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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31,
1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
COMMISSION FILE NUMBER: 0-27314
CITYSCAPE FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
11-2994671
(IRS Employer Identification No.)
565 Taxter Road, Elmsford, New York 10523-5200
(Address of principal executive offices, including zip code)
(914) 592-6677
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $0.01 per share.
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirement for
the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
As of February 28, 1997, the aggregate market value of the registrant's Common
Stock held by nonaffiliates of the registrant was $223,311,891 based on the
closing sales price of the registrant's Common Stock as reported on the Nasdaq
National Market on such date. For purposes of this calculation, shares owned by
officers, directors and 5% stockholders known to the registrant have been deemed
to be owned by affiliates. As of March 25, 1997, the number of shares of the
registrant's Common Stock outstanding was 29,744,322, and there were no shares
of the registrant's Preferred Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on June 4, 1997 (the "Proxy Statement"), which
will be filed with the Securities and Exchange Commission no later than 120 days
after the close of the registrant's fiscal year ended December 31, 1996 ("fiscal
1996") are incorporated herein as provided in Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
Cityscape Financial Corp. (the "Company") is a consumer finance company
engaged in the business of originating, purchasing, selling and servicing
mortgage loans secured primarily by one- to four-family residences. The majority
of the Company's loans are made to owners of single family residences who use
the loan proceeds for such purposes as debt consolidation and financing of home
improvements and educational expenditures, among others. Through its
wholly-owned subsidiary Cityscape Corp. ("CSC"), the Company is licensed or
registered to do business in 42 states and the District of Columbia. Through its
indirect wholly-owned subsidiary City Mortgage Corporation Limited, which
operates under the trade name Cityscape (UK) Ltd. ("CSC-UK"), the Company
originates, sells and services mortgage loans in England, Scotland and Wales.
The Company was incorporated under the laws of the State of Delaware in
December 1988. CSC, the Company's principal operating subsidiary, was
incorporated under the laws of the State of New York in March 1985. In January
1994, CSC acquired Astrum Funding Corp. ("Astrum") which had operated as a
mortgage banker in 11 states. In April 1994, the Company 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 Company's common stock (the
"CSC Acquisition"). In connection with the CSC Acquisition, the Company changed
its name to Cityscape Financial Corp.
In May 1995, the Company and three principals of a privately held UK-based
mortgage lender formed CSC-UK, a company organized under English law. CSC-UK
operates in the United Kingdom (excluding Northern Ireland, the "UK"), and lends
to individuals who are unable or unwilling to obtain mortgage financing from
conventional mortgage sources such as banks and building societies
("Conventional UK Lenders") primarily because of impaired or unsubstantiated
credit histories and/or unverifiable income. In September 1995, the Company
acquired the 50% interest in CSC-UK not then owned by the Company through the
issuance to the three other shareholders of an aggregate of 3.6 million shares
of Common Stock valued at $21.6 million.
In April 1996, CSC-UK acquired all of the outstanding capital stock of J&J
Securities Limited ("J&J"), a London-based mortgage lender, in exchange for
(pound)15.3 million ($23.3 million based on the Noon Buying Rate on the date of
such acquisition) in cash and 548,000 shares of Common Stock valued at $9.8
million based upon the closing price of the Common Stock on the date of such
acquisition less a discount for restrictions on the resale of such stock and
incurred closing costs of $788,000 (the "J&J Acquisition"). J&J provides
primarily second lien mortgage loans to UK borrowers who, similar to the
Company's UK borrowers, are unable or unwilling to obtain mortgage financing
from Conventional UK Lenders. Pursuant to the J&J Acquisition, the Company
acquired assets with a fair value of $73.8 million, consisting primarily of
mortgage loans of $73.0 million (inclusive of the $21.8 million value assigned
to the acquired mortgage servicing rights), and assumed liabilities with a fair
value of $45.1 million. The J&J Acquisition resulted in the recognition of $5.2
million of goodwill, which is being amortized using the straight-line method
over a life of ten years.
In June 1996, CSC-UK acquired all of the outstanding capital stock of
Greyfriars Group Limited (formerly known as Heritable Finance Limited and
referred to herein as "Greyfriars"), a mortgage lender based in Reading, England
in exchange for (pound)41.8 million ($64.1 million based on the Noon Buying Rate
on the date of such acquisition) in cash and 99,362 shares of Common Stock
valued at $2.5 million based upon the closing price of the Common Stock on the
date of such acquisition and incurred closing costs of $2.3 million (the
"Greyfriars Acquisition"). Greyfriars provides mortgage loans to borrowers that
generally have higher quality credit profiles than the Company's typical UK
borrowers. Pursuant to the Greyfriars Acquisition, the Company acquired assets
with a fair value of $225.4 million, consisting
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primarily of mortgage loans of $221.2 million (inclusive of the $29.2 million
value assigned to the acquired mortgage servicing rights), and assumed
liabilities with a fair value of $181.9 million. The Greyfriars Acquisition
resulted in the recognition of $25.4 million of goodwill, which is being
amortized using the straight-line method over a life of ten years.
The Company also owns an equity interest in IMC Mortgage Company, a Delaware
corporation (including its predecessor Industry Mortgage Company, L.P., "IMC").
