class 6a--Small Subordinated Debenture Subordinated Debentures. Class 6a
Claims consists of each Allowed Subordinated
Debenture Claim whose principal amount
is equal to or less than $50,000.00 or
whose Holder agrees on a Ballot or
otherwise in writing to reduce the
principal amount of such Allowed
Subordinated Debenture Claim to
$50,000.00 and to release and waive any
further or additional Claim(s) against
the Debtors ("Small Subordinated
Debenture Claims").
Class 7--Old Debt Securities Claims Class 7 consists of all Allowed
Securities Claims on account of Old Debt
against the Debtors.
Class 8--Old Series A Preferred Stock Class 8 consists of all Allowed
Interests in Cityscape of Holders of Old
Series A Preferred Stock.
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Class 9--Old Series A Preferred Stock Class 9 consists of all Allowed
Securities Claims Securities Claims on account of Old
Series A Preferred Stock against the
Debtors.
Class 10--Old Series B Preferred Stock Class 10 consists of all Allowed
Interests in Cityscape of Holders of Old
Series B Preferred Stock.
Class 11--Old Series Securities Claims Class 11 consists of all Allowed
B Preferred Stock Securities Claims on account of Old
Series B Preferred Stock against the
Debtors.
Class 12 --Old Cityscape Common Stock Class 12 consists of all Allowed
Interests in Cityscape of Holders of Old
Cityscape Common Stock.
Class 13--Old Stock Rights Class 13 consists of all Allowed
Interests in Cityscape of Holders of Old
Stock Rights and all Allowed Claims
arising out of any such Old Stock
Rights, including, without limitation,
all Allowed Claims arising out of the
rejection of Old Stock Rights.
Class 14--Old Cityscape Common Stock Class 14 consists of all Allowed
and Old Warrant Securities Claims Securities Claims on account of Old
Cityscape Common Stock or Old Warrants
against the Debtors.
V.
GENERAL PROVISIONS FOR TREATMENT OF CLAIMS AND INTERESTS
A. Unclassified Claims.
1. Administrative Claims.
a. General.
Subject to certain additional requirements for professionals and
certain other entities set forth below, the Reorganized Company shall pay to
each Holder of an Allowed Administrative Claim, on account of its Administrative
Claim and in full satisfaction thereof, Cash equal to the amount of such Allowed
Administrative Claim on, as soon as practicable after, the later of the
Effective Date and the day on which such Claim becomes an Allowed Claim, unless
the Holder and the Debtors or the Reorganized Company agree or shall have agreed
to other treatment of such Claim, or an order of the Bankruptcy Court provides
for other terms; provided, that if incurred in the ordinary course of business
or otherwise assumed by the Debtors
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pursuant to the Plan (including Administrative Claims of governmental units for
taxes), an Allowed Administrative Claim will be assumed on the Effective Date
and paid, performed or settled by the Reorganized Company, when due in
accordance with the terms and conditions of the particular agreement(s)
governing the obligation in the absence of the Reorganization Cases.
b. Payment of Statutory Fees.
On or before the Effective Date, all fees payable pursuant to 28
U.S.C. ss.1930, as determined by the Bankruptcy Court at the Confirmation
Hearing, shall be paid in Cash equal to the amount of such Administrative Claim.
2. Priority Tax Claims.
Unless otherwise agreed to by the Debtors or the Reorganized
Company, and a Holder of a Priority Tax Claim, each Holder of an Allowed
Priority Tax Claim shall receive, at the sole option of the Reorganized Company
(i) Cash equal to the unpaid portion of such Allowed Priority Tax Claim on the
later of the Effective Date and the date on which such Claim becomes an Allowed
Priority Tax Claim, or as soon thereafter as is practicable, or (ii) equal
quarterly cash payments in an aggregate amount equal to such Allowed Priority
Tax Claim, together with interest at a fixed annual rate to be determined by the
Bankruptcy Court or otherwise agreed to by the Reorganized Company and such
Holder, over a period through the sixth anniversary of the date of assessment of
such Allowed Priority Tax Claim, or upon such other terms determined by the
Bankruptcy Court to provide the Holder of such Allowed Priority Tax Claim
deferred cash payments having a value, as of the Effective Date, equal to such
Allowed Priority Tax Claim. The Holders of Allowed Priority Tax Claims are not
entitled to vote on the Plan. Pursuant to Section 1123(a)(1) of the Bankruptcy
Code, Priority Tax Claims are not designated a Class of Claims for purposes of
the Plan.
3. Bar Date for Administrative Claims.
a. General Provisions.
Except as provided below for (i) non-tax liabilities incurred in the
ordinary course of business by the Debtors in Possession, (ii) Post-Petition Tax
Claims, and (iii) DIP Claims, requests for payment of Administrative Claims must
be Filed and served on counsel for the Debtors and Reorganized Cityscape or
Reorganized CSC, as the case may be, no later than (x) sixty (60) days after the
Effective Date, or (y) such later date, if any, as the Bankruptcy Court shall
order upon application made prior to the end of such 60-day period. Holders of
Administrative Claims (including, without limitation, professionals requesting
compensation or reimbursement of expenses and the Holders of any Claims for
federal, state or local taxes) that are required to File a request for payment
of such Claims and that do not File such requests by the applicable bar date
shall be forever barred from asserting such Claims against the Debtors,
Reorganized Cityscape, Reorganized CSC, or any of their respective properties.
No request for payment shall be required in connection with the DIP Claims,
which, notwithstanding anything to the contrary in this Plan, shall be paid in
full in Cash on the Effective Date, as provided in the DIP Facilities and the
Financing Orders.
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b. Professionals.
All professionals or other Persons requesting compensation or
reimbursement of expenses pursuant to Section 327, 328, 330, 331, 503(b) or 1103
of the Bankruptcy Code for services rendered on or before the Effective Date
(including, without limitation, any compensation requested by any professional
or any other Person for making a substantial contribution in the Reorganization
Cases) shall File and serve on the Reorganized Company and counsel for the
Reorganized Company an application for final allowance of compensation and
reimbursement of expenses no later than (i) sixty (60) days after the Effective
Date, or (ii) such later date, if any, as the Bankruptcy Court shall order upon
application made prior to the end of such 60-day period; provided, however, that
any professional who may receive compensation or reimbursement of expenses
pursuant to the Ordinary Course Professionals' Order without having filed an
application may continue to receive compensation or reimbursement for services
rendered before the Effective Date without further Bankruptcy Court review or
approval to the extent provided in the Ordinary Course Professionals' Order.
Objections to applications of professionals or other Persons for compensation or
reimbursement of expenses must be Filed and served on the Reorganized Company,
counsel for the Reorganized Company and the requesting professional or other
Person on or before the later of (x) ninety (90) days after the Effective Date
and (y) thirty (30) days after such date as the Bankruptcy Court shall establish
as the deadline for Filing such applications. The professionals of the Debtors
and any Committee shall be entitled to reasonable compensation by, and
reimbursement of expenses from, the Reorganized Company for services rendered or
costs incurred by such professionals after the Effective Date promptly after
submission of appropriate invoices to the Reorganized Company. In the event of a
dispute over any such invoices, the Reorganized Company shall promptly pay any
amount not in dispute and, if such dispute cannot be resolved among the parties,
such dispute shall be resolved by the Bankruptcy Court.
c. Indenture Trustees.
On or as soon as reasonably practicable after the Effective Date,
the Reorganized Company shall pay the contractual claims of the Indenture
Trustees for their fees and expenses including their reasonable attorneys' fees
and expenses. To the extent, after being furnished with normal supporting
documents for such fees and expenses, the Reorganized Company disputes the
reasonableness of any such fees and expenses, the Reorganized Company shall pay
such fees and expenses as are not disputed, and shall submit to the Indenture
Trustee a written list of specific fees and expenses viewed by the Reorganized
Company as not being reasonable. To the extent that the Reorganized Company and
the Indenture Trustee are unable to resolve the dispute, the dispute shall be
resolved by the Bankruptcy Court. Pending the resolution of any such dispute by
consent or by Final Order of the Bankruptcy Court, an amount of Cash equal to
the disputed portion of the Indenture Trustee's request for fees and expenses
shall be held in trust in one or more segregated bank accounts in the name of
the applicable Disbursing Agent for the benefit of the applicable Indenture
Trustee, accounted for separately, and paid to the Indenture Trustee and/or
returned to the Reorganized Company, as required by the agreement of the
Reorganized Company and the Indenture Trustee or the Final Order of the
Bankruptcy Court, as the case may be. The Indenture Trustees shall not attach or
set off any of their fees and expenses against
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distributions to Holders of Old Senior Notes or Old Subordinated Debentures and
shall not otherwise withhold or delay any such distributions.
d. Ordinary Course Liabilities.
Except as provided herein, holders of Administrative Claims based on
liabilities incurred in the ordinary course of the Debtors' businesses (other
than Claims of governmental units for taxes or Claims and/or penalties related
to such taxes) shall not be required to File any request for payment of such
Claims. Such Administrative Claims shall be assumed and paid by the Reorganized
Company pursuant to the terms and conditions of the particular transactions
giving rise to such Administrative Claims, without any further action by the
Holders of such Claims.
e. Tax Claims.
All requests for payment of Post-Petition Tax Claims, for which no
bar date has otherwise been previously established, must be Filed on or before
the later of (i) sixty (60) days following the Effective Date, and (ii) 120 days
following the filing of the tax return for such taxes for such tax year or
period with the applicable governmental unit. Any Holder of any Post-Petition
Tax Claim that is required to File a request for payment of such taxes and that
does not File such a Claim by the applicable bar date shall be forever barred
from asserting any such Post-Petition Tax Claim against either of the Debtors,
Reorganized Cityscape, Reorganized CSC, or any of their respective properties,
whether any such Post-Petition Tax Claim is deemed to arise prior to, on, or
subsequent to, the Effective Date.
B. Treatment of Claims and Interests.
1. Class 1 (Bank Claims).
Class 1 consists of all Allowed Bank Claims, if any, against the
Debtors arising from the Prepetition Credit Facilities including all Claims
arising pursuant to any guarantee thereof and any pledge of assets as security
therefor. Pursuant to the Financing Orders, proceeds from the DIP Facilities
have been used, among other things, to pay all Allowed Bank Claims against the
Debtors in full in Cash. Therefore, it is contemplated that there will not be
any Bank Claims in Class 1 as of the Effective Date. However, to the extent that
there are any Bank Claims in Class 1 as of the Effective Date, (i) each such
Claim shall be deemed allowed as an Allowed Class 1 Claim in the aggregate
amount equal to the sum of (A) the unpaid principal and interest as of the
Petition Date less all payments thereon received and retained by the respective
Holder thereof during the period from the Petition Date to the Effective Date,
(B) all accrued and unpaid interest from the Petition Date through and including
the Effective Date at the rates provided for in the Financing Orders, and (C)
all other amounts due and owing as of the Effective Date in respect of the
respective Bank Claims pursuant to the Financing Orders and pursuant to the
Greenwich Facility or the CIT Facility, as the case may be, and (ii) on the
Effective Date, each Holder shall receive, on account thereof, a payment in Cash
by wire transfer equal to the amount of such Allowed Class 1 Claim. Therefore,
Class 1 is Unimpaired and, accordingly, is not entitled to vote on the Plan.
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2. Class 2a et seq. (Other Secured Claims).
Class 2a et seq. consists of all Allowed Secured Claims against the
Debtors other than Secured Claims in Class 1. These Classes will be further
divided into subclasses designated by letters of the alphabet (Class 2a, Class
2b, and so on) so that each Holder of any Other Secured Claim against the
Debtors is in a Class by itself, except to the extent that there are Other
Secured Claims that are substantially similar to each other and may be included
within a single Class. The Debtors shall File a schedule of each Other Secured
Claim, if any, against the Debtors on or before ten (10) days prior to the
commencement of the Confirmation Hearing. Each Allowed Other Secured Claim
against the Debtors will be treated as follows: either (a) the Plan shall leave
unaltered the legal, equitable and contractual rights to which such Claim
entitles the Holder; (b)(i) the Debtors shall cure any default with respect to
such Claim that occurred before or after the Petition Date (other than a default
of a kind specified in Section 365(b)(2) of the Bankruptcy Code), (ii) the
maturity of such Claim shall be reinstated as such maturity existed before any
such default, (iii) the Holder of such Claim shall be compensated for any
damages incurred as a result of any reasonable reliance by the Holder on any
right to accelerate its Claim, and (iv) the legal, equitable, and contractual
rights of such Holder will not otherwise be altered; or (c) such Claim shall
receive such other treatment to which the Holder shall consent. The Holder of
each Allowed Other Secured Claim against the Debtors which is treated as set
forth in clause (a), (b) or (c) of this paragraph will be Unimpaired and will
not be entitled to vote for or against the Plan.
3. Class 3 (Priority Claims).
Class 3 consists of the Allowed Priority Claims against the Debtors.
Class 3 Claims are Unimpaired and, accordingly, Holders of Allowed Class 3
Claims are not entitled to vote on the Plan. Each Holder of an Allowed Class 3
Claim shall be entitled to receive (i) Cash equal to the amount of such Claim,
unless the Holder of such Claim and Reorganized Cityscape agree to a different
treatment, on the latest of (a) the Effective Date or as soon as practicable
thereafter, (b) the date such Claim becomes an Allowed Priority Claim, and (c)
the date that such Claim would be paid in accordance with any terms and
conditions of any agreements or understandings relating thereto between the
Debtors and the Holder of such Claim, and/or (ii) such other treatment, as
determined by the Bankruptcy Court, required to render such Claim Unimpaired.
4. Class 4 (Senior Note Claims) and Class 4a (Small Senior Note
Claims).
Class 4 consists of the Allowed Unsecured Claims against the Debtors
of Holders of Old Senior Notes (including all Claims and causes of action
arising therefrom or in connection therewith and all guarantees related
thereto). The Claim of each Holder of Old Senior Notes (including Holders of
Small Senior Note Claims) as of the Distribution Record Date shall be allowed in
the aggregate amount of the unpaid principal of such Holder's Old Senior Notes
plus unpaid interest (calculated in accordance with the provisions of the
indenture governing the Old Senior Notes) which accrued prior to the Petition
Date. Class 4 is Impaired and, accordingly, Holders of Allowed Class 4 Claims
are entitled to vote on the Plan.
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On the Effective Date or as soon as practicable thereafter, each
Holder of an Allowed Class 4 Claim shall receive on account of such Allowed
Claim a Pro Rata portion of 6,288,564 shares of New Common Stock (i.e., one
share of New Common Stock for every $52.88 in principal of and accrued interest
on such Holder's Old Senior Notes).
Class 4a consists of the Allowed Small Senior Note Claims. Class 4a
is Impaired and, accordingly, Holders of Allowed Class 4a Claims are entitled to
vote on the Plan. On the Effective Date or as soon as practicable thereafter,
each Holder of an Allowed Class 4a Claim shall receive on account of such
Allowed Claim Cash in an amount equal to (i) $10.00, multiplied by (ii) the
number of shares of New Common Stock that such Holder would have been entitled
to receive as a Holder of an Allowed Class 4 Claim (after giving effect to the
voluntary reduction, if any, by the Holder of a Class 4 Claim of the principal
amount of such Holder's Claim to $5,000,00); provided, however, that any Holder
of a Class 4a Claim may elect on a Ballot or otherwise in writing to receive the
treatment afforded by Class 4 (i.e., New Common Stock) rather than this Class 4a
(i.e., Cash).
To the extent, if any, that the classification and manner of
satisfying Claims and Interests under the Plan do not take into consideration
all contractual, legal and equitable subordination rights that Holders of
Allowed Class 4 Claims may have against Holders of Claims or Interests with
respect to distributions made pursuant to this Plan, each Holder of an Allowed
Class 4 Claim shall be deemed, upon the Effective Date, to have waived all
contractual, legal or equitable subordination rights that such Holder might
have, including, without limitation, any such rights arising out of the Old
Senior Notes, the Old Subordinated Debentures, the indentures governing such Old
Securities or otherwise.
5. Class 5 (General Unsecured Claims) and Class 5a (Small Unsecured
Claims).
Class 5 consists of all Allowed General Unsecured Claims against the
Debtors, including, but not limited to, Claims resulting from the rejection of
leases or executory contracts (other than such Claims that fall within Class 5a
or Class 13). Class 5 is Impaired and, accordingly, Holders of Allowed Class 5
Claims are entitled to vote on the Plan.
On the Effective Date, or as soon as practicable thereafter, each
Holder of an Allowed Class 5 Claim shall receive on account of such Allowed
Claim one share of New Common Stock for every $70.47 of such Holder's Allowed
Claim.
Class 5a consists of the Allowed Small Unsecured Claims. Class 5a is
Impaired and, accordingly, Holders of Allowed Class 5a Claims are entitled to
vote on the Plan. On the Effective Date or as soon as practicable thereafter,
each Holder of an Allowed Class 5a Claim shall receive on account of such
Allowed Claim Cash in an amount equal to (i) $10.00, multipled by (ii) the
number of shares of New Common Stock that such Holder would have been entitled
to receive as a Holder of an Allowed Class 5 Claim (after giving effect to the
voluntary reduction, if any, by the Holder of a Class 5 Claim of such Holder's
Claim to $8,000.00); provided, however, that any Holder of a Class 5a Claim may
elect on a Ballot or otherwise in writing to receive the treatment afforded by
Class 5 (i.e., New Common Stock) rather than this Class 5a (i.e., Cash).
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Class 5 and Class 5a also include Trade Claims. At the outset of
their chapter 11 cases, the Debtors sought and obtained Bankruptcy Court
approval to pay in the ordinary course of business all outstanding Trade Claims
to trade creditors who continue to provide normal trade credit terms to, or have
reinstated normal trade credit terms for, the Debtors or who have previously
agreed to compromise their Claims in a manner acceptable to the Debtors. To the
extent that any payments made by the Debtors to Holders of Trade Claims pursuant
to such Order resulted in such Holders' receiving greater distributions on
account of their Trade Claims than that to which they are entitled under this
Section V.B.5, any claim of the Debtors for recovery of such overpayments to
such Holders shall be assigned by the Debtors to Reorganized Cityscape or
Reorganized CSC, as applicable, pursuant to Section XI.F of this Plan.
6. Class 6 (Subordinated Debenture Claims) and Class 6a (Small
Subordinated Debenture Claims).
Class 6 consists of Allowed Unsecured Claims against Cityscape of
Holders of Old Subordinated Debentures (including all Claims and causes of
action arising therefrom or in connection therewith). The Claim of each Holder
of Old Subordinated Debentures (including Holders of Small Subordinated
Debenture Claims) as of the Distribution Record Date shall be allowed in the
aggregate amount of the unpaid principal of such Holder's Old Subordinated
Debentures plus unpaid interest (calculated in accordance with the provisions of
the indenture governing the Old Subordinated Debentures) which accrued prior to
the Petition Date. Class 6 is Impaired and, accordingly, Holders of Allowed
Class 6 Claims are entitled to vote on the Plan.
On the Effective Date or as soon as practicable thereafter, each
Holder of an Allowed Class 6 Claim shall receive on account of such Allowed
Claim a Pro Rata portion of 369,524 shares of New Common Stock (i.e., one share
of New Common Stock for every $369.82 in principal of and accrued interest on
such Holder's Old Subordinated Debentures); provided, however, that if Class 6
and Class 6a do not accept the Plan, no New Common Stock (or any other property)
shall be distributed to Holders of Allowed Class 6 Claims pursuant to the Plan,
and any New Common Stock that would have been distributed to the Holders of
Class 6 Claims shall be distributed Pro Rata to the Holders of Class 4 Claims as
part of their distribution pursuant to Section V.B.4 above.
Class 6a consists of the Allowed Small Subordinated Debenture
Claims. Class 6a is Impaired and, accordingly, Holders of Allowed Class 6a
Claims are entitled to vote on the Plan. On the Effective Date or as soon as
practicable thereafter, each Holder of an Allowed Class 6a Claim shall receive
on account of such Allowed Claim Cash in an amount equal to (i) $10.00,
multiplied by (ii) the number of shares of New Common Stock that such Holder
would have been entitled to receive as a Holder of an Allowed Class 6 Claim
(after giving effect to the voluntary reduction, if any, by the Holder of a
Class 6 Claim of the principal amount of such Holder's Claim to $50,000.00);
provided, however, that (i) any Holder of a Class 6a Claim may elect on a Ballot
or otherwise in writing to receive the treatment afforded by Class 6 (i.e., New
Common Stock) rather than this Class 6a (i.e., Cash), and (ii) if Class 6 and
Class 6a do not accept the Plan, no Cash (or any other property) shall be
distributed to Holders of Allowed Class 6a Claims pursuant to the Plan.
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7. Class 7 (Old Debt Securities Claims).
Class 7 consists of all Allowed Securities Claims on account of Old
Debt against the Debtors. The Holders of Allowed Class 7 Claims, if any, shall
not receive or retain any interest or property under the Plan and, therefore,
Class 7 is Impaired and is deemed to have rejected the Plan. Accordingly, votes
of Holders of Allowed Class 7 Claims are not being solicited. The Debtors are
not aware of any Class 7 Claims. If there are any Allowed Class 7 Claims, the
Debtors intend to seek to confirm the Plan pursuant to the "cramdown" provisions
of Section 1129(b) of the Bankruptcy Code.
8. Class 8 (Interests of Holders of Old Series A Preferred Stock).
Class 8 consists of the Allowed Interests of Holders of Old Series A
Preferred Stock. The Holders of Allowed Class 8 Interests shall not receive or
retain any interest or property under the Plan and, therefore, Class 8 is
Impaired and is deemed to have rejected the Plan. Accordingly, votes of Holders
of Allowed Class 8 Interests are not being solicited. The Debtors intend to seek
to confirm the Plan as to Class 8 pursuant to the "cramdown" provisions of
Section 1129(b) of the Bankruptcy Code.
9. Class 9 (Old Series A Preferred Stock Securities Claims).
Class 9 consists of all Allowed Securities Claims on account of Old
Series A Preferred Stock against the Debtors. The Holders of Allowed Class 9
Claims, if any, shall not receive or retain any interest or property under the
Plan and, therefore, Class 9 is Impaired and is deemed to have rejected the
Plan. Accordingly, votes of Holders of Allowed Class 9 Claims are not being
solicited. The Debtors are not aware of any Class 9 Claims. If there are any
Allowed Class 9 Claims, the Debtors intend to seek to confirm the Plan pursuant
to the "cramdown" provisions of Section 1129(b) of the Bankruptcy Code.
10. Class 10 (Interests of Holders of Old Series B Preferred Stock).
Class 10 consists of all Allowed Interests of Holders of Old Series
B Preferred Stock. The Holders of Allowed Class 10 Interests shall not receive
or retain any interest or property under the Plan and, therefore, Class 10 is
Impaired and is deemed to have rejected the Plan. Accordingly, votes of Holders
of Allowed Class 10 Interests are not being solicited. The Debtors intend to
seek to confirm the Plan as to Class 10 pursuant to the "cramdown" provisions of
Section 1129(b) of the Bankruptcy Code.
11. Class 11 (Old Series B Preferred Stock Securities Claims).
Class 11 consists of all Allowed Securities Claims on account of Old
Series B Preferred Stock against the Debtors. The Holders of Allowed Class 11
Claims, if any, shall not receive or retain any interest or property under the
Plan and, therefore, Class 11 is Impaired and is deemed to have rejected the
Plan. Accordingly, votes of Holders of Allowed Class 11 Claims are not being
solicited. The Debtors are not aware of any Class 11 Claims. If there are any
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Allowed Class 11 Claims, the Debtors intend to seek to confirm the Plan pursuant
to the "cramdown" provisions of Section 1129(b) of the Bankruptcy Code.
12. Class 12 (Interests of Holders of Old Cityscape Common Stock).
Class 12 consists of the Allowed Interests of Holders of Old
Cityscape Common Stock. The Holders of Allowed Class 12 Interests shall not
receive or retain any interest or property under the Plan and, therefore, Class
12 is Impaired and is deemed to have rejected the Plan. Accordingly, votes of
Holders of Allowed Class 12 Interests are not being solicited. The Debtors
intend to seek to confirm the Plan as to Class 12 pursuant to the "cramdown"
provisions of Section 1129(b) of the Bankruptcy Code.
13. Class 13 (Interests of Holders of Old Stock Rights in Cityscape and
all Claims Arising Out of Such Old Stock Rights).
Class 13 consists of all Allowed Interests in Cityscape of Holders
of Old Stock Rights and all Allowed Claims arising out of any such Old Stock
Rights, including, without limitation, all Claims arising out of the rejection
of Old Stock Rights. The Holders of Allowed Class 13 Interests and Claims shall
not receive or retain any interest or property under the Plan and, therefore,
Class 13 is Impaired and is deemed to have rejected the Plan. Accordingly, votes
of Holders of Allowed Class 13 Interests and Claims are not being solicited. The
Debtors intend to seek to confirm the Plan as to Class 13 pursuant to the
"cramdown" provisions of Section 1129(b) of the Bankruptcy Code.
14. Class 14 (Old Cityscape Common Stock and Old Warrant Securities
Claims).
Class 14 consists of all Allowed Securities Claims on account of Old
Cityscape Common Stock or Old Warrants against the Debtors. The Holders of
Allowed Class 14 Claims, if any, shall not receive or retain any interest or
property under the Plan and, therefore, Class 14 is Impaired and is deemed to
have rejected the Plan. Accordingly, votes of Holders of Allowed Class 14 Claims
are not being solicited. If there are any Allowed Class 14 Claims, the Debtors
intend to seek to confirm the Plan pursuant to the "cramdown" provisions of
Section 1129(b) of the Bankruptcy Code.
C. Modification of Treatment of Claims.
The Debtors reserve for themselves and the Reorganized Company the
right to modify the treatment of any Allowed Claim or Interest in any manner
adverse only to the Holder of such Claim or Interest at any time after the
Effective Date upon the consent of the creditor or interest holder whose Allowed
Claim or Interest, as applicable, is being adversely affected.
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VI.
DISTRIBUTIONS UNDER THE PLAN
A. Disbursing Agent.
Reorganized Cityscape, Reorganized CSC, or such Person(s) as the
Debtors may employ in their sole discretion, will act as Disbursing Agent under
the Plan. The Disbursing Agent shall make all distributions of Cash and New
Common Stock required to be distributed under the applicable provisions of the
Plan. Any Disbursing Agent may employ or contract with other entities to assist
in or make the distributions required by the Plan. Each Disbursing Agent will
serve without bond, and each Disbursing Agent, other than Reorganized Cityscape
or Reorganized CSC, will receive, without further Bankruptcy Court approval,
reasonable compensation for distribution services rendered pursuant to the Plan
and reimbursement of reasonable out-of-pocket expenses incurred in connection
with such services from the Reorganized Company on terms acceptable to the
Reorganized Company.
B. Timing of Distributions.
Except as otherwise provided in this Plan with respect to any
particular Class or Claim, property to be distributed hereunder on account of
Allowed Claims and Allowed Interests in an Impaired Class (a) shall be
distributed on the Effective Date or as soon as practicable thereafter to each
Holder of an Allowed Claim or an Allowed Interest in that Class that is an
Allowed Claim or an Allowed Interest as of the Effective Date, and (b) shall be
distributed to each Holder of an Allowed Claim or an Allowed Interest of that
Class that becomes an Allowed Claim or Allowed Interest after the Effective
Date, as soon as practicable after the Order of the Bankruptcy Court allowing
such Claim or Interest becomes a Final Order. Except as otherwise provided in
this Plan with respect to any particular Class or Claim, property to be
distributed under the Plan on account of Claims in a Class that are not Impaired
or on account of an Administrative Claim shall be distributed on the later of
(i) the Effective Date or as soon as practicable thereafter, or if any Claim is
not an Allowed Claim as of the Effective Date, on the date the Order allowing
such Claim becomes a Final Order or as soon as practicable thereafter, and (ii)
the date on which the distribution to the Holder of the Claim would have been
due and payable in the ordinary course of business or under the terms of the
Claim.
C. Methods of Distributions.
1. Cash Payments.
Cash payments made pursuant to the Plan will be in U.S. dollars.
Cash payments to foreign creditors may be made, at the option of the Debtors or
the Reorganized Company, in such funds and by such means as are necessary or
customary in a particular foreign jurisdiction. Cash payments made pursuant to
the Plan in the form of checks issued by Reorganized Cityscape or Reorganized
CSC shall be null and void if not cashed within 90 days of the date of the
issuance thereof. Requests for reissuance of any check shall be made directly to
the Disbursing
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Agent as set forth in Section VI.G below. All payments in respect of Bank Claims
shall be by wire transfer.
2. Issuance and Transfers of New Common Stock.
Notwithstanding any other provision of the Plan, only whole numbers
of shares of New Common Stock will be issued or transferred, as the case may be,
pursuant to the Plan. When any distribution on account of an Allowed Claim
pursuant to the Plan would otherwise result in the issuance or transfer of a
number of shares of New Common Stock that is not a whole number, the actual
distribution of such New Common Stock will be rounded to the next higher or
lower whole number as follows: (a) fractions of 1/2 or greater will be rounded
to the next higher whole number and (b) fractions of less than 1/2 will be
rounded to the next lower whole number. The total number of shares of New Common
Stock to be distributed to a Class of Claims will be adjusted as necessary to
account for the rounding provided for in this Section. No consideration will be
provided in lieu of fractional shares that are rounded down (including in
connection with calculating the amount of Cash that a Holder of an Allowed Class
4a, 5a or 6a Claim is entitled to receive).
3. Compliance with Tax Requirements.
In connection with the distributions set forth herein, to the extent
applicable, the Disbursing Agent shall comply with all tax withholding and
reporting requirements imposed on it by any governmental unit, and all
distributions pursuant to this Plan shall be subject to such withholding and
reporting requirements. The Disbursing Agent shall be authorized to take any and
all actions that may be necessary or appropriate to comply with such withholding
and reporting requirements.
Notwithstanding any other provision contained herein: (i) each
Holder of an Allowed Claim that is to receive a distribution of Cash or New
Common Stock pursuant to the Plan shall have sole and exclusive responsibility
for the satisfaction and payment of any tax obligations imposed by any
governmental unit, including income, withholding and other tax obligations, on
account of such distribution; and (ii) no distribution shall be made to or on
behalf of such Holder pursuant to the Plan unless and until such Holder has made
arrangements reasonably satisfactory to the Disbursing Agent for the payment and
satisfaction of such tax obligations. Any Cash or New Common Stock to be
distributed pursuant to the Plan will, pending the implementation of such
arrangements, be treated as an undeliverable distribution pursuant to Section
V.G of the Plan.
D. Pro Rata Distribution.
Where the Plan provides for Pro Rata distribution, the property to
be distributed under this Plan shall be divided Pro Rata among the Holders of
Allowed Claims of the relevant Class.
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E. Distribution Record Date.
As of the close of business on the Distribution Record Date, the
transfer registers for the Voting Securities maintained by the Debtors, or their
respective agents, will be closed. The Disbursing Agent and its respective
agents and the Indenture Trustees will have no obligation to recognize the
transfer of any Voting Securities occurring after the Distribution Record Date,
and will be entitled for all purposes relating to this Plan to recognize and
deal only with those Holders of record as of the close of business on the
Distribution Record Date.
F. Surrender of Cancelled Voting Securities and Exchange for New Securities.
1. Tender of Voting Securities.
The mechanism by which Holders of Allowed Claims in Class 4 or 6
surrender their Voting Securities and exchange such Voting Securities for New
Common Stock shall be determined based upon the manner in which the Voting
Securities were issued and the mode in which they are held, as set forth below.
a. Voting Securities Held in Book-Entry Form
Voting Securities held in book-entry form through bank and broker
nominee accounts shall be mandatorily exchanged for the New Common Stock through
the facilities of such nominees and the systems of the applicable securities
depository or Clearing System (as defined below in Section VI.F.2) holding such
Voting Securities on behalf of the brokers or banks.
b. Voting Securities in Physical, Registered, Certificated Form
Each Holder of Voting Securities in physical, registered,
certificated form will be required, promptly after the Confirmation Date, to
deliver its physical certificates (the "TENDERED CERTIFICATES") to the
Disbursing Agent, accompanied by a properly executed letter of transmittal, to
be distributed by the Disbursing Agent or Information Agent promptly after the
Confirmation Date and containing such representations and warranties as are
described in the Disclosure Statement (a "LETTER OF TRANSMITTAL").
