UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-27314
AMC FINANCIAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-2994671
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11111 WILCREST GREEN, SUITE 250, HOUSTON, TEXAS 77042
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(713) 787-0100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENT FOR THE PAST 90 DAYS.
YES [X] NO [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTIONS 12, 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT.
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
7,782,615 SHARES, $.01 PAR VALUE,
OF NEW COMMON STOCK, WERE OUTSTANDING AS OF AUGUST 15, 2000
<PAGE>
AMC FINANCIAL, INC.
(FORMERLY CITYSCAPE FINANCIAL CORP.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000
PART I - FINANCIAL INFORMATION PAGE
----
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Statements of Financial Condition as of 3
June 30, 2000 (Unaudited) and December 31, 1999
Consolidated Statements of Operations for the three 4
months and six months ended June 30, 2000 and 1999 (Unaudited)
Consolidated Statements of Cash Flows for the six 5
months ended June 30, 2000 and 1999 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 12
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 18
ABOUT MARKET RISK
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 22
ITEM 5. OTHER INFORMATION 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
2
<PAGE>
PART I. - FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
AMC FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY CITYSCAPE FINANCIAL CORP.)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
REORGANIZED COMPANY
---------------------------------------
JUNE 30, 2000 DECEMBER 31, 1999
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents ....................................................... $ 34,889,363 $ 30,850,395
Marketable securities ........................................................... 105,000 763,644
Residual certificates ........................................................... 12,541,269 12,538,461
Mortgage loans held for sale, net ............................................... 13,241,079 14,338,442
Income taxes receivable ......................................................... 1,437,288 1,437,288
Investment in discontinued operations, net ...................................... 12,054,456 12,239,110
Other assets .................................................................... 585,360 927,828
------------------ ------------------
Total assets ........................................................................ $ 74,853,815 $ 73,095,168
================== ==================
LIABILITIES
Accounts payable and other liabilities .......................................... $ 8,812,568 $ 9,651,469
------------------ ------------------
Total liabilities ................................................................... 8,812,568 9,651,469
------------------ ------------------
STOCKHOLDERS' EQUITY
Common stock, $ .01 par value; 25,000,000 shares authorized;
7,782,615 and 7,743,622 issued and outstanding in 2000 and 1999,
respectively .................................................................. 77,826 77,436
Additional paid-in capital ...................................................... 62,272,688 61,202,720
Accumulated other comprehensive income .......................................... 98,489 559,108
Retained earnings ............................................................... 3,592,244 1,604,435
------------------ ------------------
Total stockholders' equity .......................................................... 66,041,247 63,443,699
------------------ ------------------
Total liabilities and stockholders' equity .......................................... $ 74,853,815 $ 73,095,168
================== ==================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
AMC FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY CITYSCAPE FINANCIAL CORP.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR REORGANIZED PREDECESSOR
COMPANY COMPANY COMPANY COMPANY
------------- ------------- ------------- -------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------- ------------- ------------- -------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES
(Loss) gain on sale of loans ........................... $ -- $ (958,717) $ -- $ 4,609,295
Loss on valuation of residuals ......................... -- (20,847,449) -- (20,847,449)
Interest ............................................... 1,100,331 1,046,404 2,247,981 3,328,487
Other .................................................. 1,144,971 6,243,867 2,666,074 7,659,773
------------- ------------- ------------- -------------
Total revenues (losses) .................................... 2,245,302 (14,515,895) 4,914,055 (5,249,894)
------------- ------------- ------------- -------------
EXPENSES
Salaries and employee benefits ......................... 4,302 1,427,944 7,807 2,856,989
Interest expense ....................................... -- 112,571 -- 1,401,630
Selling expenses ....................................... -- 115,481 -- 256,407
Other operating expenses ............................... 903,029 3,858,852 1,663,427 6,253,145
Restructuring charge ................................... -- 790,000 -- 790,000
------------- ------------- ------------- -------------
Total expenses ............................................. 907,331 6,304,848 1,671,234 11,558,171
------------- ------------- ------------- -------------
Earnings (loss) from continuing operations before
reorganization items, income taxes
and extraordinary item .............................. 1,337,971 (20,820,743) 3,242,821 (16,808,065)
Reorganization items ....................................... -- 989,999 -- 1,644,058
------------- ------------- ------------- -------------
Earnings (loss) from continuing
operations before income taxes and extraordinary
item ................................................. 1,337,971 (21,810,742) 3,242,821 (18,452,123)
Income tax provision ....................................... 468,290 60,000 1,134,987 67,673
------------- ------------- ------------- -------------
Earnings (loss) from continuing operations
before extraordinary item ............................ 869,681 (21,870,742) 2,107,834 (18,519,796)
Extraordinary item -gain from discharge of pre-
petition liabilities ..................................... -- 416,094,747 -- 416,094,747
------------- ------------- ------------- -------------
Earnings from continuing operations .................... 869,681 394,224,005 2,107,834 397,574,951
DISCONTINUED OPERATIONS:
Loss from discontinued operations, net of
income tax benefit of $64,629 ....................... (120,025) -- (120,025) --
NET EARNINGS ............................................... $ 749,656 $ 394,224,005 $ 1,987,809 $ 397,574,951
============= ============= ============= =============
NET EARNINGS (LOSS) PER COMMON SHARE:
Basic and Diluted
Earnings from continuing operations ................. $ .11 * $ .27 *
Loss from discontinued operations ................... (.01) * (.01) *
------------- -------------
Net earnings ........................................ $ .10 * $ .26 *
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic and Diluted ...................................... 7,780,449 * 7,766,652 *
============= =============
</TABLE>
*Per share amounts are not meaningful due to reorganization. See Note 2.
