EXHIBIT 99.3
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
DEBTORS' FIRST AMENDED JOINT DISCLOSURE STATEMENT
PURSUANT TO SECTION 1125
OF THE BANKRUPTCY CODE
Dated: April 27, 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.
TABLE OF CONTENTS
PAGE
I. INTRODUCTION..............................................................1
II. PLAN SUMMARY AND KEY CONSIDERATIONS......................................2
A. Plan Summary......................................................3
B. Recommendation....................................................7
C. Certain Risk Factors..............................................7
D. Voting Instructions...............................................8
III. GENERAL INFORMATION....................................................11
A. The Debtors......................................................11
B. Events Leading to the Chapter 11 Filing..........................11
C. Prepetition Legal Proceedings....................................14
D. Significant Events During the Chapter 11 Cases...................17
IV. THE PLAN OF REORGANIZATION..............................................23
A. Overview of the Plan.............................................23
B. Treatment of Claims and Interests Under the Plan.................27
C. Waiver of Conditions to Confirmation and Effective Date..........38
D. The Reorganized Company..........................................39
E. Issuance of New Common Stock.....................................41
F. Distributions Under the Plan.....................................42
G. General Information Concerning the Plan..........................48
V. CONFIRMATION AND CONSUMMATION PROCEDURES.................................55
A. Solicitation of Acceptances......................................55
B. Confirmation Hearing.............................................56
C. Confirmation.....................................................57
D. Consummation.....................................................61
E. Conditions to Effective Date.....................................61
VI. CERTAIN RISK FACTORS....................................................61
A. Risks Relating to the Projections................................61
B. Assumptions Regarding Value of Cityscape's and CSC's Assets......62
C. Business and Competition.........................................62
D. Nature of Mortgages..............................................62
E. Environmental Risks..............................................63
F. Certain Other Legal Considerations Regarding Loans...............64
G. Sale of CSC-UK...................................................64
H. Certain Federal Income Tax Considerations; Reduction and
Limitation of Corporate Tax Benefits..........................64
I. Certain Risks of Non-Confirmation................................65
J. Government Regulations...........................................65
K. Restrictions on Resale of New Common Stock of the Reorganized
Company.......................................................66
L. Lack of Trading Market; Volatility...............................66
M. Possible Dilution of New Common Stock............................66
N. Assumption Regarding Business of the Reorganized Company.........66
VII. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS..............................67
VIII. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN.............73
i
A. Alternative Chapter 11 Plans.....................................73
B. Liquidation Under Chapter 7......................................73
IX. CONCLUSION AND RECOMMENDATION...........................................74
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
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 April 27, 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.
1
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 JUNE 1 1999. BALLOTS SHOULD BE MAILED OR DELIVERED TO: CITYSCAPE
FINANCIAL CORP. AND CITYSCAPE CORP., C/O BONDHOLDER COMMUNICATIONS GROUP, 30
BROAD STREET, 46TH FLOOR, NEW YORK, NEW YORK 10004, ATTN.: JOHN FARR.
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.
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."
2
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.
ESTIMATED
CLASS DESCRIPTION TREATMENT RECOVERY
- ----- ------------------------------------ -------------------------------------------------- ----------
N/A Administrative Claims (Unclassified) Each Holder will be paid Cash equal to the full 100%
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 (Unclassified) Each Holder will receive, at the sole option of 100%
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 are any Allowed 100%
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.
- ----- ------------------------------------ -------------------------------------------------- ----------
2a ET Other Secured Claims (other than UNIMPAIRED. Either (i) the Claim will be left 100%
SEQ. Secured Claims in Class 1) unaltered, (ii) any 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
ESTIMATED
CLASS DESCRIPTION TREATMENT RECOVERY
- ----- ------------------------------------ -------------------------------------------------- ----------
3 Priority Claims UNIMPAIRED. Each Holder will receive cash equal to 100%
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 and Small Senior IMPAIRED. Each Holder of an Allowed Class 4 Claim 22.1%
4a Note Claims will receive a Pro Rata portion of 7,346,708
shares of New Common Stock (i.e., one share of New
Common Stock for every $45.26 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.
- ----- ------------------------------------ -------------------------------------------------- ----------
5 and General Unsecured Claims and Small IMPAIRED. Each Holder of an Allowed Class 5 Claim 16.6%
5a Unsecured Claims will receive on account of such Allowed Claim one
share of New Common Stock for every $60.32 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.
- ----- ------------------------------------ -------------------------------------------------- ----------
4
ESTIMATED
CLASS DESCRIPTION TREATMENT RECOVERY
- ----- ------------------------------------ -------------------------------------------------- ----------
6 and Subordinated Debenture Claims and IMPAIRED. Each Holder of an Allowed Class 6 Claim 3.2%
6a Small Subordinated Debenture Claims will receive a Pro Rata portion of 431,702 shares
of New Common Stock (I.E., one share of New Common
Stock for every $316.56 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 Claims IMPAIRED. Holders will not receive or retain any 0%
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 of Old Series A IMPAIRED. Holders will not receive or retain any 0%
Preferred Stock interest 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 Stock IMPAIRED. Holders will not receive or retain any 0%
Securities Claims 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.
- ----- ------------------------------------ -------------------------------------------------- ----------
5
ESTIMATED
CLASS DESCRIPTION TREATMENT RECOVERY
- ----- ------------------------------------ -------------------------------------------------- ----------
10 Interests of Holders of Old Series B IMPAIRED. Holders will not receive or retain any 0%
Preferred Stock interest or property under the Plan and are,
therefore, deemed to have rejected the Plan.
Accordingly, Class 10 will not be entitled to vote
on the Plan.
- ----- ------------------------------------ -------------------------------------------------- ----------
11 Old Series B Preferred Stock IMPAIRED. Holders will not receive or retain any 0%
Securities Claims 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 Old IMPAIRED. Holders will not receive or retain any 0%
Cityscape Common Stock interest 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 Old Stock IMPAIRED. Holders will not receive or retain any 0%
Rights in Cityscape and all Claims interest or property under the Plan and are,
Arising Out of Such Old Stock Rights therefore, deemed to have rejected the Plan.
Accordingly, Class 13 will not be entitled to vote
on the Plan.
- ----- ------------------------------------ -------------------------------------------------- ----------
14 Old Cityscape Common Stock and IMPAIRED. Holders will not receive or retain any 0%
Old Warrant Securities Claims interest 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.
- ----- ------------------------------------ -------------------------------------------------- ----------
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
6
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.
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
7
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
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 -- pink ballot; General Unsecured Claims --
green ballot; Subordinated Debenture Claims -- blue ballot; Master Ballot --
yellow 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 June 1, 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 Bondholder Communications Group 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 April 27, 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:
8
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:
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,
pre-addressed, 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
Morgan Guaranty Trust Company of New York, as operator of Euroclear System
("Euroclear") or Cedel Bank, societe anonyme ("Cedel"), 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 The Depository Trust Company ("DTC"), Euroclear and Cedel
(collectively, the "Clearing Systems")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 above 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.
9
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:
Bondholder Communications Group
30 Broad Street, 46th Floor
New York, NY 10004
Attn.: John Farr
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 April 27, 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
10:00 a.m., New York City Time, on June 9, 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 JUNE 1, 1999). BALLOTS SHOULD BE MAILED OR DELIVERED BY COURIER OR BY
HAND TO:
BONDHOLDER COMMUNICATIONS GROUP
30 BROAD STREET, 46TH FLOOR
NEW YORK, NY 10004
ATTN.: JOHN FARR
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.