Any New Common Stock to be distributed pursuant to this Plan on
account of any Allowed Claim in Class 4 or 6 represented by a Voting Security
held in physical, registered, certificated form shall, pending such surrender,
be treated as an undeliverable distribution pursuant to Section VI.G below.
Signatures on a Letter of Transmittal must be guaranteed by an
Eligible Institution (as defined below), unless the Voting Securities tendered
pursuant thereto are tendered for the account of an Eligible Institution. If
signatures on a Letter of Transmittal are required to be guaranteed, such
guarantees must be by a member firm of a registered national securities exchange
in the United States, a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or a
correspondent in the United States
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(each of which is an "ELIGIBLE INSTITUTION"). If Voting Securities are
registered in the name of a Person other than the Person signing the Letter of
Transmittal, the Voting Securities, in order to be tendered validly, must be
endorsed or accompanied by a properly completed power of authority, with
signature guaranteed by an Eligible Institution.
All questions as to the validity, form, eligibility (including time
of receipt), and acceptance of Letters of Transmittal and Tendered Certificates
will be resolved by the applicable Disbursing Agent, whose determination shall
be final and binding, subject only to review by the Bankruptcy Court upon
application with due notice to any affected parties in interest. Cityscape
reserves the right, on behalf of itself and the Disbursing Agent, to reject any
and all Letters of Transmittal and Tendered Certificates not in proper form, or
Letters of Transmittal and Tendered Certificates, the Disbursing Agent's
acceptance of which would, in the opinion of the Disbursing Agent or its
counsel, be unlawful.
c. Voting Securities in Bearer Form Held Through a Broker or Bank
Participant in a Clearing System
Voting Securities held in bearer form through a broker or bank
participant in a Clearing System (as defined below in Section VI.F.2) shall be
mandatorily exchanged for the New Common Stock through the facilities of such
nominees and the securities depository holding such Voting Securities on behalf
of the broker or bank.
2. Delivery of New Common Stock in Exchange for Voting Securities.
On the Effective Date, Reorganized Cityscape or the Disbursing Agent
shall issue and authenticate the New Common Stock, and shall apply to DTC to
make the New Common Stock eligible for deposit at DTC. With respect to Holders
of Voting Securities who hold such Voting Securities through nominee accounts at
bank and broker participants in DTC, Euroclear and Cedel (collectively, the
"CLEARING SYSTEMS"), the Disbursing Agent shall deliver the New Common Stock to
DTC or to the registered address specified by the Clearing Systems. The Clearing
System (or its depositary) shall return the applicable Voting Securities to the
Disbursing Agent for cancellation.
The Disbursing Agent will request that DTC effect a mandatory
exchange of the applicable Voting Securities for the New Common Stock by
crediting the accounts of its participants with the New Common Stock in exchange
for the Voting Securities. On the effective date of such exchange, each DTC
participant will effect a similar exchange for accounts of the beneficial owners
holding Voting Securities through such firms. Neither the Reorganized Company
nor the Disbursing Agent shall have any responsibility or liability in
connection with the Clearing Systems' or such participants' effecting, or
failure to effect, such exchanges.
Holders of Voting Securities holding such Voting Securities outside
a Clearing System will be required to surrender their Voting Securities by
delivering them to the Disbursing Agent, along with properly executed Letters of
Transmittal (as described above in Section VI.F. 1 .b). The Disbursing Agent
shall forward New Common Stock on account of such Voting Securities to such
Holders.
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3. Special Procedures for Lost, Stolen, Mutilated or Destroyed
Instruments.
Any Holder of a Claim or an Interest evidenced by an Instrument that
has been lost, stolen, mutilated or destroyed will, in lieu of surrendering such
Instrument, deliver to the Disbursing Agent: (a) an affidavit of loss or other
evidence reasonably satisfactory to the Disbursing Agent of the loss, theft,
mutilation or destruction; and (b) such security or indemnity as may reasonably
be required by the Disbursing Agent to hold the Disbursing Agent harmless from
any damages, liabilities or costs incurred in treating such individual as a
Holder of an Instrument. Upon compliance with this Section, the Holder of a
Claim or Interest evidenced by any such lost, stolen, mutilated or destroyed
Instrument shall, for all purposes under the Plan and notwithstanding anything
to the contrary contained herein, be deemed to have surrendered such Instrument.
4. Failure to Surrender Cancelled Instrument.
Any Holder of Voting Securities holding such Voting Securities in
physical, registered or certificated form who has not properly completed and
returned to the Disbursing Agent a Letter of Transmittal, together with the
applicable Tendered Certificates, within two years after the Effective Date
shall have its claim for a distribution pursuant to the Plan on account of such
Instrument discharged and shall be forever barred from asserting any such claim
against Reorganized Cityscape, Reorganized CSC or their properties. In such
cases, any New Common Stock held for distribution on account of such claim shall
be disposed of pursuant to the provisions of Section VI.G hereof.
G. Delivery of Distributions; Undeliverable or Unclaimed Distributions.
Any Person that is entitled to receive a Cash distribution under
this Plan but that fails to cash a check within 90 days of its issuance shall be
entitled to receive a reissued check from Reorganized Cityscape or Reorganized
CSC, as the case may be, for the amount of the original check, without any
interest, if such Person requests the Disbursing Agent to reissue such check and
provides the Disbursing Agent with such documentation as the Disbursing Agent
reasonably requests to verify that such Person is entitled to such check, prior
to the second anniversary of the Effective Date. If a Person fails to cash a
check within 90 days of its issuance and fails to request reissuance of such
check prior to the second anniversary of the Effective Date, such Person shall
not be entitled to receive any distribution under this Plan.
Subject to Bankruptcy Rule 9010, all distributions to any Holder of
an Allowed Claim or an Allowed Interest shall be made to the address of such
Holder on the books and records of the Debtors or their agents, unless either
Debtor, Reorganized Cityscape or Reorganized CSC, as applicable, has been
notified in writing of a change of address. If the distribution to any Holder of
an Allowed Claim or Allowed Interest is returned to a Disbursing Agent as
undeliverable, such Disbursing Agent shall use reasonable efforts to determine
the current address of such Holder, but no distribution shall be made to such
Holder unless and until the applicable Disbursing Agent has determined or is
notified in writing of such Holder's then-current address, at which time such
distribution shall be made to such Holder without interest.
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Undeliverable distributions shall remain in the possession of the applicable
Disbursing Agent pursuant to Section VI.A of the Plan until such time as a
distribution becomes deliverable. Undeliverable Cash shall be held in trust in
segregated bank accounts in the name of the applicable Disbursing Agent for the
benefit of the potential claimants of such funds, and will be accounted for
separately. Any Disbursing Agent holding undeliverable Cash shall invest such
Cash in a manner consistent with the Debtors' investment and deposit guidelines.
Any interest paid, and any other amounts earned, with respect to such
undeliverable Cash pending its distribution in accordance with this Plan shall
be property of Reorganized Cityscape or Reorganized CSC, as the case may be.
Undeliverable New Common Stock will be held in trust for the benefit of the
potential claimants of such securities by the applicable Disbursing Agent in
principal amounts or numbers of shares or warrants sufficient to fund the
unclaimed amounts of such securities and shall be accounted for separately. Any
unclaimed or undeliverable distributions (including Cash and New Common Stock)
shall be deemed unclaimed property under Section 347(b) of the Bankruptcy Code
at the expiration of two years after the Effective Date and, after such date,
all such unclaimed property shall revert to Reorganized Cityscape or Reorganized
CSC, as the case may be, and the Claim or Interest of any Holder with respect to
such property shall be discharged and forever barred.
Pending the distribution of any New Common Stock pursuant to the
Plan, the Disbursing Agent shall cause the New Common Stock held by it in its
capacity as Disbursing Agent to be: (A) represented in person or by proxy at
each meeting of the stockholders of Reorganized Cityscape; and (B) voted with
respect to any matter of Reorganized Cityscape proportionally with the votes
cast by other stockholders of Reorganized Cityscape.
H. Procedures for Treating Disputed Claims Under Plan of Reorganization.
1. Disputed Claims and Objections to Claims and Interests.
a. Process.
Except insofar as a Claim or Interest is allowed hereunder,
Reorganized Cityscape and Reorganized CSC shall be entitled and reserve the
right to object to Claims and Interests. Except as otherwise provided in Section
VI.H.3 below and except as otherwise ordered by the Bankruptcy Court, objections
to any Claim or Interest, including, without limitation, Administrative Claims,
shall be Filed and served upon the Holder of such Claim or Interest no later
than the later of (a) 60 days after the Effective Date, and (b) 60 days after a
proof of claim, request for payment of such Claim or proof of interest is Filed,
unless such period is extended by the Bankruptcy Court, which extension may be
granted on an ex parte basis without notice or hearing. After the Confirmation
Date, only the Debtors, Reorganized Cityscape and Reorganized CSC shall have the
authority to File, settle, compromise, withdraw or litigate to judgment
objections to Claims and Interests. From and after the Confirmation Date, the
Debtors, Reorganized Cityscape and Reorganized CSC may settle or compromise any
Disputed Claim or Disputed Interest without approval of the Bankruptcy Court.
Except as (i) specified otherwise herein, or (ii) ordered by the Bankruptcy
Court, all Disputed Claims or Disputed Interests shall be resolved by the
Bankruptcy Court.
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Among other things, either Debtor may elect, at its sole option, to
object or seek estimation under Section 502 of the Bankruptcy Code with respect
to any proof of claim filed by or on behalf of a Holder of a Claim or any proof
of interest filed by or on behalf of a Holder of an Interest.
b. Tort Claims.
All Tort Claims are Disputed Claims. Any unliquidated Tort Claim
that is not otherwise settled or resolved pursuant to Section VI.H.l.a above
shall be determined and liquidated in the Bankruptcy Court. Any Tort Claim
determined and liquidated pursuant to a judgment obtained in accordance with
this Section VI.H.1.b that is no longer subject to appeal or other review shall
be deemed to be an Allowed Claim in Class 5 or Class 5a in such liquidated
amount and satisfied in accordance with this Plan. Nothing contained in this
Section VI.H.l.b shall constitute or be deemed a waiver of any claim, right or
cause of action that the Debtors or the Reorganized Company may have against any
Person in connection with or arising out of any Tort Claim, including, without
limitation, any rights under Section 157(b) of title 28, United States Code.
2. Professionals, Administrative Claims, Trade Claims and Employee
Claims.
Except as otherwise ordered by the Bankruptcy Court, objections to
Claims of professionals shall be governed by the provisions of Section V.A.3.b
hereof. Objections to Administrative Claims based upon ordinary course
liabilities, Trade Claims and Employee Claims shall be governed by applicable
law.
3. No Distributions Pending Allowance.
Notwithstanding any other provisions of this Plan, no payments or
distributions will be made on account of a Disputed Claim or a Disputed Interest
until such Claim or Interest becomes an Allowed Claim or Allowed Interest.
4. Distributions on Account of Disputed Claims and Interests Once They
are Allowed.
Within 30 days after the end of each calendar quarter following the
Effective Date, the applicable Disbursing Agent will make all distributions on
account of any Disputed Claim or Disputed Interest that has become an Allowed
Claim or Allowed Interest during the preceding calendar quarter. Such
distributions will be made pursuant to the provisions of the Plan governing the
applicable Class. Holders of Disputed Claims or Disputed Interests that are
ultimately allowed will also be entitled to receive, on the basis of the amount
ultimately allowed: (i) matured and payable interest, if any, at the rate
provided for the Class to which such Claim belongs; and (ii) any dividends or
other payments made on account of New Common Stock, if any, provided to the
Class to which such Claim or Interest belongs, but held pending distribution.
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I. Setoffs.
Except with respect to Claims allowed pursuant to the Plan or claims
of the Debtors, Reorganized Cityscape or Reorganized CSC released pursuant to
the Plan or any contract, instrument, release, indenture or other agreement or
document created in connection with the Plan, the Debtors, Reorganized Cityscape
or Reorganized CSC, as the case may be, may, pursuant to Section 553 of the
Bankruptcy Code or applicable nonbankruptcy law, set off against any Allowed
Claim and the distributions to be made pursuant to the Plan on account of such
Claim (before any distribution is made on account of such Claim), the claims,
rights and causes of action of any nature that the Debtors, Reorganized
Cityscape or Reorganized CSC may hold against the Holder of such Allowed Claim;
provided, however, that neither the failure to effect such a setoff nor the
allowance of any Claim hereunder shall constitute a waiver or release by the
Debtors, Reorganized Cityscape or Reorganized CSC of any such claims, rights and
causes of action that the Debtors, Reorganized Cityscape or Reorganized CSC may
possess against such Holder.
J. Termination of Subordination.
The classification and manner of satisfying all Claims and Interests
under the Plan and the distributions hereunder take into consideration all
contractual, legal and equitable subordination rights, whether arising under any
agreement, general principles of equitable subordination, Section 510 of the
Bankruptcy Code or otherwise, that a Holder of a Claim or Interest may have
against other Claim or Interest Holders with respect to any distribution made
pursuant to this Plan. On the Effective Date, all contractual, legal or
equitable subordination rights that such Holder may have with respect to any
distribution to be made pursuant to this Plan shall be deemed to be waived,
discharged and terminated, and all actions related to the enforcement of such
subordination rights will be permanently enjoined. Accordingly, distributions
pursuant to the Plan to Holders of Allowed Claims and Allowed Interests shall
not be subject to payment to a beneficiary of such terminated subordination
rights, or to levy, garnishment, attachment or other legal process by any
beneficiary of such terminated subordination rights.
VII.
TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES
A. Assumptions.
To the extent that any of the contracts listed on a schedule to be
Filed and served on the parties thereto prior to the Confirmation Hearing is an
executory contract, the Debtors will assume each such contract pursuant to
Section 365 of the Bankruptcy Code on the Effective Date. Listing a contract or
lease on such schedule does not constitute an admission by the Debtors,
Reorganized Cityscape or Reorganized CSC that such contract or lease is an
executory contract or unexpired lease or that the Debtors, Reorganized Cityscape
or Reorganized CSC has any liability thereunder. The Confirmation Order will
constitute an Order of the Bankruptcy
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Court approving the assumptions described in this Section VII.A. pursuant to
Section 365 of the Bankruptcy Code, as of the Effective Date.
B. Cure of Defaults in Connection with Assumption.
Any monetary amounts by which each executory contract and unexpired
lease to be assumed pursuant to the Plan is in default will be satisfied,
pursuant to Section 365(b)(l) of the Bankruptcy Code, at the option of the
Debtors, Reorganized Cityscape or Reorganized CSC, as the case may be: (a) by
payment of the default amount in Cash on the Effective Date or as soon as
practicable thereafter; or (b) on such other terms as are agreed to by the
parties to such executory contract or unexpired lease.
If there is a dispute regarding: (i) the amount of any cure
payments; (ii) the ability of Reorganized Cityscape or Reorganized CSC to
provide "adequate assurance of future performance" (within the meaning of
Section 365 of the Bankruptcy Code) under the contract or lease to be assumed;
or (iii) any other matter pertaining to assumption, the cure payments required
by Section 365(b)(l) of the Bankruptcy Code will be made following the entry of
a Final Order resolving the dispute and approving the assumption.
C. Rejections.
Except as otherwise provided in (i) Section VII.A. above, (ii) any
previous Orders authorizing the assumption or rejection of any of the Debtors'
executory contracts on unexpired leases, or (iii) any contract, instrument,
release or other agreement or document entered into in connection with the Plan,
on the Effective Date, pursuant to Section 365 of the Bankruptcy Code, the
Debtors will reject each of the executory contracts and unexpired leases to
which either of them is a party. The Confirmation Order shall constitute an
Order of the Bankruptcy Court approving such rejections, pursuant to Section 365
of the Bankruptcy Code, as of the Effective Date.
D. Bar Date for Rejection Damages.
If the rejection of an executory contract or unexpired lease
pursuant to the preceding Section VII.C gives rise to a Claim by the other party
or parties to such contract or lease, such Claim shall be forever barred and
shall not be enforceable against the Debtors, Reorganized Cityscape, Reorganized
CSC, their successors or properties unless (a) a stipulation with respect to the
amount and nature of such Claim has been entered into by either of the Debtors,
Reorganized Cityscape or Reorganized CSC, as applicable, and the Holder of such
Claim in connection with the rejection of such executory contract or unexpired
lease, or (b) a proof of Claim is Filed and served on Reorganized Cityscape or
Reorganized CSC, as the case may be, and counsel for Reorganized Cityscape or
Reorganized CSC, as the case may be, within 30 days after the Effective Date or
such earlier date as established by the Bankruptcy Court. Unless otherwise
ordered by the Bankruptcy Court, all Allowed Claims arising from the rejection
of executory contracts and unexpired leases shall be treated as Claims in Class
5, 5a or 13, as applicable.
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VIII.
ACCEPTANCE OR REJECTION OF THIS PLAN
A. Voting Classes.
The Holders of Allowed Claims and Interests in Classes 4, 4a, 5, 5a,
6 and 6a are Impaired and shall receive distributions under the Plan, and shall
be entitled to vote to accept or reject the Plan.
B. Presumed Acceptances of Plan.
The Holders of Allowed Claims in Classes 1, 2a et. seq. and 3 are
not Impaired under the Plan and, therefore, are conclusively presumed to accept
the Plan.
C. Presumed Rejections of Plan.
Classes 7, 8, 9, 10, 11, 12, 13 and 14 will not be entitled to
receive or retain any property under this Plan, and pursuant to Section 1126(g)
of the Bankruptcy Code, are deemed not to have accepted this Plan.
D. Voting Instructions.
Each Holder of an Allowed Claim entitled to vote on the Plan will
receive a Ballot. The Voting Record Date for purposes of Classes 4, 4a, 6 and 6a
is _____. The Ballot will contain two boxes for each Class entitled to vote on
the Plan, one box indicating acceptance of the Plan and the other box indicating
rejection of the Plan. Holders of Allowed Claims who elect to vote on the Plan
must mark one or the other box pursuant to the instructions contained on the
Ballot. Any executed Ballot that does not indicate acceptance or rejection of
the Plan will be counted as an acceptance of the Plan.
E. Voting Deadline and Extensions.
THE VOTING DEADLINE IS _________________________. Ballots must be
received by the "VOTING AGENT" designated in the Ballots at the address set
forth on the applicable Ballot. To be counted for purposes of voting on the
Plan, all of the information requested on the applicable Ballot must be
provided.
F. Confirmability of Plan and Cramdown.
In the event at least one Impaired Class of Claims votes to accept
the Plan (and at least one Impaired Class either votes to reject the Plan or is
deemed to have rejected the Plan), the Debtors reserve the right to request that
the Bankruptcy Court confirm the Plan under the "cramdown" provisions of Section
1129(b) of the Bankruptcy Code. At a minimum, the Debtors will request
confirmation of the Plan over the deemed rejection of Classes 7, 8, 9, 10, 11,
12, 13 and 14 under the Plan.
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IX.
MEANS FOR EXECUTION AND IMPLEMENTATION OF THE PLAN
A. Corporate Structure.
On the Effective Date, Cityscape will become Reorganized Cityscape,
CSC will become Reorganized CSC, and Reorganized CSC will be a wholly-owned
subsidiary of Reorganized Cityscape.
B. Corporate Action.
1. Cancellation of Old Securities and Related Agreements.
On the Effective Date, all securities, instruments and agreements
governing any Claims or Interests Impaired hereby, including, without
limitation, (i) the Old Securities, (ii) the indentures governing the Old Debt,
(iii) the agreements governing the Old Warrants and (iv) any security,
instrument or agreement entered into in connection with any of the foregoing, in
each case shall be deemed terminated, cancelled and extinguished, and except as
otherwise provided herein, the Debtors, on the one hand, and the Indenture
Trustees, on the other hand, shall be released from any and all obligations
under the applicable indenture except with respect to the payments required to
be made to each such Indenture Trustee as provided herein or with respect to
such other rights of such Indenture Trustee that, pursuant to the terms of such
indenture, survive the termination of such indenture. Termination of the
indentures shall not impair the rights of the Holders of Old Debt to receive
distributions on account of Old Debt pursuant to this Plan.
2. Certificate of Incorporation and Bylaws for Reorganized Cityscape.
On the Effective Date, Reorganized Cityscape shall be deemed to have
adopted the Reorganized Cityscape Certificate of Incorporation and the
Reorganized Cityscape Bylaws pursuant to applicable non-bankruptcy law and
Section 11 23(a)(5)(I) of the Bankruptcy Code. The Reorganized Cityscape
Certificate of Incorporation will, among other provisions: (i) authorize the
issuance of the New Common Stock; and (ii) prohibit the issuance of nonvoting
equity securities to the extent required by Section 11 23(a)(6) of the
Bankruptcy Code. The Reorganized Cityscape Certificate of Incorporation and the
Reorganized Cityscape Bylaws (forms of which are attached hereto as Exhibits "A"
and "B," respectively) will become effective upon the last to occur of the
following: (1) Confirmation of the Plan; (2) the occurrence of the Effective
Date; and (3) the filing with the Delaware Secretary of State of the Reorganized
Cityscape Certificate of Incorporation.
3. Certificate of Incorporation and Bylaws for Reorganized CSC.
On the Effective Date, Reorganized CSC shall be deemed to have
adopted the Reorganized CSC Certificate of Incorporation and the Reorganized CSC
Bylaws pursuant to applicable non-bankruptcy law and Section 1 123(a)(5)(I) of
the Bankruptcy Code. The
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Reorganized CSC Certificate of Incorporation will, among other provisions,
prohibit the issuance of nonvoting equity securities to the extent required by
Section 1123(a)(6) of the Bankruptcy Code. The Reorganized CSC Certificate of
Incorporation and the Reorganized CSC Bylaws (forms of which are attached hereto
as Exhibits "C" and "D," respectively) will become effective upon the last to
occur of the following: (1) Confirmation of the Plan; (2) the occurrence of the
Effective Date; and (3) the filing with the New York Secretary of State of the
Reorganized CSC Certificate of Incorporation.
4. Directors and Management of Reorganized Cityscape.
As of the Effective Date, the Persons identified in the Disclosure
Statement will serve as the initial members of the Board of Directors of
Reorganized Cityscape. Such Persons shall be deemed elected to the Board of
Directors, and such elections shall be deemed effective as of the Effective
Date, without any requirement of further action by stockholders of the Debtors
or Reorganized Cityscape. The initial officers of Reorganized Cityscape shall be
selected by the Board of Directors of Reorganized Cityscape and, to the extent
such officers have been selected, their names have been disclosed in the
Disclosure Statement or shall be disclosed in a schedule to be Filed with the
Bankruptcy Court on or prior to the Confirmation Date. Subject to any
requirement of Bankruptcy Court approval under Section 11 29(a)(5) of the
Bankruptcy Code, those persons identified or designated as directors and
officers of Reorganized Cityscape in the Disclosure Statement or on any schedule
to be Filed with the Bankruptcy Court on or prior to the Confirmation Date shall
assume their offices as of the Effective Date and shall continue to serve in
such capacities thereafter, pending further action of the Board of Directors or
stockholders of Reorganized Cityscape in accordance with the Reorganized
Cityscape Bylaws, Reorganized Cityscape Certificate of Incorporation and
applicable state law.
5. Directors and Management of Reorganized CSC.
As of the Effective Date, the Persons identified have been disclosed
in the Disclosure Statement will serve as the initial members of the Board of
Directors of Reorganized CSC. Such Persons shall be deemed elected to the Board
of Directors, and such elections shall be deemed effective as of the Effective
Date, without any requirement of further action by stockholders of the Debtors
or Reorganized CSC. The initial officers of Reorganized CSC shall be selected by
the Board of Directors of Reorganized CSC and, to the extent such officers have
been selected, their names have been disclosed in the Disclosure Statement or
shall be disclosed in a schedule to be Filed with the Bankruptcy Court on or
prior to the Confirmation Date. Subject to any requirement of Bankruptcy Court
approval under Section 1129(a)(5) of the Bankruptcy Code, those persons
identified or designated as directors and officers of Reorganized CSC in the
Disclosure Statement or on any schedule to be Filed with the Bankruptcy Court on
or prior to the Confirmation Date shall assume their offices as of the Effective
Date and shall continue to serve in such capacities thereafter, pending further
action of the Board of Directors or the stockholder of Reorganized CSC in
accordance with the Reorganized CSC Bylaws, Reorganized CSC Certificate of
Incorporation and applicable state law.
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C. Implementation.
The Debtors, Reorganized Cityscape and Reorganized CSC are hereby
authorized and directed to take all necessary steps, and perform all necessary
acts, to consummate the terms and conditions of the Plan on the Effective Date.
On or before the Effective Date, the Debtors may file with the Bankruptcy Court
such agreements and other documents as may be necessary or appropriate to
effectuate or further evidence the terms and conditions of this Plan and the
other agreements referred to herein.
D. Other Documents and Actions.
The Debtors, Reorganized Cityscape and Reorganized CSC may, and
shall, execute such documents and take such other actions as are necessary to
effectuate the transactions provided for in the Plan.
E. Payment of Statutory Fees.
All fees payable pursuant to 28 U.S.C. ss. 1930(a)(6) (U.S. Trustee
Fees) as determined by the Bankruptcy Court at the Confirmation Hearing shall be
paid by the Debtors on or before the Effective Date.
F. Payment of Fees and Expenses of Unofficial Committees' Counsel.
Subject to the approval of the Bankruptcy Court, unpaid fees and
expenses of counsel to each of the Unofficial Committees incurred through and
including the Effective Date will be paid on or as soon as practicable after the
Effective Date.
G. Term of Injunctions or Stays.
Unless provided in the Confirmation Order or otherwise, all
injunctions or stays imposed in the Reorganization Cases pursuant to Sections
105 and 362 of the Bankruptcy Code or otherwise in effect on the Confirmation
Date shall remain in full force and effect until the Effective Date.
H. No Interest.
Except as expressly provided herein, no Holder of an Allowed Claim
or Allowed Interest shall receive interest on the distribution to which such
Holder is entitled hereunder, regardless of whether such distribution is made on
the Effective Date or thereafter.
I. Retiree Benefits.
On and after the Effective Date, to the extent required by Section
1129(a)(13) of the Bankruptcy Code, Reorganized Cityscape or Reorganized CSC, as
the case may be, shall continue to pay all retiree benefits (if any), as the
term "retiree benefits" is defined in Section 1114(a) of the Bankruptcy Code,
maintained or established by the Debtors prior to the Confirmation Date.
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J. Issuance of New Common Stock
On the Effective Date or as soon as practicable thereafter,
Reorganized Cityscape shall, in accordance with the Plan, issue the New Common
Stock to the Holders of the Allowed Class 4, 5 and 6 Claims. On the Effective
Date, all securities, instruments and agreements entered into pursuant to the
Plan, including, without limitation, the New Common Stock and any security,
instrument or agreement entered into in connection therewith, shall become
effective and binding in accordance with their respective terms and conditions
upon the parties thereto without further act or action under applicable law,
regulation, order or rule, and shall be deemed to become effective
simultaneously.
X.
CONFIRMATION AND EFFECTIVE DATE CONDITIONS
A. Conditions to Confirmation.
Confirmation of this Plan cannot occur until all of the substantive
confirmation requirements under the Bankruptcy Code have been satisfied pursuant
to Section 1129 of the Bankruptcy Code. In addition, the Bankruptcy Court will
not enter the Confirmation Order unless the Confirmation Order is acceptable in
form and substance to the Debtors, and the Confirmation Order expressly
authorizes and directs the Debtors, Reorganized Cityscape and Reorganized CSC to
perform those actions specified herein. Finally, it shall be a condition to
Confirmation that each of the events and actions required by the Plan to occur
or to be taken prior to Confirmation shall have occurred or been taken, or the
Debtors, or the party whose obligations are conditioned upon such occurrences or
actions, as applicable, shall have waived such occurrences or actions and the
Bankruptcy Court shall confirm the Plan without such occurrence or action.
B. Conditions to Effective Date.
The Effective Date will not occur and the Plan will not be
consummated unless and until each of the following conditions has been satisfied
or waived by the Debtors:
1. The Confirmation Order shall authorize and direct that the Debtors,
Reorganized Cityscape and Reorganized CSC take all actions necessary or
appropriate to enter into, implement and consummate the contracts,
instruments, releases, leases and other agreements or documents created in
connection with the Plan, including those actions contemplated by the
provisions of this Plan set forth in Section XI hereof.
2. The statutory fees owing the U.S. Trustee shall have been paid in full.
3. All other actions and documents necessary to implement the provisions
of the Plan shall have been effected or executed or, if waivable, waived
by the Person or Persons entitled to the benefit thereof.
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C. Waiver of Conditions to Confirmation and Effective Date.
Each of the conditions to Confirmation and the Effective Date, other
than the condition set forth in Section X.B.2 of the Plan, may be waived in
whole or in part by the Debtors at any time, without notice or an Order of the
Bankruptcy Court. The failure to satisfy or to waive any condition may be
asserted by the Debtors regardless of the circumstances giving rise to failure
of such condition to be satisfied (including any action or inaction by the
Debtors). The failure of the Debtors to exercise any of the foregoing rights
will not be deemed a waiver of any other rights and each such right will be
deemed an ongoing right that may be asserted at any time.
XI.
EFFECTS OF PLAN CONFIRMATION
A. Discharge of Debtors and Injunction.
Except as otherwise provided in the Plan or the Confirmation Order:
(i) on the Effective Date, the Debtors shall be deemed discharged and released
to the fullest extent permitted by Section 1141 of the Bankruptcy Code from all
Claims and Interests, including, but not limited to, demands, liabilities,
Claims and Interests that arose before the Effective Date and all debts of the
kind specified in Sections 502(g), 502(h) or 502(i) of the Bankruptcy Code,
whether or not (A) a proof of Claim or proof of Interest based on such debt or
Interest is Filed or deemed Filed pursuant to Section 501 of the Bankruptcy
Code, (B) a Claim or Interest based on such debt or Interest is allowed pursuant
to Section 502 of the Bankruptcy Code, or (C) the Holder of a Claim or Interest
based on such debt or Interest has accepted the Plan; and (ii) all Persons shall
be precluded from asserting against Reorganized Cityscape, Reorganized CSC,
their respective successors, or their respective assets or properties any other
or further Claims or Interests based upon any act or omission, transaction, or
other activity of any kind or nature that occurred prior to the Effective Date.
Except as otherwise provided in the Plan or the Confirmation Order, the
Confirmation Order shall act as a discharge of any and all Claims against and
all debts and liabilities of the Debtors, as provided in Sections 524 and 1141
of the Bankruptcy Code, and such discharge shall void any judgment against the
Debtors at any time obtained to the extent that it relates to a Claim
discharged.
Except as otherwise provided in the Plan or the Confirmation Order,
on and after the Effective Date, all Persons who have held, currently hold or
may hold a debt, Claim or Interest discharged pursuant to the terms of the Plan
are permanently enjoined from taking any of the following actions on account of
any such discharged debt, Claim or Interest: (i) commencing or continuing in any
manner any action or other proceeding against the Debtors, Reorganized Cityscape
or Reorganized CSC, or their respective successors or their respective
properties; (ii) enforcing, attaching, collecting or recovering in any manner
any judgment, award, decree or order against the Debtors, Reorganized Cityscape
or Reorganized CSC, or their respective successors or their respective
properties; (iii) creating, perfecting or enforcing any lien or encumbrance
against the Debtors, Reorganized Cityscape or Reorganized CSC, or their
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respective successors or their respective properties; and (iv) commencing or
continuing any action, in any manner, in any place that does not comply with or
is inconsistent with the provisions of the Plan or the Confirmation Order. Any
Person injured by any willful violation of such injunction shall recover actual
damages, including costs and attorneys' fees, and, in appropriate circumstances,
may recover punitive damages, from the willful violator.
B. Limitation of Liability.
None of the Debtors, Reorganized Cityscape, Reorganized CSC, the
members of the Unofficial Senior Noteholders' Committee, the members of the
Unofficial Subordinated Debentureholders' Committee, the members of the
Creditors' Committee, the Indenture Trustees or any of their respective
employees, officers, directors, agents, or representatives, or any professional
persons employed by any of them (including, without limitation, their respective
Designated Professionals), shall have any responsibility, or have or incur any
liability, to any Person whatsoever (i) for any matter expressly approved or
directed by the Confirmation Order or (ii) under any theory of liability (except
for any claim based upon willful misconduct or gross negligence) for any act
taken or omission made in good faith directly related to formulating,
implementing, confirming, or consummating the Plan, the Disclosure Statement, or
any contract, instrument, release, or other agreement or document created in
connection with the Plan; provided, that nothing in this Section XI.B shall
limit the liability of any Person for breach of any express obligation it has
under the terms of this Plan or under any agreement or other document entered
into by such Person either post-Petition Date or in accordance with the terms of
this Plan (except to the extent expressly provided in the Confirmation Order) or
for any breach of a duty of care owed to any other Person occurring after the
Effective Date.