IMC originates, purchases, sells and services mortgage loans that are secured
primarily by one- to four-family residences. Pursuant to a contractual agreement
with IMC, the Company is obligated to offer to sell an average of $1.0 million
of loans per month to IMC at market prices. The Company entered into an
agreement with IMC whereby, in return for the payment of a fee, such monthly
obligation was eliminated. For the years ended December 31, 1996 and 1995, IMC
contributed approximately $754,000 and $480,000, respectively, to the Company's
pre-tax income. IMC completed a public offering of its common stock in June
1996. As a result of this offering, the Company's interest in IMC is no longer
accounted for under the equity method of accounting whereby the Company
recognized its relative portion of the partnership earnings as revenues, but
rather as available-for-sale securities in accordance with SFAS No. 115.
Available-for-sale securities are reported on the statement of financial
condition at fair market value with any corresponding change in value reported
as an unrealized gain or loss (if assessed to be temporary) as an element of
stockholders' equity after giving effect for taxes.
The Company's principal executive office and mailing address is 565 Taxter
Road, Elmsford, New York 10523-5200 and its telephone number is (914) 592-6677.
All references herein to "$" are United States dollars; all references
to "(pound)" are to British Pounds Sterling. Unless otherwise specified,
translation of amounts from British Pounds Sterling to United States dollars has
been made herein using exchange rates at the end of the period for which the
relevant statements are prepared for balance sheet items and the weighted
average exchange rates for the relevant period for statement of operations
items, each based on the noon buying rate in New York City for cable transfers
in foreign currencies as certified for customs purposes by the Federal Reserve
Bank of New York.
US Overview
In the US, the Company focuses on lending to individuals who are unable or
unwilling to obtain mortgage financing from conventional mortgage sources such
as thrift institutions and commercial banks. These conventional lending sources,
as compared to the Company, generally impose stringent and inflexible loan
underwriting guidelines and require a longer period of time to approve and fund
loans. The Company's customers are individuals who often have impaired or
unsubstantiated credit histories and/or unverifiable income (for example,
because they are self-employed) and require or seek a high degree of
personalized service and prompt response to their loan applications. As a
result, the Company's customers generally are not averse to paying the higher
interest rates that the Company charges for its loan programs as compared to the
interest rates charged by conventional lending sources. Because its customers
generally borrow for reasons other than the purchase of homes, the Company
believes that it is not as dependent as traditional mortgage bankers on general
levels of home sales and refinancing activity. In addition, the Company has a
Wholesale Loan Acquisition Program whereby it purchases loans on a wholesale
basis, on both a flow and bulk basis, from selected financial institutions and
mortgage bankers.
In the US, the Company originates and purchases loans principally through
two channels: (i) originations through an extensive network of independent
mortgage brokers utilizing the Company's New York headquarters and four regional
processing offices located in California, Georgia, Illinois and Virginia; and
(ii) purchases on a flow basis through its Wholesale Loan Acquisition Program
from selected financial institutions and mortgage bankers known as loan
correspondents. The Company originates loans through a network of independent
mortgage brokers, with its highest producing broker accounting for 1.9% of the
total US origination and purchase volume in 1996. The Company strives to
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process each loan application received from mortgage brokers as quickly as
possible in accordance with the Company's loan application approval procedures.
Accordingly, most loan applications receive preliminary decisions within 24
hours of receipt and are funded within 15-25 days thereafter. Loans purchased on
a flow basis in the Wholesale Loan Acquisition Program are originated by loan
correspondents in accordance with the Company's underwriting guidelines and the
Company purchases such loans in the form of complete loan packages. In some
cases, the Company provides its loan correspondents with subwarehousing
arrangements to facilitate the funding of mortgage loans. The highest producing
loan correspondent in the Wholesale Loan Acquisition Program accounted for 7.4%
of the total US origination and purchase volume in 1996. In June 1996, the
Company first participated in the secondary market for loans offered on a bulk
basis by loan correspondents. From time to time, the Company may make bulk
purchases if it believes it has the excess underwriting, servicing and
management capabilities in place, as well as the necessary access to capital, to
review and purchase bulk loans competitively in this market segment.
As the Company expands the channels through which it originates and
purchases loans, it has also broadened the types of loans it offers. The Company
offers a wide range of loan products in the US, including fixed and adjustable
rate residential mortgage loans for refinancing, educational, home improvement
and debt consolidation purposes, fixed and adjustable rate purchase money
mortgage loans and mortgage loans on small multi-family and mixed-use properties
(collectively, "Core Products"). The Company also offers conventional home
improvement loans, "Sav*-A-Loan(R)" mortgage loans (loans generally made to
homeowners with little or no equity in their property but who possess a
favorable credit profile and debt-to-income ratio and who often use the proceeds
from such loans to repay outstanding indebtedness as well as to make home
improvements) and, to a lesser extent, loans partially insured by the Federal
Housing Administration (the "FHA"), an agency of the US Department of Housing
and Urban Development ("HUD"), pursuant to the Title I credit insurance program
of the National Housing Act of 1934 (collectively, "Specialty Products"). The
Company's Title I loans must be used by the borrower for property improvements
that protect or improve the basic livability or utility of the property. The
Title I loan program is a coinsurance program. The Company initially is at risk
for 10% of the principal balance of each Title I loan. The FHA will insure the
remaining 90% of the principal balance of each loan, subject to certain limits.