10
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.
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
11
("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 are discussing a
proposed settlement of the dispute, which proposed settlement would provide for
distribution of approximately (pound)3.5 million, which was held back from the
purchase price 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, if finalized, will be
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
12
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.
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. System Advisory Group, LLC subsequently withdrew such claim.
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
13
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. PREPETITION LEGAL PROCEEDINGS
COMMON SHAREHOLDER ACTIONS
The following is a summary of some of the more significant legal
proceedings involving the Debtors. In the normal course of business, aside from
the matters discussed below, the Debtors are subject to various legal
proceedings and claims.
On or about September 29, 1997, a putative class action lawsuit (the
"Ceasar Action") was filed against Cityscape 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 Old Cityscape
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 Cityscape 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 Cityscape and certain of its
officers and directors in federal court in New Jersey (the "New Jersey Action").
In these actions, plaintiffs allege that Cityscape and its senior officers
engaged in securities fraud by affirmatively misrepresenting and failing to
disclose material information regarding the lending practices of Cityscape's UK
subsidiary, and the impact that these lending practices would have on
Cityscape's financial results. Plaintiffs allege that a number of public filings
and press releases issued by Cityscape 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, Cityscape 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.
Under Section 510(b) of the Bankruptcy Code:
a claim . . . for damages arising from the purchase or sale of such
a security [i.e., a security of the debtor or of an affiliate of the
debtor], or for reimbursement or contribution allowed under section
502 on account of such a claim, shall be subordinated to all claims
or interests that are senior to or equal [to] the claim or interest
represented by such security, except that if such security is common
stock, such claim has the same priority as common stock.
The claims asserted in the foregoing litigation are for damages allegedly
sustained in connection with the purchase or sale of the Old Cityscape Common
Stock. Under the Plan, Holders of Old Cityscape Common Stock (Class 12) will not
receive or retain any interest or property under the Plan. Claims asserted in
the foregoing litigation against the Debtors, if allowed, would fall within the
Class of Old Cityscape Common Stock and Old
14
Warrant Securities Claims (Class 14) which, by virtue of Section 510(b) of the
Bankruptcy Code, is equal in priority to the Class of Holders of Old Cityscape
Common Stock. Accordingly, such Holders of Claims in Class 14 would not receive
or retain any interest or property under the Plan even if any of their asserted
Claims were Allowed. The Plan does not affect claims asserted in the foregoing
litigation against any defendants other than the Debtors.
PREFERRED SHAREHOLDER ACTION
In September 1998, Elliott Associates, L.P. and Westgate International,
L.P. filed a lawsuit against Cityscape 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 Cityscape
(Counts III and IV). Plaintiffs allege to have purchased a total of $20 million
of such preferred stock. Plaintiffs seek unspecified damages, including
pre-judgment interest, attorneys' fees, other expenses and court costs.
Cityscape and its defendant officers and directors have moved to dismiss this
action.
The claims asserted in this litigation are for damages allegedly sustained
in connection with the purchase or sale of Old Series B Preferred Stock. Under
the Plan, Holders of Old Series B Preferred Stock (Class 10) will not receive or
retain any interest or property under the Plan. Claims asserted in this
litigation against the Debtors, if allowed, would fall within the Class of Old
Series B Preferred Stock Securities Claims (Class 11) which, by virtue of
Section 510(b) of the Bankruptcy Code, is junior in priority to the Class of
Holders of Old Series B Preferred Stock. Accordingly, such Holders of Claims in
Class 11 would not receive or retain any interest or property under the Plan
even if any of their asserted Claims were Allowed. The Plan does not affect
claims asserted in this litigation against any defendants other than the
Debtors.
OTHER LAWSUITS AGAINST THE DEBTORS
In February 1998, a putative class action lawsuit (the "Simpson Action")
was filed against the Debtors 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 Debtors. In connection with the financing, the Debtors are 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 (a) who secured mortgage financing from the Debtors 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 (b) whose mortgage brokers
received a fee from the Debtors. 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 Debtors
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.
In April 1998, the Debtors were named as defendants 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 Debtors are alleged to have
purchased at least eight of the loans (and may have purchased 15 of the loans)
at issue in the complaint. The Debtors have not yet been involved in any
discovery and have yet to file their
15
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 Debtors believe that eight of these plaintiffs may
have claims that involve loans acquired by the Debtors. The Debtors have
continued to monitor the proceedings and have participated informally in certain
settlement discussions, but, as a result of the Debtors' chapter 11 proceedings,
have not been required to file a response and have not been required to
participate formally in any discovery.
Although no assurance can be given as to the outcome of the lawsuits
described above, the Debtors believe that the allegations in each of the actions
are without merit. To the extent that plaintiffs in the foregoing litigation
seek monetary damages against the Debtors, plaintiffs' Claims may be liquidated
and, if appropriate, Allowed by the Bankruptcy Court, afforded the treatment to
which such liquidated and Allowed claims are entitled under the Plan and
discharged in accordance with the Bankruptcy Code.
OTHER LEGAL PROCEEDINGS
In January 1998, the Debtors 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 Debtors under an
agreement whereby Walsh sold mortgage loans to the Debtors. The Debtors claim
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 Debtors
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 Debtors' motion for
summary judgment. On February 1, 1999, Judge Stein denied the Debtors' 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, CSC filed an action in the U.S. District Court for the
District of Maryland against multiple parties entitled Cityscape Corp. vs.
Global Mortgage Company, et al. CSC is in the process of serving the complaint
on the defendants. To date, CSC 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 CSC previously acquired. The Debtors have
previously reserved for losses against such loans.
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,
Cityscape received a request from the staff of the Securities and Exchange
Commission (the "SEC") for additional information concerning Cityscape's
voluntary restatement of its financial statements for the quarter ended June 30,
1996. The Debtors 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 Debtors 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
Debtors 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 Debtors announced that they 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
SEC has requested additional information from Cityscape in connection with the
accounting related to the J&J Acquisition and the Greyfriars Acquisition.
Cityscape is supplying
16
such requested information. In mid-October 1997, the SEC 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 Debtors are continuing to cooperate fully in this
matter.
As a result of the Debtors' negative operating results, the Debtors
received inquiries from the New York State Department of Banking regarding the
Debtors' qualifications to continue to hold a mortgage banking license. In
connection with such inquiries, the Debtors were 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 Debtors
believe they complied with their 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 Debtors hold
which in turn could have a negative effect on the Debtors' results of operations
and financial condition.
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 "U.K. Proceedings"). Although Ocwen initially informed
CSC-UK that it would defend the U.K. 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'S initiating the U.K. Proceedings, Ocwen informed CSC-UK that it
would defend the (then proposed) U.K. 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.
The Debtors, Ocwen and certain of their subsidiaries are discussing the
terms of a settlement agreement, in full and final settlement of all causes of
action, claims, demands, liabilities, damages, costs, charges and expenses that
the Debtors, CSC-UK and Ocwen and their respective subsidiaries may have against
each other. Such claims include Ocwen's alleged claim against the Debtors and/or
CSC-UK with respect to the Alleged Loan Liabilities. Under the settlement
agreement CSC-UK would be paid (pound) 2.0 million ($3.3 million) plus interest
from the Holdback account, and Ocwen would be paid the remaining (pound) 1.5
million ($2.4 million) plus interest from the Holdback account. The above
proposed settlement is contemplated in the Debtors' recorded investment in
discontinued operations at December 31, 1998. The settlement, if finalized, will
be submitted to the Bankruptcy Court for approval.