C. Releases.
On the Effective Date, each of the Debtors shall release
unconditionally, and hereby is deemed to release unconditionally (i) each of the
Debtors' then-current and former officers, directors, shareholders, employees,
consultants, attorneys, accountants, financial advisors and other
representatives (solely in their capacities as such) (collectively, the "DEBTOR
RELEASEES"), (ii) the Creditors' Committee and, solely in their capacity as
members or representatives of the Creditors' Committee, each member, consultant,
attorney, accountant or other representative of the Creditors' Committee
(including, without limitation, their respective Designated Professionals),
(iii) the Unofficial Senior Noteholders' Committee and, solely in their capacity
as members or representatives of the Unofficial Senior Noteholders' Committee,
each member, consultant, attorney, accountant or other representative of the
Unofficial Senior Noteholders' Committee (including, without limitation, their
respective Designated Professionals), (iv) the Unofficial Subordinated
Debentureholders' Committee and, solely in their respective capacity as members
or representatives of the Unofficial Subordinated Debentureholders' Committee,
each member, consultant, attorney, accountant or other representative of the
Unofficial Subordinated Debentureholders' Committee (including, without
limitation, their respective Designated Professionals), (v) the Indenture
Trustees, in their respective capacities as Indenture Trustee, and each of their
then-current and former officers, directors, shareholders, employees,
consultants, attorneys, accountants, financial advisors and
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other representatives (solely in their capacities as such) from any and all
claims, obligations, suits, judgments, damages. rights, causes of action and
liabilities whatsoever, whether known or unknown, foreseen or unforeseen,
existing or hereafter arising, in law, equity or otherwise, based in whole or in
part upon any act or omission, transaction, event or other occurrence taking
place on or prior to the Effective Date in any way relating to Cityscape, CSC,
the Company's trust indentures, the CIT Facility, the Greenwich Facility, the
DIP Facilities, the Debtors, the Reorganization Cases, the Plan or the
Disclosure Statement.
On the Effective Date, (i) provided that Class 4 and Class 4a vote
to accept the Plan, each Holder of a Class 4 or Class 4a Claim, and (ii)
provided that Class 6 and Class 6a vote to accept the Plan, each Holder of a
Class 6 or Class 6a Claim shall be deemed to have unconditionally released the
Debtor Releasees from any and all claims, obligations, suits, judgments,
damages, rights, causes of action and liabilities whatsoever which any such
Holder may be entitled to assert, whether known or unknown, foreseen or
unforeseen, existing or hereafter arising, in law, equity or otherwise, based in
whole or in part upon any act or omission, transaction, event or other
occurrence taking place on or prior to the Effective Date in any way relating to
Cityscape, CSC, the Company's trust indentures, the Debtors, the Reorganization
Cases, the Plan or the Disclosure Statement.
D. Indemnification.
The Debtors shall fully indemnify and Reorganized Cityscape or
Reorganized CSC, as the case may be, shall assume the Debtors' obligations to
indemnify any person by reason of the fact that he or she is or was a director,
officer, employee, agent, Designated Professional, member, or other authorized
representative (in each case, as applicable) of either of the Debtors, the
Creditors' Committee, the Unofficial Senior Noteholders' Committee, the
Unofficial Subordinated Debentureholders' Committee or the Indenture Trustees
(collectively, the "INDEMNITEES") against any claims, liabilities, actions,
suits, damages, fines, judgments or expenses (including reasonable attorney's
fees and expenses), arising during the course of, or otherwise in connection
with or in any way related to, the negotiation, preparation, formulation,
solicitation, dissemination, implementation, confirmation and consummation of
the Plan and the transactions contemplated thereby and the Disclosure Statement
in support thereof; provided, however, that the foregoing indemnification shall
not apply to any liabilities arising from the gross negligence or willful
misconduct of any Indemnitee. If any claim, action or proceeding is brought or
asserted against an Indemnitee in respect of which indemnity may be sought from
Reorganized Cityscape or Reorganized CSC, the Indemnitee shall promptly notify
Reorganized Cityscape or Reorganized CSC, as the case may be, in writing and
Reorganized Cityscape or Reorganized CSC, as the case may be, shall assume the
defense thereof including the employment of counsel reasonably satisfactory to
the Indemnitee, and the payment of all expenses of such Indemnitee. The
Indemnitee shall have the right to employ separate counsel in any such claim,
action or proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of the Indemnitee unless (a)
Reorganized Cityscape or Reorganized CSC, as the case may be, has agreed to pay
the fees and expenses of such counsel, or (b) Reorganized Cityscape or
Reorganized CSC, as the case may be, shall have failed to assume promptly the
defense of such claim, action or proceeding or to employ counsel
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reasonably satisfactory to the Indemnitee in any such claim, action or
proceeding, or (c) the named parties in any such claim, action or proceeding
(including any impleaded parties) include both the Indemnitee and Reorganized
Cityscape or Reorganized CSC, as the case may be, and the Indemnitee believes,
in the exercise of its business judgment and in the opinion of its legal
counsel, reasonably satisfactory to Reorganized Cityscape or Reorganized CSC, as
the case may be, that the joint representation of Reorganized Cityscape or
Reorganized CSC, as the case may be, and the Indemnitee will likely result in a
conflict of interest (in which case, if the Indemnitee notifies Reorganized
Cityscape or Reorganized CSC, as the case may be, in writing that it elects to
employ separate counsel at the expense of Reorganized Cityscape or Reorganized
CSC, Reorganized Cityscape or Reorganized CSC, as the case may be, shall not
have the right to assume the defense of such action or proceeding on behalf of
the Indemnitee). In addition, neither Reorganized Cityscape nor Reorganized CSC
shall effect any settlement or release from liability in connection with any
matter for which the Indemnitee would have the right to indemnification from
Reorganized Cityscape or Reorganized CSC unless such settlement contains a full
and unconditional release of the Indemnitee, or a release of the Indemnitee
reasonably satisfactory in form and substance to the Indemnitee.
E. Vesting of Assets.
Except as otherwise provided in the Plan or the Confirmation Order,
including Article III hereof, on the Effective Date, all property of Cityscape's
Estate shall vest in Reorganized Cityscape and all property of CSC's Estate
shall vest in Reorganized CSC, all free and clear of all Claims, liens,
encumbrances and Interests of Holders of Claims and Holders of Old Securities
and Old Stock Rights. From and after the Effective Date, Reorganized Cityscape
and Reorganized CSC may operate their business and use, acquire, and dispose of
property and settle and compromise claims or interests arising on or after the
Effective Date without supervision by the Bankruptcy Court and free of any
restrictions of the Bankruptcy Code, the Bankruptcy Rules or the Local
Bankruptcy Rules, other than those restrictions expressly imposed by the Plan or
the Confirmation Order.
F. Preservation of Causes of Action.
Except as otherwise provided herein, or in any contract, instrument,
release, or other agreement entered into in connection with the Plan, in
accordance with Section 1123(b) of the Bankruptcy Code, Reorganized Cityscape
and Reorganized CSC shall retain (and may enforce) any claims, rights and causes
of action that the Debtors or the Estates may hold against any Person,
including, among other things, (i) any claims, rights or causes of action under
Sections 544 through 550 of the Bankruptcy Code or any similar provisions of
state law, or any other statute or legal theory, and (ii) any claims for
recovery against present or former Holders of Trade Claims who received payments
from the Debtors during the pendency of the Debtors' chapter 11 cases on account
of Trade Claims to the extent that such payments resulted in such Holders'
receiving greater distributions on account of their Trade Claims than that to
which they are entitled under Section V.B.5 of this Plan; provided, however,
that (i) in the event that Class 4 and Class 4a vote to accept the Plan, any
such claims, rights or causes of action against Holders of Allowed Claims in
such Classes (solely in their capacities as such) shall be released,
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discharged and extinguished on the Effective Date, whether or not then pending,
and (ii) in the event that Class 6 and Class 6a vote to accept the Plan, any
such claims, rights or causes of action against Holders of Allowed Claims in
such Class (solely in their capacities as such) shall be released, discharged
and extinguished on the Effective Date, whether or not then pending.
G. Retention of Bankruptcy Court Jurisdiction.
To the maximum extent permitted by the Bankruptcy Code or other
applicable law, the Bankruptcy Court shall have jurisdiction of all mailers
arising out of, and related to, the Reorganization Cases and the Plan pursuant
to, and for the purpose of, Sections 105(a) and 1142 of the Bankruptcy Code,
including, without limitation, jurisdiction to:
1. Allow, disallow, determine, liquidate, classify, estimate or
establish the priority or secured or unsecured status of any Claim or
Interest, including the resolution of any request for payment of any
Administrative Claim, the resolution of any objections to the allowance or
priority of Claims or Interests and the resolution of any dispute as to
the treatment necessary to Reinstate a Claim pursuant to the Plan;
2. Grant or deny any applications for allowance of compensation or
reimbursement of expenses authorized pursuant to the Bankruptcy Code or
the Plan, for periods ending before the Effective Date;
3. Resolve any matters related to the assumption or rejection of any
executory contract or unexpired lease to which the either of the Debtors
is a party or with respect to which either of the Debtors may be liable,
and to hear, determine and, if necessary, liquidate any Claims arising
therefrom;
4. Ensure that distributions to Holders of Allowed Claims or Allowed
Interests are accomplished pursuant to the provisions of the Plan;
5. Decide or resolve any motions, adversary proceedings, contested
or litigated matters and any other matters and grant or deny any
applications involving the Debtors, Reorganized Cityscape or Reorganized
CSC that may be pending on the Effective Date;
6. Enter such Orders as may be necessary or appropriate to implement
or consummate the provisions of the Plan and all contracts, instruments,
releases, indentures and other agreements or documents created in
connection with the Plan, the Disclosure Statement or the Confirmation
Order, except as otherwise provided herein;
7. Resolve any cases, controversies, suits or disputes that may
arise in connection with the consummation, interpretation or enforcement
of the Plan or the Confirmation Order, including the release and
injunction provisions set forth in and contemplated by the Plan and the
Confirmation Order, or any entity's rights arising under or obligations
incurred in connection with this Plan or the Confirmation Order;
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8. Subject to any restrictions on modifications provided herein or
in any contract, instrument, release, indenture or other agreement or
document created in connection with the Plan, modify this Plan before or
after the Effective Date pursuant to Section 1127 of the Bankruptcy Code
or modify the Disclosure Statement, the Confirmation Order or any
contract, instrument, release, indenture or other agreement or document
created in connection with the Plan, the Disclosure Statement or the
Confirmation Order, or remedy any defect or omission or reconcile any
inconsistency in any Bankruptcy Court Order, this Plan, the Disclosure
Statement, the Confirmation Order or any contract, instrument, release,
indenture or other agreement or document created in connection with the
Plan, the Disclosure Statement or the Confirmation Order, in such manner
as may be necessary or appropriate to consummate this Plan, to the extent
authorized by the Bankruptcy Code;
9. Issue injunctions, enter and implement other Orders or take such
other actions as may be necessary or appropriate to restrain interference
by any entity with consummation, implementation or enforcement of the Plan
or the Confirmation Order;
10. Enter and implement such Orders as are necessary or appropriate
if the Confirmation Order is for any reason modified, stayed, reversed,
revoked or vacated;
11. Except as otherwise provided in this Plan, or with respect to
specific matters, in the Confirmation Order or any other Order entered in
connection with the Reorganization Cases, determine any other matters that
may arise in connection with or relating to the Plan, the Disclosure
Statement, the Confirmation Order or any contract, instrument, release,
indenture or other agreement or document created in connection with this
Plan, the Disclosure Statement or the Confirmation Order;
12. Hear and dispose of any claims assigned to, and asserted by,
Reorganized Cityscape or Reorganized CSC pursuant to Section XI.F of this
Plan;
13. Resolve any disputes relating to the Indenture Trustees'
requests for payment of their fees and expenses, as provided in Section
V.A.3.c of the Plan;
14. Resolve any disputes over invoices submitted by professionals to
the Reorganized Company for compensation for services rendered or
reimbursement of expenses incurred after the Effective Date, as provided
in Section V.A.3.b of the Plan; and
15. Enter an Order or Orders closing the Reorganization Cases.
H. Failure of Bankruptcy Court to Exercise Jurisdiction.
If the Bankruptcy Court abstains from exercising or declines to
exercise jurisdiction, or is otherwise without jurisdiction over any matter
arising out of the Reorganization Cases, including the matters set forth in
Section XI.G above, Section XI.G shall not prohibit or
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<PAGE> 119
limit the exercise of jurisdiction by any other court having competent
jurisdiction with respect to such matter.
I. Committees.
On the Effective Date, all Committees, if any, shall be dissolved
and the members of such Committees and their professionals shall be released and
discharged from all further rights and duties arising from or related to the
Reorganization Cases. The professionals retained by such Committees and the
members thereof shall not be entitled to compensation or reimbursement of
expenses incurred for services rendered after the Effective Date other than for
services rendered pursuant to the Plan, to enforce the terms of the Plan or in
connection with other activities reserved to such Committees or such
professionals under the Plan or the Confirmation Order or in connection with any
application for allowance of compensation and reimbursement of expenses pending
as of, or Filed after, the Effective Date.
XII.
MISCELLANEOUS PROVISIONS
A. Final Order.
Any requirement in this Plan that an Order be a Final Order may be
waived by the Debtors; provided, that nothing contained herein or elsewhere in
this Plan shall prejudice the right of any party in interest to seek a stay
pending appeal with respect to such order.
B. Modification of the Plan.
The Debtors reserve the right to modify the Plan at any time prior
to the Confirmation Date in the manner provided for by Section 1127 of the
Bankruptcy Code or as otherwise permitted by law without additional disclosure
pursuant to Section 1125 of the Bankruptcy Code, except as the Bankruptcy Court
may otherwise order.
The Debtors reserve the right after the Confirmation Date and before
the Effective Date to modify the terms of the Plan or waive any conditions to
the effectiveness thereof if and to the extent the Debtors determine that such
modifications or waivers are necessary or desirable to consummate the Plan. The
Debtors will give such Holders of Claims and Interests notice of such
modifications or waivers as may be required by applicable law and the Bankruptcy
Court, and any such modifications shall be subject to the approval of the
Bankruptcy Court to the extent required by, and in accordance with, Section 1127
of the Bankruptcy Code.
The Debtors shall give notice to any Committee, each of the
Unofficial Committees and each of the DIP Lenders of any modification of the
Plan.
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<PAGE> 120
C. Revocation of the Plan.
The Debtors reserve the right to revoke or withdraw the Plan prior
to the Confirmation Date. If the Debtors revoke or withdraw the Plan, or if
Confirmation does not occur, then the Plan shall be null and void, and all of
the Debtors' respective obligations with respect to the Claims and Interests
shall remain unchanged and nothing contained herein or in the Disclosure
Statement shall be deemed an admission or statement against interest or to
constitute a waiver or release of any claims by or against either Debtor or any
other Person or to prejudice in any manner the rights of either Debtor or any
Person in any further proceedings involving either Debtor or any Person.
D. Severability of Plan Provisions.
If, prior to Confirmation, any term or provision of the Plan is held
by the Bankruptcy Court to be invalid, void or unenforceable, the Bankruptcy
Court will have the power, upon the request of the Debtors, to alter and
interpret such term or provision to make it valid or enforceable to the maximum
extent practicable, consistent with the original purpose of the term or
provision held to be invalid, void or unenforceable, and such term or provision
shall then be applicable as altered or interpreted. Notwithstanding any such
holding, alteration or interpretation, the remainder of the terms and provisions
of this Plan shall remain in full force and effect and shall in no way be
affected, impaired or invalidated by such holding, alteration or interpretation.
The Confirmation Order shall constitute a judicial determination and shall
provide that each term and provision of this Plan, as it may have been altered
or interpreted in accordance with the foregoing, is valid and enforceable
pursuant to its terms.
E. Successors and Assigns.
The rights, benefits and obligations of any Person named or referred
to in the Plan shall be binding on, and shall inure to the benefit of, any heir,
executor, trustee, administrator, successor or assign of such Person.
F. Saturday, Sunday or Legal Holiday.
If any payment or act under the Plan is required to be made or
performed on a date that is not a Business Day, then the making of such payment
or the performance of such act may be completed on the next succeeding Business
Day, but shall be deemed to have been completed as of the required date.
G. Post-Effective Date Effect of Evidences of Claims or Interests.
Except as otherwise specified herein, notes, bonds, stock
certificates and other evidences of Claims against or Interests in the Debtors,
and all Instruments of the Debtors (in either case, other than those executed
and delivered as contemplated hereby in connection with the consummation of the
Plan), shall, effective upon the Effective Date, represent only the right to
participate in the distributions contemplated by the Plan.
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<PAGE> 121
H. Governing Law.
Unless a rule of law or procedure is supplied by (i) federal law
(including the Bankruptcy Code, the Bankruptcy Rules or the Local Bankruptcy
Rules). (ii) an express choice of law provision in any agreement, contract,
instrument, or document provided for, or executed in connection with, the Plan,
or (iii) applicable non-bankruptcy law, the rights and obligations arising under
the Plan and any agreements, contracts, documents, and instruments executed in
connection with the Plan shall be governed by, and construed and enforced in
accordance with, the laws of the State of New York without giving effect to the
principles of conflict of laws thereof.
I. No Liability for Solicitation or Participation.
As specified in Section 1125(e) of the Bankruptcy Code, Persons that
solicit acceptances or rejections of the Plan and/or that participate in the
offer, issuance, sale, or purchase of securities offered or sold under the Plan,
in good faith and in compliance with the applicable provisions of the Bankruptcy
Code, shall not be liable, on account of such solicitation or participation, for
violation of any applicable law, rule, or regulation governing the solicitation
of acceptances or rejections of the Plan or the offer, issuance, sale, or
purchase of securities.
J. No Admissions or Waiver of Objections.
Notwithstanding anything herein to the contrary, if the Effective
Date does not occur, nothing contained in the Plan shall be deemed as an
admission by the Debtors or any other party with respect to any matter set forth
herein, including, without limitation, liability on any Claim or the propriety
of any Claims classification. The Debtors are not bound by any statements herein
or in the Disclosure Statement as judicial admissions.
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<PAGE> 122
DATED: March 26, 1999
CITYSCAPE FINANCIAL CORP.,
By: /s/ Steven M. Miller
----------------------------------------
Name: Steven M. Miller
Title: President and Chief Executive
Officer
CITYSCAPE CORP.,
a New York corporation
By: /s/ Steven M. Miller
----------------------------------------
Name: Steven M. Miller
Title: Senior Vice President
Presented by:
Robert J. Rosenberg
A. Brent Truitt
Rachael Fink
LATHAM & WATKINS
885 Third Avenue, Suite 1000
New York, New York 10022
(212) 906-1200
COUNSEL FOR CITYSCAPE FINANCIAL
CORP. AND CITYSCAPE CORP.
By: /s/ Robert J. Rosenberg
-----------------------------
Robert J. Rosenberg
<PAGE> 123
INDEX OF EXHIBITS
Exhibit A Reorganized Cityscape Certificate of Incorporation
Exhibit B Reorganized Cityscape Bylaws
Exhibit C Reorganized CSC Certificate of Incorporation
Exhibit D Reorganized CSC Bylaws
<PAGE> 124
EXHIBIT A
REORGANIZED CITYSCAPE CERTIFICATE OF INCORPORATION
<PAGE> 125
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CITYSCAPE FINANCIAL CORP.
I, the undersigned Chief Executive Officer of Cityscape Financial
Corp., a corporation existing under the laws of the State of Delaware
(hereinafter referred to as the "Corporation"), do hereby certify as follows:
FIRST: That the Certificate of Incorporation of the Corporation was
filed with the Secretary of State of the State of Delaware on December 16,
1988, under the name Mandi of Essex, LTD. An amendment to the certificate
for Renewal and Revival of Charter of Mandi of Essex, Inc. was filed on
April 21, 1994 and was further amended by Amendment to Certificate of
Change of Registered Agent and Registered Office on June 23, 1994. An
Amendment to the Certificate of Incorporation amending the authorized
number of shares was filed by the Secretary of State of Delaware on July
22, 1994.
SECOND: This Restated Certificate of Incorporation restates and
integrates and amends the Certificate of Incorporation of the Corporation
by restating the Certificate of Incorporation in its entirety. The text of
the Certificate of Incorporation is in its entirety as follows:
FIRST: The name of the Company is:
CITYSCAPE FINANCIAL CORP.
SECOND: The address of the Company's registered office in the
State of Delaware is 1209 Orange Street, Wilmington,
County of New Castle, Delaware, 19801, and the name of
its registered agent at such address is The Corporation
Trust Company.
THIRD: The purpose of the Company is to engage in any lawful
act or activity for which corporations may be
organized under the General Corporation Law of
Delaware as it now exists or may hereafter be amended
and supplemented.
FOURTH: The total number of shares of stock which the Company
shall have authority to issue is __________ having a
par value of $0.01 per share. All such shares are
Common Stock.
The issuance of nonvoting equity securities is
prohibited.
FIFTH: The personal liability of the directors of the
Company is hereby eliminated to the fullest extent
permitted by paragraph (7) of
<PAGE> 126
subsection (b) of Section 102 of the General Corporation
Law of the State of Delaware, as the same may be amended
and supplemented. Any repeal or modification of this
Article Fifth shall not adversely affect any right or
protection of a director of the Company existing
immediately prior to such repeal or modification.
SIXTH: The Company shall, to the fullest extent permitted or
required by Section 145 of the General Corporation Law
of the State of Delaware, as the same may be amended and
supplemented, indemnify any and all persons to whom it
shall have power to indemnify under said section from
and against any and all of the expenses, liabilities or
other matters referred to in or covered by said section,
and the indemnification provided for herein shall not be
deemed exclusive of any other rights to which those
indemnified may be entitled under any By-Law, agreement,
vote of stockholders or disinterested directors or
otherwise, both as to action in his or her official
capacity and as to action in another capacity while
holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs,
executors and administrators of such person. Any repeal
or modification of this Article Sixth shall not
adversely affect any right or protection existing
hereunder immediately prior to such repeal or
modification.
SEVENTH: From time to time any of the provisions of this
certificate of incorporation may be amended, altered or
repealed, and other provisions authorized by the laws of
the State of Delaware at the time in force may be added
or inserted in the manner and at the time prescribed by
said laws, and all rights at any time conferred upon the
stockholders of the Company by this certificate of
incorporation are granted subject to the provisions of
this Article Seventh.
EIGHTH: In furtherance and not in limitation of the rights,
powers, privileges and discretionary authority granted
or conferred by the General Corporation Law of the State
of Delaware or other statutes or laws of the state of
Delaware, the Board of Directors is expressly authorized
to make, alter, amend or repeal the By-Laws of the
Company, without any action on the part of the
Stockholders, but the Stockholders may make additional
By-Laws and may alter, amend or repeal any By-Law
whether adopted by them or otherwise. The Company may in
its By-Laws confer powers upon its Board of Directors in
addition to the foregoing and in addition
2
<PAGE> 127
to the powers and authorities expressly conferred
upon the Board of Directors by applicable law.
THIRD: This Restated Certificate of Incorporation was duly adopted
pursuant to the Corporation's Plan of Reorganization as filed with the
United States Bankruptcy Court for the Southern District of New York and
confirmed by such Court as of ___________, 1999 (the "Plan of
Reorganization"), pursuant to Chapter 11 of Title 11 of the United States
Code and otherwise in accordance with applicable provisions of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, I have subscribed this document on the date set
forth below and do hereby affirm, under the penalties of perjury, that the
statements contained therein have been examined by me and are true and correct.
Date: _____________, 1999
CITYSCAPE FINANCIAL CORP.
-----------------------------------
Name:
Title:
3
<PAGE> 128
EXHIBIT B
REORGANIZED CITYSCAPE BYLAWS
<PAGE> 129
AMENDED & RESTATED
BY-LAWS
OF
CITYSCAPE FINANCIAL CORP.
<PAGE> 130
TABLE OF CONTENTS
Page
----
ARTICLE I. OFFICES .........................................................1
Section 1 ................................................................1
Section 2 ................................................................1
ARTICLE II. MEETINGS OF STOCKHOLDERS .......................................1
Section 1 ................................................................1
Section 2 ................................................................1
Section 3 ................................................................1
Section 4 ................................................................2
Section 5 ................................................................2
Section 6 ................................................................2
Section 7 ................................................................2
Section 8 ................................................................3
Section 9 ................................................................3
ARTICLE III. DIRECTORS .....................................................3
Section 1 ................................................................3
Section 2 ................................................................3
Section 3 ................................................................4
Section 4 ................................................................4
Section 5 ................................................................4
Section 6 ................................................................4
Section 7 ................................................................4
Section 8 ................................................................5
Section 9 ................................................................5
Section 10 ...............................................................5
Section 11 ...............................................................6
Section 12 ...............................................................6
Section 13 ...............................................................6
ARTICLE IV OFFICERS ........................................................8
Section 1 ................................................................8
Section 2 ................................................................8
Section 3 ................................................................9
Section 4 ................................................................9
Section 5 ................................................................9
Section 6 ................................................................9
Section 7 ................................................................9
Section 8 ...............................................................10
Section 9 ...............................................................10
Section 10 ..............................................................10
Section 11 ..............................................................1O
ARTICLE V. CERTIFICATES OF STOCK ..........................................11
Section 1 ...............................................................11
Section 2 ...............................................................11
Section 3 ...............................................................12
Section 4 ...............................................................12
Section 5 ...............................................................12
Section 6 ...............................................................13
Section 7 ...............................................................13
ARTICLE VI GENERAL PROVISIONS .............................................13
Section 1 ...............................................................13
i
<PAGE> 131
Page
----
Section 2 ...............................................................13
Section 3 ...............................................................14
Section 4 ...............................................................14
Section 5 ...............................................................14
Section 6 ...............................................................14
Section 7 ...............................................................14
Section 8 ...............................................................14
ARTICLE VII. AMENDMENTS ...................................................15
Section 1 ...............................................................15
ii
<PAGE> 132
AMENDED & RESTATED
BY-LAWS
OF
CITYSCAPE FINANCIAL CORP.
As Amended As Of ________, 1999
ARTICLE I.
OFFICES
Section 1. The registered office shall be in the City of Wilmington,
County of New Castle, State of Delaware.
Section 2. The corporation may also have offices at such other
places both within and without the State of Delaware as the Board of Directors
may from time to time determine or the business of the corporation may require.
ARTICLE II.
MEETINGS OF STOCKHOLDERS
Section 1. Meetings of stockholders shall be held at any place
within or outside the State of Delaware designated by the Board of Directors. In
the absence of any such designation, stockholders' meetings shall be held at the
principal executive office of the corporation.
Section 2. The annual meeting of stockholders shall be held each
year on a date and a time designated by the Board of Directors. At each annual
meeting directors shall be elected and any other proper business may be
transacted.
Section 3. A majority of the stock issued and outstanding and
entitled to vote at any meeting of stockholders, the holders of which are
present in person or represented by proxy, shall constitute a quorum for the
transaction of business except as otherwise provided by law, by the Certificate
of Incorporation, or by these By-Laws. A quorum, once established, shall not be
broken by the withdrawal of enough votes to leave less than a quorum and the
votes present may continue to transact business until adjournment. If, however,
such quorum shall not be present or represented at any meeting of the
stockholders, a majority of the voting stock represented in person or by proxy
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. If the adjournment is for more than thirty days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote thereat.
<PAGE> 133
Section 4. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes, or
the Certificate of Incorporation, or these By-Laws, a different vote is required
in which case such express provision shall govern and control the decision of
such question.
Section 5. At each meeting of the stockholders, each stockholder
having the right to vote may vote in person or may authorize another person or
persons to act for him by proxy appointed by an instrument in writing subscribed
by such stockholder and bearing a date not more than three years prior to said
meeting, unless said instrument provides for a longer period. All proxies must
be filed with the Secretary of the corporation at the beginning of each meeting
in order to be counted in any vote at the meeting. Each stockholder shall have
one vote for each share of stock having voting power, registered in his name on
the books of the corporation on the record date set by the Board of Directors as
provided in Article V, Section 6 hereof. All elections shall be had and all
questions decided by a plurality vote.
Section 6. Special meetings of the stockholders, for any purpose, or
purposes, unless otherwise prescribed by statute or by the Certificate of
Incorporation, may be called by the President and shall be called by the
President or the Secretary at the request in writing of a majority of the Board
of Directors, or at the request in writing of stockholders owning a majority in
amount of the entire capital stock of the corporation issued and outstanding,
and entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice.
Section 7. Whenever stockholders are required or permitted to take
any action at a meeting, a written notice of the meeting shall be given which
notice shall state the place, date and hour of the meeting, and, in the case of
a special meeting, the purpose or purposes for which the meeting is called. The
written notice of any meeting shall be given to each stockholder entitled to
vote at such meeting not less than ten nor more than sixty days before the date
of the meeting. If mailed, notice is given when deposited in the United States
mail, postage prepaid, directed to the stockholder at his address as it appears
on the records of the corporation.
Section 8. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
2
<PAGE> 134
Section 9. Unless otherwise provided in the Certificate of
Incorporation, any action required to be taken at any annual or special meeting
of stockholders of the corporation, or any action which may be taken at any
annual or special meeting of such stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted. Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
ARTICLE III.
DIRECTORS
Section 1. The number of directors which shall constitute the whole
Board shall be not less than one (1) nor more than ten (10). The first Board
shall consist of ______ directors. The directors need not be stockholders. The
directors shall be elected at the annual meeting of the stockholders, except as
provided in Section 2 of this Article, and each director elected shall hold
office until his successor is elected and qualified; provided, however, that
unless otherwise restricted by the Certificate of Incorporation or by law, any
director or the entire Board of Directors may be removed, either with or without
cause, from the Board of Directors at any meeting of stockholders by a majority
of the stock represented and entitled to vote thereat.
Section 2. Vacancies on the Board of Directors by reason of death,
resignation, retirement, disqualification, removal from office, or otherwise,
and newly created directorships resulting from any increase in the authorized
number of directors may be filled by a majority of the directors then in office,
although less than a quorum, or by a sole remaining director. The directors so
chosen shall hold office until the next annual election of directors and until
their successors are duly elected and shall qualify, unless sooner displaced. If
there are no directors in office, then an election of directors may be held in
the manner provided by statute. If, at the time of filling any vacancy or any
newly created directorship, the directors then in office shall constitute less
than a majority of the whole Board (as constituted immediately prior to any such
increase), the Court of Chancery may, upon application of any stockholder or
stockholders holding at least ten percent of the total number of the shares at
the time outstanding having the right to vote for such directors, summarily
order an election to be held to fill any such vacancies or newly created
directorships, or to replace the directors chosen by the directors then in
office.
Section 3. The property and business of the corporation shall be
managed by or under the direction of its Board of Directors. In addition to the
powers and authorities by these By-Laws expressly conferred upon them, the Board
may exercise all such powers of the corporation and do all such lawful acts and
things as are not by statute or by the Certificate of Incorporation or by these
By-Laws directed or required to be exercised or done by the stockholders.
3
<PAGE> 135
MEETINGS OF THE BOARD OF DIRECTORS
Section 4. The directors may hold their meetings and have one or
more offices, and keep the books of the corporation outside of the State of
Delaware.
Section 5. Regular meetings of the Board of Directors may be held
without notice at such time and place as shall from time to time be determined
by the Board.
Section 6. Special meetings of the Board of Directors may be called
by the President on forty-eight hours' notice to each director, either
personally or by mail or by telegram; special meetings shall be called by the
President or the Secretary in like manner and on like notice on the written
request of two directors unless the Board consists of only one director; in
which case special meetings shall be called by the President or Secretary in
like manner or on like notice on the written request of the sole director.