The Company expects that an increasing percentage of its loan origination and
purchase volume in the future will consist of the "Sav*-A-Loans(R)" product. The
Company also offers jumbo loans and, beginning in 1997, conventional home
mortgage loans (collectively, "Other Products").
The Company retains the servicing rights to substantially all loans it
originates or purchases. Loan servicing involves the collection of payments due
under a loan, the monitoring of the loan, the remitting of payments to the
holder of the loan, the furnishing of reports to such holder and the enforcement
of the lender's rights, including attempting to recover delinquencies and
instituting loan foreclosures.
The Company sells its US loan production primarily through securitizations
and, to a lesser extent, through whole loan sales. Through 1994, the Company
sold virtually all of its loan production in private placements to a variety of
institutional purchasers. In 1995 and 1996, however, the Company sold a
substantial portion of its loan production in securitizations. In the US, the
Company funds its originations and purchases through warehouse lines of credit
and purchase and sale facilities. The Company sells the loans it originates and
purchases into the purchase and sale facilities prior to their securitization
and recognizes a gain on sale of the loans at the time of such sale. The Company
also sold $73.5 million and $209.0 million of its US loan production in whole
loan sales to institutional investors in 1996 and 1995, respectively.
UK Overview
The Company commenced its UK operations in May 1995 with the formation of
CSC-UK. In the UK market, the Company has focused on lending to individuals who
are generally unable to obtain mortgage financing from Conventional UK Lenders
because of impaired or unsubstantiated credit histories and/or
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unverifiable income, or who otherwise choose not to seek financing from such
conventional lenders. The UK market is highly fragmented and underserved by
conventional lenders as compared to the US market. The lack of participation of
Conventional UK Lenders in this market is primarily a result of economic
difficulties experienced in the UK in the late 1980s which, in conjunction with
poor underwriting practices and a decline in home values caused in part by the
significant reduction in the deductibility of mortgage interest for UK personal
income tax purposes (enacted in 1988), resulted in unacceptable losses for
Conventional UK Lenders who made loans to these borrowers during that period. As
a result of these losses, the regulatory authorities responsible for overseeing
Conventional UK Lenders imposed higher capital adequacy ratios on Conventional
UK Lenders as a condition to making loans to borrowers with impaired or
unsubstantiated credit histories and/or unverifiable income irrespective of the
actual income levels or the home equity of these borrowers. Given the lack of
participation by Conventional UK Lenders, the Company believes that these
borrowers currently obtain mortgage financing through a number of small mortgage
lending institutions, if at all.
The Company originates loans in the UK through a network of independent
mortgage brokers and, to a lesser extent, through direct marketing to occupants
of government-owned residential properties in the UK. The Company has entered
into contracts with 45 of its UK brokers, including several of its highest
producing brokers, which grant the Company a right of first refusal on all loan
applications that meet specified underwriting criteria. To further increase its
loan origination volume and market share in the UK, the Company also acquired
J&J and Greyfriars, two previously unaffiliated UK-based mortgage lenders. The
J&J Acquisition provides the Company with greater strength in the second lien
loan market, experienced management personnel necessary for the continuance of
its expansion in the UK and a greater share of the fragmented UK market through
additional broker relationships and the expansion of offered products. The
Greyfriars Acquisition represents an expansion to a higher credit quality
borrower and new product types complementary to the Company's other UK business,
using more traditional underwriting guidelines.
Although the Company's operations in the UK are generally similar to its US
operations, there are certain distinctions, primarily related to loan payment
and prepayment terms.
Except for certain loans subject to regulations promulgated under the United
Kingdom Consumer Credit Act 1974 (the "CCA"), the Company's UK loans are
calculated by using a standard rate of interest (the "Standard Rate"), and may
provide the opportunity for a borrower to make a reduced, or "concessionary"
payment (the "Concessionary Rate") to the extent that the borrower pays his loan
when due and is current on previous loan payments.
The Company calculates the amount of interest payable on a mortgage loan
over its stated term to maturity by using a "flat" rate of interest on its
original loan balance assuming no amortization of the loan. The cost of credit
is determined by multiplying the Standard Rate times the original principal
amount of the loan times the original stated term of the loan. To determine the
UK borrower's monthly payment, the total cost of credit, adjusting for fees and
charges, is added to the original principal amount of the loan and divided by
the number of months represented in the loan term. This payment results in an
effective annual percentage rate (the "APR") that is greater than the APR on a
loan originated in the US.
For purposes of allocating loan payments between principal and interest, the
amount of a payment that is deemed to be allocable to the repayment of principal
will be determined on an actuarial basis assuming that the loan has an interest
rate that is equal to the APR on the loan, calculated using the applicable
Concessionary Rate. For example, a hypothetical loan of (pound)35,000 written
with a Concessionary Rate of 9.9% and an original term to stated maturity of 20
years would have a monthly payment of (pound)434.58 and an APR of 13.97%
assuming all payments were made when due. In order to determine the principal
portion of each monthly payment under the Concessionary Rate of the hypothetical
(pound)35,000 loan described above, the loan is amortized using its
Concessionary Rate APR.