See accompanying notes to consolidated financial statements.
4
<PAGE>
AMC FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY CITYSCAPE FINANCIAL CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
-------------------- --------------------
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
-------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings ................................................................... $ 1,987,809 $ 397,574,951
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization ................................................. -- 367,453
Income taxes payable .......................................................... 1,070,358 210,093
Gain from discharge of pre-petition liabilities ............................... -- (416,094,747)
Decrease (Increase) in residual certificates .................................. (2,808) 21,218,991
Proceeds from sale of mortgages ............................................... -- 104,576,347
Other, net .................................................................... 798,955 10,582,414
Adjustments to discontinued assets and liabilities
(Note 6) .................................................................... 184,654 --
-------------------- --------------------
Net cash provided by operating activities ......................................... 4,038,968 118,435,502
-------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of equipment ............................................................. -- 21,441
-------------------- --------------------
Net cash provided by investing activities ......................................... -- 21,441
-------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in warehouse financings .............................................. -- (105,969,355)
-------------------- --------------------
Net cash used in financing activities ............................................. -- (105,969,355)
-------------------- --------------------
Net increase in cash and cash equivalents ......................................... 4,038,968 12,487,588
Cash and cash equivalents at beginning of period .................................. 30,850,395 18,405,426
-------------------- --------------------
Cash and cash equivalents at end of period ........................................ $ 34,889,363 $ 30,893,014
==================== ====================
Supplemental disclosure of cash flow information:
Interest paid during the period:
Continuing operations ......................................................... $ -- $ 1,693,980
Discontinued operations ....................................................... --
Supplemental schedule of non-cash investing and financing activities:
Unrealized gain on marketable securities, net of tax .......................... $ -- $ --
Cancellation of indebtedness .................................................. -- 476,510,976
Extinguishment of old stock ................................................... -- (175,778,644)
Issuance of new common stock .................................................. -- 60,416,229
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
AMC FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY CITYSCAPE FINANCIAL CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
1. Organization
AMC Financial, Inc., formerly Cityscape Financial Corp. (the "Company" or
"AMC"), was a consumer finance company which, through its wholly owned
subsidiary Cityscape Corp. ("CSC"), was in the business of selling and servicing
mortgage loans secured primarily by one- to four-family residences. The Company
was previously in the business of originating and purchasing mortgage loans
until such business was indefinitely suspended in November 1998. The majority of
the Company's loans were made to owners of single-family residences for such
purposes as debt consolidation, financing of home improvements and educational
expenditures. In October 1998, the Company and CSC filed voluntary petitions for
bankruptcy in the United States Bankruptcy Court. The Bankruptcy Court confirmed
the amended plan of reorganization in June 1999. In September 1999 the Company
relocated operations from Elmsford, New York to Houston, Texas. The debtors'
cases against the Company and CSC were closed and a final decree granted on May
4, 2000.
2. Reorganization
The Company has been reorganized through a plan of reorganization under
Chapter 11 of Title 11 of the United States Bankruptcy Code. Although the plan,
as amended, became effective on July 1, 1999, the effective date of the plan for
accounting purposes is considered to be June 30, 1999, and accordingly, the
Company adopted fresh start reporting as of June 30, 1999 (see Notes 4 and 5).
Adjustments were recorded as of June 30, 1999 to reflect the effects of the
consummation of the plan of reorganization and the implementation of fresh start
reporting.
3. Plan of Liquidation and Dissolution
In January 2000 the Company engaged a financial advisor, Peter J. Solomon
Company Limited, to advise the Company on strategic alternatives regarding the
Company's future. Such alternatives included re-entering the mortgage loan
origination and servicing business, sale of the Company, liquidation of assets
and subsequent distribution of cash to the shareholders upon dissolution of the
Company and maintenance of the current status of the Company. In April 2000 the
financial advisor recommended to the Board of Directors that liquidation and
subsequent dissolution of the Company was the strategy most likely to maximize
stockholder value. On May 2, 2000 the Board of Directors authorized, subject to
stockholder approval, the orderly liquidation of the Company's assets pursuant
to the Plan of Liquidation and Dissolution (the "Plan"). The Plan provides that,
if the requisite stockholder approval is received (such time of approval deemed
the "Effective Date"), the officers and directors of the Company will initiate
the complete liquidation and subsequent dissolution of the Company. After the
Effective Date, AMC will not engage in any business activities except for the
purpose of preserving the value of its assets, prosecuting and defending suits
by or against the Company, satisfying all outstanding liabilities, adjusting and
winding up its business and affairs, selling and liquidating its properties and
6
<PAGE>
assets and making distributions to the stockholders in accordance with the Plan.
Once the liquidation of AMC's property and assets is substantially completed, or
at such earlier time as determined by the Board of Directors, the officers of
the Company will promptly execute and file a certificate of dissolution with the
Secretary of the State of Delaware. Such Plan will be submitted to the
stockholders for approval at the Company's Annual Meeting of Stockholders
currently scheduled to be held on September 12, 2000. If the Plan is not
approved by the stockholders, the Board of Directors will explore alternatives
then available for the future of the Company.
4. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and do not include all
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments consisting of normal recurring accruals, considered necessary for a
fair presentation of the results for the interim period, have been included. The
accompanying consolidated financial statements and the information included
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations" should be read in conjunction with the consolidated
financial statements and related notes of the Company for the year ended
December 31, 1999.
The Company's emergence from Chapter 11 proceedings resulted in a new
reporting entity with no retained earnings or accumulated deficit as of June 30,
1999. Retained earnings as of June 30, 2000 represent earnings from July 1, 1999
through June 30, 2000. A vertical black line has been drawn on certain of the
accompanying consolidated financial statements and footnotes to distinguish
between the pre-reorganization operating results (the "Predecessor Company") and
the post-reorganization operating results (the "Reorganized Company").
Operating results for the three and six months ended June 30, 2000 are for
the Reorganized Company and results for the three and six months ended June 30,
1999 are for the Predecessor Company. The results for the Reorganized Company
are not comparable to those of the Predecessor Company. Since the Company's
emergence from Chapter 11 proceedings, the Company has not had significant
operations as a restructured entity.
The consolidated financial statements of the Company include the accounts
of CSC and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
5. Fresh Start Reporting
As of June 30, 1999, the Company adopted fresh start reporting in
accordance with 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"). Fresh start reporting assumes that a new
reporting entity has been created and assets and liabilities should be reported
at their fair values as of the effective date.
7
<PAGE>
The reorganization value was determined based upon the Predecessor
Company's estimate of the fair value of the Company's assets as defined in the
plan of reorganization, which did not assume any future origination and loan
sale activity. Accordingly, the reorganization value approximates the fair value
of the Company's assets before considering liabilities, which must be assumed
and extinguished pursuant to the terms of the plan of reorganization, as
amended, and represents the Company's estimates of the amount a buyer would pay
for the assets after the restructuring.
6. 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. The Company initially held a 50% interest in CSC-UK and subsequently
purchased the remaining 50% of CSC-UK. CSC-UK had no operations and no
predecessor prior to May 1995. In March 1998 the Company adopted a plan to sell
the assets of CSC-UK and completed the sale in April 1998.
The net assets of CSC-UK have been reclassified on the Company's
consolidated financial statements as investment in discontinued operations, net.
As of June 30, 2000, the Company's net investment in discontinued operations
totaled approximately $12.1 million, net representing cash on hand in the
discontinued operations of approximately $12.2 million and net receivables (net
of liabilities) due of approximately $145,000. A loss of $120,025, net of tax of
$64,629 was recorded on discontinued operations for the quarter ended June 30,
2000. The loss resulted from an increase in the reserve recorded against the
income tax receivable due from the Inland Revenue Service. At December 1999 the
Company recorded a loss on discontinued operations of $500,037, net of tax of
$269,251. The Company expects to maintain a balance of cash on hand in the
discontinued operations to cover existing and potential liabilities and costs
pending dissolution of CSC-UK and its subsidiaries.
7. Valuation of Residuals
The interests the Company received upon loan sales through its
securitizations are in the form of residual certificates. The Company's residual
certificates are comprised of interests in "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 used the proceeds from such loans to repay outstanding indebtedness as
well as to make home improvements).
The Company classifies these residual certificates as securities
available-for-sale 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 interest rates, collateral value, economic forecasts and historical
default and prepayment rates of the portfolio under review. If the fair value of
the residual certificates is different from the recorded value and the
difference is considered to be a permanent difference, the gain or loss on the
valuation of residuals will be reflected in the consolidated statements of
operations. Should the unrealized gain or loss be
8
<PAGE>
considered a temporary difference, the unrealized amount, net of applicable
income taxes, will be recorded in accumulated other comprehensive income in
stockholders' equity.
The table below summarizes the value of the Company's residual
certificates:
REORGANIZED COMPANY
---------------------------------------
JUNE 30, 2000 DECEMBER 31, 1999
------------------ ------------------
Sav*-A-Loan(R) ....................... $ 12,541,269 $ 12,538,461
================== ==================
The key assumptions used to value the Company's residual certificates at
June 30, 2000 and December 31, 1999 were as follows:
REORGANIZED COMPANY
----------------------------------------
JUNE 30, 2000 DECEMBER 31, 1999
------------------ ------------------
Sav*-A-Loan(R)
Discount Rate ................. 20.0% 20.0%
Constant Prepayment Rate ...... 19.0% 19.0%
Loss Rate Range Per Annum ..... 3.0 - 8.0% 3.0 - 8.0%
There were no adjustments to residual certificates for the quarter and six
months ended June 30, 2000. In December 1999, the Company recorded an unrealized
gain of $62,739, net of tax of $33,783, on residual certificates. The unrealized
gain was considered a temporary gain and, as such, was recorded in accumulated
other comprehensive income in stockholders' equity.