Section 7. At all meetings of the Board of Directors a majority of
the authorized number of directors shall be necessary and sufficient to
constitute a quorum for the transaction of business, and the vote of a majority
of the directors present at any meeting at which there is a quorum, shall be the
act of the Board of Directors, except as may be otherwise specifically provided
by statute, by the Certificate of Incorporation or by these By-Laws. If a quorum
shall not be present at any meeting of the Board of Directors the directors
present thereat may adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present. If only one
director is authorized, such sole director shall constitute a quorum.
Section 8. Unless otherwise restricted by the Certificate of
Incorporation or these By-Laws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the Board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
Section 9. Unless otherwise restricted by the Certificate of
Incorporation or these By-Laws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at such meeting.
COMMITTEES OF DIRECTORS
Section 10. The Board of Directors may, by resolution passed by a
majority of the whole Board, designate one or more committees, each such
committee to consist of one or more of the directors of the corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or
4
<PAGE> 136
not he or they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board of Directors, shall have and may exercise all the powers
and authority of the Board of Directors in the management of the business and
affairs of the corporation, and may authorize the seal of the corporation to be
affixed to all papers which may require it; but no such committee shall have the
power or authority in reference to amending the Certificate of Incorporation,
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, recommending to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or amending the
By-Laws of the corporation; and, unless the resolution or the Certificate of
Incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend or to authorize the issuance of stock.
Section 11. Each committee shall keep regular minutes of its
meetings and report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
Section 12. Unless otherwise restricted by the Certificate of
Incorporation or these By-Laws, the Board of Directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
INDEMNIFICATION
Section 13. (a) The corporation shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
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(b) The corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor by reason of the fact that he is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no such indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable for negligence or misconduct in the performance
of his duty to the corporation unless and only to the extent that the Court of
Chancery of Delaware or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which such Court of Chancery or such
other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of the
corporation shall be successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in paragraphs (a) and (b), or in defense
of any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
(d) Any indemnification under paragraphs (a) and (b) (unless ordered
by a court) shall be made by the corporation only as authorized in the specific
case upon a determination that indemnification of the director, officer,
employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in paragraphs (a) and (b). Such
determination shall be made (1) by the Board of Directors by a majority vote of
a quorum consisting of directors who were not parties to such action, suit or
proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, or (3) by the stockholders.
(e) Expenses incurred in defending a civil or criminal action, suit
or proceeding may be paid by the corporation in advance of the final disposition
of such action, suit or proceeding as authorized by the Board of Directors in
the manner provided in paragraph (d) upon receipt of an undertaking by or on
behalf of the director, officer, employee or agent to repay such amount unless
it shall ultimately be determined that he is entitled to be indemnified by the
corporation as authorized in this Section 13.
(f) The indemnification provided by this Section 13 shall not be
deemed exclusive of any other rights to which those indemnified may be entitled
under any by-law, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a person.
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(g) The Board of Directors may authorize, by a vote of a majority of
a quorum of the Board of Directors, the corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the corporation would have the power to
indemnify him against such liability under the provisions of this Section 13.
(h) For the purposes of this Section 13, references to "the
corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under the provisions of this Section with
respect to the resulting or surviving corporation as he would have with respect
to such constituent corporation if its separate existence had continued.
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include service
as a director, officer, employee or agent of the corporation which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants or beneficiaries; and
a person who acted in good faith and in a manner he reasonably believed to be in
the interest of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the corporation" as referred to in this section.
ARTICLE IV.
OFFICERS
Section 1. The officers of this corporation shall be chosen by the
Board of Directors and shall include a President, a Secretary, and a Treasurer.
The corporation may also have at the discretion of the Board of Directors such
other officers as are desired, including a Chairman of the Board, one or more
Vice Presidents, one or more Assistant Secretaries and Assistant Treasurers, and
such other officers as may be appointed in accordance with the provisions of
Section 3 hereof. In the event there are two or more Vice Presidents, then one
or more may be designated as Executive Vice President, Senior Vice President, or
other similar or dissimilar title. At the time of the election of officers, the
directors may by resolution determine the order of their rank. Any number of
offices may be held by the same person, unless the Certificate of Incorporation
or these By-Laws otherwise provide.
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Section 2. The Board of Directors, at its first meeting after each
annual meeting of stockholders, shall choose the officers of the corporation.
Section 3. The Board of Directors may appoint such other officers
and agents as it shall deem necessary who shall hold their offices for such
terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the Board.
Section 4. The salaries of all officers and agents of the
corporation shall be fixed by the Board of Directors.
Section 5. The officers of the corporation shall hold office until
their successors are chosen and qualify in their stead. Any officer elected or
appointed by the Board of Directors may be removed at any time by the
affirmative vote of a majority of the Board of Directors. If the office of any
officer or officers becomes vacant for any reason, the vacancy shall be filled
by the Board of Directors.
CHAIRMAN OF THE BOARD
Section 6. The Chairman of the Board, if such an officer be elected,
shall, if present, preside at all meetings of the Board of Directors and
exercise and perform such other powers and duties as may be from time to time
assigned to him by the Board of Directors or prescribed by these By-Laws. If
there is no President, the Chairman of the Board shall in addition be the Chief
Executive Officer of the corporation and shall have the powers and duties
prescribed in Section 7 of this Article IV.
PRESIDENT
Section 7. Subject to such supervisory powers, if any, as may be
given by the Board of Directors to the Chairman of the Board, if there be such
an officer, the President shall be the Chief Executive Officer of the
corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and officers of the
corporation. He shall preside at all meetings of the stockholders and, in the
absence of the Chairman of the Board, or if there be none, at all meetings of
the Board of Directors. He shall be an ex-officio member of all committees and
shall have the general powers and duties of management usually vested in the
office of President and Chief Executive Officer of corporations, and shall have
such other powers and duties as may be prescribed by the Board of Directors or
these By-Laws.
SECRETARY AND ASSISTANT SECRETARY
Section 8. The Secretary shall attend all sessions of the Board of
Directors and all meetings of the stockholders and record all votes and the
minutes of all proceedings in a book to be kept for that purpose; and shall
perform like duties for the standing committees when required by the Board of
Directors. He shall give, or cause to be given, notice of all meetings of the
stockholders and of the Board of Directors, and shall perform such other duties
as may be prescribed by the Board of Directors or these By-Laws. He shall keep
in safe custody the seal of
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the corporation, and when authorized by the Board, affix the same to any
instrument requiring it, and when so affixed it shall be attested by his
signature or by the signature of an Assistant Secretary. The Board of Directors
may give general authority to any other officer to affix the seal of the
corporation and to attest the affixing by his signature.
Section 9. The Assistant Secretary, or if there be more than one,
the Assistant Secretaries in the order determined by the Board of Directors, or
if there be no such determination, the Assistant Secretary designated by the
Board of Directors, shall, in the absence or disability of the Secretary,
perform the duties and exercise the powers of the Secretary and shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe.
TREASURER AND ASSISTANT TREASURER
Section 10. The Treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all
moneys, and other valuable effects in the name and to the credit of the
corporation, in such depositories as may be designated by the Board of
Directors. He shall disburse the funds of the corporation as may be ordered by
the Board of Directors, taking proper vouchers for such disbursements, and shall
render to the Board of Directors, at its regular meetings, or when the Board of
Directors so requires, an account of all his transactions as Treasurer and of
the financial condition of the corporation. If required by the Board of
Directors, he shall give the corporation a bond, in such sum and with such
surety or sureties as shall be satisfactory to the Board of Directors, for the
faithful performance of the duties of his office and for the restoration to the
corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
Section 11. The Assistant Treasurer, or if there shall be more than
one, the Assistant Treasurers in the order determined by the Board of Directors,
or if there be no such determination, the Assistant Treasurer designated by the
Board of Directors, shall, in the absence or disability of the Treasurer,
perform the duties and exercise the powers of the Treasurer and shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe.
ARTICLE V.
CERTIFICATES OF STOCK
Section 1. Every holder of stock of the corporation shall be
entitled to have a certificate signed by, or in the name of the corporation by,
the Chairman or Vice Chairman of the Board of Directors, or the President or a
Vice President, and by the Secretary or an Assistant Secretary, or the Treasurer
or an Assistant Treasurer of the corporation, certifying the number of shares
represented by the certificate owned by such stockholder in the corporation.
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Section 2. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent, or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer, transfer agent, or registrar at the date of issue.
Section 3. If the corporation shall be authorized to issue more than
one class of stock or more than one series of any class, the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualification,
limitations or restrictions of such preferences and/or rights shall be set forth
in full or summarized on the face or back of the certificate which the
corporation shall issue to represent such class or series of stock, provided
that, except as otherwise provided in section 202 of the General Corporation Law
of Delaware, in lieu of the foregoing requirements, there may be set forth on
the face or back of the certificate which the corporation shall issue to
represent such class or series of stock, a statement that the corporation will
furnish without charge to each stockholder who so requests the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
LOST. STOLEN OR DESTROYED CERTIFICATES
Section 4. The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
TRANSFERS OF STOCK
Section 5. Upon surrender to the corporation, or the transfer agent
of the corporation, of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignation or authority to transfer, it shall be
the duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
FIXING RECORD DATE
Section 6. In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of the
stockholders, or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise
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any rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record date
which shall not be more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
Section 7. The corporation shall be entitled to treat the holder of
record of any share or shares of stock as the holder in fact thereof and
accordingly shall not be bound to recognize any equitable or other claim or
interest in such share on the part of any other person, whether or not it shall
have express or other notice thereof, save as expressly provided by the laws of
the State of Delaware.
ARTICLE VI.
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation,
subject to the provisions of the Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the capital
stock, subject to the provisions of the Certificate of Incorporation.
Section 2. Before payment of any dividend there may be set aside out
of any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve fund to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think conducive to the interests of the
corporation, and the directors may abolish any such reserve.
CHECKS
Section 3. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers as the Board of
Directors may from time to time designate.
FISCAL YEAR
Section 4. The fiscal year of the corporation shall be fixed by
resolution of the Board of Directors.
SEAL
Section 5. The corporate seal shall have inscribed thereon the name
of the
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corporation, the year of its organization and the words "Corporate Seal,
Delaware". Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
NOTICES
Section 6. Whenever, under the provisions of the statutes or of the
Certificate of Incorporation or of these By-Laws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or stockholder, at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by telegram.
Section 7. Whenever any notice is required to be given under the
provisions of the statutes or of the Certificate of Incorporation or of these
By-Laws, a waiver thereof in writing, signed by the person or persons entitled
to said notice, whether before or after the time stated therein, shall be deemed
to be equivalent.
ANNUAL STATEMENT
Section 8. The Board of Directors shall present at each annual
meeting, and at any special meeting of the stockholders when called for by vote
of the stockholders, a full and clear statement of the business and condition of
the corporation.
ARTICLE VII.
AMENDMENTS
Section 1. These By-Laws may be altered, amended or repealed or new
By-Laws may be adopted by the stockholders or by the Board of Directors, when
such power is conferred upon the Board of Directors by the Certificate of
Incorporation, at any regular meeting of the stockholders or of the Board of
Directors or at any special meeting of the stockholders or of the Board of
Directors if notice of such alteration, amendment, repeal or adoption of new
By-Laws be contained in the notice of such special meeting. If the power to
adopt, amend or repeal By-Laws is conferred upon the Board of Directors by the
Certificate of Incorporation it shall not divest or limit the power of the
stockholders to adopt, amend or repeal By-Laws.
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EXHIBIT C
REORGANIZED CSC CERTIFICATE OF INCORPORATION
<PAGE> 145
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CITYSCAPE CORP.
--------------------------------------------
I, the undersigned Chief Executive Officer of Cityscape Corp., a
corporation existing under the laws of the State of New York (hereinafter
referred to as the "Corporation"), do hereby certify as follows:
FIRST: That the Certificate of Incorporation of the Corporation was
filed with the Secretary of State of the State of New York on March 4, 1985,
under the name of RSSG Corp. An Amendment changing the corporation's name to
Cityscape Corp. was filed on November 7, 1985, and was further amended by
Amendment to Certificate of Incorporation filed by the Department of State on
February 16, 1990.
SECOND: This Restated Certificate of Incorporation restates and
integrates and amends the Certificate of Incorporation of the Corporation by
restating the Certificate of Incorporation in its entirety. The text of the
Certificate of Incorporation is in its entirety as follows:
FIRST: The name of the corporation is CITYSCAPE CORP.
SECOND: The corporation is formed for the following purpose or
purposes:
To engage in any lawful act or activity for which
corporations may be organized under the Business
Corporation Law, provided that the corporation is not
formed to engage in any act or activity requiring the
consent or approval of any state official, department,
board, agency or other body without such consent or
approval first being obtained.
THIRD: The office of the corporation is to be located in the
County of Westchester, State of New York.
FOURTH: The aggregate number of shares which the corporation
shall have authority to issue is 400 all of which are
of a par value of $0.01 each, and all of which are of
the same class.
The issuance of nonvoting equity securities is
prohibited.
<PAGE> 146
FIFTH: The Secretary of State is designated as the agent of the
corporation upon whom process against the corporation
may be served. The post office address within the State
of New York to which the Secretary of State shall mail a
copy of any process against the corporation served upon
him is:
Cityscape Corp.
565 Taxter Road
Elmsford, New York 10523
SIXTH: The duration of the corporation is to be perpetual.
SEVENTH: The corporation shall, to the fullest extent permitted
by Article 7 of the Business Corporation Law of the
State of New York, as the same may be amended and
supplemented, indemnify any and all persons whom it
shall have power to indemnify under said Article from
and against any and all of the expenses, liabilities, or
other matters referred to in or covered by said Article,
and the indemnification provided for herein shall not be
deemed exclusive of any other rights to which any person
may be entitled under any By-Law, resolution of
shareholders, resolution of directors, agreement, or
otherwise, as permitted by said Article, as to action in
any capacity in which he served at the request of the
corporation.
EIGHTH: The personal liability of the directors of the
corporation is eliminated to the fullest extent
permitted by the provisions of paragraph (b) of Section
402 of the Business Corporation Law of the State of New
York, as the same may be amended and supplemented.
THIRD: This Amended and Restated Certificate of Incorporation was
duly adopted pursuant to the Corporation's Plan of Reorganization as filed with
the United States Bankruptcy Court for the Southern District of New York and
confirmed by such Court as of 1999 (the "Plan of Reorganization"), pursuant to
Chapter 11 of Title 11 of the United States Code and otherwise in accordance
with applicable provisions of the Business Corporation Law of the State of New
York.
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IN WITNESS WHEREOF, I have subscribed this document on the date set forth
below and do hereby affirm, under the penalties of perjury, that the statements
contained therein have been examined by me and are true and correct.
Date: _____________, 1999
CITYSCAPE CORP.
-----------------------------
Name:
Title:
3
<PAGE> 148
EXHIBIT D
REORGANIZED CSC BYLAWS
<PAGE> 149
AMENDED & RESTATED
BY-LAWS
OF
CITYSCAPE CORP.
(a New York corporation)
As Amended As Of__________, 1999
ARTICLE VIII.
SHAREHOLDERS
1. Certificates Representing Shares. Certificates representing
shares shall set forth thereon the statements prescribed by Section 508, and,
where applicable, by Sections 505, 616, 620, 709, and 1002, of the Business
Corporation Law and by any other applicable provision of law and shall be signed
by the Chairman or a Vice-Chairman of the Board of Directors, if any, or by the
President or a Vice-President and by the Secretary or an Assistant Secretary or
the Treasurer or an Assistant Treasurer and may be sealed with the corporate
seal or a facsimile thereof. The signatures of the officers upon a certificate
may be facsimiles if the certificate is countersigned by a transfer agent or
registered by a registrar other than the corporation itself or its employee, or
if the shares are listed on a registered national security exchange. In case any
officer who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer at the date of its issue.
A certificate representing shares shall not be issued until the full
amount of consideration therefor has been paid except as Section 504 of the
Business Corporation Law may otherwise permit.
The corporation may issue a new certificate for shares in place of
any certificate theretofore issued by it, alleged to have been lost or
destroyed, and the Board of Directors may require the owner of any lost or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify the corporation against any claim that may be made
against it on account of the alleged loss or destruction of any such certificate
or the issuance of any such new certificate.
2. Fractional Share Interests. The corporation may issue
certificates for fractions of a share where necessary to effect transactions
authorized by the Business Corporation Law which shall entitle the holder, in
proportion to his fractional holdings, to exercise voting rights, receive
dividends and participate in liquidating distributions; or it may pay, in cash
the fair value of fractions of a share as of the time when those entitled to
receive such fractions are determined; or it may issue scrip in registered or
bearer form over the manual
<PAGE> 150
or facsimile signature of an officer of the corporation or of its agent,
exchangeable as therein provided for full shares, but such scrip shall not
entitle the holder to any rights of a shareholder except as therein provided.
3. Share Transfers. Upon compliance with provisions restricting the
transferability of shares, if any, transfers of shares of the corporation shall
be made only on the share record of the corporation by the registered holder
thereof or by his attorney thereunto authorized by power of attorney duly
executed and filed with the Secretary of the corporation or with a transfer
agent or a registrar, if any, and on surrender of the certificate or
certificates for such shares properly endorsed and the payment of all taxes due
thereon.
4. Record Date for Shareholders. For the purpose of determining the
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof, or to express consent to or dissent from any proposal
without a meeting, or for the purpose of determining shareholders entitled to
receive payment of any dividend or the allotment of any rights, or for the
purpose of any other action, the directors may fix, in advance, a date as the
record date for any such determination of shareholders. Such date shall not be
more than fifty days nor less than ten days before the date of such meeting, nor
more than fifty days prior to any other action. If no record date is fixed, the
record date for the determination of shareholders entitled to notice of or to
vote at a meeting of shareholders shall be at the close of the business on the
day next preceding the day on which notice is given, or, if no notice is given,
the day on which the meeting is held; the record date for determining
shareholders for any purpose other than that specified in the preceding clause
shall be at the close of business on the day on which the resolution of the
directors relating thereto is adopted. When a determination of shareholders of
record entitled to notice of or to vote at any meeting of shareholders has been
made as provided in this paragraph, such determination shall apply to any
adjournment thereof, unless directors fix a new record date under this paragraph
for the adjourned meeting.
5. Meaning of Certain Terms. As used herein in respect of the right
to notice of a meeting of shareholders or a waiver thereof or to participate or
vote thereat or to consent or dissent in writing in lieu of a meeting, as the
case may be, the term "share" or "shares" or "shareholder" or "shareholders"
refers to an outstanding share or shares and to a holder or holders of record of
outstanding shares when the corporation is authorized to issue only one class of
shares, and said reference is also intended to include any outstanding share or
shares and any holder or holders of record of outstanding shares of any class
upon which or upon whom the Certificate of Incorporation confers such rights
where there are two or more classes or series of shares or upon which or upon
whom the Business Corporation Law confers such rights notwithstanding that the
Certificate of Incorporation may provide for more than one class or series of
shares, one or more of which are limited or denied such rights thereunder.
6. Shareholder Meetings.
- TIME. The annual meeting shall be held on the date fixed, from time to
time, by the directors, provided, that the first annual meeting shall be held on
a date within thirteen months after the formation of the corporation, and each
successive annual meeting shall be held on a date
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within thirteen months after the date of the preceding annual meeting. A special
meeting shall be held on the date fixed by the directors except when the
Business Corporation Law confers the right to fix the date upon shareholders.
- PLACE. Annual meetings and special meetings shall be held at such place,
within or without the State of New York, as the directors may, from time to
time, fix. Whenever the directors shall fail to fix such place, or, whenever
shareholders entitled to call a special meeting shall call the same, the meeting
shall be held at the office of the corporation in the State of New York.
- CALL. Annual meetings may be called by the directors or by any officer
instructed by the directors to call the meeting. Special meetings may be called
in like manner except when the directors are required by the Business
Corporation Law to call a meeting, or except when the shareholders are entitled
by said Law to demand the call of a meeting.
- NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER OF NOTICE. Written notice of all
meetings shall be given, stating the place, date, and hour of the meeting, and,
unless it is an annual meeting, indicating that it is being issued by or at the
direction of the person or persons calling the meeting. The notice of an annual
meeting shall state that the meeting is called for the election of directors and
for the transaction of other business which may properly come before the
meeting, and shall, (if any other action which could be taken at a special
meeting is to be taken at such annual meeting) state the purpose or purposes.
The notice of a special meeting shall in all instances state the purpose or
purposes for which the meeting is called; and, at any such meeting, only such
business may be transacted which is related to the purpose or purposes set forth
in the notice. If the directors shall adopt, amend, or repeal a bylaw regulating
an impending election of directors, the notice of the next meeting for election
of directors shall contain the statements prescribed by Section 601(b) of the
Business Corporation Law. If any action is proposed to be taken which would, if
taken, entitle shareholders to receive payment for their shares, the notice
shall include a statement of that purpose and to that effect and shall be
accompanied by a copy of Section 623 of the Business Corporation Law or an
outline of its material terms. A copy of the notice of any meeting shall be
given, personally or by first class mail, not less than ten days nor more than
fifty days before the date of the meeting, unless the lapse of the prescribed
period of time shall have been waived, to each shareholder at his record address
or at such other address which he may have furnished by request in writing to
the Secretary of the corporation. In lieu of giving a copy of such notice
personally or by first class mail as aforesaid, a copy of such notice may be
given by third class mail not fewer than twenty-four nor more than fifty days
before the date of the meeting. Notice by mail shall be deemed to be given when
deposited, with postage thereon prepaid, in a post office or official depository
under the exclusive care and custody of the United States post office
department. If a meeting is adjourned to another time or place, and, if any
announcement of the adjourned time or place is made at the meeting, it shall not
be necessary to give notice of the adjourned meeting unless the directors, after
adjournment, fix a new record date for the adjourned meeting. Notice of a
meeting need not be given to any shareholder who submits a signed waiver of
notice before or after the meeting. The attendance of a shareholder at a meeting
without protesting prior to the
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conclusion of the meeting the lack of notice of such meeting shall constitute a
waiver of notice by him.
- SHAREHOLDER LIST AND CHALLENGE. A list of shareholders as of the record
date, certified by the Secretary or other officer responsible for its
preparation or by the transfer agent, if any, shall be produced at any meeting
of shareholders upon the request thereat or prior thereto of any shareholder. If
the right to vote at any meeting is challenged, the inspectors of election, if
any, or the person presiding thereat, shall require such list of shareholders to
be produced as evidence of the right of the persons challenged to vote at such
meeting, and all persons who appear from such list to be shareholders entitled
to vote thereat may vote at such meeting.
- CONDUCT OF MEETING. Meetings of the shareholders shall be presided over
by one of the following officers in the order of seniority and if present and
acting--the Chairman of the Board, if any, the Vice-Chairman of the Board, if
any, the President, a Vice-President, or, if none of the foregoing is in office
and present and acting, by the Chairman to be chosen by the shareholders. The
Secretary of the corporation, or in his absence, an Assistant Secretary, shall
act as secretary of every meeting, but if neither the Secretary nor an Assistant
Secretary is present the Chairman of the meeting shall appoint a secretary of
the meeting.
- PROXY REPRESENTATION. Every shareholder may authorize another person or
persons to act for him by proxy in all matters in which a shareholder is
entitled to participate, whether by waiving notice of any meeting, voting or
participating at a meeting, or expressing consent or dissent without a meeting.
Every proxy must be signed by the shareholder or his attorney-in-fact. No proxy
shall be valid after the expiration of eleven months from the date thereof
unless otherwise provided in the proxy. Every proxy shall be revocable at the
pleasure of the shareholder executing it, except as otherwise provided by the
Business Corporation Law.
- INSPECTORS - APPOINTMENT. The directors, in advance of any meeting, may,
but need not, appoint one or more inspectors to act at the meeting or any
adjournment thereof. If an inspector or inspectors are not appointed, the person
presiding at the meeting may, but need not, appoint one or more inspectors. In
case any person who may be appointed as an inspector fails to appear or act, the
vacancy may be filled by appointment made by the directors in advance of the
meeting or at the meeting by the person presiding thereat. Each inspector, if
any, before entering upon the discharge of his duties, shall take and sign an
oath faithfully to execute the duties of inspector at such meeting with strict
impartiality and according to the best of his ability. The inspectors, if any,
shall determine the number of shares outstanding and the voting power of each,
the shares represented at the meeting, the existence of a quorum, the validity
and effect of proxies, and shall receive votes, ballots or consents, hear and
determine all challenges and questions arising in connection with the right to
vote, count and tabulate all votes, ballots or consents, determine the result,
and do such acts as are proper to conduct the election or vote with fairness to
all shareholders. On request of the person presiding at the meeting or any
shareholder, the inspector or inspectors, if any, shall make a report in writing
of any challenge, question or matter determined by him or them and execute a
certificate of any fact found by him or them.
<PAGE> 153
- QUORUM. Except for a special election of directors pursuant to Section
603(b) of the Business Corporation Law, and except as herein otherwise provided,
the holders of a majority of the outstanding shares shall constitute a quorum at
a meeting of shareholders for the transaction of any business. When a quorum is
once present to organize a meeting, it is not broken by the subsequent
withdrawal of any shareholders. The shareholders present may adjourn the meeting
despite the absence of a quorum.
- VOTING. Each share shall entitle the holder thereof to one vote. In the
election of directors, a plurality of the votes cast shall elect. Any other
action shall be authorized by a majority of the votes cast except where the
Business Corporation Law prescribes a different proportion of votes.
7.Shareholder Action Without Meetings. Whenever shareholders are
required or permitted to take any action by vote, such action may be taken
without a meeting on written consent, setting forth the action so taken, signed
by the holders of all shares.
ARTICLE IX.
GOVERNING BOARD
1. Functions and Definitions. The business of the corporation shall
be managed under the direction of a governing board, which is herein referred to
as the "Board of Directors" or "directors" notwithstanding that the members
thereof may otherwise bear the titles of trustees, managers, or governors or any
other designated title, and notwithstanding that only one director legally
constitutes the Board. The word "director" or "directors" likewise herein refers
to a member or to members of the governing board notwithstanding the designation
of a different official title or titles. The use of the phrase "entire board"
herein refers to the total number of directors which the corporation would have
if there were no vacancies.
2. Qualifications and Number. Each director shall be at least
eighteen years of age. A director need not be a shareholder, a citizen of the
United States, or a resident of the State of New York. The number of directors
which shall constitute the whole Board shall be not less than one (1). The first
Board shall consist of _________ directors. The number of directors constituting
the board may be fixed from time to time by the by-laws, or by action of the
shareholders or of the board under the specific provisions of a by-law adopted
by the shareholders. If not otherwise fixed under this paragraph, the number
shall be one (1). The number of directors may be increased or decreased by
action of shareholders or of the directors, provided that any action of the
directors to effect such increase or decrease shall require the vote of a
majority of the entire Board. No decrease shall shorten the term of any
incumbent director.
3. Election and Term. The first Board of Directors shall be elected
by the incorporator or incorporators and shall hold office until the first
annual meeting of shareholders and until their successors have been elected and
qualified. Thereafter, directors who are elected at an annual meeting of
shareholders, and directors who are elected in the interim by the shareholders
to fill vacancies and newly created directorships, shall hold office until the
next annual meeting of shareholders and until their successors have been elected
and qualified; and
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directors who are elected in the interim by the directors to fill vacancies and
newly created directorships shall hold office until the next meeting of
shareholders at which the election of directors is in the regular order of
business and until their successors have been elected and qualified. In the
interim between annual meetings of shareholders or of special meetings of
shareholders called for the election of directors, newly created directorships
and any vacancies in the Board of Directors, including vacancies resulting from
the removal of directors for cause or without cause, may be filled by the vote
of the remaining directors then in office, although less than a quorum exists.
4. Meetings.
- TIME. Meetings shall be held at such time as the Board shall fix, except
that the first meeting of a newly elected Board shall be held as soon after its
election as the directors may conveniently assemble.
- PLACE. Meetings shall be held at such place within or without the State
of New York as shall be fixed by the Board.
- CALL. No call shall be required for regular meetings for which the time
and place have been fixed. Special meetings may be called by or at the direction
of the Chairman of the Board, if any, of the President, or of a majority of the
directors in office.
- NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER No notice shall be required for
regular meetings for which the time and place have been fixed. Written, oral, or
any other mode of notice of the time and place shall be given for special
meetings in sufficient time for the convenient assembly of the directors
thereat. The notice of any meeting need not specify the purpose of the meeting.
Any requirement of furnishing a notice shall be waived by any director who signs
a waiver of notice before or after the meeting, or who attends the meeting
without protesting, prior thereto or at its commencement, the lack of notice to
him.
- QUORUM AND ACTION. A majority of the entire Board shall constitute a
quorum except when a vacancy or vacancies prevents such majority, whereupon a
majority of the directors in office shall constitute a quorum, provided such
majority shall constitute at least one-third of the entire Board. A majority of
the directors present, whether or not a quorum is present, may adjourn a meeting
to another time and place. Except as herein otherwise provided, the act of the
Board shall be the act, at a meeting duly assembled, by vote of a majority of
the directors present at the time of the vote, a quorum being present at such
time. Any one or more members of the Board of Directors or of any committee
thereof may participate in a meeting of said Board or of any such committee by
means of a conference telephone or similar communications equipment allowing all
persons participating in the meeting to hear each other at the same time, and
participation by such means shall constitute presence in person at the meeting.
- CHAIRMAN OF THE MEETING. The Chairman of the Board, if any and if
present and acting, shall preside at all meetings. Otherwise, the President, if
present and acting, or any other director chosen by the Board, shall preside.
<PAGE> 155
5. Removal of Directors. Any or all of the directors may be removed
for cause or without cause by the shareholders. One or more of the directors may
be removed for cause by the Board of Directors.
6. Committees. Whenever the Board of Directors shall consist of more
than three members, the Board of Directors, by resolution adopted by a majority
of the entire Board of Directors, may designate from their number three or more
directors to constitute an Executive Committee and other committees, each of
which, to the extent provided in the resolution designating it, shall have the
authority of the Board of Directors with the exception of any authority the
delegation of which is prohibited by Section 712 of the Business Corporation
Law.
7. Written Action. Any action required (or permitted to be taken by
the Board of Directors or by any committee thereof may be taken without a
meeting if all of the members of the Board of Directors or of any committee
thereof consent in writing to the adoption of a resolution authorizing the
action. The resolution and the written consents thereto by the members of the
Board of Directors or of any such committee shall be filed with the minutes of
the proceeding of the Board of Directors or of any such committee.
ARTICLE X.
OFFICERS
The directors may elect or appoint a Chairman of the Board of
Directors, a President, one or more Vice-Presidents, a Secretary, one or more
Assistant Secretaries, a Treasurer, one or more Assistant Treasurers, and such
other officers as they may determine. The President may but need not be a
director. Any two or more offices may be held by the same person except the
offices of President and Secretary; or, when all of the issued and outstanding
shares of the corporation are owned by one person, such person may hold all or
any combination of offices.
Unless otherwise provided in the resolution of election or
appointment, each officer shall hold office until the meeting of the Board of
Directors following the next annual meeting of shareholders and until his
successor has been elected and qualified.
Officers shall have the powers and duties defined in the resolutions
appointing them.
The Board of Directors may remove any officer for cause or without
cause.
ARTICLE XI.
STATUTORY NOTICES TO SHAREHOLDERS
The directors may appoint the Treasurer or other fiscal officer
and/or the Secretary or any other officer to cause to be prepared and furnished
to shareholders entitled thereto any special financial notice and/or any
financial statement, as the case may be, which
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may be required by any provision of law, and which, more specifically, may be
required by Sections 510, 511, 515, 516, 517, 519, and 520 of the Business
Corporation Law.
ARTICLE XII.
BOOKS AND RECORDS
The corporation shall keep correct and complete books and records of
account and shall keep minutes of the proceedings of the shareholders, of the
Board of Directors, and/or any committee which the directors may appoint, and
shall keep at the office of the corporation in the State of New York or at the
office of the transfer agent or registrar, if any, in said state, a record
containing the names and addresses of all shareholders, the number and class of
shares held by each, and the dates when they respectively became the owners of
record thereof Any of the foregoing books, minutes, or records may be in written
form or in any other form capable of being converted into written form within a
reasonable time.
ARTICLE XIII.
CORPORATE SEAL
The corporate seal, if any, shall be in such form as the Board of
Directors shall prescribe.
ARTICLE XIV.
FISCAL YEAR
The fiscal year of the corporation shall be fixed, and shall be
subject to change from time to time, by the Board of Directors.
ARTICLE XV.