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With regard to prepayment terms, if a UK borrower redeems his loan in full
prior to the maturity date (whether voluntarily or through a default), the
equivalent of an early payment fee is incurred as a result of the borrower's
contractual obligation to pay a stated amount of interest for the credit
extended. The Company's UK loans provide for prepayment fees to be determined in
one of two ways. For some of the Company's UK loans, the prepayment fee is based
on an amount equal to a certain number of months interest; however, for the
majority of the Company's UK loans, the total principal and interest due over
the full term of the loan is calculated and then the borrower is provided a
rebate for the unexpired portion of the loan term, resulting in the equivalent
of an early payment fee. The amount due on a majority of the Company's loans in
the case of a prepayment is based upon the amount of interest, at the Standard
Rate or the Concessionary Rate (whichever is in effect on the date of
prepayment), that has been "earned" and calculated in accordance with the "Rule
of 78s" method with a one- to six-month deferment (i.e., for purposes of
calculating the amount of interest that has been earned, the redemption date is
set at one to six months after the date of actual redemption by the borrower).
Prepayments of the Company's regulated loans are calculated using a one-month
deferment, except where the term of the loan is five years or less, in which
case a two-month deferment is used. This generally results in lower prepayment
fees as compared to the Company's unregulated UK loans, which typically use a
six-month deferment. In the hypothetical (pound)35,000 loan described above, the
prepayments after the 18th, 120th and 180th months calculated using a six-month
deferment at the Standard Rate would require the borrower to pay (pound)45,872,
or 31.1% more than the original principal balance ((pound)41,080 or 17.4% more
than the original principal balance if the prepayment were calculated using a
one-month deferment), (pound)54, 651 or 56.1% more than the original principal
balance ((pound)48,869 or 39.6% more than the original principal balance if the
prepayment were calculated using a one-month deferment) and (pound)51,440 or
47.0% more than the original principal balance ((pound)32,277 or 7.8% less than
the original principal balance if the prepayment were calculated using a
one-month deferment), respectively.
The Company believes that the standard rate/concessionary rate structure
utilized in some of its loan products is enforceable under English law, and that
providing for a Standard Rate that can be reduced to a Concessionary Rate upon
prompt payment does not contravene the common law rule against charging penalty
interest. In addition, the Company believes that the provisions of such loans
entitling the Company to accelerate repayment upon the occurrence of specified
events of default and to calculate the interest rebate using the Rule of 78s
with a six month deferment are not penalties. A recent UK regulatory initiative
questions standard/concessionary rate structures and the use of the Rule of 78s.
See " - Regulation -- UK."
The Company anticipates selling UK loans through securitizations and, to a
lesser extent, through whole loan sales to maximize its revenues and provide
greater flexibility in managing its cash requirements. Prior to each such sale,
the Company sells UK loans upon origination to Greenwich International Ltd., a
subsidiary of Greenwich Capital Markets, Inc. (referred to herein, including any
affiliates as "Greenwich") pursuant to the terms of the UK Greenwich Facility
(defined herein under "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources"). The
Company completed UK loan sales through securitizations of (pound)32.0 million
($49.6 million), (pound)64.5 million ($102.0 million) and (pound)116.3 million
($189.2 million), respectively, in March, October and November 1996.
BUSINESS STRATEGY
The Company's business strategy is to continue its focus on lending to
borrowers who are unable or unwilling to obtain mortgage financing from
conventional mortgage sources. In the US, the Company originates loans through
an extensive network of independent mortgage brokers and purchases loans under
its Wholesale Loan Acquisition Program on a flow basis from selected financial
institutions and mortgage bankers. In the UK, the Company originates loans
principally through a network of independent mortgage brokers. The Company's
goal is to continue to increase its loan origination and purchase volume by
pursuing the strategies discussed below.
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Geographic Expansion in the US
The Company intends to expand its independent mortgage broker network and
Wholesale Loan Acquisition Program in the US on a nationwide basis. The Company
currently has an extensive independent broker network covering 42 states and the
District of Columbia utilizing the Company's New York headquarters and four
regional processing centers located in California, Georgia, Illinois and
Virginia and it purchases loans from selected financial institutions and
mortgage bankers. The Company's expansion strategy involves (i) identifying
areas with demographic statistics that are comparable to existing markets where
the Company has been successful in originating and purchasing loans, (ii)
understanding the area's regulatory requirements and tailoring the Company's
loan programs to comply with such requirements, (iii) searching for and
retaining business development representatives for that area who have (or have
the ability to develop) contacts with the independent mortgage brokers
originating loans in that area and (iv) marketing to the independent mortgage
brokers through the business development representatives in order to generate
loan originations.
Growth through Selected Acquisitions
The Company intends to continue to expand its existing operations through
the acquisition of complementary consumer finance businesses in order to enhance
revenue and market share as well as to capitalize on the Company's existing
systems, financial resources and experienced personnel. In furtherance of this
strategy, the Company acquired J&J and Greyfriars. The J&J Acquisition provides
the Company with greater strength in the second lien loan market, experienced
management personnel and a greater share of the fragmented UK market through
additional broker relationships and the expansion of product offerings. The
Greyfriars Acquisition represents an expansion to a higher credit quality
borrower and new product types complementary to the Company's other UK business.