In addition, the Debtors are parties to various legal proceedings arising
out of the ordinary course of their 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 Debtors.
D. SIGNIFICANT EVENTS DURING THE CHAPTER 11 CASES
FILING OF THE CHAPTER 11 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.
17
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, NY 10022
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
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, NY 10022
ATTORNEYS
18
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
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
19
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
ATTORNEYS
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, NY 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. The Debtors have repaid
all indebtedness under the DIP Facilities.
20
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 OR REQUESTED
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:
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 six
leases of non-residential 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
21
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 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.
COMPENSATION MOTION
On April 21, 1999 the Debtors filed a motion pursuant to Sections 363, 365
and 105 of the Bankruptcy Code seeking, among other things, (i) approval of the
payment of 1998 bonuses to senior management in the aggregate amount of
$1,135,000; (ii) approval of the payment of 1998 stay bonuses to certain
mid-level employees in the aggregate amount of less than $11,000; (iii) approval
of 1999 stay bonuses for certain employees remaining with the Debtors in the
aggregate amount of $462,441; (iv) approval of the assumption of the employment
agreements (two as amended) with Cheryl P. Carl who is in charge of the Debtors'
sales of mortgage loans, Peter Kucma who is the Debtors' chief operating officer
and Tim S. Ledwick who is the Debtors' chief financial officer; and (v) approval
of the terms of the continued employment of the Debtors' chief executive
officer. A hearing on this motion is scheduled for May 6, 1999.
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;
22
(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" (the "Examiner's
Report") is attached hereto as Exhibit "B". You are encouraged to read the full
text of the Examiner's Report. It is the Debtors' view that the Examiner's
conclusions support the releases being given by the Debtors and the related
injunctions that are included within the Plan.
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.
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.
23
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 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
24
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 7,944,200 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 $79 million,
consisting primarily of mortgage residual certificates, receivables related to
such certificates, mortgages held for sale 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.
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 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. 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.
25
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 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."
26
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. Payment of all United States Trustee fees
required to be made prior to the Effective Date will be made by the Debtors.
Payment of all United States Trustee fees required to be made after the
Effective Date will be made by the Reorganized Company. The Debtors will file
all required monthly financial reports prior to the Effective Date and the
Reorganized Company will file all required monthly financial reports after the
Effective Date.
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. Proofs of claim on
account of Administrative Claims, Priority Tax Claims and other Priority Claims
have been filed in the Debtors' chapter 11 cases which Claims, if Allowed as
asserted, would exceed $10,000,000 in the aggregate. In addition, a deadline for
the assertion of Administrative Claims has not yet been set (nor do the Debtors
anticipate that one will be set to occur until after the Effective Date of the
Plan). Nevertheless, based upon a careful review of their books and records, the
Debtors believe that the Allowed amount of Administrative Claims, Priority Tax
Claims and other Priority Claims will fall below, or even well below,
$10,000,000 in the aggregate after the Debtors complete their claims resolution
process. However, given the uncertainty at this time as to the outcome of any
individual component of such total, the Debtors believe that setting forth any
greater specificity as to the components would represent merely guesswork and
would not be helpful to creditors voting on the Plan. Therefore, they have
chosen instead to present the amount of such Claims in the aggregate and to
assume payment of such amount in full, in cash for purposes of estimating
recoveries to other creditors under the Plan.
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 such Allowed Priority Tax Claim, or upon such other terms
determined by the Bankruptcy Court to provide the
27
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. Proofs of claim on
account of Administrative Claims, Priority Tax Claims and other Priority Claims
have been filed in the Debtors' chapter 11 cases which Claims, if Allowed as
asserted, would exceed $10,000,000 in the aggregate. In addition, a deadline for
the assertion of Administrative Claims has not yet been set (nor do the Debtors
anticipate that one will be set to occur until after the Effective Date of the
Plan). Nevertheless, based upon a careful review of their books and records, the
Debtors believe that the Allowed amount of Administrative Claims, Priority Tax
Claims and other Priority Claims will fall below, or even well below,
$10,000,000 in the aggregate after the Debtors complete their claims resolution
process. However, given the uncertainty at this time as to the outcome of any
individual component of such total, the Debtors believe that setting forth any
greater specificity as to the components would represent merely guesswork and
would not be helpful to creditors voting on the Plan. Therefore, they have
chosen instead to present the amount of such Claims in the aggregate and to
assume payment of such amount in full, in cash for purposes of estimating
recoveries to other creditors under the Plan.
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.
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
28
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
(other than possibly any that may arise by virtue of any creditor's right of
setoff under Section 553 of the Bankruptcy Code) against the Debtors as of the
Effective Date. In the event there are any Allowed Other Secured Claims, the
Debtors anticipate that such Claims will be left unimpaired without the need for
any Cash payments by the Debtors or, in the case of Allowed Other Secured Claims
arising by virtue of setoff rights, satisfied with funds already held by the
Holders of such Claims. Thus, there should be no effect on distributions to
Holders of Allowed Claims in any other Class in the event there are any Allowed
Other Secured Claims.
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) 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. Proofs of claim on
account of Administrative Claims, Priority Tax Claims and other Priority Claims
have been filed in the Debtors' chapter 11 cases which Claims, if Allowed as
asserted, would exceed $10,000,000 in the aggregate. In addition, a deadline for
the assertion of Administrative Claims has not yet been set (nor do the Debtors
anticipate that one will be set to occur until after the Effective Date of the
Plan). Nevertheless, based upon a careful review of their books and records, the
Debtors believe that the Allowed amount of Administrative Claims, Priority Tax
Claims and other Priority Claims will fall below, or even well below,
$10,000,000 in the aggregate after the Debtors complete their claims resolution
process. However, given the uncertainty at this time as to the outcome of any
individual component of such total, the Debtors believe that setting forth any
greater specificity as to the components would represent merely guesswork and
would not be helpful to creditors voting on the Plan. Therefore, they have
chosen instead to present the amount of such Claims in the aggregate and to
assume payment of such amount in full, in cash for purposes of estimating
recoveries to other creditors under the Plan.
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
29
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 7,346,708 shares of New Common Stock (I.E., one share of New
Common Stock for every $45.26 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.)
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 $60.32 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).
30
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.
The Plan's assumption that the total Allowed Claims in Class 5 (General
Unsecured Claims) will not exceed $10 million is predicated on, among other
things, the Debtors either (a) achieving a consensual resolution of the Claims
filed by Harris Trust and Savings Bank ("Harris"), U.S. Bank National
Association ("U.S. Bank"), Financial Security Assurance Inc. ("FSA") and
Financial Guaranty Insurance Company ("FGIC") or (b) successfully contesting
such Claims. Harris is the trustee and FGIC is the certificate insurer for the
particular securitization known as Cityscape Home Equity Loan Trust, Series
1996-3. Either Harris or U.S. Bank, as applicable, is the trustee and FSA is the
certificate insurer for each of the particular securitizations known as (i)
Cityscape Home Equity Loan Trust, Series 1995-2, (ii) Cityscape Home Equity Loan
Trust, Series 1995-3, (iii) Cityscape Home Equity Loan Trust, Series 1996-1,
(iv) Cityscape Home Equity Loan Trust, Series 1996-2 and (v) Cityscape Home
Equity Loan Trust, Series 1996-4. FSA, FGIC, Harris and U.S. Bank each filed
proofs of claim against the Debtors asserting in the aggregate claims for
hundreds of millions of dollars (E.G., FGIC's claim, alone, is for an amount not
less than $162 million). FSA, FGIC, Harris and U.S. Bank each assert that (1) a
portion of each Claim is secured, (2) a portion of each Claim is entitled to
administrative priority under Sections 503(b) and 507(a)(1) of the Bankruptcy
Code, and (3) each Claim that is not determined to be a Secured or
Administrative Claim is a Class 5 General Unsecured Claim. The Debtors dispute
some or all of such assertions. The Debtors, FSA, FGIC, Harris and U.S. Bank are
currently discussing possible terms of consensual resolutions. If these Claims
are not compromised, disallowed, or reduced significantly, FSA, FGIC, Harris
and/or U.S. Bank may be able to cause Class 5 to vote against the Plan.