CONTROL OVER BY-LAWS
The shareholders entitled to vote in the election of directors or
the directors upon compliance with any statutory requisite may amend or repeal
the By-Laws and may adopt new By-Laws, except that the directors may not amend
or repeal any By-Law or adopt any new By-Law, the statutory control over which
is vested exclusively in the said shareholders or in the incorporators. By-Laws
adopted by the incorporators or directors may be amended or repealed by the said
shareholders.
<PAGE> 157
Exhibit B to Debtors' First Amended Joint Disclosure Statement
Pursuant to Section 1125 of the Bankruptcy Code
Examiner Report Pursuant to Order of October 20, 1998
<PAGE> 158
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
- - --------------------------------x
In re: : Chapter 11
:
CITYSCAPE FINANCIAL CORP., : Case Nos. 98-B-22569 (ASH)
and CITYSCAPE CORP., : and 98-B-22570 (ASH)
: Jointly Administered
Debtors. :
- - --------------------------------x
EXAMINER REPORT PURSUANT
TO ORDER OF OCTOBER 20,1998
To: The Honorable Adlai S. Hardin, Jr.
United States Bankruptcy Judge
Examiner Harrison J. Goldin respectfully submits this Report in accordance
with this Court's order dated October 20, 1998 (the "Examiner Order").
INTRODUCTION
A. PROCEDURAL BACKGROUND
On October 6, 1998 Cityscape Financial Corp. and Cityscape Corp. (together
the "Debtor")(1) separately filed in this Court voluntary petitions under
Chapter 11 of the Bankruptcy Code. On October 7, 1998 an order was entered
granting the Debtors application that the cases be jointly administered. Along
with the petitions, the Debtor filed a "prepackaged" joint disclosure statement
and plan of reorganization (the "Plan"). The Plan enjoys the support of the
Unofficial Committee of Subordinated Debentures (holders of 6% Convertible
Subordinated Debentures, due 2006), and the Unofficial Committee of Senior
Noteholders
- - ----------
(1) Unless otherwise indicated, the two Debtors, Cityscape Financial Corp. and
its wholly owned subsidiary Cityscape Corp., are referred to collectively below
as the "Debtor"
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(holders of 12 3/4% Senior Notes, due September 1, 2004). Opposed are the equity
classes, including Elliott Associates, L.P. and Westgate International, L.P.
(together "Elliott"). (Elliott is a holder of Series B Convertible Preferred
Stock.) Hearings on approval of the disclosure statement and confirmation are
scheduled for November 13, 1998.
On October 7, 1998 Elliott moved, pursuant to Bankruptcy Code Section
1104(c), for entry of an order appointing an examiner. A hearing was held and on
October 20, 1998, over the opposition of the Indenture Trustee for Subordinated
Indenture (Chase Manhattan Bank), the Trustee for Senior Indenture (Norwest),
the Unofficial Committee of Subordinated Debentures and the Unofficial Committee
of Senior Noteholders, the Court entered the Examiner Order; it defined and
limited the scope of the Examiners investigation and report. On October 22, 1998
the Court approved my appointment as Examiner.
B. DESCRIPTION OF THE DEBTOR
Cityscape Financial Corp. is a consumer finance company that, through its
wholly-owned subsidiary, Cityscape Corp., is in the business of originating,
purchasing, selling and servicing mortgage loans secured primarily by one-to
four-family residences. The majority of the Debtors loans are made to owners of
single family residences, who typically use the loan proceeds for such purposes
as debt consolidation, financing of home improvements and payment of educational
expenses, among others. Typically, the Debtor from time to time would sell its
loans in securitized packages, retaining a residual interest, in order to
finance its growing lending business. The Debtor is licensed to do business in
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46 states and the District of Columbia. In May 1995 the Debtor commenced
operations in the United Kingdom ("UK") with the formation of City Mortgage
Company, Ltd., an English corporation in which the Debtor originally held a 50%
interest and later acquired a 100% interest, that originated, sold and serviced
loans in England, Scotland and Wales. In March, 1998 the Debtors board of
directors adopted a plan to sell the Debtors entire UK operation; a sale to a
third party closed in the spring of 1998.
Total revenues for the Debtors fiscal year ended December 31, 1996 were
$107.8 million. Revenues declined some $74 million in 1997, to $34 million. Net
income in 1996 was $50.7 million; the net loss in 1997 was $418.9 million. The
Debtors financial collapse in 1997 is discussed in more detail below.
SCOPE OF EXAMINATION
The Examiner Order directed the Examiner to review and investigate the
following matters (the "Scope"):
(a) Whether the facts relating to the Debtors' restatements of their
financial statements and write-downs of assets for the period beginning with the
quarter ended June 30, 1996 may give rise to potential claims of the Debtors'
Estates against any of the Individual Defendants (or any other of the Debtors'
current and former officers and directors) and/or the Debtors' financial
advisors and other professionals (a "Potential Claim").
(b) The results of any investigations with regard to the
restatements of the Debtors' financial statements and write-downs of assets
performed by the
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Debtors, any special committee of the Debtors' boards of directors or any
independent third-party.
(c) The extent to which, if at all, any person who may be liable on a
Potential Claim and who is being released under the Plan is contributing to the
Plan.
(d) The facts and circumstances with respect to alleged short sales of
the Debtors' common stock during 1997 and 1998 by the Individual Defendants (or
any other of the Debtors' current and former officers and directors) and/or the
Debtors' financial advisors and other professionals.
(e) The extent to which the proceeds of insurance policies of the
Debtors that might cover a Potential Claim are being used to fund payments under
the Plan.
(f) The extent to which the proceeds of insurance policies of the
Debtors might be available to satisfy Potential Claims. Examiner Order at 3.
This Court directed the Examiner to complete and file his report not
later than 5:00 p.m. New York City time on November 9, 1998. Id.
Thus, the Examiner was allotted 18 calendar days from the time of his
appointment on October 22 to complete his examination and report. Mindful of the
exigencies discussed in the Examiner Order and the need to facilitate the plan
process in these cases, beginning on October 23, 1998 the Examiner and his
counsel commenced a program of expedited interviews with the parties in
interest, their legal counsel, senior management of the Debtor and personnel of
the Debtors accounting and financial advisory firms. Given the time constraints
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imposed by the Examiner Order, the Examiner concluded that it would not be
practicable to depose formally or conduct Rule 2004 examinations of people with
material information concerning the matters under investigation. The Examiner
determined that gathering information by informal interviews would speed up the
investigation process; in any event, witnesses and their legal counsel might be
more forthcoming and less defensive in an interview format.
The following individuals were interviewed by the Examiner and his legal
counsel. These witnesses submitted voluntarily to interviews without the need of
a Rule 2004 order, thereby streamlining the process and resulting in a cost
saving to the Estate. As directed by the Court, the Debtor, its counsel and all
other parties cooperated fully with the Examiner.
1. John Verdonck, KPMG Peat Marwick
2. James Goldsmith, KPMG Peat Marwick
3. Michael Walters, KPMG Peat Marwick
4. Daniel Dooley, Pricewaterhouse Coopers
5. David Friedman, Esq., counsel to the senior bondholders
6. Robert Rosenberg, Esq., bankruptcy counsel to the Debtor
7. James Brandt, Esq., bankruptcy counsel to the Debtor
8. Sean Griffiths, Esq., corporate counsel to the Debtor
9. Robert Serio Esq. and Peter Beshar, Esq., litigation counsel
to the Debtor
10. Kenneth Eckstein, Esq., counsel to the subordinated
bondholders
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11. Mark Brodsky, Esq., Elliott
12. Brian Rosen, Esq., counsel to Elliott
13. Tim Ledwick, Chief Financial Officer of the Debtor
14. Robert Grosser, Chairman and former CEO of the Debtor
15. Steven Miller, current CEO of the Debtor
16. Jonah Goldstein, Esq., director and general counsel of the
Debtor
17. Andrew Heyer, CIBC Oppenheimer Corp. ("CIBC")
18. Robert Kramer, Bear, Steams & Co. Inc. ("Bear, Stearns")
In addition, the Examiner and his counsel reviewed and analyzed voluminous
documents and analyses produced voluntarily by the Debtor and others. Such
evidence helped the Examiner assess witnesses' statements concerning the
chronology of events and the timing of the Debtor's discovery of many of the
circumstances which adversely affected the Debtor and its business prospects.
EVALUATION OF POTENTIAL CLAIMS ARISING
FROM RESTATEMENTS AND WRITE-DOWNS
This section of the Examiner's Report addresses Scope paragraph (a),
relating to the Debtor's restatements of financial statements and write-downs of
assets commencing the second quarter of 1996 and potential claims by the
Debtor's Estate arising therefrom.
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A. RESTATEMENT OF FINANCIAL RESULTS
FOR QUARTER ENDED JUNE 30, 1996
During the second quarter of 1996 the Debtor's wholly-owned British
subsidiary, City Mortgage Company, Ltd. ("CMC"), acquired all the outstanding
stock of J&J Securities Ltd. ("J&J"), a London-based mortgage banker, and
Heritable Group Ltd. ("Heritable"), a UK-based mortgage finance company. Both of
these acquisitions were accounted for as purchase transactions.
On August 14, 1996 the Debtor filed its Form 10-Q for the three months
ended June 30,1996, reporting earnings of $34.8 million for that quarter. It
also disclosed that the Debtor was recognizing a total of $60.4 million of
goodwill in connection with the two acquisitions. Also during the second quarter
of 1996, CMC sold the loan portfolios acquired in the J&J and Heritable
acquisitions. As reported in the Form 10-Q, the results for that quarter
included gains of $51.0 million on the sale of these loan portfolios.
According to The Debtor, prior to the filing of this Form 10-Q KPMG Peat
Marwick LLP ("KPMG"), the Debtor's outside auditor, approved the appropriateness
of the accounting treatment in the Form 10-Q of the two acquisitions and the
subsequent portfolio sales. Representatives of KPMG denied to the Examiner that
any such approval had been given.
After the Form 10-Q was filed, representatives of KPMG questioned whether
the accounting for the acquisitions accorded with generally accepted accounting
principles governing purchase accounting for financial transactions. The issue
that concerned KPMG related to the general accounting principle that assets
acquired in a transaction subject to purchase accounting should be
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booked by the acquiree at fair value. As initially reflected in the consolidated
financial results for the three months ended June 30, 1996, the Debtor recorded
the acquired portfolios at par; shortly after their acquisition the Debtor
realized a substantial gain when the portfolios were sold above par. KMPG took
the position that, given these subsequent sales which had occurred in such
proximity to their purchase, carrying the portfolios at par on their acquisition
did not give recognition to their fair value, i.e., that the value of the
portfolios at purchase had to have been understated on the Debtors financial
statements and, therefore, a gain on the sale was incorrectly recognized.
The Debtor was convinced that the treatment set forth in the Form 10-Q
was correct, that such treatment had been blessed by KPMG's engagement partner
and that, because others at KPMG now disagreed with that partner, the Debtor was
needlessly being placed in the embarrassing and awkward position of having to
restate previously announced results. Nonetheless, the Debtor acquiesced in
KPMG's insistence that such a restatement take place. Prior to issuing the
restatement, the Debtor took the initiative and contacted the Securities and
Exchange Commission ("S.E.C.") to advise it that a restatement would be
forthcoming. By letter dated September 26, 1996, the S.E.C. advised the Debtor
that a prompt restatement was necessary.
On September 27, 1996, approximately six weeks after the original Form
10-Q was filed, the Debtor filed an amended Form 10-Q for the quarter ended
June 30, 1996 which contained a restatement of results for that quarter. The
value of the assets acquired in the acquisitions was increased by approximately
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$51 million and goodwill recognized on the acquisitions was reduced from $60.5
million to $10.6 million. The gain on the sale of the loan portfolios was
thereby reduced from $80.1 million to $29.2 million. As a result, earnings
before minority interests and income taxes were reduced from $59.6 million to
$14.1 million; and net earnings were reduced from $34.8 million to $8.3 million.
The reduction in goodwill benefited the Debtor by relieving the negative impact
on future earnings that results from the amortization of goodwill.
The stock market did not react adversely to the restatement. The stock
closed at 26-1/2 on both Friday, September 27, 1996 and Monday, September 30,
1996, as compared to a closing price of 25-5/8 on Thursday, September 26, 1996.
On November 19, 1996 the Debtor filed another amended Form 10-Q,
containing a further restatement of the results for the quarter ended June 30,
1996. The effect of This restatement was to increase net earnings from $8.3
million to $11.1 million and to increase goodwill recorded in connection with
the acquisitions from $10.6 million to $30.6 million. This restatement corrected
the accounting treatment of $5.0 million of restructuring charges and $17.3
million of deferred taxes recorded as a result of the acquisitions. The stock
market also did not react adversely to this second restatement. The stock closed
at 19-5/8 on November 19, 1996 and 21-5/8 on November 20, 1996, as compared to a
closing price of 19-1/4 on November 18, 1996.
By letter dated October 23, 1996 the S.E.C. advised the Debtor that it was
conducting an informal inquiry relating to the restatement. The Debtor was
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notified on October 17, 1997 That the S.E.C. had commenced a formal
investigation. In connection with this investigation the S.E.C. has taken
testimony from representatives of the Debtor and others. Some of this
testimony was taken as recently as the week of October 26, 1998. The S.E.C.
has taken no action to date arising from the investigation.
The purchase accounting issues that relate to The two U.K acquisitions are
complex, and professionals can reasonably differ on their treatment. In
connection with the S.E.C. investigation, the Debtor's counsel retained
PriceWaterhouse (now Pricewaterhouse Coopers LLP) ("PwC"). A representative of
PwC advised the Examiner of his view that the initial accounting treatment was
acceptable and that the Debtor should not have been required to undertake a
restatement; the accounting literature can be read to support the position
originally taken by the Debtor, as well as that taken in the restatement. A
summary of the documentation that supports each of the two positions, which was
prepared by PwC at the request of the Examiner, is set forth in Appendix A
hereto.
The Examiner uncovered no evidence that any representative of the Debtor,
or any professional, acted in bad faith, recklessly or unreasonably respecting
the accounting issues that relate to the Debtor's results for the second quarter
of 1996. The Examiner also concludes that it is not in the Debtor's interest to
pursue a claim against anyone relating to these circumstances. Under Section
141(e) of the Delaware General Corporation Law, the directors of the Debtor were
entitled to rely on the opinions and statements of professionals
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and experts. The only potentially colorable claim would be against KPMG for
allegedly having wrongfully approved the Debtor's initial treatment and then
changing its position and requiring a restatement, to the Debtor's injury.
However, the only concrete injury to the Debtor appears to have been the legal
and other professional fees, and management time, that relate to the restatement
and subsequent S.E.C. investigation. This, however, does not, in the Examiner's
view, justify the expense and effort of an accountant's malpractice action.
B. WRITE-DOWN TAKEN FOR
QUARTER ENDED JUNE 30, 1997
In a Form 8-K filed on August 4, 1997 the Debtor disclosed that it had
taken a pre-tax reserve of $15.0 million to increase reserves relating to UK
mortgage servicing receivables. This reserve was in recognition of regulatory
developments relating to the UK's Office of Fair Trading ("OFT"), as follows:
On March 13, 1997 CMC, which contributed 50% of the Debtor's
profitability, received a letter from the OFT, the regulatory agency responsible
for overseeing and licensing mortgage lenders in the UK. The letter referred to
specified business practices which the Director General of the OFT considered
"deceitful or oppressive, or otherwise unfair or improper, whether unlawful or
not." These practices included two which were significant components of CMC's
modus operandi, namely, a "dual rate" structure and use of the so-called "Rule
of 78." Under the dual rate structure borrowers were charged a "standard"
interest rate; but in the event they made payments on schedule, they were
charged a much lower "concessionary" interest rate, which might be as much as
half the standard rate. The Rule of 78 refers to a method for calculating the
amount
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owed by a borrower who wishes to pre-pay a mortgage loan prior to maturity; it
is less favorable to the borrower than other methods often applied. (A detailed
explanation of the Rule of 78, and sample calculations applying the Rule, are
set forth in Appendix B hereto.) The OFT letter said that the Rule of 78
produces "an excessively high settlement figure relative to the amount borrowed
and repayments already made." The letter also stated that the Director General
"will take appropriate action against those that appear to carry on the
practices highlighted by this letter."
In its 1996 Form 10-K, filed on March 31, 1997, the Debtor referred to the
letter from the OFT, noting that it was reviewing and evaluating its practices
respecting the issues raised in the letter and had not yet discussed the letter
with the OFT. The Form 10-K referred to the Debtor's belief that the regulatory
concerns reflected in the letter would not have a material adverse effect on any
of its existing mortgage loans, "although no assurances to that effect can be
given at this time." The Form 10-K also noted the possible material adverse
effect in future periods that would result from elimination of use of the dual
rate structure and the Rule of 78.
Based on its consultations with Clifford Chance, CMC's UK counsel, the
Debtor believed that under British law the OFT lacked the power to change
existing contractual arrangements between CMC and its borrowers and, thus, that
any regulatory changes could have only prospective effect. In addition, by
statute, the Rule of 78 is mandatory for so-called "regulated loans," i.e.,
loans with a principal balance of (pound)15,000 or less. The Debtor questioned
how the OFT
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logically could nullify, for "unregulated loans" in excess of (pound)15,000, a
practice that is required for regulated loans.
Pursuant to negotiations with the OFT held after March 31, 1997, the
Debtor agreed to discontinue use of the Rule of 78 on new loans originated after
August 1,1997. In a Form 10-Q filed on May 12, 1997 the Debtor disclosed this
development and repeated its belief that the OFT regulatory initiative would not
have a material adverse effect on any existing mortgage loans, "although no
assurances to that effect can be given at this time." This cautionary language,
as well as that in the Form 10-K, may have reflected some uncertainty respecting
the opinion of UK counsel that existing loans were beyond the purview of the
OFT. The Form 10-Q noted that elimination of the Rule of 78 could have a
material adverse effect in future periods on the Debtors operations and
financial condition. The Form 10-Q also referred to the possible future
modification of the standard/concessionary rate structure as a result of OFT
regulatory initiatives, which could similarly have a material adverse effect on
the Debtor.
On July 18, 1997 the OFT issued "Non-Status Lending Guidelines for Lenders
and Brokers." These Guidelines made clear that the "unfair and oppressive" dual
rate structure should be discontinued, since in the OFT's view the imposition of
a "standard" rate, as opposed to a "concessionary" rate, constituted an
unjustified penalty for late payments. The Guidlines also concluded "that the
use of the Rule of 78 is inappropriate in the non-status lending market and
amounts to a penalty on early redemption that is not justified by the costs
involved. Lenders should discontinue its use at the earliest possible
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opportunity, and should not apply it rigidly to existing loan agreements without
some form of cap to ensure that payments on early redemption are not excessive."
The Debtor was caught by surprise by this challenge of the OFT to
continued use of The Rule of 78 in existing agreements. Robert Grosser, the
Debtor's CEO at that time, who had visited the OFT on June 20,1997, told the
Examiner that he received no indication at that time that this retroactive
position would be taken. Prior to this meeting, CMC's UK counsel had received a
letter from the OFT dated June 17, 1997 referring to the willingness of certain
lenders not to "take up their full entitlement to apply the rule of 78." The
letter then stated: "We should be interested to know if your client sees any
scope for adopting such a practice retrospectively, so that even where there is
a contractual entitlement for them to be reimbursed on the basis of the rule of
78, they do not exercise this." Following the June 20 meeting, an OFT
representative wrote a letter on June 23, 1997 (the next business day), stating
that he "found our meeting to be useful and constructive, and will reflect
further on the points which you and your colleagues raised."
On July 23, 1997 the Debtor filed a Form 8-K discussing the OFT Guidelines
and their potential impact on the Debtors business. The Debtor noted that the
dual rate system would be eliminated on future loans and that in the future the
Debtor would calculate prepayments using methods other than the Rule of 78. The
Debtor commented that these developments "could have a material adverse effect
in future periods." The Form 8-K also stated that use of
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the Rule of 78 respecting existing loan agreements might be restricted by the
OFT, which, in turn, could have a material adverse effect on the Debtor.
As noted, on August 4, 1997 the Debtor announced that it was taking a $15
million reserve relating to its UK operations. The Debtor consulted with and was
advised by KPMG respecting this reserve. It was based on a review of the UK loan
portfolio and the assumption that the Debtor would no longer apply the Rule of
78 to existing unregulated loans (i.e., loans in excess of (pound)15,000) which
were prepaid after the seventh or eighth year of their existence.
Representatives of the Debtor advised the Examiner that, at that time,
they were reasonably confident that they could work out a settlement of this
nature with the OFT as to the Rule of 78 and existing loans. Tending to
substantiate this confidence is a letter dated July 25, 1997 from the OFT to
CMC's UK counsel, referring to CMC's recent offer "to cease applying the Rule of
78 to all existing loans from the tenth year of the loan." The letter expressed
reservations about the proposal because "[o]ur knowledge of the operation of the
Rule of 78 is That its most onerous impact occurs about one third of the way
through the loan, which means around the eighth year of a 25 year loan." The
Debtor's presumption that a settlement with the OFT could be reached on the
basis assumed in calculating the $15 million reserve (i.e., non-enforcement of
the Rule of 78 after the seventh or eighth year) does not appear to be
unreasonable.
Since the Debtor believed that the UK operation would still be
sufficiently profitable, notwithstanding the foregoing regulatory developments,
no write-down
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of goodwill was taken in the second quarter of 1997. KPMG was consulted
respecting this determination.
In its Form 10-Q for the quarter ended June 30, 1997, filed on August 14,
1997, the Debtor referred to the $15 million reserve and cautioned that "there
can be no assurance that such additional reserve will be sufficient to offset
any negative impact that changes resulting from the new Non-Status Guidelines
may have on the carrying value of the Company's recorded mortgage servicing
receivables."
On August 13, 1997, the day before the Form 10-Q was filed and shortly
after the Form 8-K was filed, Mr. Grosser purchased (on margin) 100,000 shares
of the Debtor's stock in the open market for approximately $1,000,000. At the
time this purchase was made Mr. Grosser already directly owned nearly 3.9
million shares of the Debtor's stock. Mr. Grosser advised the Examiner that, in
making this purchase, he was motivated by the view that the stock had been hurt
by bad press, that an agreement ultimately would be reached with the OFT that
would remove the cloud of uncertainty and that part of the $15 million reserve,
which he thought was conservative, could be reversed.
It is difficult to identify a cause of action that the Debtor has against
anyone respecting the $15 million reserve taken in the second quarter of 1997.
Starting in March, 1997 the Debtor was confronted by a significant change in the
UK regulatory climate. The Examiner has not found any material misstatements,
omissions or delays in the Debtor's public disclosure concerning developments in
the UK during the period from March, 1997 through August, 1997. All
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disclosures were reviewed by both UK and U.S. counsel. While further reserves
were later required as a result of increasingly aggressive positions asserted by
the OFT after August, 1997, the Examiner found no evidence that the Debtor had
deliberately or negligently understated the reserve taken for the quarter ended
June 30, 1997. Indeed, as late as October 1997, internal documents indicate that
management thought the $15 million reserve could prove excessive. Nor does the
Debtor appear to have inaccurately reported its then apparently reasonably held
belief respecting the UK regulatory situation. The Examiner notes that
securities class actions are pending against the Debtor and others in the United
States District Court for the Eastern District of New York, based on alleged
deficiencies in disclosure as to developments in the UK. While the Examiner is
not called on to evaluate such third party claims, nothing in the pleadings in
these class actions suggests a basis for a claim by the Debtor itself (in
contrast to its shareholders) that it sustained injury from such challenged
disclosure.
C. WRITE-DOWNS TAKEN FOR
QUARTER ENDED SEPTEMBER 30, 1997
In the Form 10-Q for the quarter ended September 30, 1997, which was filed
on November 14, 1997, the Debtor reported a $95.1 million loss adjustment, which
was described in its income statement as "Net unrealized loss on valuation of
residuals." This item and other factors produced a $115.1 million pre-tax loss
for the third quarter. The Form 10-Q described the reason for the $95.1 million
write-down as follows:
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As a result of the Company's initiatives to enhance liquidity, the
Company anticipates selling its interest-only and residual
certificates on its US home equity securitizations. In anticipation
of such sale, the Company has valued such residuals at the expected
net realizable value based on a liquidation sale and has recorded a
$95.1 million loss adjustment. Previously, the Company determined
the fair value of these assets based on a discounted cash flow
analysis.
On October 21, 1997, three weeks before the filing of the Form 10-Q, the
Debtor announced that it had retained Bear, Stearns to explore strategic
alternatives. The Debtor also said that Third quarter results would be
materially below analysts' estimates. While no public disclosure of the Bear,
Steams retention was made until October 21, 1997, the Bear, Stearns interviewee
stated that the firm had actually commenced performing services for the Debtor
at some undefined point between the time the OFT Guidelines were issued on July
18, 1997 and the time the $15 million reserve was taken on August 4, 1997, but
before Mr Grosser's $1 million stock purchase on August 13, 1997. Bear, Stearns'
assignment was to explore options, including a possible disposition of the
Debtor's UK operations in view of the change in the regulatory climate there.
The Debtor's decision to liquidate its interest-only and residual
certificates on its U.S. home equity securitizations was prompted by the
liquidity crisis in which it found itself during October and November, 1997. As
a result of a calamitous decline in the price of the Debtor's common stock, from
a high of 10-1/16 on October 10, 1997 to a low of 1-1/2 on October 28, 1997, the
Debtor was no longer able to access the capital markets. While explanations vary
as to the
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cause of this collapse in the Debtor's stock, people interviewed by the Examiner
referred to the following factors:
1. Ratings downgrades of the Debtor's debt instruments by Moody's
on October 10, 1997 and by Standard and Poor's on October 22,
1997.
2. Unfavorable press comments on the Debtor.
3. A large and longstanding short position in the Debtor's stock.
4. Margin calls that resulted in forced sales of the Debtor's
stock, which accelerated when the price of the stock dropped
below $5 a share, at which point the stock was no longer
eligible for margin.
5. Developments relating to the Debtor's 6% Convertible Preferred
Stock, Series A ("Series A Preferred"), which the Debtor
issued in April, 1997, and its 6% Convertible Preferred Stock,
Series B ("Series B Preferred"), which the Debtor issued in
September, 1997. Both of these series were convertible into
common stock at the market price of the stock at the time a
conversion was sought, with no floor of any kind applicable to
the conversion. Hence, as the price of the common declined,
more shares were required to satisfy the potential exercise of
the preferred's conversion privilege -- a phenomenon that led
several of those interviewed to describe the instrument as a
"death spiral preferred." On September 26 and October 14,
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1997 the Debtor filed registration statements with the S.E.C.
respecting the shares of common stock into which the Series A
and Series B Preferred were potentially convertible; these
registration statements covered a total of 16.5 million shares
of common stock. As of June 30, 1997, The Debtor had 31.7
million common shares outstanding. The market may have begun
to perceive a mass dilution from the potential conversion of
the preferred into common, contributing to the disintegration
of the stock price.
In any event, with the precipitous decline in the common stock price,
funding sources previously available to the Debtor dried up. The Debtor was
forced to address its liquidity needs by such steps as whole loan sales, which,
while immediately cash positive, resulted in lower margins and a negative impact
on future earnings. Moreover, under generally accepted accounting principles the
Debtor's intention to sell these assets required it to reduce the recorded
amount of the residuals in question to their expected net realizable value based
on a liquidation sale. Guided by portfolio sales by other companies at or about
this time period, the Debtor determined to take a 35% write-down on the value of
its U.S. residuals, which produced the $95.1 million number referred to above.
In addition, the Form 10-Q filed on November 14, 1997 showed a $16.0
million provision for loan losses as a 1997 third quarter expense. This
provision resulted from portfolio performance in the U.S. and the UK, the latter
unrelated to the OFT situation.
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While the third-quarter write-downs were obviously large, the Examiner's
investigation establishes that they were, in material part, directly
attributable to the sudden and extreme deterioration in the Debtor's common
stock price and the consequent impact on its ability to access capital sources.
From mid-August until mid-October of 1997 the stock price was relatively stable,
in the $10-11 range. Confronted subsequently by the need to change its method of
doing business and to sell whole loans to solve its liquidity problems, the
Debtor had no choice but to mark down its portfolio, which led to the quarter's
horrendous results.
D. WRITE-DOWNS TAKEN FOR
QUARTER ENDED DECEMBER 31, 1997
The Debtor's problems intensified after the third quarter of 1997. As a
result of escalating pressure from the OFT, which was threatening injunctive
action against CMC, the Debtor agreed that it would not use the Rule of 78 to
calculate prepayments on existing unregulated loans. It also agreed that for
such loans the standard rate of interest would be no more than 2.5% higher than
the concessionary rate. These revisions respecting its existing UK loan
portfolio led the Debtor, for the fourth quarter of 1997, to take a write-down
of $106.2 million in the value of its UK mortgage servicing receivables and to
write off unamortized goodwill of $52.7 million recorded in connection with its
UK acquisitions. The Debtor also wrote off an unamortized commitment fee of
$32.4 million related to its UK operations.
The Debtor sold its UK business on May 1,1998 pursuant to an agreement
dated March 31, 1998. The Debtor received net proceeds of
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approximately $102 million, less costs of approximately $16 million related to
the disposal of its discontinued UK operations.
As a consequence of continued deterioration in its U.S. operations, the
Debtor took further write-downs in the fourth quarter, resulting in a total 1997
recognition of a net unrealized loss of $148 million on the valuation of its
domestic residuals.
RESULTS OF INVESTIGATIONS OF
RESTATEMENTS AND WRITE-DOWNS
As to Scope paragraph (b), the Examiner has determined that, with the
exception of the ongoing S.E.C. investigation referred to above, there were no
investigations regarding the restatements of the Debtor's financial statements
and write-downs of assets performed by the Debtor or anyone else.
ALLEGED SHORT SALES OF
DEBTOR'S COMMON STOCK
As to Scope paragraph (d), alleged short sales of the Debtor's common
stock, the Examiner has adduced no evidence that the Debtor's current or former
officers or directors engaged in any short sales of any kind during 1997 and
1998 (or at any other time). All witnesses denied categorically any such short
selling activities. Their denials are corroborated by the Form 4 disclosures
filed with the S.E.C., which were provided to the Examiner. Additionally, as
discussed below, officers and directors of the Debtor owned substantial
quantities of the Debtor's common stock which they have retained to this day and
are now worthless, or which were the subject of forced sales through margin
calls.
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Examinations of personnel employed by the Debtor's financial advisors
(CIBC and Bear, Stearns) were inconclusive. Those interviewed had no knowledge
of any short selling activity; their involvements were with the investment
advisory and/or underwriting functions of their respective firms. CIBC advised
that it acquired $15 million of the Debtor's Series B Preferred in September,
1997, which it continued to hold as the value declined to zero. Bear, Steams
advised that it acquired the Debtor's Series A Preferred in April, 1997; the
disposition, if any, of such shares was not known to the person interviewed.
Those interviewed could not say definitively whether the proprietary trading
desks of their firms held short positions in the Debtor's common stock. They
said their institutions maintain a "Chinese wall" of confidentiality between
their underwriting and proprietary trading functions. Time limitations precluded
the Examiner from pursuing these matters further.
One of the parties in the case suggested that the Examiner conduct Rule
2004 examinations of major securities broker/dealers in New York to try and
determine which institutions held short positions in the Debtor's common stock
and whether those short positions were illegal. Of course, There is nothing
illegal about short selling per se. Only when, for example, the seller has not
actually borrowed the shares to be sold short does the transaction violate
S.E.C. rules and regulations. Moreover, the Examiner considers a wholesale
fishing expedition into the short sales positions of a large number of
broker/dealers which did not serve in any professional or fiduciary capacity to
the Debtor beyond the scope of the Examiner Order. It would take many months and
consume
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Estate resources not contemplated in the Examiner Order budget to review short
sale trades by broker/dealers. And, even assuming that illegality could be
established, the successful assertion by the Debtor of a private right of action
against third party broker/dealers for illegal short selling under the
Securities Exchange Act of 1934 (the "Act") would raise difficult factual issues
of causation and injury, as well as novel legal issues.(2) In any event, on
November 2, 1998 this Court ruled that the scope of the Examiner's investigation
does not include an inquiry into the short sales trading positions of people or
entities that had not served as underwriters, placement agents or financial
advisors to the Debtor. This Court ruled further that the Examiner should limit
his investigation of this issue solely to two interviews with a single
individual each at CIBC and Bear Stearns. Hence, this Report does not contain
any further analysis or discussion of alleged short sales of the Debtor's common
stock
ISSUES RELATING TO INSURANCE
COVERAGE AND AVAILABILITY TO
DEBTOR OF INSURANCE PROCEEDS
This section of the Report addresses insurance matters referred to in
Scope paragraphs (e) and (f).