8. Administrative Services Agreement
The Company entered into an Administrative Services Agreement (the
"Agreement") with AEGIS Mortgage Corporation ("AEGIS") to assume responsibility
for accounting and administrative activities effective September 1, 1999. The
Company pays administrative fees of $90,000 per month under the terms of the
Agreement. The Agreement is effective until terminated by either party. AEGIS is
required to give the Company a minimum of ninety (90) days written notice prior
to termination and the Company is required to give AEGIS a minimum of thirty
(30) days written notice prior to termination.
9. Marketable Securities
Marketable securities, which represent the Company's investment in the
common stock of Mortgage.com, are classified as available-for-sale securities.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of applicable income taxes, reported as a separate
component within stockholders' equity in accumulated other comprehensive income.
During the first quarter of 2000, the Company exercised warrants for 70,000
shares of Mortgage.com for $50,000.
9
<PAGE>
Another 70,000 shares were sold in the first quarter of 2000 for $193,757; which
resulted in a realized gain of $193,757. The remaining stock has been recorded
at the fair market value of $85,750 net of taxes of $19,250, at June 30, 2000.
10. Comprehensive Income
In accordance with Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," comprehensive income includes all changes in a
company's equity (except those resulting from investments by and distributions
to owners), including, among other things, foreign currency transaction
adjustments and unrealized gains (losses) on marketable securities classified as
available-for-sale. Total comprehensive income for the quarter ended June 30,
2000 and the six months ended June 30, 2000 follows:
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR REORGANIZED PREDECESSOR
COMPANY COMPANY COMPANY COMPANY
------------- ------------- ------------- -------------
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ ------------------------------
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net earnings .................................................... $ 749,656 $ 394,224,005 $ 1,987,809 $ 397,574,951
Other comprehensive income:
Unrealized gain (loss) on marketable securities,
net of tax benefit of $24,500 and $180,210 respectively ... (45,500) -- (334,677) --
Reclassification adjustment,
net of tax of $67,815 ..................................... -- -- (125,942) --
------------- ------------- ------------- -------------
Net gain (loss) recognized
in other comprehensive income ............................. (45,500) -- (460,619) --
------------- ------------- ------------- -------------
Total comprehensive income, net of tax .......................... $ 704,156 $ 394,224,005 $ 1,527,190 $ 397,574,951
============= ============= ============= =============
</TABLE>
11. Income Taxes
Pursuant to Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", the Company had available certain deductible
temporary differences and net operating loss carryforwards for use in future tax
reporting periods, which created deferred tax assets. Statement of Financial
Accounting Standards No. 109 requires that deferred tax assets be reduced by a
valuation allowance if, based on the weight of the available evidence, it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. During the six months ended June 30, 2000, the deferred tax
asset valuation allowance was reduced by $1,070,358 with a corresponding
increase in additional paid-in capital in accordance with SOP 90-7 to adjust the
recorded net deferred tax asset to an amount considered more likely than not to
be realized. Realization of the deferred tax asset is dependent on generating
sufficient taxable income prior to the expiration of the loss carryforwards in
2014. Realization could also be affected by a significant ownership change of
the Company over a period of three years as prescribed by income tax law. In
view of the proposed liquidation it is more likely than not that all of the
deferred tax assets will not be realized and accordingly the valuation allowance
fully offsets the deferred tax asset.
In accordance with SOP 90-7, income tax benefits recognized from
pre-confirmation net operating loss carryforwards are used first to reduce the
reorganization value in excess of amounts allocable to identifiable assets and
thereafter to increase additional paid-in capital.
10
<PAGE>
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 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 change of
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 1997 primarily as a result of conversions of the
Company's Series A Preferred Stock into the Company's common stock.
Additionally, a change in ownership occurred 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 of
bankruptcy.
12. Earnings Per Share
Basic earnings per share are computed on the basis of the weighted average
number of common shares outstanding. Earnings per share was not calculated for
the periods prior to fresh start accounting since such amounts would not be
meaningful. The Company has no stock options or preferred stock convertible into
common stock and therefore diluted earnings per share is equal to basic earnings
per share. Basic and diluted earnings per share is calculated as follows:
REORGANIZED COMPANY
---------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 2000
------------------ ------------------
Net Earnings ......................... $ 749,656 $ 1,987,809
Weighted average shares .............. 7,780,449 7,766,652
Basic and diluted earnings per share . $ .10 $ .26
================== ==================
13. Changes in Stockholders' Equity
During the six months ended June 30, 2000, the Company issued an
additional 38,993 shares of common stock. There were no cash proceeds related to
the issuance of these shares. There will be no more shares issued with the
granting of the final decree.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements, which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements. 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999:
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
------------- -------------
THREE MONTHS ENDED JUNE 30,
--------------------------------
2000 1999
------------- -------------
<S> <C> <C>
REVENUES
Loss on sale of loans .................................................................... $ -- $ (958,717)
Loss on valuation of residuals ........................................................... -- (20,847,449)
Interest ................................................................................. 1,100,331 1,046,404
Other .................................................................................... 1,144,971 6,243,867
------------- -------------
Total revenues (losses) ...................................................................... 2,245,302 (14,515,895)
------------- -------------
EXPENSES
Salaries and employee benefits ........................................................... 4,302 1,427,944
Interest expense ......................................................................... -- 112,571
Selling expenses ......................................................................... -- 115,481
Other operating expenses ................................................................. 903,029 3,858,852
Restructuring charge ..................................................................... -- 790,000
------------- -------------
Total expenses ............................................................................... 907,331 6,304,848
------------- -------------
Earnings (loss) from continuing operations before reorganization items, income
taxes and extraordinary item ............................................................ 1,337,971 (20,820,743)
Reorganization items ......................................................................... -- 989,999
------------- -------------
Earnings (loss) from continuing operations before income taxes and extraordinary item .... 1,337,971 (21,810,742)
Income tax provision ......................................................................... 468,290 60,000
------------- -------------
Earnings (loss) from continuing operations before extraordinary item ..................... 869,681 (21,870,742)
Extraordinary item -gain from discharge of pre-petition liabilities .......................... -- 416,094,747
------------- -------------
Earnings from continuing operations ...................................................... 869,681 394,224,005
DISCONTINUED OPERATIONS:
Loss from discontinued operations, net of income tax benefit of $64,629 ................. (120,025) --
------------- -------------
NET EARNINGS ................................................................................. $ 749,656 $ 394,224,005
============= =============
NET EARNINGS (LOSS) PER COMMON SHARE:
Basic and Diluted
Earnings from continuing operations ................................................... $ .11 *
Loss from discontinued operations ..................................................... (.01) *
-------------
Net earnings .......................................................................... $ .10 *
=============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic and Diluted ........................................................................ 7,780,449 *
=============
</TABLE>
*Per share amounts are not meaningful due to reorganization.