Allowance of any of the Claims of FSA, FGIC, Harris or U.S. Bank in an amount
that causes the total Allowed Claims in Class 5 to exceed $10 million would
affect the value of the distributions to Class 4 and Class 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 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 431,702 shares of New Common Stock (I.E., one share of New
Common Stock for every $316.56 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
31
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
32
any, will 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. 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 7,944,200
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
33
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.
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 7,944,200 shares of New Common Stock to be issued,
Holders of Old Senior Notes will be entitled to a distribution of 7,346,708
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 7,944,200 shares
- Amount of shares contributed by Class 4 to Class 6 (after giving effect
to allowance of $10,000,000 in Class 5 Claims)
(431,702 shares)
= 7,346,708 shares (or approximately 92.48% of the 7,944,200 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 $45.26 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 431,702 shares that would otherwise have been distributed
to Class 6.
CLASS 6 DISTRIBUTION
Of the estimated 7,944,200 shares of New Common Stock to be issued,
Holders of Old Subordinated Debentures will be entitled to a distribution of
431,702 shares, or approximately 5.43% of the 7,944,200 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
$316.56 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 7,944,200 shares of New Common Stock to be issued,
Holders of Allowed General Unsecured Claims will be entitled to a distribution
of approximately 165,790 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) +
34
Allowed Amount of Class 5 Claims (estimated at $10,000,000)
x 7,944,200 shares
= 165,790 shares (or approximately 2.09% of the 7,944,200 shares).
Based upon the estimated, allowed amount of Class 5 Claims ($10,000,000),
this means that each Holder of a Class 5 Claim will receive one share of New
Common Stock for each $60.32 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 165,790 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 7,944,200 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) $60.32), (b) such excess shares will distributed to
the Holders of Allowed Class 5 Claims at the rate of one share per $60.32 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. For example, the Plan's
assumption that the total Allowed Claims in Class 5 (General Unsecured Claims)
will not exceed $10 million is predicated on, among other things, the Debtors
either (a) achieving a consensual resolution of the Claims filed by Harris, U.S.
Bank, FSA and FGIC or (b) successfully contesting such Claims. Harris is the
trustee and FGIC is the certificate insurer for the particular securitization
known as Cityscape Home Equity Loan Trust, Series 1996-3. Either Harris or U.S.
Bank, as applicable, is the trustee and FSA is the certificate insurer for each
of the particular securitizations known as (i) Cityscape Home Equity Loan Trust,
Series 1995-2, (ii) Cityscape Home Equity Loan Trust, Series 1995-3, (iii)
Cityscape Home Equity Loan Trust, Series 1996-1, (iv) Cityscape Home Equity Loan
Trust, Series 1996-2 and (v) Cityscape Home Equity Loan Trust, Series 1996-4.
FSA, FGIC, Harris and U.S. Bank each filed proofs of claim against the Debtors
asserting in the aggregate claims for hundreds of millions of dollars (E.G.,
FGIC's claim, alone, is for an amount not less than $162 million). FSA, FGIC,
Harris and U.S. Bank each assert that (1) a portion of each Claim is secured,
(2) a portion of each Claim is entitled to administrative priority under
Sections 503(b) and 507(a)(1) of the Bankruptcy Code, and (3) each Claim that is
not determined to be a Secured or Administrative Claim is a Class 5 General
Unsecured Claim. The Debtors dispute some or all of such assertions. The
Debtors, FSA, FGIC, Harris and U.S. Bank are currently discussing possible terms
of consensual resolutions. If these Claims are not compromised, disallowed, or
reduced significantly, FSA, FGIC, Harris and/or U.S. Bank may be able to cause
Class 5 to vote against the Plan. Allowance of any of the Claims of FSA, FGIC,
Harris or U.S. Bank in an amount that causes the total Allowed Claims in Class 5
to exceed $10 million would affect the value of the distributions to Class 4 and
Class 6.
EFFECT OF OVERESTIMATION OR UNDERESTIMATION OF AGGREGATE AMOUNT OF
ADMINISTRATIVE CLAIMS, PRIORITY TAX CLAIMS AND OTHER PRIORITY CLAIMS.
Solely for the purpose of preparing the projections attached hereto as
Exhibit C and the liquidation analysis attached hereto as Exhibit D and for
estimating recoveries for creditors under the Plan, the Debtors have assumed
(they believe conservatively) that the aggregate amount of Administrative
Claims, Priority Tax Claims and other Priority Claims will not exceed
$10,000,000. If the Debtors' estimated maximum of $10,000,000 is an overestimate
of the aggregate amount of such Claims, the Reorganized Company will have Cash
in excess of that anticipated in an amount equal to the difference between
$10,000,000 and the actual, Allowed amount of such Claims. The aggregate value
of the New Common Stock to be distributed to Holders of Allowed Claims in
Classes 4, 5 and 6 would, thus, be increased by the amount of such excess Cash.
If the Debtors' estimated maximum is an underestimate of the aggregate amount of
such Claims, the Reorganized Company will have to use more Cash to satisfy such
Claims than is anticipated in an amount equal to the difference between the
actual, Allowed amount of such Claims and
35
$10,000,000. The aggregate value of the New Common Stock to be distributed to
Holders of Allowed Claims in Classes 4, 5 and 6 would, thus, be decreased by
such amount.
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)(l) 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 (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
36
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)(l) of the Bankruptcy Code, Priority Tax Claims are not
designated as a Class of Claims for purposes of the Plan.
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.
37
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 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
38
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 $79 million,
consisting primarily of mortgage residual certificates, receivables related to
such certificates, mortgages held for sale and cash. The use of such assets
(including the possibility of reentering the mortgage 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
39
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.
Because the decision to hire officers will vest in the new Boards of
Directors of the Reorganized Company, which Boards are not currently constituted
but whose initial members have been named, the Debtors are not in a position to
identify which, if any, insiders, officers or directors of the Debtors will hold
any position as an officer of either Reorganized Cityscape or Reorganized CSC.
To date, none of the directors or officers of the Reorganized Company that has
been named by the Unofficial Committee of Senior Noteholders is an officer,
director or insider of either of the Debtors. The Debtors have asked the
Unofficial Committee of Senior Noteholders to advise them of any additional
officers and/or directors that are chosen and, to the extent that such officers
and/or directors have been named as of the time of the Confirmation Hearing, the
Debtors will disclose their names and affiliations to the Court and other
parties in interest.
40
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.