Further Development and Expansion of UK Operations
In the UK, the Company seeks to target an underserved segment of the home
equity market by lending to borrowers who are unable to obtain mortgage
financing from conventional mortgage sources because of impaired or
unsubstantiated credit histories, and/or unverifiable income, or who choose not
to seek financing from such conventional lenders. Given the lack of
participation by Conventional UK Lenders in this market segment, the Company
believes that these borrowers currently obtain mortgage financing through a
number of small, privately held mortgage lenders, if at all.
Since the formation of CSC-UK in May 1995, the Company has been actively
marketing its products and services to mortgage brokers in the UK. In order to
increase purchase volume from its UK brokers, the Company has entered into
contracts with 45 of its brokers, including several of its highest producing
brokers, which grant the Company a right of first refusal on all loan
applications that meet specified underwriting criteria. The Company has
proprietary on-line software used by many of its brokers to expedite the loan
application process and has adopted in the UK its US underwriting procedures in
implementing standardized appraisal guidelines and employing underwriting and
processing staff to provide prompt, efficient and reliable service to the UK
broker community. The Company also intends to broaden the range of loan products
it offers in the UK in order to increase the base of brokers it serves. For
example, the Company has begun direct marketing of a new loan product designed
for occupants of government-owned residential properties in the UK.
Expansion of Wholesale Operations
The Company seeks to increase significantly its wholesale purchases of loans
from selected financial institutions and mortgage bankers under its Wholesale
Loan Acquisition Program. The Company offers a wide range of products and
services, as well as quick response times, to meet the needs of the participants
in its Wholesale Loan Acquisition Program. In addition, the Company offers
subwarehousing arrangements to selected mortgage bankers to facilitate the
funding of mortgage loans.
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Maximization of Independent Mortgage Broker Relationships
The Company seeks to maximize its loan origination capability from its
network of independent mortgage brokers by offering a variety of innovative
products and providing consistent underwriting and prompt and efficient service
at competitive prices. The Company offers over 20 loan products to its
independent mortgage brokers to meet the needs of the diverse borrower market.
The Company targets brokers with a smaller volume of loans, a segment of the
mortgage market the Company believes has typically been underserved by
traditional sources, and attempts to retain and grow these relationships by
providing quality and reliable products and services as well as consistent
underwriting and substantial funding sources. The Company processes and
underwrites loans for its brokers, generally making preliminary decisions within
24 hours of receipt of an application and funding within 15-25 days thereafter.
The Company believes that it can achieve further penetration of its existing
independent mortgage broker network without incurring significant concentration
risks. In the UK, the Company has entered into contracts with 45 of its brokers,
including several of its highest producing brokers, which grant the Company a
right of first refusal on all loan applications that meet specified underwriting
criteria. In addition, the Company has proprietary on-line software used by many
of its brokers to expedite the loan application process.
Maintenance of Underwriting Standards and Infrastructure
As the Company expands its product offerings and increases its loan
origination and purchase volume, it intends to continue to apply its
underwriting standards and quality control procedures in connection with the
loans it originates, purchases and services. The Company strives to develop
software and purchase hardware that monitor the Company's loan portfolio in
order to service the portfolio effectively. The Company has recently upgraded
its computer system to provide additional capacity to accommodate the increased
loan origination and purchase volume and to provide greater flexibility in
monitoring the various types of loan products the Company offers. The Company
continues to expand its facilities, retain experienced personnel and monitor
loan payments carefully in order to maintain service levels as it grows its loan
origination and purchase volume.
Introduction and Expansion of New Products
The Company frequently reviews its loan offerings and introduces new loan
products to attempt to meet the needs of its customers. The Company also
evaluates products or programs that it believes enhance revenue by leveraging
the Company's existing systems and personnel. In furtherance of this strategy,
in December 1995 the Company expanded loan production volume to include Title I
home improvement loans, in May 1996 the Company expanded loan production volume
to include conventional home improvement loans and in February 1997 the Company
expanded loan production volume to include conventional loans. The Company also
offers adjustable rate mortgage loans, jumbo loans and "Sav*-A-Loans(R)" (loans
to homeowners with little or no equity in their property but who possess a
favorable credit profile and debt-to-income ratio and who often use the proceeds
from such loans to repay outstanding indebtedness as well as make home
improvements). In addition, the Greyfriars Acquisition has provided the Company
with expanded loan product offerings to UK borrowers with higher quality credit
than the Company's typical UK borrowers.
LOANS
Overview
The Company's consumer finance activities primarily consist of originating,
purchasing, selling and servicing mortgage loans. The vast majority of these
loans are traditional home equity loans secured by first mortgages on one- to
four-family residences. The balance are loans secured by junior mortgages on
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one- to four-family residences, loans secured by first mortgages on small
multi-family residences and mixed-use properties, "Sav*-A-Loans(R)," jumbo
loans, conventional home improvement loans and, to a lesser extent, Title I home
improvement loans. Once a loan application has been received, the underwriting
process completed and the loan funded or purchased, the Company typically will
package the loans in a portfolio and sell the portfolio, either through a
securitization or directly on a whole loan basis to institutional purchasers.