12
<PAGE>
THE RESULTS OF OPERATIONS SHOWN ABOVE ARE FOR THE REORGANIZED AND PREDECESSOR
COMPANIES. THE COMPANY ADOPTED FRESH START REPORTING IN ACCORDANCE WITH SOP 90-7
EFFECTIVE JUNE 30, 1999. THEREFORE, THE OPERATING RESULTS PRESENTED ABOVE FOR
THE THREE MONTHS ENDED JUNE 30, 2000 ARE NOT COMPARABLE TO THOSE FOR THE SAME
PERIOD IN FISCAL YEAR 1999.
Revenues increased $16.7 million to $2.2 million for the three months
ended June 30, 2000 from a negative $14.5 million for the comparable period in
1999, primarily due to a loss on the valuation of residuals of $20.8 million
recorded during the second quarter of 1999.
The Company did not sell any loans and therefore recognized no gain or
loss on the sale of loans during the three months ended June 30, 2000. For the
comparable period in 1999, the Company recognized a loss on the sale of loans of
$959,000 primarily due to a reserve of $1.0 million established on amounts due
from loans sold in 1999. This loss was partially offset by a gain of $43,000 on
the sale of $16.6 million of whole loans at an average net premium of 0.3%.
For the three months ended June 30, 2000, the Company had no decrease in
the valuation of residuals. During the comparable period in 1999 the Company
recorded an unrealized loss on the valuation of residuals of $20.8 million. In
the second quarter of 1999, the Company increased the loss rate from the first
quarter on both home equity and Sav*-A-Loan(R) securitizations. The constant
prepayment rate on Sav*-A-Loan(R) securitizations was also increased from the
first quarter of 1999 to the second quarter of 1999. There were no rate changes
from the first quarter of 2000 to the second quarter of 2000.
Interest income increased $.1 million, or 5.2%, to $1.1 million for the
three months ended June 30, 2000 from $1.0 million for the comparable period in
1999. In the second quarter of 2000 the Company recorded interest income from
loans held for sale and investments in high-grade commercial paper. During the
second quarter of 1999 the Company had a higher average balance of loans held
for sale, which produced increased interest income.
Other income decreased $5.1 million, or 82.7%, to $1.1 million for the
three months ended June 30, 2000 from $6.2 million for the comparable period in
1999. During the second quarter of 1999, the Company entered into agreements to
transfer its servicing rights on all of its home equity securitizations and
received net cash of $14.4 million. The Company reported a net gain of $6.1
million which represented amounts received in excess of the Company's carrying
value of servicer advances. Servicer advances represented claims against the
securitization trusts for reimbursement of advances made to such trusts by the
Company as servicer.
Total expenses decreased $5.4 million, or 85.6%, to $.9 million for the
three months ended June 30, 2000 from $6.3 million for the comparable period in
1999. The decrease was due primarily to a reduction of the Company's workforce
and the resulting reduction of other operating expenses.
Salaries and employee benefits decreased $1.4 million, or 99.7%, to $0.0
for the three months ended June 30, 2000 from $1.4 million for the comparable
period in 1999. This decrease was due to a reduction of staffing levels to one
employee at June 30, 2000 as compared to 42 employees at June 30,
13
<PAGE>
1999. During the three months ended June 30, 2000, the employees salary was paid
by another company and reimbursed by the Company. The expense is included in
other operating expenses.
No interest expense was incurred during the second quarter of 2000 as
compared to $113,000 for the three months ended June 30, 1999. During the second
quarter of 1999 the Company incurred interest expense on two credit warehouse
facilities until April 1999 when the Company paid off all warehouse related
financing.
Selling and other operating expenses decreased $3.1 million, or 77.3%, to
$.9 million for the three months ended June 30, 2000 from $4.0 million for the
comparable period in 1999. This decrease was due primarily to a reduction in
other operating costs. During the second quarter of 1999 the Company incurred
higher operating costs associated with a corporate office. Such costs included
rent, utilities, telephone and equipment leasing. The Predecessor Company's
offices were closed subsequent to the second quarter of 1999; therefore, such
expenses were not incurred during 2000.