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(2) See, e.g., Advanced Magnetics, Inc. v. Bayfront Partners, Inc., No. 92 Civ.
6879 (CSH), 1996 WL 14440, at *8-9 (S.D.N.Y. Jan. 16. 1990) ("Advanced Magnetics
1") (holding that corporation could assert a claim under ss. 10(b) of the Act
and related rules based on alleged illicit short sales that reduced share prices
in a public offering), acq., 106 F.3d 11 (2d Cir. 1997); Advanced Magnetics 1,
1996 WL 14440, at *5-8 (holding that no private right of action exists under ss.
10(a) of the Act relating to short sales of securities); Advanced Magnetics 1,
106 F.3d at 22 (observing, after district court had dismissed the ss.10(a)
claim, that corporation's assertion of that claim was a "novel proposition");
Advanced Magnetics, inc. v. Bayfront Partners, Inc., No. 92 Civ. 6879(CSH), 1997
WL. 299430. at *6 (S.D.N.Y. June 4,1997) (reaffirming the holding of Advanced
Magnetics 1 that "no private right of action exists under ss. 10(a) and the
rules issued pursuant thereto," after court considered additional arguments from
the parties on ss. 10(a)'s language and legislative history).
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The Debtor indicated that it has Directors and Officers and Company
Reimbursement insurance policies on a "claims made" basis for the policy period
January 1,1998 to January 1, 2001 which afford $35 million in coverage; $25
million in coverage was maintained for the policy period November 2,1996 to
January 1, 1998. The Debtor's counsel has stated that the insurers were notified
of the securities class actions commenced in or about October, 1997, as well as
the action commenced by Elliott in the United States District Court for the
Southern District of New York in September, 1998. Insurance proceeds are not
being used to fund payments under the Debtor's Plan.
The policies contain the so-called "insured versus insured" exclusion
pursuant to which there is no coverage for claims "by, or on behalf of or at the
direction of any of the Assureds..." (There is coverage for an independently
brought shareholder derivative action.) The term "Assureds" is defined to
include "the Company," i.e., Cityscape Financial Corp. and any subsidiary.
Assuming the Debtor, or a litigation trust established under a plan of
reorganization, were to bring an action against present or former officers and
directors of the Company, it is unclear whether the aforesaid exclusion would
bar coverage. Compare Reliance Inc. Co. of Illinois v. Weis, 148 B.R. 575, 578
(Bankr. E.D. Mo. 1992), aff'd, 5 F.3d 532 (6th Cir. 1993), cert. denied, 510
U.S. 1117 (1994) with In re Pintlar, 205 B.R. 945 (Bankr. D. Idaho 1997); see
also In re The Leslie Fey Companies Inc., 207 B.R. 764, 784-85 (Bankr. S.D.N.Y.
1997). Third party claims against the Company's directors and officers, such as
those
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already pending referred to above, would not be precluded under the "insured
versus insured" exclusion.
In any event, nothing that has come to the Examiner's attention leads him
to recommend that claims be asserted against any of the Debtor's present or
former directors or officers. While the collapse of the Debtor was massive and
sudden, causing huge losses to its creditors and equity holders, the Examiner
has not uncovered evidence of bad faith, lack of integrity, self-dealing,
falsification or manipulation of corporate records or other impropriety.
Clearly, the Debtor's management believed in its favorable prospects throughout
the 1996 - 1997 period, notwithstanding the difficulties being experienced. For
example, from 1996 on Mr Grosser never sold a share of the Debtor's stock (with
the exception of a 200,000 share forced sale pursuant to a margin call on
October 22, 1997, at an average share price of $2.93). As a result, his holding
of nearly 3.9 million shares, which in January, 1997 was worth over $115 million
(on the basis of a $30 a share market price), was ridden down to zero. Robert
Parent, the Debtor's Executive Vice President, also experienced losses of
comparable magnitude, having maintained his full position of over 3.8 million
shares as of January, 1997.(3)
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(3) As shown by S.E.C. filings, pursuant to the terms of credit facilities which
David A. Steene and Gerald Epstein entered into with Merrill Lynch International
Bank United on March 20, 1997, Merrill Lynch sold 250,000 shares owned by each
of them on August 19, 1997 and applied the proceeds to outstanding loans. Mr.
Steene was a director of Cityscape Financial Corp. and CMC and Mr. Epstein a
director of CMC; they were both very active in the Debtors UK operation. The
average sales price was approximately $9.50. Following such sales, Mr. Steene
continued to own 950,000 shares and Mr. Epstein 952,200 shares. Virtually all of
such shares were sold by Merrill Lynch from October 14 through October 24, 1997
at prices ranging from $2.50 to $9.00 a share.
Another director of Cityscape Financial Corp., Asher Fensterheim, Mr.
Grosser's father-in-law, entered into credit facilities with several financial
institutions between December, 1996 and April, 1997. The lenders sold more than
3.4 million pledged shares between October 21 and October
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To be sure, this evaporation of personal wealth does not insulate the
Debtor's executives from liability to the Debtor. Yet the demise of the Debtor
appears to have resulted from a precipitous combination of cyclonic forces, such
as the unexpected aggressiveness of UK regulators and the crushing 85% decline
in the price of the Debtor's stock over a two-week period in October, 1997. An
effort to establish director and officer liability to the Debtor under these
circumstances -- especially absent evidence of fraud or other misconduct -- is
not, in the Examiner's view, a sensible undertaking.(4)
In this connection, note that the Certificate of Incorporation of the
Debtor Cityscape Financial Corp. contains a provision precluding, to the fullest
extent permitted by the Delaware General Corporation Law, the personal liability
of a director to the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director. Section 102(b)(7) of the Delaware law
expressly authorizes a provision of this nature in a certificate of
incorporation, except that liability may not be eliminated or limited for (a)
breach of the director's duty of loyalty to the corporation or its stockholders,
(b) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (c) unlawful payment of dividends or unlawful
stock purchases or redemptions or (d)
- - ----------
31, 1997 and applied the proceeds to outstanding loans. The sales occurred at
prices ranging from $1.44 to $5.94 a share.
Steven Weiss, an officer and director of Cityscape Corp., entered into credit
facilities with two financial institutions between January, 1997 and April,
1997. The lenders sold 200,000 pledged shares between October 21 and October 27,
1997 and applied the proceeds to outstanding loans. The sales occurred at prices
ranging from $2.56 to $3.97 a share.
(4) The Debtor paid annual bonuses to certain of its executives on the basis of
a percentage of a defined portion of pre-tax profits, "as determined by the
Company's outside auditors in accordance with GAAP." No audited year-end figures
have been restated and, accordingly, no claim can be made that bonuses were
inflated by erroneous results that were corrected later.
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any transaction from which a director derived an improper personal benefit.
Hence, mismanagement by a director of the Debtor Cityscape Financial Corp.
(assuming that it occurred) would not, by itself, be actionable in a suit by
that Debtor against its present or former directors. See, e.g., Zirn v. VLI
Corp., 681 A.2d 1050, 1061-62 (Del. 1996) (ss. 102(b)(7) and a corresponding
provision in the certificate of incorporation protect directors from monetary
liability for breach of duty of care); Frank v. Arnelle, 1998 WL 668649, *10
(Del. Ch.) (same).
Debtor Cityscape Corp., a wholly owned subsidiary of Debtor Cityscape
Financial Corp., is a New York corporation; its directors do not have protection
comparable to that afforded by ss. 102(b)(7) of the Delaware General
Corporation Law. Thus, an action by that Debtor against its directors (who
include inside directors of the parent) could be based on a breach of the duty
of care owed by a director under Section 717 of the New York Business
Corporation Law. However, for the reasons noted above, the Examiner does not
recommend actions by either Debtor against its directors or officers.
THE NON-DEBTOR RELEASES
IN THE PROPOSED PLAN
This section of the Report addresses issues arising under Scope paragraph
(c) concerning releases under the Plan and contributions by releasees to the
Plan.
The proposed Plan contains two kinds of releases. The first is a release
of all claims of the Debtor and the Estate against the Debtor's current or
former officers and directors, accountants, financial advisors and legal counsel
(the "Derivative Release"). Plan at Section XI(C)(i). The second type of release
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covers claims held by third parties, such as individual preferred shareholders
like Elliott, against those same current and former officers and directors,
accountants, financial advisors and legal counsel (the "Third Party Release").
Plan at Section XI(C). The classes of senior and subordinated debt have
overwhelmingly approved the Derivative Release and the Third Party Release,
while the preferred shareholder classes under the Plan have failed to approve
either such release. The Derivative and Third Party Releases are discussed
separately because the Derivative Release is within the Court's express power to
grant under section 524(e) of the Bankruptcy Code; The Third Party release
involves consideration of the Court's inherent powers under section 105(a) of
the Code.
A. THE DERIVATIVE RELEASE
It is well settled law that a debtor may release claims of the estate
against third parties pursuant to a confirmed plan of reorganization. The
leading case in this Circuit is In re Texaco, Inc., 84 B.R. 893 (Bankr. S.D.N.Y.
1988). The plan there proposed to release all derivative claims against Texaco's
officers and directors brought by certain Texaco shareholders after the entry of
the Pennzoil judgment against Texaco arising out of the Getty Oil purchase
transaction. The Court held that the release of the derivative actions was a
proper exercise of the debtor's discretion in the context of a full and complete
settlement of the Pennzoil judgment against Texaco.
The Texaco court analyzed whether the estate was relinquishing a valuable
property right in granting the releases. In doing so, it first evaluated the
merits of the underlying claims against the directors and officers. 84 B.R. at
903.
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Following the guidance of Texaco, we turn first to the merits of the underlying
claims covered by the Derivative Release.
As noted already, the Examiner has found no evidence of fraud or bad faith
in connection with the two restatements of the Debtor's financial statements
during 1996. The earnings and goodwill write-downs and asset write-ups
represented issues as to which reasonably prudent accountants could (and do)
differ. The Debtor followed the advice of its outside auditors, KPMG, in issuing
the first and second restatements and informed the SEC prior to issuing the
first restatement. The common stock price reacted favorably to the announcement
that unamortized goodwill from the J&J and Heritable acquisitions would be
reduced. These events all occurred long before the issuance of The Series B
Preferred in September, 1997 and were or should have been well known to the
preferred holders.
Similarly, the Examiner has found no evidence of fraud or bad faith in
connection with the write-down of the Debtor's UK mortgage receivables in the
second quarter of 1997. The Debtor disclosed promptly in its financial reports
all material developments respecting its dealings with the OFT, an independent
body whose proposed rules the Debtor could not reasonably be expected to have
predicted. The initial OFT letter was received on March 13, 1997 and was
promptly reported in the Debtors 1996 Form 10K, filed on March 31, 1997.
Officers of The Debtor stated in their interviews that they had no expectation
the OFT would seek to affect the existing portfolio of mortgages until they
received the OFT Guidelines on July 18, 1997. Their statements are buttressed by
the
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fact that smaller, regulated home loans in the UK were permitted to be governed
by the Rule of 78 and a dual rate structure. The Debtor promptly reported on the
OFT Guidelines in a Form 8K filed on July 23, 1997.
The Debtor's explanation as to why it wrote down second quarter UK
mortgage assets by $15 million, instead of some larger number, is credible and
consistent with its then state of negotiations with the OFT. Its legal advisors
in the UK told it that the OFT did not have jurisdiction over pre-existing
unregulated mortgage loans. The Debtor's officers and directors were justified
in relying on this advice. Indeed, on August 13, 1997, during the unfolding OFT
developments, Mr Grosser purchased an additional 100,000 shares of the Debtor's
common stock for $1 million.
Since the Debtor's basis for asserting fraud, bad faith or other
actionable conduct against its officers and directors and professionals is
tenuous, given the findings of the Examiner's investigation, such a claim can
reasonably be released under the proposed Plan. The derivative causes of action
that the Examiner investigated are of little value to the Estate and satisfy the
Texaco criteria.
Another factor cited in the applicable case law is whether the officers
and directors are entitled to indemnification for liabilities incurred while
acting on behalf of the Debtor. Texaco, 84 B.R. at 904-05; In re Leslie Fay
Companies, Inc., 207 B.R. 764, 783 (Bankr. S.D.N.Y. 1997). The Texaco court
stated that any derivative recoveries against officers and directors would be
offset by their indemnification claims over against the debtor. 84 B.R. at
904-05. However, this statement does not appear to be correct Under Section
145(b) of the Delaware
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General Corporation Law, applicable to both Texaco and the Debtor Cityscape
Financial Corp., a Delaware corporation has no obligation and no authority to
indemnify a director or officer against a judgment rendered or a settlement made
in an action or suit by or in the right of a corporation. Indemnification is
permissible for defense expenses. The by-laws of Cityscape Financial Corp.
(Article Eighth) are consistent with the Delaware law.(5)
The Leslie Fay court noted that the "insured versus insured" exclusion to
Leslie Fay's D&O policies did not cover derivative actions not initiated or
instigated by the debtor. Such a third party derivative action was pending at
the date of confirmation; the court excluded it from the release to preserve the
possibility of a D&O insurance recovery on behalf of the estate. 207 BR. at 783.
The Leslie Fay court did, however, approve a release that covered claims by the
debtor against its officers or directors. Id.(6)
While the Debtor's D&O policies provide coverage for an independently
brought shareholder derivative action, no such action is pending in this case.
The "insured versus insured" exclusion bars coverage only for claims by or on
behalf of, or at the direction of, the "Assureds," i.e, Cityscape Financial
Corp. and Cityscape Corp. Moreover, as discussed above, even if mismanagement by
- - ----------
(5) for Debtor Cityscape Corp., a New York corporation, the situation is
different Under New York Business Corporation Law ss. 722(c) a corporation may
under certain circumstances indemnify a director or officer for a settlement of
an action brought by or in the right of the corporation. The by-laws of
Cityscape Corp. (Article 8.2) purport to make such indemnification mandatory if
a court approves it as fair and reasonable in a particular case.
(6) The Leslie Fay court also noted that it is appropriate as a policy mailer to
grant officers and directors releases covering their post-bankruptcy activities
in order to encourage their continued presence at the company during the
reorganization process and their participation in that process.
207 B.R. at 782.
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directors of Cityscape Financial Corp. could be proven, that, standing alone,
would not appear to be actionable under Delaware law.
Therefore, the Derivative Release provided in the Plan falls squarely
within the kind of release approved in Leslie Fey. There is no third party
derivative action extant and the Debtor cannot be said to have a valid direct
cause of action or insurance claim against its own directors and officers that
could be realized by suing in its own name.
A final, and most significant, factor respecting the Derivative Release is
the overwhelming acceptance of the Debtor's prepackaged Plan by the two creditor
classes. These classes claim that the Debtor is hopelessly insolvent and that
under no circumstances can an enterprise value for the Debtor be conceived that
is sufficient to place the non-consenting preferred stockholders in the money.
These senior parties, which would be entitled to receive any derivative or
direct action recoveries in any event, have voted to approve the Derivative
Release. Should this Court find at confirmation that the Debtor is, indeed,
hopelessly insolvent, with the preferred stock classes far out of the money,
then this Court can overrule any objection by those classes to the Derivative
Release. It has long been established law that objectors to a plan of
reorganization may not raise the putative objections of third parties. In re
Drexel Burnham Lambert Group, 138 B.R. 717, 721 (Bankr. S.D.N.Y. 1992) (holding
that a party whose equity interest is worthless lacks standing to object to the
confirmation of a plan, because it has no stake in the controversy); In re
Orlando Investors, L.P., 103 B.R. 593, 597 (Bankr. E.D. Pa. 1989) (holding that
it does not follow "that the
B-33
<PAGE> 191
statutory right to be heard on an issue includes the right to assert interests
possessed solely by others" and finding that parties lacked standing to object
to a plan because their property rights were not impaired under the plan,
whereas, in contrast, parties whose rights were impaired did not object to the
plan confirmation). See also Kane v. Johns Manville Corporation, 843 F.2d 636,
641 (2d Cir. 1988) ("A party who seeks to appeal an order confirming a plan must
be 'directly and adversely affected pecuniarily' by it").
B. THE THIRD PARTY RELEASE
It is beyond the scope of the Examiner's authority in this case to
investigate the bone fides of the third party securities class action claims or
the Elliott claims against the Debtor and others. The Examiner assumes for
purposes of this discussion that there may be some validity to these claims.
The Third Party Release is more problematic than the Derivative Release.
Section 524(e) of the Bankruptcy Code expressly prohibits a court from using its
all writs powers under section 105(a) to release or discharge third parties from
claims against them by a debtor's creditors. In a number of circuits, this
prohibition is held to be absolute. See, e.g., ln re Lowenschuss, 67 F.3d 1394,
1401-02 (9th Cir. 1995)("This court has repeatedly held, without exception,
that section 524(e) precludes bankruptcy courts from discharging the liabilities
of non-debtors."); First Fidelity Bank v. McAteer, 985 F.2d 114, 118-19 (3d Cir.
1989) (the Bankruptcy Code alters the debtor's contractual obligations, but not
the contractual obligations and liabilities of third parties).
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<PAGE> 192
The Second Circuit, however, has taken a somewhat more flexible approach
to the discharge of third party claims. See, e.g., In re Drexel Burnham Lambert
Group, Inc., 960 F.2d 285, 293 (2d Cir. 1992) (finding that settlement with past
officers and directors was a crucial part of the plan of liquidation, sufficient
to warrant imposition of an injunction preventing creditors from suing past
officers and directors); ln re Johns-Manville Corporation, 837 F.2d 89, 93-94
(2d Cir. 1988) (court has power to protect non-debtors where a settlement is
necessary to permit a channeling of all settlement funds into a single pot to
permit equitable distribution to all creditors). The Johns-Manville rationale
for a "channeling" injunction is not present here, since the Examiner's
investigation has developed no evidence that the Debtor's officers, directors,
financial advisors or accountants are making a monetary or pecuniary
contribution to creditors under the proposed Plan. Additionally, the Drexel
Burnham reasoning would not seem to apply here either. The Third Party Release
can easily be carved out from the Derivative Release and the other Plan
provisions without changing the economics of the transactions contemplated in
the Plan. Most importantly, the officers and directors are not remaining in
their present roles with the reorganized Debtor. A new management team and board
of directors will be brought in to run the Debtor if the proposed Plan is
confirmed.
Courts outside the Second Circuit have identified five criteria or factors
that are helpful here in evaluating the appropriateness and necessity of a Third
Party Release. ln re Monarch Capital Corp., 65 F.3d 973, 979-80 (1st Cir. 1995);
B-35
<PAGE> 193
In re Master Mortgage Investment Fund, Inc., 168 B.R. 930, 935 (Bankr. W.D. Mo.
1994). Those factors are discussed below.
1. A Third Party Release may be proper where there is an identify
of interest between the debtor and the third party, such as an
indemnity relationship, so that suit against the non-debtor
is, in essence, a suit against the debtor or will deplete
assets of the estate.
This factor might at first appear to weigh in favor of
granting the Third Party Release to the Debtor's officers and
directors who have indemnification rights (at least as to
defense costs) under Delaware law. However, to the best of the
Examiner's knowledge, The officers and directors have not paid
anything of value to the third party claimants or otherwise
incurred any present pecuniary liability for which their
indemnity could be invoked against the Debtor, except perhaps
for payment of legal defense fees. Under these circumstances,
should the Court determine to confirm the proposed Plan,
section 502(e)(1 )(B) of the Bankruptcy Code will cause a
disallowance of any claim for contribution or indemnity that
the officers and directors might file to the extent that they
have not themselves already incurred loss. In re Wedtech
Corp., 85 B.R. 285, 290 (Bankr. S.D.N.Y. 1988) (disallowing
pursuant to section 502(e)(1 )(B) of the Code contingent
claims for indemnity that
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<PAGE> 194
were filed by a debtor's former officers and directors). See
also In re Drexel Burnham Lambert Group, Inc., 148 B.R. 982,
987 (Bankr. S.D.N.Y. 1992) (disallowing under Code section
502(e)(1 )(B) an underwriter's claim against an issuer-debtor
because the claim was a "contingent claim for reimbursement on
which the debtor and the Claimants are co-liable").
2. The non-debtor has contributed substantial assets to the
reorganization.
This factor militates against granting the Third Party
Release. The officers and directors and other proposed
releasees are contributing nothing of pecuniary value to the
reorganization pot. Thus, one of the principal reasons for
overriding the prohibitions of section 524(e) of the Code does
not exist here.(7)
3. The injunction is essential to reorganization. Without it,
there is little likelihood of success.
As noted, the Third Party Release can easily be carved out of
the Plan without impacting on the Plan's economics. The senior
and subordinated creditors will still receive the controlling
common stock and new warrants in the reorganized Debtor,
whether or not there is a release. The old officers and
directors will not continue in their present positions with
the
- - ----------
(7) Following the Leslie Fay reasoning, this Court could nonetheless grant
complete releases to the officers and directors for their post-petition
activities on public policy grounds, although such releases may be of little
moment, given the short duration of these cases under the aegis of the court.
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reorganized Debtor. Accordingly, any ensuing litigation will
not cause substantial disruption to the reorganized Debtor's
ongoing business.
4. A substantial majority of the creditors agree to such
injunction; specifically, the impacted class (or classes) has
"overwhelmingly voted to accept the proposed plan treatment."
While the creditor classes have voted overwhelmingly to accept
the Plan, the holders of the Series B Preferred have rejected
the Plan. The largest holder in this preferred class, Elliott,
will lose Rule 10b-5 and common law claims against the
officers and directors if The Third Party Release is approved.
Additionally, the common shareholders will lose their Rule
10b-5 claims that are the subject of the several class actions
pending in the Eastern District of New York. Thus, this factor
cannot be said to militate in favor of granting the Third
Party Release.
5. The plan provides a mechanism for the payment of all or
substantially all of the claims of the class or classes
affected by the injunction.
This factor weighs decidedly against granting the Third Party
Release. First, under The Plan the preferred stockholder
classes will not receive even a fraction of their initial
investment. They are to receive warrants whose strike price
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<PAGE> 196
will be set at a level (approximately $400 million in
enterprise value) which requires that the creditor classes be
paid in full before such warrants have any value. Second, as
concluded earlier in this Report, the Estate's claims against
the officers and directors are of doubtful worth. Were those
claims stronger, one could conclude that any recoveries
thereon, which would be paid into the general pot of creditor
recoveries under the Plan, should take precedence over the
third party claims. This would be especially so because of the
D&O insurance, the proceeds of which (if available
notwithstanding the "insured versus insured" exclusion) should
properly go to the Estate to be distributed to creditors in
their strict order of priority. Here, however, because the
Estate's claims are not strong, and because of "insured versus
insured" coverage issues, the third party claims, if valid,
will likely have the only call on the D&O policy proceeds. To
cut off the third party claims by means of the Third Party
Release would deprive these classes of preferred shareholders
(as well as common shareholders on whose behalf the pending
class actions have been brought) of virtually the only avenue
available to them to recover meaningful value in these cases.
For all the foregoing reasons, the Examiner recommends that this Court
deny confirmation of any plan that contains the Third Party Release as presently
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<PAGE> 197
drafted. It may be that upon further negotiation the parties can arrive at a
third party release that is satisfactory to all the impaired constituencies. For
example, the parties might agree on a release that is limited to a claim in
excess of any D&O insurance coverage that is applicable under the policies.
However, such resolution should be left to the parties themselves to negotiate.
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<PAGE> 198
Dated: New York, New York
November 9, 1998
Respectfully submitted,
/s/ Harrison J. Goldin
-------------------------------------
Harrison J. Goldin
Goldin Associates, L.L.C.
767 Fifth Avenue
New York, New York 10153
(212) 593-2255
WINTHROP, STIMSON, PUTNAM
& ROBERTS
By: /s/ Richard L. Epling
----------------------------------
Richard L. Epling (RE-9302)
Stephen A. Weiner (SW-7829)
One Battery Park Plaza
New York, New York 10004
(212) 858-1000
Counsel to the Examiner
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<PAGE> 199
ACCOUNTING FOR PURCHASE TRANSACTIONS
Relevant Accounting Literature with respect to Purchase Transactions
The accounting principles applied to this dispute by Cityscape Corp.
("Cityscape" or the "Company.") and KPMG Pear Marwick LLP) ("KPMG") arc as
follows:
o Accounting Principles Board ("APB") No. 16, "Business Combinations"
o Emerging Issues Task Force ("EITF") Issue No. 87-11, "Allocation of
Purchase Price to Assets to Be Sold"
o EITF Issue No. 86.24, "Third Party Establishment of Collateralized
Mortgage Obligations" ("CMO")
o Auditing and Accounting Guide ("AAG") -- "Bank, and Savings Institutions",
Chapter 8, "Mortgage Banking Activities and Loan Sales"
o Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standard ("SFAS") No. 122, "Accounting for Mortgage Servicing
Rights"
o EITF Issue No. 84-21, "Sale of a Loan with a Partial Participation
Retained"
o SFAS No. 65, "Accounting for Certain Mortgage Banking Activities"
o EITF Issue No. 88-11, "Allocation of Recorded Investment When a Loan or
Part of a Loan is Sold"
o Mortgage - Backed Securities Products, Analyses, Trading by William W.
Bartlett (NYIF Corp., Simon & Schuster, Inc., and Prentice Hall. New
Jersey, 1989).
o Financial Reporting Standard ("FRS") 7 [United Kingdom {"UK"}] --"Fair
Values in Acquisition Accounting"
Cast for Recognition of Gains
Cityscape believes that its financial statements, as restated, comport with
GAAP. As set forth below, the accounting originally applied equally comported
with GAAP; and Cityscape believes that either accounting treatment has support
as to its reasonableness. Eased on his review of the relevant accounting
literature and the documents provided to him and his staff Daniel V. Dooley,:
partner of PricewaterhouseCoopers LLP ("PwC"), concurs with this conclusion.
B-42
EXHIBIT A
<PAGE> 200
The relevant accounting literature supporting the recognition of gains are as
follows:
APB No. 16, "Business Considerations", paragraph 88 allows for post acquisition
recognition of a reasonable profit" on sale of businesses stock in trade, in
this instance, mortgage loan products. The gain is calculated by valuing the
interest only ("I/O") product created and retained, both to compute the
reciprocal basis in the creation of the mortgage pass through security ("MPTS")
sold and to comport with EITF 86-24, 84-21, SFAS No. 122 and EITF 88-11.
Specifically, in respect of inventory; which is the nature of the whole mortgage
loans acquired in the Heritable and J&J business combinations to be sold as
mortgage products by Cityscape, APB 16, paragraph 88(c) provides the applicable
guidance. Cityscape's whole mortgage loans are "raw materials", as defined by
APB 16, paragraph 88 (c)(3), to be used by the Company in the production of
mortgage products, and as such should be valued at, "...current replacement
costs." Such costs would be par, which is the value of similar new loans
originated or purchased in the UK market. Even if such loans were deemed to be
"work in process", according to APB 16, paragraph 88 (c) (2), their value would
be:" ...estimated selling price of the finished goods less the sum of (a) costs
to complete, (b) costs of disposal, and (c) a reasonable profit allowance for
the completing and selling effort of the acquiring corporation based on profits
for similar finished goods." In the mortgage banking business, given the nature
of the transactions, interest rate and market differentials, the creation of
value in the residual tranche, and the value of creating and securitizing the
mortgage products, the "reasonable profit allowance" as defined by APB No. 16
would be the gain achieved by Cityscape.
EITF Issue No. 86-24, "Third-Party Establishment of Collateralized Mortgage
Obligations" is applicable to the Cityscape transaction. It addresses this
issue: "A financial institution sells mortgage loans to an unrelated third party
that then uses the mortgages as collateral to issue...CMOs...Other than the
responsibility to replace any mortgages that are deemed to have any eligibility
defects, the financial institution is not at risk with respect to the
mortgages...As part of the transaction, the financial institution acquires the
right to receive a defined portion of
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<PAGE> 201
the total payments received from the mortgages in excess of the amount required
to service the CMOs (hereafter referred to as the residual interest). The issue
is whether the transaction represents a sale of mortgages from the viewpoint of
the financial institution, and if it does represent a sale whether the present
value of the expected residual cash flows...can be included in the computation
of gain or loss on the sale." EITF 86-24 further provides: "...the sale of
mortgages to an unrelated third party under [this] condition. ..should be
accounted for as a sale by the financial institution. Any gain or loss from the
sale, including the present value of the residual interest if it can be reliably
estimated, should be recognized in the period in which the transaction occurs."
AAG -- Banks and Savings Institutions at Chapter 8 first addresses at 3.12 what
"market value" should be used for the whole mortgage loans at acquisition date.
At such time the whole loans were held for investment but planned to be sold in
part. In this context, AAG 8.12 states: "...Uncommitted loans should be valued
based on the market in which the institution normally operates." Even if treated
as committed to sale (as whole loans), AAG 8.12 requires: "Committed loans
should be valued based on actual commitment price." Either way, the accounting
evidence of J&J, Heritable and Cityscape is that the mortgage loans, acquired as
whole loans, were priced and valued in the appropriate market at only par (net
book value), hence fair value.
AAG 8.18 specifically prescribes when a transaction can be recorded to account
for a sale of loans or mortgage products, as follows: "...gains however, should
not be recognized before the closing of the sale, that is, when title has passed
and, ... there are no significant unresolved contingencies." In the case of
Cityscape, this occurred after the acquisitions were completed at the time of
the sale of the loan, into the Greenwich facility,
SFAS No. 122, "Accounting for Mortgage Servicing Rights", specifically describes
the "economic events" that can create gains from sales of mortgage loans at
paragraph 31, as follows: "...A mortgage banking enterprise can create
additional value by purchasing or originating mortgage loans in one market and
packaging them for sale in another market, comparable to buying at wholesale and
selling retail. For example, a mortgage banking
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<PAGE> 202
enterprise may originate mortgage loans with contractual interest of 10 percent,
pool those mortgage loan, and sell the pool at par to yield 9 percent. An
investor would be willing to receive 9 percent on its investment because... it
has acquired a passive investment in a pool of mortgage loans." This is just a
simple example of how increased value, post acquisition, can be created by a
mortgage banking business. In the subject Cityscape transactions, the gains
were created by: (1) pooling of the loans; (2) creation of the MPTS; (3) credit
enhancement of the MPTS by subordination of the I/O cash flow strip; and the (4)
creation of a residual interest in the form of a mortgage servicing receivable.
In the rating agency's judgment, Cityscape's servicing capability uniquely
enabled it to produce the transactions that created the gain.
EITF Issue No. 84-21, "Sale of a Loan with a Partial Participation Retained"
provides guidance for the concept of gain recognition when new mortgage products
are created as follows: "An enterprise sells a loan to pay a yield below the
face rate of the loan, thereby retaining a share in the interest income over the
period that the loan remains outstanding. The enterprise also retains the
servicing rights as well as the excess interest. The issue is whether the
present value of the estimated future interest income stream should be
recognized immediately in calculating gain or loss on the sale...Several Task
Force members stated that immediate gain recognition is the redomninant practice
[and]...gain recognition is required by existing literature (SFAS No. 65 and the
Audit and Accounting Guide for Savings and Loans)..."
EITF Issue No. 88-11, "Allocation of Recorded investment When a Loan is Part of
a Loan is Sold" then specifically addresses how to allocate cost basis between
the MPTS (principal and interest) and the I/O products, stating: "...an
enterprise that sells, the right to receive...a portion of either or both [of
the interest payments and principal payments]...should allocate the recorded
investment in that loan between the portion of the loan sold and the portion
retained based on the relative fair values of those portions on the date the
loan was acquired." Mr. Dooley's interpretation of the facts of the case support
Cityscape's actions. The Company accounted for cost basis in this matter and
conformed with the separate guidance provided in EITF 86-24, since the residual
interest (I/O) value is the gain, when the MPTS is sold for essentially the same
amount as the original purchase price of the whole loans.