The Company retains the right to service substantially all of the loan
origination and purchase volume that it sells. The Company also acts as a
contract loan servicer for other financial institutions.
Loan Originations and Purchases
The Company is licensed or registered to originate or purchase loans in 42
states and the District of Columbia through a network of independent mortgage
brokers and through its eight US branch offices. In addition, the Company
purchases loans on a wholesale basis from selected financial institutions and
mortgage bankers and, on occasion, in bulk from other originators. In the UK,
the Company also originates loans through a network of independent mortgage
brokers. The Company believes that its strategy of originating loans through
independent mortgage brokers and purchasing loans in the US through wholesale
acquisitions is efficient as it allows the Company, with only nine offices, to
maintain lower overhead expenses than competing companies utilizing a more
extensive branch office system.
CHANNELS OF LOAN ORIGINATIONS AND PURCHASES
US UK
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YEAR ENDED FORMATION
DECEMBER 31, THROUGH
------------------------------------------- DECEMBER 31,
1996 1995 1994 1996 1995
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Independent Mortgage
Brokers:
Principal balance...... $ 548,242 $291,907 $149,724 $220,034 $41,395
Number of loans........ 9,173 4,161 1,947 8,042 960
Average principal
balance per loan..... $ 59.8 $ 70.2 $ 76.9 $ 27.4 $ 43.1
Wholesale Loan
Acquisition
Program:
Principal balance...... $ 612,049 $125,957 $ 4,686 $ 1,045 --
Number of loans........ 9,431 1,847 60 47 --
Average principal
balance per loan..... $ 64.9 $ 68.2 $ 78.1 $ 22.2 --
Bulk Purchases(1):
Principal balance...... $ 129,064 -- -- $242,467 --
Number of loans........ 2,259 -- -- 18,527 --
Average principal
balance per loan..... $ 57.1 -- -- $ 13.1 --
Total Loan Originations
and Purchases:
Principal balance...... $1,289,355 $417,864 $154,410 $463,546 $41,395
Number of loans........ 20,863 6,008 2,007 26,616 960
Average principal
balance per loan..... $ 61.8 $ 69.6 $ 76.9 $ 17.4 $ 43.1
- ------------------
(1) For the year ended December 31, 1996, the UK data represent the loan
portfolios acquired as a result of the J&J Acquisition and Greyfriars
Acquisition.
Independent Mortgage Brokers. A significant portion of the Company's US loan
origination and purchase volume is currently derived from independent mortgage
brokers. During 1996 and 1995, $548.2 million or 42.5% and $291.9 million or
69.9%, respectively, of the Company's loan originations and purchases were
sourced through the independent mortgage broker network. All independent
mortgage brokers submitting loan applications to the Company must be registered
or licensed as required by the
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jurisdiction in which they operate. The Company believes that not only are
independent mortgage brokers the most efficient way to reach borrowers, but also
that the use of these brokers minimizes the Company's staffing requirements and
marketing expenses.
The Company receives credit application packages from mortgage brokers. As
independent mortgage brokers may submit loan applications to several prospective
lenders simultaneously, the Company strives to provide a quick response to the
loan application (in most instances a preliminary response is given on the same
day that the application is received). In addition, the Company emphasizes
personal service to both the broker and loan applicant by having consultants and
loan processors follow the loan application through the application and closing
process. Because the Company's independent mortgage brokers collect fees from
the borrower and are not compensated by the Company, the Company believes that
consistent underwriting, quick response times and personal service are critical
to successfully originating loans through independent mortgage brokers. During
1996 and 1995, the single highest producing independent mortgage broker
accounted for 1.9% and 6.4%, respectively, of the Company's US loan originations
and purchases, and the ten highest producing independent mortgage brokers
accounted for 7.8% and 21.0%, respectively, of the Company's US loan
originations and purchases. The Company periodically reviews the performance of
the loans produced by each independent broker and any pattern of higher than
expected delinquency or documentation deficiencies will result in the
elimination of that broker from the Company's approved list.
Wholesale Loan Acquisition Program. In addition to originating loans through
its network of independent mortgage brokers, the Company purchases US loans on a
flow basis through its Wholesale Loan Acquisition Program. These loan purchases
are in the form of complete loan packages originated by loan correspondents.
Commenced in 1994, the Wholesale Loan Acquisition Program accounted for $612.0
million (47.5%), $126.0 million (30.1%) and $4.7 million (3.0%) of the Company's
total US loan origination and purchase volume for 1996, 1995 and 1994,
respectively. The Company anticipates that this program will account for
substantially more of the Company's total loan origination and purchase volume
in the future.
The Company purchases loans on a flow basis under the Wholesale Loan
Acquisition Program. The correspondent follows the Company's underwriting
guidelines and lends to the borrower in accordance with these guidelines. After
the correspondent has made the loan, the Company purchases the loan from the
correspondent. Loan correspondents must be registered or licensed as required by
the jurisdiction in which they operate and must be approved by the Company.