There were no restructuring charges incurred during the second quarter of
2000 as compared to $790,000 during the same period in 1999. Such charges were
incurred in association with the Company's plan to relocate the corporate
offices from Elmsford, New York to Houston, Texas and included severance
obligations and future lease obligations.
Net earnings decreased to $.7 million for the three months ended June 30,
2000 from $394.2 million for the comparable period in 1999. Included in net
earnings for the three months ended June 30, 1999 was an extraordinary item
reflecting the gain from the discharge of pre-petition liabilities, net of
taxes, totaling $416.1 million. Excluding the extraordinary item, there was an
increase in net earnings for the second quarter of 2000 as compared to the same
period in 1999 primarily as a result of the unrealized loss on the valuation of
residuals recorded in 1999.
14
<PAGE>
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
------------- -------------
SIX MONTHS ENDED JUNE 30,
----------------------------------
2000 1999
------------- -------------
<S> <C> <C>
REVENUES
Gain on sale of loans ................................................................ $ -- $ 4,609,295
Loss on valuation of residuals ....................................................... -- (20,847,449)
Interest ............................................................................. 2,247,981 3,328,487
Other ................................................................................ 2,666,074 7,659,773
------------- -------------
Total revenues (losses) .................................................................. 4,914,055 (5,249,894)
------------- -------------
EXPENSES
Salaries and employee benefits ....................................................... 7,807 2,856,989
Interest expense ..................................................................... -- 1,401,630
Selling expenses ..................................................................... -- 256,407
Other operating expenses ............................................................. 1,663,427 6,253,145
Restructuring charge ................................................................. -- 790,000
------------- -------------
Total expenses ........................................................................... 1,671,234 11,558,171
------------- -------------
Earnings (loss) from continuing operations before reorganization items,
income taxes and extraordinary item ................................................ 3,242,821 (16,808,065)
Reorganization items ..................................................................... -- 1,644,058
------------- -------------
Earnings (loss) from continuing operations before income taxes and
extraordinary item ................................................................. 3,242,819 (18,452,123)
Income tax provision ..................................................................... 1,134,987 67,673
------------- -------------
Earnings (loss) from continuing operations before extraordinary item ................. 2,107,834 (18,519,796)
Extraordinary item -gain from discharge of pre-petition liabilities ...................... -- 416,094,747
------------- -------------
Earnings from continuing operations .................................................. 2,107,834 397,574,951
DISCONTINUED OPERATIONS:
Loss from discontinued operations, net of income tax benefit of $64,629 ............. (120,025) --
NET EARNINGS ............................................................................. $ 1,987,809 $ 397,574,951
============= =============
NET EARNINGS (LOSS) PER COMMON SHARE:
Basic and Diluted
Earnings from continuing operations ............................................... $ .27 *
Loss from discontinued operations ................................................. (.01) *
-------------
Net earnings ...................................................................... $ .26 *
=============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic and Diluted .................................................................... 7,766,652 *
=============
</TABLE>
*Per share amounts are not meaningful due to reorganization.
15
<PAGE>
THE RESULTS OF OPERATIONS SHOWN ABOVE ARE FOR THE REORGANIZED AND PREDECESSOR
COMPANIES. THE COMPANY ADOPTED FRESH START REPORTING IN ACCORDANCE WITH SOP 90-7
EFFECTIVE JUNE 30, 1999. THEREFORE, THE OPERATING RESULTS PRESENTED ABOVE FOR
THE SIX MONTHS ENDED JUNE 30, 2000 ARE NOT COMPARABLE TO THOSE FOR THE SAME
PERIOD IN FISCAL YEAR 1999.
Revenues increased $10.1 million to $4.9 million for the six months ended
June 30, 2000 from negative $5.2 million for the comparable period in 1999. This
increase was due primarily to no losses recorded on the valuation of residuals
for the six months ended June 30, 2000 as compared to a loss of $20.8 million
for the comparable period in 1999. The net loss in revenues in 1999 was
partially offset by a gain on the sale of loans of $4.6 million and the
recognition of $6.1 million of revenues related to the transfer of its home
equity servicing rights and related servicer advances during the first six
months of 1999.
There were no loans sold during the first six months of 2000 and therefore
no gain or loss was recorded as compared to a $4.6 million gain for the same
period in 1999. Since the Company's emergence from bankruptcy in June 1999, the
Company has not actively engaged in the purchase and sale of loans. For the six
months ended June 30, 1999, the Company recognized a gain of $7.0 million on the
sale of loans which related to the Company's profit participation on loans
previously sold into the Company's purchase facility, offset by the sale of
$106.6 million of loans sold at a net loss of $2.4 million.
For the six months ended June 30, 2000, the Company had no losses on the
valuation of residuals as compared to losses of $20.8 million for the six months
ended June 30, 1999. The Company utilized the same discount rate, constant
prepayment rate and loss rate per annum at June 30, 2000 and December 31, 1999.
The Company's loss on valuation residuals of $20.8 million for the six months
ended June 30, 1999 was recorded during the second quarter of 1999. This loss
was a result of increasing the loss rates on both home equity and Sav*-A-Loan(R)
securitizations and increasing the constant prepayment rate on Sav*-A-Loan(R)
securitizations.