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<PAGE> 203
The text "Mortgage-Backed Securities" by William Bartlet recognizes the creation
of new value in relationship to the present value of the cash flow streams
generated by the new securities in Chapter 6: "The price of any mortgage backed
security ("MBS") is the present value of the future stream of cash flows
generated by the security" and lists some of these mortgage products created out
of the original whole loans as principal only ("P/O") and I/O strips, CMOs and
Residuals. Bartlet defines the earnings process for the mortgage banker trading
in such mortgage products in Chapter 2 at p. 78: "The sale of mortgage loans
[and mortgage products] produces a net gain or loss equal to the sum of (1) the
difference between the principal amount of the loans and the net price at which
the loans are sold (the cash gain or loss on sale) and (2) the present value of
the difference between the gross mortgage interest rate collected by the
mortgage banker from the borrowers and the pass-through interest rate collected
by the mortgage banker from the borrower and the pass-through interest rate
remitted to the purchaser of the loans, net of a normal servicing spread."
Cityscape also conformed to UK GAAP. FRS 7 requires: "Changes in the assets and
liabilities resulting from the acquirer's intention or from events after the
acquisition should be dealt with as post-acquisition items."
Case for Restatement
Citing EITF Issue No. 87-11, "Allocation of Purchase Price to Assets to Be Sold"
or an inability to support the estimates of the future I/O cash flow stream,
KMPG compelled Cityscape to restate its acquisition accounting and previously
issued 10-Q. The effect of this restatement was to reverse the gain on sale and
allocate this excess of proceeds over carrying value of the sold MPTS (or
conversely, the present value of the residual I/O) as a credit (reduction) to
recorded goodwill.
The accounting issue at the heart of the restatement is embodied in a general
principle stated in APB No. 16, "Business Combinations", paragraph 87, ...An
acquiring corporation should allocate the cost of acquired company to assets
acquired...normally equal to their fair values at date of acquisition...
Independent appraisal may be used as an aid in determining the fair values
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<PAGE> 204
of some assets and liabilities. Subsequent sales of assets may also provide
evidence of value." More specifically, KPMG cites EITF 87-11, consensus point
no. 5; "...Issue. An enterprise (Company A) acquires another enterprise...in a
business combination accounted for as a purchase...Company A's intent is to
keep the majority of Company B's operations and sell within one year Subsidiary
S, an operating unit that represents the remainder of Company B. Company A will
use the proceeds from the sale to reduce the debt incurred to finance the
acquisition of Company B...[Should] the difference between the selling price and
carrying amount of Subsidiary S retroactively adjust the purchase price
allocation of Company B or be reflected as income at the date of sale?..." The
answer in EITF 87-11 relied on by KPMG is: "...The difference between the
carrying amount of Subsidiary S at the date of sale and the proceeds from the
sale usually should result in a reallocation of the purchase price of Company B
based on those sales proceeds..."
EITF 87-11 is inapplicable to Cityscape's accounting issue. EITF 87-11
specifically limits its guidance to: "...net assets held for sale that
constitute a line of business or a portion of a line of business as defined by
APB Opinion 30 "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business"...Those net assets may be in the form of a
subsidiary, a division, or a department provided that its assets, results of
operations, and activities can be clearly distinguished, both physically and
operationally, and also for financial reporting purposes from the other assets,
results of operations, and activities of the purchased entity..." The loans used
by Cityscape to create and subsequently sell the MPTS and create the residual
interest in the form of a mortgage servicing receivable clearly are not a
subsidiary, division, department or any form of identifiable operation. EITF
87.11 does not apply.
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<PAGE> 205
The rule of 78s is an accelerated method of calculating interest. Under
this rule (which gets its name from the fact that the sum of the values from 1
through 12 is 78), you'll pay more interest during the early years of the loan
than you would with an equivalent simple-interest loan. Since more of each
payment is going toward interest, less is going toward principal. As a result,
the payoff during the early periods of a rule of 78s loan will be higher than it
would be if Interest were calculated in the traditional way.
To calculate the payoff for a rule of 78s loan, begin by calculating the total
interest you'll pay over the life of the loan. To do this, multiply the number
of payments by the term, then subtract the principal from the result. For
example if you borrowed $2500 and are paying $77.41 a month for 48 months,
you'll pay a total of (77.4lx48)-2500=$3715.88-2500=$$1215.88 in interest.
Next, calculate the sum of the digits in the life of the loan. For example, if
the term of the loan is 48 months, you'd add 1,2,3,4, and so forth, all the way
to 48. (Fortunately, there's an easy way to do this: Add 1 to the final value,
and multiply by 1/2 of the final value. For example, to sum the values from 1 to
48, you'd multiply 48+1=49 by 48/2=24. The result--49x24=1176--is the sum of the
digits).
Once you've calculated these two values, calculate the total amount of interest
you'll have paid by the time of the payoff. To do this, subtract 1 from the
payoff period and divide by 2. Then subtract that result from the term of the
loan. Multiply the result of the subtraction by the payoff period. Divide the
result of the multiplication by the sum of the digits. Then, multiply the result
of the division by the total interest. For example, to calculate the rule of 78s
payoff of our example loan after the 10th payment, you'd proceed as follows:
1. (10-1)/2=4.5
2. 48-4.5=43.5
3. 43.5x10=435
4. 435/1176-.369898
5. .369898x1215.88=$449.75
After you've calculated the total amount of the interest you'll have paid by the
time of payoff (In this case, $449.75), calculate the total amount of the
payments you'll have made up to that point. To do that, simply multiply the
payoff period by the periodic payment. In this case, the result if
10x$77.41=$774.10. Then subtract the result of the interest calculation. The
result of that subtraction---in this case, $774.10-$449.75=$324.39--is the
amount of principal you'll you'll have paid. Finally, subtract the result of
that subtraction from the amount borrowed. The result--in this case,
$2500-$324.39=$2175.61--is the payoff amount. The payoff on an identical
simple-interest loan would be $2135.57--over $40 less than the payoff for the
rule of 78s loan.
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EXHIBIT B
<PAGE> 207
- - ----------------------------------------------------------------
Loan Amount in British pounds (pound)15,000.00
@ exchange rate of 1.661 @ 2:30pm 11/4/98
- - ----------------------------------------------------------------
- - ----------------------------------------------------------------
Loan Amount in US dollars $24,915.00
Annual Rate 9.000%
Term in Years 20
- - ----------------------------------------------------------------
<TABLE>
<CAPTION>
Variance Variance as
- - ---------- Simple interest Rule of 78s simple interest vs. a percent of
$24,915.00 payoff Years payoff Rule of 78s Payoff O/S balance
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
24,448.41 1 25,035.60 587.18 2.40%
23,938.06 2 25,012.36 1,074.30 4.49%
23,379.53 3 24,845.31 1,465.48 6.27%
22,769.23 4 24,534.43 1,765.19 7.75%
22,101.36 5 24,079.72 1,978.36 8.95%
21,370.84 6 23,481.18 2,110.35 9.87%
20,571,78 7 22,738.82 2,167.04 10.53%
19,697.77 8 21,852.64 2,154.86 10.94%
18,741.78 9 20,822.63 2,080.85 11.10%
17,696.10 10 19,648.79 1,952,69 11.03%
16,552.33 11 18,331.13 1.778,79 10.75%
15,301.27 12 16,869.64 1,568.37 10.25%
13,932.85 13 15,264.32 1,331.47 9.56%
12,438.06 14 13,515.18 1.079,12 8.68%
10,798.87 15 11,622.22 823.35 7.62%
9,008.09 16 9,585.43 577.33 6.41%
7,049.33 17 7,404.81 355.48 5.04%
4,906.82 18 5,080.38 173,55 3.54%
2,563.33 19 2,612.10 48.77 1.90%
0.00 20 0.00 (0.00)
- - ----------------------------------------------------------------
Loan Amount in British pounds (pound)15,000.00
@ exchange rate of 1.661 @ 2:30pm 11/4/98
- - ----------------------------------------------------------------
- - ----------------------------------------------------------------
Loan Amount in US dollars $24,915.00
Annual Rate 18.000%
Term in Years 4
- - ----------------------------------------------------------------
<CAPTION>
Variance Variance as
Simple interest Rule of 78s simple interest vs. a percent of
$24,915.00 payoff Years payoff Rule of 78s Payoff O/S balance
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
20,244.25 1 20,562.50 318.25 1.57%
14,659.82 2 14,959.17 299.35 2.04%
7,982.96 3 8,105,00 122.04 1.53%
(0.00) 4 (0.00) (0.00)
</TABLE>
B-49
<PAGE> 208
- - ----------------------------------------------------------------
Loan Amount in British pounds (pound)15,000.00
@ exchange rate of 1.661 @ 2:30pm 11/4/98
- - ----------------------------------------------------------------
- - ----------------------------------------------------------------
Loan Amount in US dollars $24,915.00
Annual Rate 9.000%
Term in Years 30
Monthly Payment $200.47
- - ----------------------------------------------------------------
<TABLE>
<CAPTION>
Variance Variance as
- - ---------- Simple interest Rule of 78s simple interest vs. a percent of
$24,915.00 payoff Years payoff Rule of 78s Payoff O/S balance
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
24,744.78 1 25,602.94 858.16 3.47%
24,558.60 2 26,186.16 1,627.56 6.63%
24,354.94 3 26,664.65 2,309.71 9.48%
24,132.19 4 27,038.43 2,906.24 12.04%
23,888.54 5 27,307.49 3,418.95 14.31%
23,622.03 6 27,471.83 3,849.80 16.30%
23,330.52 7 27,531.45 4,200.93 18.01%
23,011.67 8 27,486.34 4,474.68 19.45%
22,662.90 9 27,336.52 4,673.62 20.62%
22,281.42 10 27,081.98 4,800.56 21.55%
21,864.15 11 26,722.72 4~858.57 22.22%
21,407.75 12 26,258.74 4,851.00 22.66%
20,908.52 13 25,690.04 4,781.52 22.87%
20,362.47 14 25,016.62 4,654.15 22.86%
19,765.19 15 24,238.48 4,473.29 22.63%
19,111.88 16 23,355.62 4,243.74 22.20%
18,397.29 17 22,368.04 3,970.75 21.58%
17,615.67 18 21,275.74 3,660.07 20.78%
16,760.72 19 20,078.72 3,318.00 19.80%
15,825.58 20 18,776.98 2,951.41 18.65%
14,802.71 21 17,370.52 2,567.82 17.35%
13,683.89 22 15,859.34 2,175.46 15.90%
12,460.11 23 14,243.45 1,783.33 14.31%
11,121.54 24 12,522.83 1,401.29 12.60%
9,657.40 25 10,697.49 1,040.09 10.77%
8,055.91 26 8,767.43 711.52 8.83%
6,304.20 27 6,732.65 428.46 6.80%
4,388.15 28 4,593.16 205.00 4.67%
2,292.38 29 2,348.94 56.56 2.47%
0.00 30 0.00 (0.00)
</TABLE>
B-50
<PAGE> 209
Exhibit C to Debtors' First Amended Joint Disclosure Statement
Pursuant to Section 1125 of the Bankruptcy Code
Unaudited Proforma Consolidated Balance Sheet
and Projected Financial Information
<PAGE> 210
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
The Unaudited Pro Forma Consolidated Balance Sheet presented below is based upon
the historical consolidated financial position of the Debtors as of November 30,
1998. The pro forma adjustments made to the historical consolidated balance
sheet (based on the assumptions set forth below) give effect to the
Reorganization as if that entire series of transactions, including the issuance
of the New Common Stock to the holders of the Old Senior Notes, the Old
Subordinated Debentures, and the Trade Creditors had occurred on November 30,
1998. In addition, since the Reorganization is to be effectuated through a plan
of reorganization under chapter II of the Bankruptcy Code, the provisions of the
American Institute of Certified Public Accountants Statement of Position ("SOP")
90-7. (Financial Reporting by Entities in Reorganization under the Bankruptcy
Code), which require the application of fresh start reporting, have been
reflected in the pro forma consolidated balance sheet as of November 30, 1998.
The pro forma consolidated balance sheet is unaudited and was derived by
adjusting the historical balance sheet of the Debtors for certain transactions
as described in the respective notes thereto. THIS PRO FORMA BALANCE SHEET IS
PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED TO BE
INDICATIVE OF THE FINANCIAL CONDITION OF THE DEBTORS HAD THE TRANSACTIONS
DESCRIBED THEREIN BEEN CONSUMMATED ON THE DATE INDICATED AND ARE NOT INTENDED TO
BE PREDICTIVE OF THE FINANCIAL CONDITION OF THE DEBTORS AT ANY FUTURE DATE.
The pro forma adjustments are based on available information and certain
assumptions that the Debtors believe are reasonable under the circumstances. The
Unaudited Pro Forma Consolidated Balance Sheet and accompanying notes should be
read in conjunction with the historical consolidated financial statements of the
Debtors, including the notes thereto, and the other information pertaining to
the Debtors appearing elsewhere in this Disclosure Statement. In addition, the
independent auditors of Cityscape and CSC have neither examined nor compiled the
Unaudited Pro Forma Consolidated Balance Sheet and accordingly assume no
responsibility for it. The Projections (defined below) were prepared based upon
the Debtors' unaudited financial information as of November 30, 1998; the 1998
year-end audit had not been completed as of the time the Projections were
prepared. Consequently. the actual audited operating results and financial
information for the Debtors may materially differ from the unaudited financial
information upon which the Projections are based because of, among other things,
adjustments. if any, resulting from completion of a 1998 year-end audit of the
Debtors.
C-1
<PAGE> 211
<TABLE>
<CAPTION>
Adjustments For After
Cityscape Adjs Historical Reorganization Reorganization
--------- ---- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Assets
Cash And Cash Equivalents 21,097,725 21,097,725 (5,000,000) 1 16,097,725
Cash Held In Escrow 20,912,690 20,912,690 20,912,690
Mortgage Servicing Receivables 7,617,021 (7,617,021) -- -- --
Trading Securities 76,217,559 (42,556,629) 33,660,930 33,660,930
Mortgages Held For Sale, Net 131,243,357 805,700 132,049,057 132,049,057
Mortgages Held For Investment, Net 4,805,700 (4,805,700) -- --
Equipment And Leasehold Improvements, Net 1,455,558 (1,417,558) 38,000 38,000
Investment In Discontinued Operations, Net 13,289,902 13,289,902 13,289,902
Income Tax Receivable 2,165,698 2,165,698 2,165,698
Reorganization Value
Other Assets 14,615,720 (3,420,619) 11,195,101 -- 11,195,101
------------ ----------- ------------ ------------ -----------
Total Assets 293,420,930 (59,011,827) 234,409,103 (5,000,000) 229,409,103
------------ ----------- ------------ ------------ -----------
Liabilities
Warehouse Financing Facilities 112,636,623 112,636,623 112,636,623
Accounts Payable And Other Liabilities 83,605,057 4,730,334 88,335,391 (46,411,517) 2 41,923,874
Allowance For Loan Losses 7,617,021 (7,617,021) -- --
Income Taxes Payable 284,218 284,218 284,218
Old Senior Notes 300,000,000 300,000,000 (300,000,000) 3
Old Subordinated Debentures 129,620,000 -- 129,620,000 (129,620,000) --
------------ ----------- ------------ ------------ -----------
Total Liabilities 633,762,919 (2,886,687) 630,876,232 (476,031,517) 154,844,715
Equity (Deficit)
Old Cityscape Common Stock 649,489 649,489 (649,489) 5 --
Old Cityscape Preferred Stock 52 52 (52) 5 --
Treasury Stock (175,000) (175,000) 175,000 5 --
New Common Stock -- 128,000 5 128,000
Additional Paid-In Capital 175,304,103 175,304,103 346,541 5 175,650,644
Retained Earnings (Accumulated Deficit) (516,120,633) (56,125,140) (572,245,773) 471,031,517 6 --
------------ ----------- ------------ ------------ -----------
Total Stockholders Equity (Deficit) (340,341,989) (56,125,140) (396,467,129) 471,031,517 74,564,388
------------ ----------- ------------ ------------ -----------
Total Liabilities and Equity (Deficit) 293,420,930 (59,011,827) 234,409,103 (5,000,000) 229,409,103
------------ ----------- ------------ ------------ -----------
<CAPTION>
Adjustments For
Fresh Start
Reporting Pro Forma
--------- ---------
<S> <C> <C>
Assets
Cash And Cash Equivalents 16,097,725
Cash Held In Escrow 20,912,690
Mortgage Servicing Receivables --
Trading Securities 33,660,930
Mortgages Held For Sale, Net 132,049,057
Mortgages Held For Investment, Net
Equipment And Leasehold Improvements, Net 38,000
Investment In Discontinued Operations, Net 13,289,902
Income Tax Receivable 2,165,698
Reorganization Value (11,359,790) (11,359,790)
Other Assets -- 11,195,101
------------ -----------
Total Assets (11,359,790) 218,049,313
------------ -----------
Liabilities
Warehouse Financing Facilities 112,636,623
Accounts Payable And Other Liabilities 41,923,874
Allowance For Loan Losses --
Income Taxes Payable -- 284,218
Old Senior Notes --
Old Subordinated Debentures -- --
------------ -----------
Total Liabilities -- 154,844,715
Equity (Deficit)
Old Cityscape Common Stock --
Old Cityscape Preferred Stock --
Treasury Stock --
New Common Stock 128,000
Additional Paid-In Capital (112,574,046) 7 63,076,598
Retained Earnings (Accumulated Deficit) (101,214,256) 7 101,214,256
------------ -----------
Total Stockholders Equity (Deficit) (11,359,790) 63,204,598
------------ -----------
Total Liabilities and Equity (Deficit) (11,359,790) 218,049,313
------------ -----------
</TABLE>
C-2
<PAGE> 212
(1) To record estimated fees and expenses consisting of estimated financing
costs, severance, and professional fees.
(2) To record the elimination of interest accrued on the Old Senior Notes and
Old Subordinated Debentures and the extinguishment of other liabilities
subject to compromise.
(3) To record the extinguishment of Old Senior Notes.
(4) To record the extinguishment of Old Subordinated Debentures.
(5) To reflect the issuance of New Common Stock and the cancellation of Old
Cityscape Common Stock. Old Cityscape Preferred Stock and treasury stock.
(6) To record the net gain on forgiveness of debt and additional
reorganization expenses, as detailed below:
<TABLE>
<CAPTION>
<S> <C>
Gain on Forgiveness of Debt:
Extinguishment of Old Senior Notes........................ $300,000
Extinguishment of Old Subordinated Debentures............. 129,620
Elimination of accrued interest and
liabilities subject to compromise...................... 46,411
--------
Net gain on forgiveness of debt........................... 476,031
Reorganization expenses................................... (5,000)
--------
Total change in retained earnings......................... $471,031
========
</TABLE>
(7) To eliminate historical deficit and reflect fresh start adjustments
(pursuant to SOP 90-7) related to the reorganization value of the
Reorganized Company.
The Debtors propose to account for the reorganization and the related
transactions using the principles of fresh start reporting as required by SOP
90-7. The Debtors have estimated a range of reorganization values between
approximately $80 million and $90 million. For purposes of determining
reorganization value, the Debtors have used $84 million. Reorganization value,
as defined in SOP 90-7, generally approximates the fair value of the entity
before considering liabilities and approximates the amount a willing buyer would
pay' for the assets immediately after the restructuring. Asset valuations were
assessed with respect to the following criteria: (i) the Debtors' historical
cost basis in the underlying assets; (ii) underlying liquidity and cash flow
characteristics of the assets; and (iii) the mark-to-market value of the assets
as determined under various sale and liquidation scenarios. These criteria
contain significant subjective components, which the Debtors did not
independently verify. The foregoing criteria then were applied to the Debtors'
financial forecast included elsewhere in this Disclosure Statement. See
"Projected Financial Information." The valuation takes into account the
following factors, not listed in order of importance:
(i) The Debtors' emergence from chapter 11 proceedings pursuant to the
Plan as described herein is assumed to occur on or about May 31,
1999.
(ii) That all transactions contemplated by the Plan will be consummated
by the Effective Date.
(iii) That general financial and market conditions as of the assumed
Effective Date of the Plan will not differ materially from those
prevailing as of the date of this Disclosure Statement.
The Debtors estimate that the Reorganized Company will have net assets with an
approximate carrying value of $68 million consisting of unencumbered assets of
approximately $84 million less liabilities (excluding funds held in escrow) of
approximately $16 million at the Effective Date.
The amount of stockholders' equity in the fresh start balance sheet is not an
estimate of the trading value of the New Common Stock after confirmation of the
Plan, which value is subject to many uncertainties and cannot be reasonably
estimated at this time. Neither the Debtors nor their financial advisors make
any representation as to the trading value of the shares to be issued under the
Plan.
C-3
<PAGE> 213
PROJECTED FINANCIAL INFORMATION
The following Projections (as defined below) were prepared by Cityscape and CSC.
based upon, among other things, the anticipated future financial condition and
results of operations of the Reorganized Company.
Cityscape and CSC do not generally publish their business plans and strategies
or make external projections of their anticipated financial position or results
of operations. Accordingly, after the Effective Date, the Reorganized Company
does not intend to update or otherwise revise the Projections to reflect
circumstances existing since their preparation in March 1999 or to reflect the
occurrence of unanticipated events, even in the event that any or all of the
underlying assumptions are shown to be in error. Furthermore, the Reorganized
Company' does not intend to update or revise the Projections to reflect changes
in general economic or industry conditions. However, Reorganized Cityscape's
regular quarterly and annual financial statements, and the accompanying
discussion and analysis, contained in Reorganized Cityscape's Quarterly Reports
on Form 10-Q and Annual Reports on Form 10-K, will contain disclosure concerning
Reorganized Cityscape's actual financial condition and results of operations
during the period covered by' the Projections.
The Projections were not prepared with a view toward general use, but rather for
the limited purpose of providing information in conjunction with the Plan.
Accordingly, the Projections were not intended to be presented in accordance
with the published guidelines of the American Institute of Certified Public
Accountants regarding financial projections, nor have they been presented in
lieu of pro forma historical financial information, and accordingly, are not
intended to comply with Rule 11-02 of Regulation S-X of the Commission. In
addition, the independent auditors of Cityscape and CSC have neither examined
nor compiled the Projections and accordingly assume no responsibility for them.
Projected unaudited consolidated statements of operations, balance sheets, and
statements of cash flows for the Debtors are included for the six-month period
prior to an assumed Effective Date of May 31, 1999. Projected unaudited
consolidated financial statements for the Reorganized Company are included for
the seven months ending December 31, 1999, and for each twelve month period
ending December 31, 2000, 2001, 2002, and 2003.
Additional information relating to the principal assumptions used in preparing
the Projections is set forth below. See "Certain Risk Factors" for a discussion
of various other factors that could materially affect Reorganized Cityscape's
and Reorganized CSC's financial condition, results of operations, businesses,
prospects and securities.
For the purpose of providing projected financial information, the Debtors have
defined its business as mortgage banking and related operating and investment
activities, including but not limited to the origination, ownership, sale, and
servicing of mortgage loans.
The Debtors estimate that the Reorganized Company will have net assets with an
approximate carrying value of $68 million, consisting primarily of mortgage
residual certificates, receivables related to such certificates and cash.
It is assumed that the Reorganized Company will invest such cash and operate its
business in such a manner that it will not be required to register as an
investment company under the Investment Company Act of 1940, and the rules and
regulations thereunder. While a plan as to the use of the Reorganized Company's
cash and other assets has not been formed, such assets will be available for
general corporate purposes as determined by the Board of Directors of the
Reorganized Company, including investments, acquisitions, joint ventures and
dividends and other distributions on equity securities, all as determined by the
Board of Directors to be in the best interests of the Reorganized Company.
The projected financial statements assume that the Reorganized Company's cash
will be invested at an assumed yield of 5% per annum. There are no present plans
for the Reorganized Company to pay' dividends on its New Common Stock. Any such
dividends will be determined by the Board of Directors of the Reorganized
Company' in light of the financial condition, cash flow, results of operations,
and legal dividend capacity of the Reorganized Company, and other factors. The
Projections assume no payment of dividends throughout the Projection Period.
Following the Effective Date, it is expected that the Reorganized Company will
invest its available cash and manage
C-4
<PAGE> 214
its business with a view to maximizing values to holders of its equity
securities. It is expected that the Reorganized Company should be able to
invest such available cash in a manner which will create higher returns than the
5% rate assumed in the Projections. However, there is no assurance that this
will be the case or that such investments, if made, will create returns
sufficient to allow the Reorganized Company to pay dividends at any time in the
future.
It is expected that the Reorganized Company will reenter the mortgage loan
origination business at some time in the future, based on prevailing industry
conditions and the general business climate. Because the Reorganized Company
will be relatively liquid, it is expected that management of the Reorganized
Company will examine various acquisition prospects in the subprime and high-LTV
organization and servicing markets. Because of a deterioration of the capital
markets supporting the subprime and high-LTV origination businesses, a number of
potential acquisition or merger candidates may be available. However, there can
be no assurance that the Reorganized Company will identify suitable acquisition
or merger candidates, or that if such candidates are identified, acceptable
business transactions will be structured and concluded.
Specifically, Aegis Mortgage Corporation ("Aegis") may be a potential
acquisition or merger candidate. Aegis is owned solely by D. Richard Thompson,
the prospective Chairman and CEO of the Reorganized Company. Aegis is involved
principally in the origination and servicing of single-family mortgage loans,
concentrating primarily on the conforming marketplace for FHA, VA, and
conventional mortgages. In the year concluding December 31, 1998, Aegis
originated approximately $875 million of single-family mortgage loans. At
December 31, 1998, Aegis serviced approximately $150 million in mortgage loans
from its Oklahoma City location. Aegis is headquartered in Houston, Texas, and
maintains wholesale and retail production offices in seven states. In 1998,
Aegis originated mortgage loans in a total of 28 states.
Aegis may be an attractive acquisition or merger candidate because of its
efficient loan production operation and management synergies. The Reorganized
Company could expand Aegis's loan production operations through application of
capital to support additional branch facilities and warehouse lines.
A number of obstacles could impede the acquisition or merger of Aegis with the
Reorganized Company. First, an acquisition or merger with Aegis represents a
conflict of interest for Thompson. and if such an acquisition or merger is
considered. Thompson would be required not to participate in any discussions or
from representing the Reorganized Company with respect to any resulting
transaction with Aegis. Accordingly, the Reorganized Company may be at a
disadvantage in discussing, structuring or concluding any such transaction.
Second, pricing and terms are integral to any acquisition or merger transaction,
and there can be no assurance that Aegis and the Reorganized Company can reach
agreement on mutually agreeable pricing and terms of any proposed acquisition or
merger transaction. Third, the disinterested management and directors of the
Reorganized Company may feel that companies with subprime and/or high-LTV
origination and servicing operations represent more attractive acquisition or
merger candidates than does Aegis.
Within this context the following points represent the major assumptions
underlying the attached financial data (the "Projections").
1. Effective Date and Plan Terms. The Projections assume that the Plan
will be confirmed in accordance with its terms, and that all
transactions contemplated by the Plan will be consummated by the
assumed Effective Date. Any significant delay in the assumed
Effective Date of the Plan may have a significant negative impact on
the operations and financial performance of the Reorganized Company
including, but not limited to, higher overhead and operating
expenses, and higher reorganization expenses.
2. General Operating Assumptions. The Reorganized Company is assumed
throughout the Projection Period to have no loan production. The
loan servicing portfolio is assumed to run-off at a rate of
approximately 35% CPR for home equity loans and 20% CPR for
Sav-A-Loans.
The Projections were prepared assuming that the current general
economic conditions prevailing today will not change materially
during the Projection Period.
C-5
<PAGE> 215
3. Revenue. The following revenue assumptions employed in the
Projections are based on the recent historical results of Cityscape
and CFC and current conditions in the mortgage lending industry.
Accretion Income. For the Projection period June 1, 1999 and beyond,
the Projections assume that the Home Equity and Say-A-Loan residuals
will accrete value as each residual comes closer to generating cash
flow.
Interest Income. Represents interest earned on loans and cash held
at the following rates (the Home Equity' Loans and the Sav-A-Loans
are for periods prior to and including May 31, 1999, the assumed
Effective Date:
<TABLE>
<CAPTION>
<S> <C>
Home Equity Loans 9.5%
Sav-A-Loans 13.5%
Cash on Hand 5%
</TABLE>
Servicing Income. Represents the revenue attributable to the
Reorganized Company's servicing operations on a cash basis and
unadjusted for SFAS No. 122.
4. Expenses--Salaries and Employee Benefits. The Projections assume
that the Reorganized Company will reduce its workforce to be in line
with current and projected levels of business activity. The
Projections assume that the Debtors will have approximately 40
employees by the Effective Date. In general, salaries and related
expenses have been reduced to be in line with the reduced level of
business activity.
5. Other Operating Expenses. Primarily includes expenses for rent,
travel and entertainment, telephone and utilities, ordinary course
professional fees, supplies, and general insurance. All expense
levels are estimated to correspond to the recently reduced levels of
business activity.
6. Income Taxes. Projected income taxes are based on an assumed
combined state and federal tax at 40%, applied to income from
operations plus cash-flow received from residual interests, adjusted
pursuant to specific tax guidelines governing REMIC and owner trust
structures. While taxes will accrue and be paid on a quarterly
basis, the Projections assume that the Reorganized Company will not
have the benefit of net operating loss carry forwards for income tax
purposes as all net operating losses will be used to offset gain on
forgiveness of debt.
7. Gain on Forgiveness of Debt. The gain results from the
extinguishment of debt in exchange for the issuance of the New
Common Stock. The gain is calculated based on a carrying value of
the Old Senior Notes and Old Subordinated Debentures on November 30,
1998 (including principal and accrued interest) and the carrying
value of other liabilities subject to compromise, principally
consisting of future lease obligations with respect to realty and
equipment leases.
8. Fresh Start Accounting. The Projections have been prepared using
basic principles of the "fresh start" accounting for the periods
after the Effective Date. These principles are contained in SOP
90-7. The fair values of the assets and liabilities of the
Reorganized Company (and thus the amount allocable to reorganization
expenses in excess of amounts allocated to identifiable tangible and
intangible assets, if any) are subject to revision following the
results of appraisals and other studies which will be performed
after consummation of the Reorganization and the related
transactions. The Projections assume that the reorganization value
in excess of amounts allocable to identifiable assets, if any, will
be amortized over ten years. The amount of stockholders' equity in
the Fresh Start balance sheet is not an estimate of the trading
value of the New Common Stock after the confirmation of the Plan,
which value is subject to many uncertainties and cannot be
reasonably estimated at this time. Neither the Debtors nor their
financial advisors make any representations as to the trading value
of the shares to be issued under the Plan.
C-6
<PAGE> 216
Financial Projections. Each of the following tables summarizes the
Debtor (projections for several distinct periods including:
a. The six months ending May 31, 1999;
b. The seven months ending December 31, 1999; and
c. Each of the twelve months ending December 31, 2000, 2001,
2002, and 2003.
The projections include Projected Consolidated Statements of
Operations, Projected Consolidated Balance Sheets (including
estimates of the effects of Fresh Start accounting) and Projected
Consolidated Statements of Cash Flows.