Prior to approving a financial institution or mortgage banker as a loan
correspondent, the Company performs an extensive investigation of, among other
things, the proposed loan correspondent's licensing or registration and the
performance of its previously originated loans. The investigation includes
contacting the agency that licenses or registers such loan correspondent, as
well as other purchasers of loans originated by it, and reviewing such loan
correspondent's financial statements. Following approval, the Company requires
each loan correspondent to enter into a purchase and sale agreement with
customary representations and warranties regarding the loans sold to the
Company. No single financial institution or other mortgage banker in the
Wholesale Loan Acquisition Program accounted for more than 7.4% or 6.4% of the
Company's US loan originations and purchases during 1996 or 1995, respectively.
In order to facilitate its Wholesale Loan Acquisition Program, the Company
offers a wide range of products and services designed to meet the needs of its
loan correspondents including, in certain cases, a subwarehousing facility to
assist in the funding of mortgage loans. Borrowings under the Company's
subwarehousing lines have terms of not more than 30 days and require personal
guarantees from the principals of the loan correspondents for such credit lines.
Bulk Purchases. In June 1996, the Company first participated in the
secondary market for loans offered on a bulk basis by other originators. The
Company completed bulk purchases of $129.1 million in loans as of December 31,
1996. Bulk purchases accounted for 10.0% of the Company's total US loan
origination and purchase volume in 1996. In the case of bulk purchases, loan
correspondents originate
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numerous loans without seeking the Company's preapproval. The loans are packaged
in a large portfolio and presented to the Company for review and possible
purchase. The Company re-underwrites the loans in each package and purchases
those loans that meet its underwriting standards. From time to time, the Company
may make bulk purchases if it believes it has the underwriting, management and
servicing capabilities and capital resources necessary to compete effectively in
this market.
Geographic Distribution of US Loans. Although the Company is licensed or
registered in 42 states and the District of Columbia, it has historically
concentrated its business in the eastern seaboard states and the midwest. While
this concentration has declined, New York contributed 37.0% of the Company's
total US loan origination and purchase volume for the year ended December 31,
1995 and 17.7% for the year ended December 31, 1996. The Company intends to
expand its loan origination and purchase activities into new states, as well as
within states it currently serves, through both independent mortgage brokers and
its Wholesale Loan Acquisition Program. Typically, the Company begins to
originate and purchase loans within a six-month period after receiving its
license or becoming registered in a state. This allows the Company time to
develop appropriate documentation and procedures for complying with local and
state regulatory requirements, retain a business development representative for
the market, implement through that business development representative a
strategy designed to familiarize loan origination and purchase sources with the
Company and its loan programs, as well as pre-qualify appraisers, title
companies and closing attorneys. During 1996 and 1995, the Company received its
license or became registered to conduct mortgage banking activities in 25
additional states.
GEOGRAPHIC DISTRIBUTION OF US LOAN ORIGINATIONS
AND PURCHASES
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
------------ ------------- ---------
States
New York...... 17.7% 37.0% 67.2%
New Jersey.... 10.9 6.4 2.1
Illinois...... 10.0 17.6 12.2
Florida....... 8.4 0.6 --
Maryland...... 7.0 7.6 5.3
Ohio.......... 5.8 2.3 --
Indiana....... 5.8 4.1 5.0
Michigan...... 5.5 1.1 --
Georgia....... 4.9 4.2 --
Pennsylvania.. 4.6 5.8 0.4
Massachusetts. 3.8 1.9 0.7
South Carolina 2.5 1.7 --
Virginia...... 2.0 2.5 1.7
North Carolina 1.9 1.6 --
Connecticut... 1.7 1.4 4.5
California.... 1.3 -- --
Tennessee..... 0.9 -- --
All other states 5.3 4.2 0.9
------- -------- --------
Total. 100.0% 100.0% 100.0%
======= ======== ========
UK Originations. The Company currently originates all of its UK loans
through independent mortgage brokers using methods similar to those used in the
US to generate loan origination volume. Most loans to borrowers with impaired or
unsubstantiated credit histories, and/or unverifiable income, or who otherwise
do not choose to use Conventional UK Lenders are originated by independent
mortgage brokers throughout the UK. Mortgage brokers fund their originated loans
through private investors, selected financial institutions and, since the
formation of CSC-UK, the Company.
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The Company is licensed to originate loans throughout England, Scotland and
Wales. The Company will only originate loans through Company-approved
independent mortgage brokers that are accredited and licensed under the CCA.
Unlike in the US, the Company pays these brokers a commission on loans they
originate through CSC-UK. Many of the Company's mortgage brokers in the UK,
including the Company's 31 highest producing mortgage brokers, utilize the
Company's proprietary on-line software to expedite the loan process. Although
the Company has a large number of independent brokers who are approved to submit
applications in the UK, 30.7% of CSC-UK's loan originations in 1996 and 60.5% in
1995 came from three mortgage brokers. Although the Company believes that its
products and services will attract a consistent flow of loan origination volume
from mortgage brokers, there can be no assurance the Company will be able to
obtain similar levels of loan origination volume from these three, or other,
brokers in the future.
The Company has expanded its broker relationships, and therefore its
originations, in the UK through internal development, as well as through
strategic acquisitions. In order to provide increased purchase volume, the
Company has entered into contracts with several of its highest producing brokers
which grant the Company a right of first refusal on all loan applications by the
broker that meet specified underwriting criteria. The contracts generally have
three-year terms and provide that the Company will pay the broker certain
additional commissions upon the sale to the Company of specified volumes of
qualifying loans. As of December 31, 1996, the Company had entered into such
right of first refusal contracts with 45 UK brokers. These brokers accounted for
50.0% and 70.0% of the Company's total UK loan origination volume in 1996 and
1995, respectively.