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
41
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 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
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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 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). Prior to the
Confirmation Hearing, the Debtors will File with the Bankruptcy Court a notice
disclosing the identity(ies) of the Disbursing Agent or Agents to be used for
making distributions under the Plan. 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
43
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 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.
44
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 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 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, 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
45
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 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
46
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 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
47
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.
SETOFFS
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.
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
48
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)(l) 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)(l) 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.
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 Debtors will File a
list of executory contracts and unexpired leases to be rejected pursuant to the
Plan, and will serve such list on the parties to such contracts and unexpired
leases and the Office of the United States Trustee prior to the Confirmation
Hearing. 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
49
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.
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.
The Debtors conducted analyses of the avoidability under Sections 544
through 550 of the Bankruptcy Code of some of the more significant payments and
transfers made prior to the commencement of these cases (such as payments made
to their bank lenders, stay bonus payments made to senior managers and other
ordinary course
50
payments) and concluded that there was no basis on which to seek to recover the
payments that were analyzed. They did not, however, conduct such an analysis
with respect to each and every prepetition payment or transfer that was made
within the relevant time periods, which payments and transfers are listed in the
Debtors' Statements of Financial Affairs filed with the Bankruptcy Court. The
Debtors determined that it was appropriate to defer to the Boards of Directors
of the Reorganized Company to analyze and, if appropriate, pursue such avoidance
actions. First, the Plan (at Section XI.F) provides that the Reorganized Company
will retain all rights and causes of action under Sections 544 through 550 of
the Bankruptcy Code. Second, because the Plan is an "all-equity" plan (other
than payments to be made on account of certain administrative, priority and
small, unsecured claims), any cash recovered would not affect the distributions
to be made to creditors under the Plan. Instead, recoveries by the Debtors or
Reorganized Company obtained by pursuing any such avoidance actions would serve
to increase the value of the shares of stock distributed to the creditors. Thus,
because the only effect of successful prosecution of any such avoidance actions
would be to increase the value of the New Common Stock to be distributed under
the Plan, and because the cost to the Debtors or Reorganized Company of pursuing
any such claims would be borne (indirectly) by the holders of the New Common
Stock, the Debtors determined to (i) retain the rights of the Reorganized
Company to pursue such claims, and (ii) leave the decision of whether or not to
pursue such claims to the Boards of Directors of the Reorganized Company. To do
otherwise, the Debtors believe, would risk burdening the estates with
unnecessary costs and possibly delaying the Debtors' exit from chapter 11.
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; (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
51
of the Creditors' Committee, the Indenture Trustees, The CIT Group/Equipment
Financing, Inc., Greenwich Capital Financial Products, Inc. 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 Debtors believe that this limitation of liability of certain entities
and individuals associated with the reorganization for activities related to the
Debtors' chapter 11 cases (including the related injunction provided under
Section XI.D of the Plan) implements the qualified immunity which courts have
found to exist for those who act in a fiduciary capacity with respect to a
chapter 11 reorganization. SEE IN RE DREXEL BURNHAM LAMBERT GROUP, INC., 138
B.R. 717 (Bankr. S.D.N.Y. 1992) (expressly approving of provision implementing
qualified immunity in a plan of reorganization), AFF'D ON OTHER GROUNDS, 140
B.R. 347 (S.D.N.Y. 1992); SEE ALSO PAN AM CORP. V. DELTA AIR LINES, INC., 175
B.R. 438, 514 (S.D.N.Y. 1994) (stating that official committee enjoys qualified
immunity concerning conduct within the scope of the committee's authority);
PHILIP V. L.F. ROTHSCHILD HOLDINGS, INC. (IN RE L.F. ROTHSCHILD HOLDINGS, INC.),
163 B.R. 45, 49 (S.D.N.Y. 1994) (holding that indenture trustee in its capacity
as committee member entitled to limited immunity).
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,
(vi) The CIT Group/Equipment Financing, Inc. and Greenwich Capital Financial
Products, Inc., 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
52
Company's trust indentures, the CIT Facility, the Greenwich Facility, the DIP
Facilities, the Debtors, the Reorganization Cases, the Plan or the Disclosure
Statement.
The Debtors do not believe that the Claims they are releasing under the
Plan have sufficient value to warrant pursuing them, which is consistent with
the conclusions of the Court-appointed examiner in the Debtors' chapter 11
cases. See the Examiner's Report, attached as Exhibit B hereto, at 10-11, 16-17,
21-22, 26-27. A debtor (after notice and a hearing) may "abandon any property of
the estate that is burdensome to the estate or that is of inconsequential value
and benefit to the estate," 11 U.S.C.ss.554(a), including legal claims that the
debtor has the right to pursue against non-debtors. ANACONDA-ERICSSON
TELECOMMUNICATIONS, INC. V. HESSEN (IN RE TELTRONICS SERVICES, INC.), 762 F.2d
185, 189 (2d Cir. 1985); KNAPP V. SELIGSON (IN RE IRA HAUPTT & CO.), 398 F.2d
607, 613 (2d Cir. 1968); HANOVER INS. CO. V. TYCO INDUS., INC., 500 F.2d 654,
657 (3d Cir. 1974) ("In carrying out his statutory duty to maximize the
bankrupt's estate, the Trustee may abandon his claim to any asset, including a
cause of action, he deems less valuable to the estate than the cost of asserting
that claim or administering that property"); IN RE WILSON, 94 B.R. 886, 888-89
(Bankr. E.D. Va. 1989).
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 (in its capacity as
a 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 (in
its capacity as a 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; PROVIDED, HOWEVER,
that nothing in Section XI.C of the Plan will constitute or be deemed to
constitute a release of any such claims, obligations, suits, judgments, damages,
rights, causes of action and liabilities other than such claims, obligations,
suits, judgments, damages, rights, causes of action and liabilities that are
held by Holders of Class 4, Class 4a, Class 6 and Class 6a Claims solely in
their capacities as Holders of such Claims.
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, the Indenture Trustees, The
CIT Group/Equipment Financing, Inc. or Greenwich Capital Financial Products,
Inc. (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
53
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 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
54
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;
(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.
55
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 April 27, 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 10:00 a.m., New York City Time, on June 9, 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 5:00 p.m., New York City Time, on June 1, 1999:
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.
56
OFFICE OF THE UNITED STATES TRUSTEE
33 Whitehall Street, 21st Floor
New York, NY 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, 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.
57
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 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;
58
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.
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.
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
59
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.
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.
60
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.
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;
61
(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.
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
62
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.
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.
63
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 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 against 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.
G. 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
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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 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
65
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 II 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 7,944,200 issued and
outstanding shares) will be less than $10.00 per 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
66
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.
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
67
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 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
68
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 pre-change 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 pre-ownership 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 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.
69
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 of ten 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
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.
70
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 of
ten 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 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
71
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.
72
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
73
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.
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: April 27, 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
74
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 Under Chapter 11 of the Bankruptcy Code
First Amended Joint Plan of Reorganization of Cityscape Financial Corp. and
Cityscape Under Chapter 11 of the Bankruptcy Code, dated April 27, 1999,
incorporated by reference to Exhibit 2.1 to the Company's 8-K filed with the
Commission on June 30, 1999.
A-1
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
Examiner Report Pursuant to Order of October 20, 1998, dated November 9, 1998,
incorporated by reference to Exhibit B to Exhibit 99.2 to the Company's 10-K405
filed with the Commission on June 30, 1999.