C-7
<PAGE> 217
CITYSCAPE CORPORATION AND CITYSCAPE FINANCIAL CORPORATION
PROJECTED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
The Company
---------------------------------------------------------------------
Historical
------------------------------- Projected Projected
Eleven Period From Seven Months
Year Ended Months Ended December 1, Ending
December 31, November 30, through December 31,
1997 1998 May 31, 1999 1999
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Revenues:
Gain (Loss) On Sale 83,366 1,453 -- --
Net Unrealized Loss On Valuation Of Residuals (148,004) (68,861) -- --
Mortgage Origination Income 4,849 2,202 -- --
Net Interest Income (Expense) 2,830 (34,346) 1,739 823
Accretion On Residual Balances 1,800 -- 5,065
Servicing Income 745 389 1,383 1,909
Other 20,302 636 -- --
------------ ------------- ------------ -------------
Total Revenues (36,657) (96,371) 2,128 7,271
Expenses:
Salaries And Employee Benefits 41,089 28,276 3,602 2,435
Selling Expenses 4,137 4,031 1,800 300
Other Operating Expenses 42,085 39,660 3,000 1,100
Provision For Loan Losses 12,614 8,728 -- --
Restructuring Charge / Non-Recurring Expense -- 44,422 5,000 --
------------ ------------- ------------ -------------
Total Expenses 99,925 125,117 13,402 3,835
------------ ------------- ------------ -------------
Earnings (Loss) From Continuing Operations Before
Income Taxes And Extraordinary Items (136,582) (221,487) (11,274) 3,436
Income Tax (Benefit) Provision (18,077) (1,845) -- 1,043
------------ ------------- ------------ -------------
Earnings (Loss) From Continuing Operations Before
Extraordinary Items (118,505) (219,642) (11,274) 2,393
Earnings (Loss) From Discontinued Operations (295,846) -- -- --
Gain On Forgiveness Of Debt -- -- 476,032 --
------------ ------------- ------------ -------------
Net Earnings (Loss) (414,351) (219,642) 464,757 2,393
Old Cityscape Preferred Stock Dividends 905 20,327 -- --
Old Cityscape Preferred - Beneficial Discount 2,725 -- -- --
Old Cityscape Preferred - Increase In Liquidation
Preference 918 -- -- --
Old Cityscape Preferred - Default Payments -- -- -- --
Net Earnings (Loss) Applicable To Common Stock (418,899) (239,969) 464,757 2,393
------------ ------------- ------------ -------------
Net Interest Income (Expense) Detail:
Interest Income 73,520 11,143 3,657 823
Interest Expense And Fees On Warehouse Credit
Facilities (70,690) (45,489) (1,917) --
------------ ------------- ------------ -------------
Net Interest Income (Expense) 2,830 (34,346) 1,739 823
------------ ------------- ------------ -------------
<CAPTION>
The Reorganized Company
---------------------------------------------------------------------
Projected Year Ending December 31,
---------------------------------------------------------------------
2000 2001 2002 2003
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Gain (Loss) On Sale -- -- -- --
Net Unrealized Loss On Valuation Of Residuals -- --
Mortgage Origination Income -- -- -- --
Net Interest Income (Expense) 1,719 1,378 1,299 1,434
Accretion On Residual Balances 9,269 10,901 12,881 13,999
Servicing Income 1,431 1,076 813
Other -- -- -- --
--------------- --------------- --------------- ---------------
Total Revenues 12,897 13,711 15,256 16,246
Expenses:
Salaries And Employee Benefits 2,424 2,424 2,424 2,424
Selling Expenses -- -- -- --
Other Operating Expenses 1,200 1,200 1,200 1,200
Provision For Loan Losses -- -- -- --
Restructuring charge / Non-Recurring Expense -- -- -- --
--------------- --------------- --------------- ---------------
Total Expenses 3,624 3,624 3,624 3,624
--------------- --------------- --------------- ---------------
Earnings (Loss) From Continuing Operations Before
Income Taxes And Extraordinary Items 9,273 10,087 11,632 12,622
Income Tax (Benefit) Provision 3,551 3,760 4,455 4,943
--------------- --------------- --------------- ---------------
Earnings (Loss) From Continuing Operations Before
Extraordinary Items 5,723 6,327 7,177 7,680
Earnings (Loss) From Discontinued Operations -- -- -- --
Gain On Forgiveness Of Debt -- -- -- --
--------------- --------------- --------------- ---------------
Net Earnings (Loss) 5,723 6,327 7,177 7,680
Old Cityscape Preferred Stock Dividends -- -- -- --
Old Cityscape Preferred - Beneficial Discount -- -- -- --
Old Cityscape Preferred - Increase In Liquidation
Preference -- -- -- --
Old Cityscape Preferred - Default Payments -- -- -- --
--------------- --------------- --------------- ---------------
Net Earnings (Loss) Applicable To Common Stock 5,723 6,327 7,177 7,680
--------------- --------------- --------------- ---------------
Net Interest Income (Expense) Detail:
Interest Income 1,719 1,378 1,299 1,434
Interest Expense And Fees On Warehouse Credit
Facilities -- -- -- --
--------------- --------------- --------------- ---------------
Net Interest Income (Expense) 1,719 1,378 1,299 1,434
--------------- --------------- --------------- ---------------
</TABLE>
C-8
<PAGE> 218
CITYSCAPE CORPORATION AND CITYSCAPE FINANCIAL CORPORATION
PROJECTED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
The Company
----------------------------------------------------
Historical
----------------------------------
Projected
Pre-Confirm
December 31, November 30, May 31, Reorganization
1997 1998 1999 Adjustments
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Assets
Cash And Cash Equivalents 2,594 21,098 20,137 --
Cash Held In Escrow 24,207 20,913 7,000 --
Mortgage Servicing Receivables 9,525 -- -- --
Trading Securities 126,475 33,661 33,061 --
Mortgages Held For Sale, Net 93,290 132,049 5,000 --
Mortgages Held For Investment, Net 6,531 -- -- --
Equipment And Leasehold Improvements, Net 6,058 38 38 --
Investment In Discontinued Operations, Net 84,232 13,290 6,990 --
Income Tax Receivable 18,376 2,166 2,166 --
Other Assets 27,268 11,195 17,195 17,195
--------------- --------------- --------------- ---------------
Total Assets 398,556 234,409 91,586 --
--------------- --------------- --------------- ---------------
Liabilities
Warehouse Financing Facilities 77,479 112,637 -- --
Accounts Payable And Other Liabilities 63,428 88,335 69,423 (46,412)
Allowance For Loan Losses 4,555 -- -- --
Income Taxes Payable 300 284 284 --
Old Senior Notes 300,000 300,000 300,000 (300,000)
Old Subordinated Debentures 129,620 129,620 129,620 (129,620)
--------------- --------------- --------------- ---------------
Total Liabilities 575,382 630,876 499,327 (476,032)
Equity (Deficit)
Old Cityscape Common Stock 476 649 649 (649)
Old Cityscape Preferred Stock -- 0 0 (0)
Treasury Stock (175) (175) (175) 175
New Common Stock -- -- -- 128
Additional Paid-In Capital 175,477 175,304 175,304 (107,142)
Retained Earnings (Accumulated Deficit) (352,604) (572,246) (583,520) 583,520
--------------- --------------- --------------- ---------------
Total Stockholders Equity (Deficit) (176,826) (396,467) (407,741) 476,032
--------------- --------------- --------------- ---------------
Total Liabilities and Equity (Deficit) 398,556 234,409 91,586 --
--------------- --------------- --------------- ---------------
<CAPTION>
The Reorganized Company
---------------------------------------------------------------------
Projected
Post-Confirm December 31,
May 31, ---------------------------------------------------
1999 1999 2000 2001
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Assets
Cash And Cash Equivalents 20,137 34,387 27,568 25,976
Cash Held In Escrow 7,000 7,000 7,000 7,000
Mortgage Servicing Receivables -- -- -- --
Trading Securities 33,061 37,075 43,605 51,524
Mortgages Held For Sale, Net 5,000 -- -- --
Mortgages Held For Investment, Net -- -- -- --
Equipment And Leasehold Improvements, Net 38 38 38 38
Investment In Discontinued Operations, Net 6,990 -- -- --
Income Tax Receivable 2,166 -- -- --
Other Assets 8,195 8,195 8,195 8,195
--------------- --------------- --------------- ---------------
Total Assets 91,586 86,695 86,406 92,733
--------------- --------------- --------------- ---------------
Liabilities
Warehouse Financing Facilities -- -- -- --
Accounts Payable And Other Liabilities 23,011 16,011 10,000 10,000
Allowance For Loan Losses -- -- -- --
Income Taxes Payable 284 -- -- --
Old Senior Notes -- -- -- --
Old Subordinated Debentures -- -- -- --
--------------- --------------- --------------- ---------------
Total Liabilities 23,295 16,011 10,000 10,000
Equity (Deficit)
Old Cityscape Common Stock -- -- -- --
Old Cityscape Preferred Stock -- -- -- --
Treasury Stock -- -- -- --
New Common Stock 128 128 128 128
Additional Paid-In Capital 68,162 68,162 68,162 68,162
Retained Earnings (Accumulated Deficit) -- 2,393 8,116 14,443
--------------- --------------- --------------- ---------------
Total Stockholders Equity (Deficit) 68,290 70,684 76,406 82,733
--------------- --------------- --------------- ---------------
Total Liabilities and Equity (Deficit) 91,586 86,695 86,406 92,733
--------------- --------------- --------------- ---------------
<CAPTION>
The Reorganized Company
---------------------------------
December 31,
---------------------------------
2002 2003
--------------- ---------------
<S> <C> <C>
Assets
Cash And Cash Equivalents 28,680 33,740
Cash Held In Escrow 7,000 7,000
Mortgage Servicing Receivables -- --
Trading Securities 55,998 58,617
Mortgages Held For Sale, Net -- --
Mortgages Held For Investment, Net -- --
Equipment And Leasehold Improvements, Net 38 38
Investment In Discontinued Operations, Net -- --
Income Tax Receivable -- --
Other Assets 8,195 8,195
--------------- ---------------
Total Assets 99,911 107,590
--------------- ---------------
Liabilities
Warehouse Financing Facilities -- --
Accounts Payable And Other Liabilities 10,000 10,000
Allowance For Loan Losses -- --
Income Taxes Payable -- --
Old Senior Notes -- --
Old Subordinated Debentures -- --
--------------- ---------------
Total Liabilities 10,000 10,000
Equity (Deficit)
Old Cityscape Common Stock -- --
Old Cityscape Preferred Stock --
Treasury Stock -- --
New Common Stock 128 128
Additional Paid-In Capital 68,162 68,162
Retained Earnings (Accumulated Deficit) 21,620 29,300
--------------- ---------------
Total Stockholders Equity (Deficit) 89,911 97,590
--------------- ---------------
Total Liabilities and Equity (Deficit) 99,911 107,590
--------------- ---------------
</TABLE>
C-9
<PAGE> 219
CITYSCAPE CORPORATION AND CITYSCAPE FINANCIAL CORPORATION
PROJECTED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
The Company
---------------------------------------------------------------
Historical
------------------------------- Projected Projected
Eleven Period From Seven Months
Year Ended Months Ended December 1, Ending
December 31, November 30, through December 31,
1997 1998 May 31, 1999 1999
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Cash Flow From Operating Activities
Earnings (Loss) From Continuing Operations (118,505) (219,642) (11,274) 2,393
Adjustments To Reconcile Net (Loss) Earnings From
Continuing Operations To Net Cash Used In
Continuing Operating Activities:
Depreciation And Amortization 2,846 3,168 --
Income Taxes Payable (27,528) (16) -- (284)
Gain On Forgiveness Of Debt (476,032)
Net Unrealized Gain On Securities
Decrease (Increase) in Mortgage Servicing Receivables 40,606 9,525 -- --
Decrease (Increase) in Trading Securities (23,276) 92,814 600 (4,015)
Provision For Losses 12,614 8,728 -- --
Net Purchases (Sales) Of Securities Under Agreements
To Resell 154,177
(Repayment Of) Proceeds From Securities Sold But
Not Yet Purchased (152,862)
Proceeds From Sale Of Mortgages 1,637,387 407,138 127,049 5,000
Mortgage Origination Funds Disbursed (1,655,191) (454,625)
Other, Net 5,062 55,930 465,031 4,166
------------- ------------- ------------- ------------
Net Cash Provided By (Used In) Continuing Operating Activities (124,670) (96,980) 105,375 7,260
Net Cash (Used In) Discontinued Operating Activities (177,260) -- -- --
Net Cash Provided By (Used In) Operating Activities (301,930) (96,980) 105,375 7,260
------------- ------------- ------------- ------------
Cash Flows From Investing Activities
(Purchases) Sales Of Equipment (5,134) 2,852 -- --
Sale From Discontinued Operations, Net 70,942 6,300 6,990
Proceeds From Equipment Sale And Leaseback Financing 1,776
Proceeds From Sale Of Available-For-Sale Securities 18,289
Proceeds From The Sale Of Mortgage Loans Held For
Investment 15,248 6,531 -- --
Net Cash Provided By (Used In) Investing Activities 30,179 80,325 6,300 6,990
Cash Flows From Financing Activities
Increase (Decrease) In Warehouse Credit Facilities (2,749) 35,158 (112,637) --
Proceeds From Notes And Loans Payable 49,000
Repayment Of Notes And Loans Payable (161,406)
Proceeds From Issuance Of Old Cityscape Preferred Stock 98,250
Net Proceeds From Issuance Of Old Cityscape Common
Stock 221
Purchase Of Treasury Stock (175)
Net Proceeds From Issuance Of Old Senior Notes 290,759 -- -- --
------------- ------------- ------------- ------------
Net Cash Provided By (used In) Financing Activities 273,900 35,158 (112,637) --
Net Increase (Decrease) In Cash And Cash Equivalents 2,149 18,503 (962) 14,250
Cash And Cash Equivalents At The Beginning Of Period 445 2,594 21,098 20,137
------------- ------------- ------------- ------------
Cash And Cash Equivalents At The End Of The Period 2,594 21,097 20,136 34,387
------------- ------------- ------------- ------------
<CAPTION>
The Reorganized Company
-------------------------------------------------------------
Projected Year Ending December 31,
-------------------------------------------------------------
2000 2001 2002 2003
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Cash Flow From Operating Activities
Earnings (Loss) From Continuing Operations 5,723 6,327 7,177 7,680
Adjustments To Reconcile Net (Loss) Earnings From
Continuing Operations To Net Cash Used In
Continuing Operating Activities:
Depreciation And Amortization
Income Taxes Payable
Gain On Forgiveness Of Debt
Net Unrealized Gain On Securities
Decrease (Increase) In Mortgage Servicing Receivables -- -- -- --
Decrease (Increase) In Trading Securities (6,530) (7,919) (4,474) (2,619)
Provision For Losses -- -- -- --
Net Purchases (Sales) Of Securities Under Agreements
To Resell
(Repayment Of) Proceeds From Securities Sold But
Not Yet Purchased
Proceeds From Sale Of Mortgages
Mortgage Origination Funds Disbursed
Other, Net (6,011) -- -- --
------------- ------------- ------------- ------------
Net Cash Provided By (Used In) Continuing Operating Activities (6,818) (1,592) 2,704 5,061
Net Cash (Used In) Discontinued Operating Activities -- -- -- --
------------- ------------- ------------- ------------
Net Cash Provided By (Used In) Operating Activities (6,818) (1,592) 2,704 5,061
------------- ------------- ------------- ------------
Cash Flows From Investing Activities
(Purchases) Sales Of Equipment
Sale From Discontinued Operations, Net
Proceeds From Equipment Sale And Leaseback Financing
Proceeds From Sale Of Available-For-Sale Securities
Proceeds From The Sale Of Mortgage Loans Held For
Investment -- -- -- --
------------- ------------- ------------- ------------
Net Cash Provided By (Used In) Investing Activities -- -- -- --
------------- ------------- ------------- ------------
Cash Flows From Financing Activities
Increase (Decrease) In Warehouse Credit Facilities
Proceeds From Notes And Loans Payable
Repayment Of Notes And Loans Payable
Proceeds From Issuance Of Old Cityscape Preferred Stock
Nat Proceeds From Issuance Of Old Cityscape Common
Stock
Purchase Of Treasury Stock
Net Proceeds From Issuance Of Old Senior Notes -- -- -- --
------------- ------------- ------------- ------------
Net Cash Provided By (used In) Financing Activities -- -- -- --
------------- ------------- ------------- ------------
Net Increase (Decrease) In Cash And Cash Equivalents (6,818) (1,592) 2,704 5,061
Cash And Cash Equivalents At The Beginning Of Period 34,387 27,568 25,976 28,680
------------- ------------- ------------- ------------
Cash And Cash Equivalents At The End Of The Period 27,568 25,976 28,680 33,740
------------- ------------- ------------- ------------
</TABLE>
C-10
<PAGE> 220
Exhibit D to Debtors' First Amended Joint Disclosure Statement
Pursuant to Section 1125 of the Bankruptcy Code
Liquidation Analysis
C-11
<PAGE> 221
Chapter 7 Liquidation Analysis
The "Best Interest Test" under Section 1129 of the Bankruptcy Code
requires that each holder of impaired claims or impaired interests receive
property with a value not less than the amount such holder would receive in a
Chapter 7 liquidation. As indicated above, Cityscape and CSC believe that under
the Plan, Holders of Impaired Claims or Impaired Interests will receive property
with a value equal to or in excess of the value such Holders would receive in a
liquidation of Cityscape and CSC under Chapter 7 of the Bankruptcy Code. The
Chapter 7 Liquidation Analysis set forth herein demonstrates that the Plan
satisfies the requirements of the "Best Interest Test."
To estimate potential returns to Holders of Claims and Interests in
a Chapter 7 liquidation, Cityscape and CSC determined, as might a Bankruptcy
Court conducting such an analysis, the amount of liquidation proceeds that might
be available for distribution and the allocation of such proceeds among the
Classes of Claims and Interests based on their relative priority. Cityscape and
CSC considered many factors and data, including actual sales and market data
from Cityscape's and CSC's most recent sales of whole loans and residual
interests, which are their two significant types of assets. Cityscape and CSC
have assumed that the liquidation of all assets would be conducted in an orderly
manner and, as such, the bids received for Cityscape's and CSC's significant
assets would be, at most, materially no different from the bids Cityscape and
CSC have received from sales and inquiries in recent months. The liquidation
proceeds available to Cityscape and CSC for distribution to Holders of Claims
against and Interests in Cityscape and CSC would consist of the net proceeds
from the disposition of the assets of Cityscape and CSC, augmented by any other
cash held and generated during the assumed holding period stated herein by
Cityscape and CSC and after deducting the incremental expenses of operating the
business pending disposition.
In general, as to each entity, liquidation proceeds would be
allocated in the following priority: (i) first, to the Claims of secured
creditors to the extent of the value of their collateral; (ii) second, to the
costs, fees and expenses of the liquidation, as well as other administrative
expenses of Cityscape's and CSC's Chapter 7 cases, including tax liabilities;
(iii) third, to the unpaid Administrative Claims of the Reorganization Cases;
(iv) fourth, to Priority Tax Claims and other Claims entitled to priority in
payment under the Bankruptcy Code; (v) fifth, to Unsecured Claims; (vi) sixth,
to Holders of Old Cityscape Preferred Stock; and (vii) seventh, to Holders of
Old Cityscape Common Stock. Cityscape's and CSC's liquidation costs in a Chapter
7 case would include the compensation of a bankruptcy trustee, as well as
compensation of counsel and other professionals retained by such trustee, asset
disposition expenses, applicable taxes, litigation costs, Claims arising from
the operation of Cityscape and CSC during the pendency of the Chapter 7 cases
and all unpaid Administrative Claims incurred by Cityscape and CSC during the
Reorganization Cases that are allowed in the Chapter 7 case. The liquidation
itself might trigger certain Priority Claims, such as Claims for severance pay,
and would likely accelerate or, in the case of taxes, make it likely that the
Internal Revenue Service would assert all of its claims as Priority Tax Claims
rather than asserting them in due course as is expected to occur under the
Reorganization Cases. These Priority Claims would be paid in full out of the net
liquidation proceeds, after payment of secured Claims, Chapter 7 costs of
D-1
<PAGE> 222
administration and other Administrative Claims, and before the balance would be
made available to pay Unsecured Claims or to make any distribution in respect of
Interests.
The following Chapter 7 liquidation analysis is provided solely to
discuss the effects of a hypothetical Chapter 7 liquidation of Cityscape and CSC
and is subject to the assumptions set forth herein. There can be no assurance
that such assumptions would be accepted by a Bankruptcy Court. The Chapter 7
liquidation analysis has not been independently audited or verified.
Liquidation Value of Cityscape and CSC
The table below details the computation of Cityscape's and CSC's
liquidation value and the estimated distributions to Holders of Impaired Claims
and Impaired Interests in a Chapter 7 liquidation of Cityscape and CSC. This
analysis is based upon a number of estimates and assumptions that are inherently
subject to significant uncertainties and contingencies, many of which would be
beyond the control of Cityscape and CSC. Accordingly, while the analyses that
follow are necessarily presented with numerical specificity, there can be no
assurance that the values assumed would be realized if Cityscape and CSC were in
fact liquidated, nor can there be any assurance that a Bankruptcy Court would
accept this analysis or concur with such assumptions in making its
determinations under Section 1129(a) of the Bankruptcy Code. Actual liquidation
proceeds could be materially lower or higher than the amounts set forth below;
no representation or warranty can or is being made with respect to the actual
proceeds that could be received in a Chapter 7 liquidation of Cityscape and CSC.
The liquidation valuations have been prepared solely for purposes of estimating
proceeds available in a Chapter 7 liquidation of the Estates and do not
represent values that may be appropriate for any other purpose. Nothing
contained in these valuations is intended or may constitute a concession or
admission of Cityscape and CSC for any other purpose.
Estimated Liquidation Proceeds
Cityscape and CSC assume that under an orderly Chapter 7 liquidation
scenario, zero value would be assigned to the mortgage servicing platform and
that the loan servicing operation would cease. As such, Cityscape and CSC assume
that the majority of the proceeds from liquidation will result from sales of
their interest-only and residual mortgage securities (the "Residuals") as of the
commencement of the liquidation. In determining the estimated proceeds from the
sale of these, as well as other insignificant assets, Cityscape and CSC
performed the following:
(i) Estimated the value of all assets and related liabilities as of
May 31, 1999, based on the most recent balance sheet information and by
forecasting the effect of maintaining their current operations and recent
performance through May 31, 1999; and
(ii) Estimated the recovery on each individual class of assets based
on current market data without taking into account the impact of Chapter 7
on the potential buyers' pricing strategies.
D-2
<PAGE> 223
Nature and Timing of the Liquidation Process
Under Section 704 of the Bankruptcy Code, a Chapter 7 trustee must,
among other duties, collect and convert the property of the debtor's estate to
cash and close the estate as expeditiously as is compatible with the best
interests of the parties in interest. Solely for the purposes of this
liquidation analysis, it is assumed that Cityscape's and CSC's Reorganization
Cases would be converted to a Chapter 7 liquidation on May 31, 1999. Cityscape
and CSC assumed dispositions of their assets in multiple transactions, rather
than as an entirety or a piecemeal liquidation of Cityscape's and CSC's
operating assets, during a five-month period ending October 31, 1999.
Additional Liabilities and Reserves
Cityscape and CSC believe that there would be certain actual and
contingent liabilities and expenses for which provision would be required in a
Chapter 7 liquidation before distributions could be made to creditors in
addition to the expenses that would be incurred in a Chapter 11 reorganization,
including: (a) certain liabilities that are not dischargeable pursuant to the
Bankruptcy Code; (b) Administrative Claims including the fees of a trustee and
of counsel and other professionals (including financial advisors and
accountants) and other liabilities; and (c) certain administrative costs
including the incremental expenses of marketing the assets and performing the
procedures necessary to divest the remaining Residuals. Management believes that
there is significant uncertainty as to the reliability of Cityscape's and CSC's
estimates of the amounts related to the foregoing that have been assumed in the
liquidation analysis.
Conclusion
In summary, Cityscape and CSC believe that a Chapter 7 liquidation
of Cityscape and CSC would result in a diminution in the value to be realized by
the Holders of Claims and Interests. As set forth in the table below,
Cityscape's and CSC's management estimates that the total liquidation proceeds
available for distribution, net of Chapter 7 expenses, would aggregate
approximately $40,297 million. Cityscape and CSC believe that the Claims against
and Interests in the Company other than Claims for Chapter 7 trustees' fees,
professionals' fees and related expenses, Claims based upon the Old Senior Notes
and Claims of general unsecured creditors would receive no value in a
liquidation of Cityscape and CSC under Chapter 7 of the Bankruptcy Code. The
Holders of the Old Senior Notes and general unsecured creditors are expected to
receive recoveries under the Plan in excess of that shown in a Chapter 7
liquidation. The recovery for Cityscape's and CSC's creditors and equity
security holders, in aggregate, would be less than the proposed distribution
under the Plan. Consequently, Cityscape and CSC believe that the Plan will
provide a substantially greater ultimate return to the Holders of Claims and
Interests than would a Chapter 7 liquidation.
The following table estimates Cityscape's and CSC's assets as of May
31, 1999, and the amount of recovery on each asset.
D-3
<PAGE> 224
LIQUIDATION ANALYSIS
ESTIMATED AS OF MAY 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Estimated Estimated
Book Percentage Liquidation
Balance Recovery Value
------- ---------- -----------
<S> <C> <C> <C> <C>
Assets available to creditors
Cash and Cash Equivalents(1) ................ $20,137 100.0% $20,137
Trading Securities .......................... 33,061 50.0% 16,531
Mortgages Held for Sale ..................... 5,000 80.0% 4.01
Equipment and Leasehold Improvements, Net ... 38 0.0% --
Investment in Discontinued Operations, Net .. 6,990 70.0% 4,893
Income Tax Receivable ....................... 2,166 100.0% 2,166
Other Assets (2) ............................ 17,195 0.0% --
------- ---- -------
Total Assets Available to Creditors ......... $84,587 56.4% $47,727
======= ==== =======
</TABLE>
- - ----------
Notes:
(1) Does not include cash held in escrow. Assumes that cash held in escrow is
netted against escrows payable.
(2) Primarily includes prepaid expenses, prepaid insurance and foreclosure and
interest advances in connection with mortgage loan securitizations.
D-4
<PAGE> 225
APPLICATION OF PROCEEDS TO CLAIMS AND INTERESTS
ESTIMATED AS OF MAY 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Estimated Proceeds
Amount Available to Percentage
of Claims Satisfy Claims Recovery
--------- -------------- --------
<S> <C> <C> <C>
Total estimated liquidation proceeds
available for distribution ........... $ 47,727
Chapter 7 expenses
Trustee's fees ..................... 1,400
Operating costs .................... 4,800
Professional fees................... 1,230
-------
Available to pay unsecured creditors .. $40,297
=======
Unsecured Creditors
Priority and Chapter 11 Administrative 10,000 10,000 100.00%
Claims (3)
Old Senior Notes (4) 332,513 29,789 8.96%
General Unsecured Claims(S) 8,000 508 6.35%
Old Subordinated Debentures (6) 136,659 -- 0.0%
Interests
Old Cityscape Preferred Stock -- -- 0.0%
Old Cityscape Common Stock -- -- 0.0%
Total Claims $ 487,172
=========
</TABLE>
Notes:
(3) The Debtors are not currently in a position to determine the amount of
chapter 11 Administrative Claims, Priority Tax Claims and other Priority
Claims for which they will be liable as of the assumed date of
liquidation. However, for the purpose of preparing this analysis, they
have assumed that the aggregate amount of such Claims will not exceed
$10,000,000.
(4) Includes $300,000,000 of principal on Old Senior Notes and $32,512,500 of
accrued interest.
(5) Includes other unsecured claims including, but not limited to, lease
rejection claims of approximately $5.8 million (assuming no leases are
sold), all of which claims are assumed, for purposes of this analysis
only, not to constitute "Senior Indebtedness" under the indenture goveming
the Old Subordinated Debentures.
(6) Includes $129,620,000 of principal on Old Subordinated Debentures and
$7,038,720 of accrued interest.
D-5
<PAGE> 226
File a Plan: 98-22569 Cityscape Financial Corp.
U.S. Bankruptcy Court
Southern District of New York
Notice of Electronic Filing
The following transaction was received from Truitt, A. Brent on 3/26/1999 at
11:01 AM
Case Name: Cityscape Financial Corp.
Case Number: 98-22569-ash
Document Number: 289
Docket Text:
First Amended Disclosure Statement (Joint) Pursuant to Section 1125 of the
Bankruptcy Code filed by A. Brent Truitt of Latham & Watkins on behalf of
Cityscape Financial Corp.. (Attachments: # (1) Exhibit A - First Amended Joint
Plan, # (2) Exhibit A-D to Exhibit A - First Amended Joint Plan, # (3) Exhibit B
- - - Examiners Report, # (4) Exhibit C - Balance Sheet and Projected Financial
Information, # (5) Exhibit D - Liquidation Analysis)(Truitt, A.)
The following document(s) are associated with this transaction:
Document description: Main Document
Original filename: N:/USER/SZWICK/DATA/PDF/ZWICK/CityScape/Amendedp&ds/discstat.
pdf
Electronic document Stamp:
[STAMP NYSBStamp_ID=842906028 [Date=3/26/1999][FileNumber=29025-0][4562441df2f48
a4672d8a3041c4f4016d4553934c59216f21e649e76902f08afc8cfff8lef6bb7193b164e7a7fc42
e7a4bf1ab239ca6aa65cf98c37996362d9e]]
Document description: Exhibit A - First Amended Joint Plan
Original filename: N:/USER/SZWICK/DATA/PDF/ZWICK/CityScape/Amendedp&ds/exhibit
A-Plan.pdf
Electronic document Stamp:
[STAMP NYSBStamp_ID=842906028[Date=3/26/999][FileNumber=29O2S-1][a5ccff67c384f37
9dac0e257813b1eabe9548c888c76ab008d0a62e971cfa6a5ac51960e847158a31b010edd454dce5
cf475b14a79592fd41ed6a109b2e85eea]]
Document description: Exhibit A-D to Exhibit A - First Amended Joint Plan
Original filename: N:/USER/SZWICK/DATA/PDF/ZWICK/CityScape/Amendedp&d5/planexha-
d.pdf
Electronic document Stamp:
[STAMP NYSB Stamp_ID=842906028[Date=3/26/1999][FileNumber=29025-2][037883fdcd4ba
d4f13d2ef6fa44c0f5813811912d5f4742f435300c418c6ef9425ddb55ead48ebd729ad2a4f49ea0
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Document description: Exhibit B - Examiners Report
Original filename:N:/USER/SZWICK/DATA/PDF/ZWICK/CityScape/AmendedP7ds/examrpt.
PDF
Electronic document Stamp:
[STAMP NYSBStamp_ID=842906028[Date=3/26/1999][FileNumber=29025-3][7c6a69676b487c
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078cb02f1f4e96de470093ad718783b0ce]]
Document description: Exhibit C - Balance Sheet and Projected Financial
Information
Original filename: N:/USER/SZWICK/DATA/PDF/ZWICK/CityScape/AmendedP&ds/Balance
Sheet.PDF
Electronic document Stamp:
[STAMP NYSBStamp_ID=842906028[Date=3/26/1 999][FileNumber29O25-4][b4d7e5a4d6892e
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Document description: Exhibit D Liquidation Analysis
Original filename: N:/USER/SZWICK/DATA/PDF/ZWICK/CityScape/Amendedp&ds/ExhibitD.
PDF
Electronic document Stamp:
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[STAMP NYSBStamp_ID=842906028[Date=3/26/1999][FileNumber=29O25-5][ae8c94cl06c0O3
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98-22569-ash Notice will be electronically mailed to:
Kevin W. Barrett [email protected];[email protected]
Saul Eliot Burian [email protected]
Alan Morris Feld [email protected];[email protected];[email protected]
Joy F. Forster
[email protected];[email protected];[email protected];
[email protected]
David M. Friedman [email protected]
Michael N. Gottfried [email protected]
Mark R. Somerstein [email protected]
Michael Scott Stainer [email protected];[email protected]
Richard L. Wynne
[email protected];[email protected];[email protected];[email protected];
[email protected]
98-22569-ash Notice will not be electronically mailed to:
Nancy L. Bertolino
919 Third Avenue
New York, NY 10022
[email protected]
Ronald L. Cohen
One Battery Park Plaza
New York, NY 10004
[email protected]
Carla E. Craig
Steiner, LLP
120 W. 45th Street
New York, NY 10036
[email protected]
Richard L. Epling
1 Battery Park Plaza
New York, NY 10004
[email protected]
Rachael Fink
885 Third Avenue
New York, NY 10022
[email protected]
Nathan M. Fuchs
7 World Trade Center
New York, NY 10048
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Andrew C. Gold
2 Park Avenue
New York, NY 10016
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Bruce H. Kaplan
225 Broadhollow Road
Suite 404W
Melville, NY 11530
David Michael Pollack
81 Main Street
White Plains, NY 10601
[email protected]
Janine L. Pollack
One Pennsylvania Plaza
New York, NY 101 19-0165
Jeffrey N. Rich
919 Third Avenue
New York, NY 10022
[email protected]
Brian S. Rosen
767 Fifth Avenue
New York, NY 10153
[email protected]
Robert J. Rosenberg
885 Third Avenue
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David A. Schrader
185 Madison Avenue
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Barry N. Seidel
1221 Avenue of the Americas
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Doria G. Stetch
33 Whitehall Street
22nd Floor
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Arturo D. Tavarez
300 Quarropas Street
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David L. Tillem & Dicker
925 Westchester Avenue
White Plains, NY 10604
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<PAGE> 229
[email protected]
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885 Third Avenue
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Roland Sanford Young
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Suite 1000
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