Interest income decreased $1.1 million, or 32.5%, to $2.2 million for the
six months ended June 30, 2000 from $3.3 million for the comparable period in
1999. This decrease was due primarily to lower average balances of mortgage
loans held for sale during the first six months of 2000 as compared to the same
period in 1999.
Other income decreased $5.0 million to $2.7 million for the six months
ended June 30, 2000 from $7.7 million for the comparable period in 1999. During
the second quarter of 1999, the Company entered into agreements to transfer its
servicing rights on all of its home equity securitizations and received net cash
of $14.4 million resulting in a net gain of $6.1 million, representing amounts
received in excess of the Company's carrying value of servicer advances.
Servicer advances represent claims against the securitization trusts for
reimbursement of advances made to such trusts by the Company as servicer.
16
<PAGE>
Total expenses decreased $9.9 million, or 85.5%, to $1.7 million for the
six months ended June 30, 2000 from $11.6 million for the comparable period in
1999. This decrease was due primarily to the reduction of its workforce from 42
at June 30, 1999 to one June 30, 2000.
Salaries and employee benefits decreased $2.9 million, or 99.7%, to $0.0
million for the six months ended June 30, 2000 from $2.9 million for the
comparable period in 1999. This decrease was due primarily to decreased staffing
levels to one employee at June 30, 2000 as compared to 42 employees at June 30,
1999. This expense is recorded in other expense for the six months ended June
30, 2000.
Interest expense decreased $1.4 million, or 100.0%, to $0.0 million for
the six months ended June 30, 2000 from $1.4 million for the comparable period
in 1999. In 1999 the Company incurred interest expense on warehouse facility
lines which were paid off in April 1999.
Selling and other expenses decreased $4.8 million, or 74.4%, to $1.7
million for the six months ended June 30, 2000 from $6.5 million for the
comparable period in 1999. This decrease was due primarily to decreased
operating costs of $4.6 million, or 73.4%, to $1.7 million for the six months
ended June 30, 2000 from $6.3 million for the comparable period in 1999
reflecting the Company's restructuring efforts and related reduction in
workforce.
There were no restructuring charges for the six months ended June 30, 2000
as compared to $790,000 recorded during the six months ended June 30, 1999.
Restructuring charges incurred in 1999 were a result of the Company's plan to
move its operations from Elmsford, New York to Houston, Texas. Restructuring
charges primarily represented severance obligations and future lease
obligations.
No reorganization items were incurred during the six months ended June 30,
2000 as compared to $1.6 million for the same period in 1999. Reorganization
items for 1999 primarily included legal and other professional services.
Net earnings decreased $395.5 million for the six months ended June 30,
2000 to $2.0 million from $397.6 million for the comparable period in 1999.
Included in the net earnings in 1999 is an extraordinary item reflecting the
gain from the discharge of pre-petition liabilities, net of taxes, totaling
$416.1 million. Excluding the extraordinary gain, the Company incurred a loss
during the first six months of 1999 due primarily to a loss on valuation of
residuals which was partially offset by gains recognized on loans sold into the
Company's purchase facility as well as the gain recognized on the transfer of
servicing rights.
Liquidity and Capital Resources
During the six months ended June 30, 2000, the Reorganized Company
generated $4.0 million in cash from operations. During the six months ended June
30, 1999, the Predecessor Company generated $118.4 million from operations which
included $416.1 million gain on the discharge of pre-petition liabilities. The
Company's principal cash requirements include the payment of operating and post
bankruptcy expenses. The Company uses its cash flow from interest income to meet
its working capital needs. Should the full funding of the over-collateralization
accounts in connection with the Company's securitizations occur, the Company
also may receive cash payments on its residual certificates related to
17
<PAGE>
its securitizations, although no assurance can be given as to when or whether
this will occur. Based upon the current and anticipated levels of operations,
the Company believes that cash flow from operations and available cash will be
adequate to meet the Company's anticipated requirements for working capital
through the next twelve months.
The Board of Directors approved a Plan of Liquidation and Dissolution of
the Company on May 2, 2000. The Plan will be presented to the stockholders for
approval at the Company's Annual Meeting (See Note 3 to the consolidated
financial statements).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market
prices and interest rates. The Company's market risk arises from interest rate
risk inherent in its financial instruments. The Company is not currently subject
to commodity price risk. The Company does not make use of off-balance sheet
derivative instruments to control interest rate risk.
The Company is dependent on interest earned from loans held for sale and
investments in high-grade commercial paper for current cash flow purposes. A
decrease in interest rates or the sale of loans could adversely affect cash
flow; however the Company believes that cash on hand is sufficient to meet
existing obligations.
The interests that the Company received on loan sales through its
securitizations are in the form of residual certificates which are classified as
securities available-for-sale. Securities available-for-sale 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 residual certificates using a discount
rate of 20.0%.
The Company is exposed to foreign currency exchange risk related to the
pending dissolution of CSC-UK and its subsidiaries. Specifically, the exchange
risk relates to certain receivables and liabilities which will be satisfied in a
foreign currency. The Company believes this exposure to be immaterial, and
therefore, has not utilized any financial instrument to mitigate any potential
exchange risk.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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
former 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 former 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 former
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 former officers and directors in federal court in New Jersey (the
"New Jersey Action").