B-1
EXHIBIT C TO DEBTORS' FIRST AMENDED JOINT DISCLOSURE STATEMENT
PURSUANT TO SECTION 1125 OF THE BANKRUPTCY CODE
United Proforma Consolidated Balance Sheet
and Projected Financial Information
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 December 31,
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 December 31,
1998. In addition, since the Reorganization is to be effectuated through a plan
of reorganization under chapter 11 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 December 31, 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.
C-1
PRO FORMA CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
ADJUSTMENTS
FOR FRESH
ADJUSTMENTS FOR AFTER START
HISTORICAL REORGANIZATION REORGANIZATION REPORTING PRO FORMA
---------- --------------- -------------- ----------- ---------
Assets
Cash And Cash Equivalents ................. 18,405 (1,000)1 17,405 17,405
Cash Held In Escrow ....................... 3,769 3,769 3,769
Mortgage Servicing Receivables ............ --
Trading Securities ........................ 33,661 33,661 33,661
Mortgages Held For Sale, Net .............. 123,346 123,346 123,346
Mortgages Held For Investment, Net ........ --
Equipment And Leasehold Improvements, Net . --
Investment In Discontinued Operations, Net. 13,008 13,008 13,008
Income Tax Receivable ..................... 1,550 1,550 1,550
Reorganization Value ...................... -- -- (600)7 (600)
Other Assets .............................. 15,599 15,599 15,599
---------- --------------- -------------- ----------- ---------
Total Assets .............................. 209,338 (1,000) 208,338 (600) 207,738
---------- --------------- -------------- ----------- ---------
Liabilities
Warehouse Financing Facilities ............ 105,969 105,969 105,969
Accounts Payable And Other Liabilities .... 23,519 23,519 23,519
Allowance For Loan Losses ................. -- --
Liabilities Subject to Compromise ......... 47,804 (47,804)2 -- --
Old Senior Notes .......................... 300,000 (300,000)3 -- --
Old Subordinated Debentures ............... 129,620 (129,620)4 -- -- --
---------- --------------- -------------- ----------- ---------
Total Liabilities ......................... 606,913 (477,424) 129,489 -- 129,489
Equity (Deficit)
Old Cityscape Common Stock ................ 649 (649)5 -- --
Old Cityscape Preferred Stock ............. 0 (0)5 -- --
Treasury Stock ............................ (175) 175 5 -- --
New Common Stock .......................... 128 5 128 128
Additional Paid-In Capital ................ 175,304 347 5 175,651 (97,529)7 78,121
Retained Earnings (Accumulated Deficit) ... (573,354) 476,424 6 (96,929) 96,929 7 --
---------- --------------- -------------- ----------- ---------
Total Stockholder's Equity (Deficit) ...... (397,575) 476,424 78,849 (600) 78,249
---------- --------------- -------------- ----------- ---------
Total Liabilities and Equity (Deficit) .... 209,338 (1,000) 208,338 (600) 207,738
---------- --------------- -------------- ----------- ---------
C-2
(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:
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................... 47,804
--------
Net gain on forgiveness of debt...................... 477,424
Reorganization expenses.............................. (1,000)
--------
Total change in retained earnings.................... $476,424
========
(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 $95 million and $100 million. For purposes of determining
reorganization value, the Debtors have used $97 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 $79 million consisting of unencumbered assets of
approximately $97 million less liabilities (excluding funds held in escrow) of
approximately $18 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
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 April 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 five-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 $79 million, consisting primarily of mortgage
residual certificates, receivables related to such certificates, mortgages held
for sale 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.
C-4
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.
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.
C-5
The Projections were prepared assuming that the current general
economic conditions prevailing today will not change materially
during the Projection Period.
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 Sav-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:
Home Equity Loans 9.5%
Sav-A-Loans 13.5%
Cash on Hand 5%
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 December 31,
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
C-6
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.
FINANCIAL PROJECTIONS. Each of the following tables summarizes the
Debtors' projections for several distinct periods including:
a. The five 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.
POSSIBLE SALE OF SERVICER ADVANCES. The Projections do not reflect
the potential impact of a sale of the Debtors' servicer advances
(I.E., claims against securitization trusts for reimbursement of
advances made to such trusts by the Debtors as servicer) currently
under negotiation with third parties. If such a transaction as
currently being discussed were to occur, the Debtors would receive
cash of approximately $17 to 18 million and record a net gain of
approximately $9 to 10 million at the time of closing. Such possible
sale would be in connection with a possible consensual resolution of
the claims asserted by Harris Trust and Savings Bank, U.S. Bank
National Association, Financial Security Assurance Inc. and
Financial Guaranty Insurance Company discussed in greater detail in
Section IV.B of the Disclosure Statement.
C-7
CITYSCAPE CORPORATION AND CITYSCAPE FINANCIAL CORPORATION
PROJECTED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(AMOUNTS IN THOUSANDS)
THE COMPANY
------------------------------------------------------------
HISTORICAL PROJECTED PROJECTED
---------------------------- PERIOD FROM SEVEN MONTHS
YEAR ENDED YEAR ENDED JANUARY 1, ENDING
DECEMBER 31, DECEMBER 31, THROUGH DECEMBER 31,
1997 1998 MAY 31, 1999 1999
------------ ------------ ------------ ------------
Revenues:
Gain (Loss) On Sale .............................. 83,366 128 -- --
Net Unrealized Loss On Valuation Of Residuals .... (148,004) (68,847) -- --
Mortgage Origination Income ...................... 4,849 2,238 -- --
Net Interest Income (Expense) .................... 2,830 (32,076) 2,135 1,630
Accretion On Residual Balances ................... -- 5,065 9,269 10,901
Servicing Income ................................. 389 1,383 1,909 1,431
Other ............................................ 20,302 1,454 6,529 --
------------ ------------ ------------ ------------
Total Revenues ................................... (36,657) (97,102) 9,053 8,079
Expenses:
Salaries And Employee Benefits ................... 41,089 28,744 3,602 2,435
Selling Expenses ................................. 4,137 4,424 1,800 300
Other Operating Expenses ......................... 42,085 47,061 3,000 1,100
Provision For Loan Losses ........................ 12,614 8,267 -- --
Restructuring Charge / Non-Recurring Expense ..... -- 35,113 1,000 --
------------ ------------ ------------ ------------
Total Expenses ................................... 99,925 123,609 9,402 3,835
------------ ------------ ------------ ------------
Earnings (Loss) From Continuing Operations Before
Income Taxes And Extraordinary Items ........ (136,582) (220,712) (349) 4,244
Income Tax Benefit (Provision) ................... (18,077) 38 -- 1,366
------------ ------------ ------------ ------------
Earnings (Loss) From Continuing Operations Before
Extraordinary Items ......................... (118,505) (220,750) (349) 2,878
Earnings (Loss) From Discontinued Operations ..... (295,846) -- -- --
Gain On Forgiveness Of Debt ...................... -- -- 477,366 --
------------ ------------ ------------ ------------
Net Earnings (Loss) .............................. (414,351) (220,750) 477,016 2,878
Old Cityscape Preferred Stock Dividends .......... 905 -- -- --
Old Cityscape Preferred--Beneficial Discount ..... 2,725 -- -- --
Old Cityscape Preferred--Increase In Liquidation
Preference .................................. 918 6,278 -- --
Old Cityscape Preferred--Default Payments ........ -- 14,049 -- --
------------ ------------ ------------ ------------
Net Earnings (Loss) Applicable To Common Stock ... (418,899) (241,077) 477,016 2,878
------------ ------------ ------------ ------------
Net Interest Income (Expense) Detail:
Interest Income .................................. 73,520 14,363 6,551 1,630
Interest Expense And Fees On Warehouse Credit
Facilities .................................. (70,690) (46,439) (4,415) --
------------ ------------ ------------ ------------
Net Interest Income (Expense) .................... 2,830 (32,076) 2,135 1,630
------------ ------------ ------------ ------------
THE REORGANIZED COMPANY
----------------------------------------
PROJECTED YEAR ENDING DECEMBER 31,
-----------------------------------------
2000 2001 2002 2003
-------- -------- -------- --------
Revenues:
Gain (Loss) On Sale .............................. -- -- -- --
Net Unrealized Loss On Valuation Of Residuals .... -- -- -- --
Mortgage Origination Income ...................... -- -- -- --
Net Interest Income (Expense) .................... 3,392 2,548 2,504 2,675
Accretion On Residual Balances ................... 12,881 13,999
Servicing Income ................................. 1,076 813
Other ............................................ -- -- -- --
-------- -------- -------- --------
Total Revenues ................................... 14,570 14,881 16,461 17,487
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 ........ 10,946 11,257 12,837 13,863
Income Tax Benefit (Provision) ................... 4,220 4,228 4,937 5,439
-------- -------- -------- --------
Earnings (Loss) From Continuing Operations Before
Extraordinary Items ......................... 6,727 7,029 7,900 8,424
Earnings (Loss) From Discontinued Operations ..... -- -- -- --
Gain On Forgiveness Of Debt ...................... -- -- -- --
-------- -------- -------- --------
Net Earnings (Loss) .............................. 6,727 7,029 7,900 8,424
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 ... 6,727 7,029 7,900 8,424
-------- -------- -------- --------
Net Interest Income (Expense) Detail:
Interest Income .................................. 3,392 2,548 2,504 2,675
Interest Expense And Fees On Warehouse Credit
Facilities .................................. -- -- -- --
-------- -------- -------- --------
Net Interest Income (Expense) .................... 3,392 2,548 2,504 2,675
-------- -------- -------- --------
C-8
CITYSCAPE CORPORATION AND CITYSCAPE FINANCIAL CORPORATION
PROJECTED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(AMOUNTS IN THOUSANDS)
THE COMPANY
-------------------------------------------
HISTORICAL PROJECTED
---------------------------- PRE-CONFIRM
DECEMBER 31, DECEMBER 31, MAY 31, REORGANIZATION
1997 1998 1999 ADJUSTMENTS
------------ ------------ ----------- --------------
Assets
Cash And Cash Equivalents ....... 2,594 18,405 14,862
Cash Held In Escrow ............. 24,207 3,769 3,479
Mortgage Servicing Receivables .. 9,525 -- --
Trading Securities .............. 126,475 33,661 33,403
Mortgages Held For Sale, Net .... 93,290 123,346 17,100
Mortgages Held For Investment, Net 6,531 -- --
Equipment And Leasehold
Improvements, Net ............... 6,058 -- --
Investment In Discontinued
Operations, Net ................. 84,232 13,008 13,008
Income Tax Receivable ........... 18,376 1,550 1,361
Other Assets .................... 27,268 15,599 17,980 --
------------ ------------ ----------- --------------
Total Assets .................... 398,556 209,338 101,193 --
------------ ------------ ----------- --------------
Liabilities
Warehouse Financing Facilities .. 77,479 105,969 --
Accounts Payable And Other
Liabilities ..................... 63,428 23,519 21,751
Allowance For Loan Losses ....... 4,555 -- --
Liabilities Subject to Compromise 300 47,804 47,746 (47,746)
Old Senior Notes ................ 300,000 300,000 300,000 (300,000)
Old Subordinated Debentures ..... 129,620 129,620 129,620 (129,620)
------------ ------------ ----------- --------------
Total Liabilities ............... 575,382 606,913 499,117 (477,366)
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 ................ -- -- 128 128
Additional Paid-In Capital ...... 175,477 175,304 175,304 (95,991)
Retained Earnings (Accumulated
Deficit) ....................... (352,604) (573,354) (573,703) 573,703
------------ ------------ ----------- --------------
Total Stockholder's Equity
(Deficit) ...................... (176,826) (397,575) (397,924) 477,366
------------ ------------ ----------- --------------
Total Liabilities and Equity
(Deficit) ...................... 398,556 209,338 101,193 --
------------ ------------ ----------- --------------
THE REORGANIZED COMPANY
-------------------------------------------------------------------
PROJECTED
POST-CONFIRM DECEMBER 31,
MAY 31, ----------------------------------------------------
1999 1999 2000 2001 2002 2003
------------ -------- -------- -------- -------- --------
Assets
Cash And Cash Equivalents ....... 14,862 26,805 50,962 50,072 53,498 59,304
Cash Held In Escrow ............. 3,479 3,479 3,479 3,479 3,479 3,479
Mortgage Servicing Receivables .. -- -- -- -- -- --
Trading Securities .............. 33,403 37,075 43,605 51,524 55,998 58,617
Mortgages Held For Sale, Net .... 17,100 17,100 -- -- -- --
Mortgages Held For Investment, Net -- -- -- -- -- --
Equipment And Leasehold
Improvements, Net ............... -- -- -- -- -- --
Investment In Discontinued
Operations, Net ................. 13,008 10,000 -- -- -- --
Income Tax Receivable ........... 1,361 1,361 -- -- -- --
Other Assets .................... 17,980 1,000 1,000 1,000 1,000 1,000
------------ -------- -------- -------- -------- --------
Total Assets .................... 101,193 96,819 99,046 106,075 113,975 122,399
------------ -------- -------- -------- -------- --------
Liabilities
Warehouse Financing Facilities .. -- -- -- -- -- --
Accounts Payable And Other
Liabilities ..................... 21,751 14,500 10,000 10,000 10,000 10,000
Allowance For Loan Losses ....... -- -- -- -- -- --
Liabilities Subject to Compromise -- -- -- -- -- --
Old Senior Notes ................ -- -- -- -- -- --
Old Subordinated Debentures ..... -- -- -- -- -- --
------------ -------- -------- -------- -------- --------
Total Liabilities ............... 21,751 14,500 10,000 10,000 10,000 10,000
Equity (Deficit)
Old Cityscape Common Stock ...... -- -- -- -- -- --
Old Cityscape Preferred Stock ... -- -- -- -- --
Treasury Stock .................. -- -- -- -- -- --
New Common Stock ................ 128 128 128 128 128
Additional Paid-In Capital ...... 79,314 79,314 79,314 79,314 79,314 79,314
Retained Earnings (Accumulated
Deficit) ....................... -- 2,878 9,604 16,633 24,533 32,957
------------ -------- -------- -------- -------- --------
Total Stockholder's Equity
(Deficit) ...................... 79,442 82,319 89,046 96,075 103,975 112,399
------------ -------- -------- -------- -------- --------
Total Liabilities and Equity
(Deficit) ...................... 101,193 96,819 99,046 106,075 113,975 122,399
------------ -------- -------- -------- -------- --------
C-9
CITYSCAPE CORPORATION AND CITYSCAPE FINANCIAL CORPORATION
PROJECTED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(AMOUNTS IN THOUSANDS)
THE COMPANY
-------------------------------------------