In these actions, plaintiffs allege that the Company and its former 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 certain 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. Plaintiffs seek unspecified damages, including pre-judgment
interest, attorneys' and accountants' fees and court costs.
In December 1997, the Eastern District plaintiffs filed a motion for
appointment of lead plaintiffs and approval of co-lead counsel. On September 23,
1998, the court granted this motion. On March 25, 1998, the Company and its
former officers and directors who were defendants filed a motion with the
federal Judicial Panel for Multidistrict Litigation ("JPML"), seeking
consolidation of all current and future securities actions, including the New
Jersey Action, for pre-trial purposes before Judge Sterling Johnson in the
Eastern District. On June 12, 1998, the JPML granted this motion. As a result of
the Company's Chapter 11 proceedings, the action against the Company was
discharged when the Company's plan of reorganization became effective on July 1,
1999. The action is still pending against the individual defendants.
WALSH ACTION. 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 as to certain of the loans. In December 1998, Judge Stein of the
Southern District denied Walsh's motion to dismiss, or,
19
<PAGE>
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 that granted Walsh's motion to dismiss with respect
to 69 of the loans at issue. The parties completed all discovery by the early
summer of 1999, and then filed cross-motions for summary judgment. The Company
moved for Partial Summary Judgment on 32 loans that were part of a fraudulent
pyramid scheme in New Jersey and that Walsh warranted under the parties'
agreement as being "true and correct in all material respects." Walsh, in turn,
moved for summary judgment on all of the loans remaining in the case, claiming
that the Company had waived its right to sue on all loans. The parties completed
the briefing on both motions on October 22, 1999. On June 8, 2000, Judge Stein
issued an order granting the Company's motion for Partial Summary Judgment on
the 32 New Jersey loans and also granting, in part, Walsh's summary judgment
motion dismissing the Company's action on the remaining loans. An inquest will
be heard later this year to determine the Company's damages on the 32 New Jersey
loans.
GLOBAL MORTGAGE ACTION. In August 1998, the Company filed a lawsuit in the
Circuit Court for Baltimore City, Maryland entitled Cityscape Corp et. al. v.
Global Mortgage et. al. (the "Global Mortgage Action") against various
defendants seeking damages for losses resulting from the Company's acquisition
in 1995 and 1996 of 145 fraudulent residential mortgages on inner city Baltimore
rowhouses. The complaint, as amended, seeks $5.5 million in compensatory damages
and unspecified punitive damages against the mortgage broker and its principals,
the title company and its principals, the settlement attorney and the
appraisers, based on theories of negligence, malpractice, conspiracy and fraud.
The Company recently consummated settlements with all the defendants in this
case.
Although no assurance can be given as to the outcome of the unresolved
lawsuits described above, the Company believes that the allegations in each of
the actions are without merit. The Company intends to defend vigorously against
these actions and seek their early dismissal. The lawsuits, however, against the
Company, could have a material adverse effect on the Company's consolidated
financial position and results of operations.
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 value 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
20
<PAGE>
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 requested
additional information from the Company in connection with the accounting
related to the J&J Acquisition and the Greyfriars Acquisition. The Company
supplied such requested information. In mid-October 1997, the Commission
authorized its staff to conduct a formal investigation which, to date, has
continued to focus on the issues surrounding the restatement of the financial
statements for the quarter ended June 30, 1996. The Company is continuing to
cooperate fully in this matter; however, the Commission has not contacted the
Company on this matter since July 1999.
In the normal course of business, aside from the matters discussed above,
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.
21
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Since July 1, 1999, the Company has issued an aggregate of 7,782,615
unregistered securities. Such unregistered securities were issued to creditors
of the Company pursuant to the Company's First Amended Joint Plan of
Reorganization under Chapter 11 of Title 11 of the United States Bankruptcy Code
effective as of July 1, 1999 and were in settlement of claims against the
Company. The unregistered securities were issued pursuant to Section 1145 of the
United States Bankruptcy Code, which exempts such issuances from Section 5 of
the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
3.1** Certificate of Incorporation of the Company (incorporated by
reference to the Company's Form 10-Q for quarter ended June
30, 1999)
3.2** Bylaws of the Company (incorporated by reference to the
Company's Form 10-Q for quarter ended June 30, 1999)
10.1** Agreement with AEGIS Mortgage Corporation - Service Agreement,
dated September 1, 1999 (incorporated by reference to the
Company's Form 10-Q for the quarter ended September 30, 1999)
27.1* Financial Data Schedule
99.1* Final Decree, dated May 4, 2000
--------------------------
* Indicates documents filed herewith.
** Indicates documents incorporated by reference from the prior filing
indicated.
22
<PAGE>
(b) Reports on Form 8-K
A current report on Form 8-K filed by the Company on May 3, 2000
announcing the Board of Directors adoption of a Plan of Liquidation and
Dissolution. No financial statements were filed.
A current report on Form 8-K filed by the Company on June 1, 2000
setting the Company's annual meeting of shareholders for September 12,
2000. No financial statements were filed.
23
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMC FINANCIAL, INC
------------------
(Registrant)
Date: August 15, 2000 By: /s/ D. RICHARD THOMPSON
----------------------------
D. Richard Thompson
Title: Chief Executive Officer, President
and Chief Financial Officer
24