HISTORICAL PROJECTED
---------------------------- PERIOD FROM
YEAR ENDED YEAR ENDED JANUARY 1
DECEMBER 31, DECEMBER 31, THROUGH
1997 1998 MAY 31, 1999
------------ ------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES
Earnings (Loss) From Continuing Operations ............ (118,505) (220,750) (349)
Adjustments To Reconcile Net (Loss) Earnings From -- -- --
Continuing Operations To Net Cash Used In .... -- -- --
Continuing Operating Activities:
Depreciation And Amortization ................ 2,846 6,020 --
Income Taxes Payable ......................... (27,528) 16,738 --
Gain On Forgiveness Of Debt .................. -- -- (477,366)
Net Unrealized Gain On Securities
Decrease (Increase) In Mortgage Servicing
Receivables ................................ 35,099 4,969 --
Decrease (Increase) In Trading Securities .... (23,276) 92,815 258
Provision For Losses ......................... 12,614 8,267 --
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 .............. 1,637,387 414,167 106,246
Mortgage Origination Funds Disbursed ......... (1,655,191) (460,300) --
Accrued Interest Payable on Senior and
Subordinated Debt ............................ 4,484 39,771 --
Accrued Reorganization Charges ............... 8,521 -- --
Other, Net ...................................... 6,085 2,881 473,636
------------ ------------ ------------
Net Cash Provided By (Used In) Continuing Operating
Activities .......................................... (124,670) (86,900) 102,426
Net Cash (Used In) Discontinued Operating Activities .. (177,260) -- --
------------ ------------ ------------
Net Cash Provided By (Used In) Operating Activities ... (301,930) (86,900) 102,426
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Purchases) Sales of Equipment .................. (5,134) -- --
Sale From Discontinued Operations, Net .......... -- 71,224 --
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 2,997 --
------------ ------------ ------------
Net Cash Provided By (Used In) Investing Activities ... 30,179 74,221 --
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) In Warehouse Credit
Facilities .................................... (2,749) 28,490 (105,969)
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 28,490 (105,969)
------------ ------------ ------------
Net Increase (Decrease) In Cash And Cash Equivalents .. 2,149 15,811 (3,544)
Cash And Cash Equivalents At The Beginning Of Period .. 445 2,594 18,405
------------ ------------ ------------
Cash And Cash Equivalents At The End Of The Period .... 2,594 18,405 14,862
------------ ------------ ------------
THE REORGANIZED COMPANY
--------------------------------------------------------------------
PROJECTED
SEVEN MONTHS
ENDING DECEMBER 31,
DECEMBER 31, ----------------------------------------------------
1999 2000 2001 2002 2003
------------ ---------- ---------- ---------- ----------
CASH FLOW FROM OPERATING ACTIVITIES
Earnings (Loss) From Continuing Operations ............ 2,878 6,727 7,029 7,900 8,424
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 .... (3,672) (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 .............. -- 17,100 -- -- --
Mortgage Origination Funds Disbursed ......... -- -- -- -- --
Accrued Interest Payable on Senior and
Subordinated Debt ............................ -- -- -- -- --
Accrued Reorganization Charges ............... -- -- -- --
Other, Net ...................................... 9,729 (3,139) -- -- --
------------ ---------- ---------- ---------- ----------
Net Cash Provided By (Used In) Continuing Operating
Activities .......................................... 8,935 14,158 (890) 3,426 5,805
Net Cash (Used In) Discontinued Operating Activities .. -- -- -- -- --
------------ ---------- ---------- ---------- ----------
Net Cash Provided By (Used In) Operating Activities ... 8,935 14,158 (890) 3,426 5,805
------------ ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Purchases) Sales of Equipment .................. -- -- -- -- --
Sale From Discontinued Operations, Net .......... 3,008 10,000 -- -- --
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 ... 3,008 10,000 -- -- --
------------ ---------- ---------- ---------- ----------
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 ............................... -- -- -- --
Net 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 .. 11,943 24,158 (890) 3,426 5,805
Cash And Cash Equivalents At The Beginning Of Period .. 14,862 26,805 50,962 50,072 53,498
------------ ---------- ---------- ---------- ----------
Cash And Cash Equivalents At The End Of The Period .... 26,805 50,962 50,072 53,498 59,304
------------ ---------- ---------- ---------- ----------
C-10
EXHIBIT D TO DEBTORS' FIRST AMENDED JOINT DISCLOSURE STATEMENT
PURSUANT TO SECTION 1125 OF THE BANKRUPTCY CODE
Liquidation Analysis
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
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
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 $47.711 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
LIQUIDATION ANALYSIS
ESTIMATED AS OF MAY 31, 1999
(Dollars in thousands)
ESTIMATED ESTIMATED
BOOK PERCENTAGE LIQUIDATION
BALANCE RECOVERY VALUE
----------- ----------- -----------
ASSETS AVAILABLE TO CREDITORS
Cash and Cash Equivalents (1) .................. $ 14,862 100.0% $ 14,862
Trading Securities ............................. 33,403 50.0% 16,702
Mortgages Held for Sale ........................ 17,100 80.0% 13,680
Investment in Discontinued Operations, Net ..... 13,008 70.0% 9,106
Income Tax Receivable .......................... 1,361 100.0% 1,361
Other Assets (2) ............................... 17,980 0.0% --
----------- ----------- -----------
Total Assets Available to Creditors ............ $ 97,714 57.0% $ 55,711
=========== =========== ===========
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. The Liquidation Analysis does not reflect the
potential impact of a sale of the Debtors' servicer advances (I.E.,
claims against securitization trusts for reimbursement of advances
made to such trusts by the Debtors as servicer) currently under
negotiation with third parties. If such a transaction as currently
being discussed were to occur, the Debtors would receive cash of
approximately $17 to 18 million and record a net gain of
approximately $9 to 10 million at the time of closing. Such possible
sale would be in connection with a possible consensual resolution of
the claims asserted by Harris Trust and Savings Bank, U.S. Bank
National Association, Financial Security Assurance Inc. and
Financial Guaranty Insurance Company discussed in greater detail in
Section IV.B of the Disclosure Statement.
D-4
APPLICATION OF PROCEEDS TO CLAIMS AND INTERESTS
ESTIMATED AS OF MAY 31, 1999
(Dollars in thousands)
ESTIMATED PROCEEDS
AMOUNT AVAILABLE TO PERCENTAGE
OF CLAIMS SATISFY CLAIMS RECOVERY
--------- -------------- ----------
TOTAL ESTIMATED LIQUIDATION PROCEEDS
AVAILABLE FOR DISTRIBUTION ................ -- $ 55,711 --
CHAPTER 7 EXPENSES
Trustee's fees ........................... -- 1,700 --
Operating costs .......................... -- 4,800 --
Professional fees ........................ -- 1,500 --
--------- -------------- ----------
Available to pay unsecured creditors ........ -- $ 47,711 --
========= ============== ==========
UNSECURED CREDITORS
Priority and Chapter 11 Administrative
Claims (3) ................................. 10,000 10,000 100.00%
Old Senior Notes (4) ........................ 332,513 37,079 11.15%
General Unsecured Claims(5) ................. 8,000 632 7.9%
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 -- --
========= ============== ==========
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 governing the
Old Subordinated Debentures.
(6) Includes $129,620,000 of principal on Old Subordinated Debentures and
$7,038,720 of accrued interest.
D-5