The Company also recently expanded its originations sources in the UK
through the J&J Acquisition and the Greyfriars Acquisition. J&J originates loans
through a network of approved independent mortgage brokers, the majority of
which specialize in lending to borrowers who generally have credit
characteristics which would allow them to qualify for loans from Conventional UK
Lenders. These mortgage brokers refer applicants with weaker credit
characteristics to J&J. Traditionally, J&J's loans have been secured primarily
by second mortgages. Loans made by J&J tend to have higher interest rates than
the blended interest rates on loans made by CSC-UK. The weighted average
interest rate on J&J's loan portfolio as of December 31, 1996 and 1995 was 23.0%
and 23.2%, respectively, as compared to that of 16.4% and 16.4%, respectively,
on CSC-UK's loan portfolio as of the same dates. J&J's loans are subject to
prepayment fees. In addition, certain of J&J's loans are also subject to the
calculation of prepayments under the Rule of 78s method. Because the majority of
J&J's loans are regulated, prepayments under the Rule of 78s method are
therefore calculated with a one-month deferment, which generally results in
lower prepayment fees.
The Company believes that the J&J Acquisition strengthens the Company's
position in the UK market and expands its product base. J&J specializes in
lending to customers who are very similar to those served by the Company and
offers loan products used by borrowers for similar purposes. Pursuant to the J&J
Acquisition, the Company expanded its mortgage broker network. J&J also
originates several types of loans that the Company did not previously offer. The
Company believes that the expansion of the mortgage broker network and loan
products achieved through the J&J Acquisition will enable the Company to
increase its share of the fragmented UK market. The J&J Acquisition also
provides the Company with additional experienced management personnel for its
continued expansion in the UK. The Company also believes that, with access to
improved loan funding sources such as the UK Greenwich Facility, J&J will be
able to increase its loan origination volume significantly.
Greyfriars provides secured mortgage loans to individuals in the UK that
generally have higher quality credit profiles than the Company's typical UK
borrowers. Greyfriars originates, through a network of mortgage brokers, a wide
range of mortgage loan products secured primarily by second mortgages on single
family residences. The majority of Greyfriars' loans are made to owners of
residences who use the proceeds for such purposes as debt consolidation, the
financing of home improvements and educational purposes. Loans made by
Greyfriars tend to have a lower interest rate than the blended interest rate on
loans made by CSC-UK. The weighted average interest rate on Greyfriars' loan
portfolio as of December
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31, 1996 and 1995 was 13.8% and 14.8%, respectively, as compared to that of
16.4% and 16.4%, respectively, on CSC-UK's loan portfolio as of the same dates.
Greyfriars' loans are subject to prepayment fees and to the calculation of
prepayments under the Rule of 78s method. Because the majority of Greyfriars'
loans are regulated, prepayments under the Rule of 78s method are generally
calculated with a one-month deferment which generally results in lower
prepayment fees.
The Greyfriars Acquisition represents an expansion in borrower and product
types complementary to the Company's other UK business. Greyfriars specializes
in lending to customers with higher quality credit characteristics than those
served by the Company but who use the loan proceeds for similar purposes.
Greyfriars also originates several types of loans that the Company did not
previously offer. Greyfriars' business uses more traditional underwriting
guidelines and practices than those of CSC-UK, thereby expanding CSC-UK's
underwriting capability and, accordingly, the products CSC-UK is able to offer.
The Company believes that the expansion of loan products achieved through the
Greyfriars Acquisition will enable the Company to increase its share of the
fragmented UK market. The Company also believes that, with access to improved
loan funding sources such as the UK Greenwich Facility, Greyfriars will be able
to increase its loan origination volume significantly.
The following table highlights certain selected information relating to the
origination and purchase of Core Product loans by the Company during the periods
shown.
CORE PRODUCT LOAN ORIGINATIONS AND PURCHASES
US UK
------------------------------------ --------------------------
FORMATION
YEAR ENDED DECEMBER 31, YEAR ENDED THROUGH
------------------------------------ DECEMBER 31, DECEMBER 31,
1996 (1) 1995 1994 1996(2) 1995
-------- -------- --------- ---------- -------------
Type of property securing loan:
One- to four-family............ 95.5% 97.2% 98.3% 98.5% 96.3%
Multi-family/Mixed-use......... 4.5 2.8 1.7 1.5 3.7
Type of mortgage securing loan:
First mortgage................. 94.0 89.0 87.0 67.8 92.0
Second mortgage................ 6.0 11.0 13.0 32.2 8.0
Weighted average interest rate... 11.8 11.9 11.1 16.4 16.4
Weighted average initial
loan-to-value ratio(3)......... 72.5 66.4 59.7 56.0 49.0
- ------------------
(1) Including Specialty Products and Other Products, one- to four-family would
be 96.1%, multi-family/mixed use would be 3.9%, first mortgage would be
89.6%, second mortgage would be 10.4%, weighted average interest rate would
be 12.0% and weighted average initial loan-to-value ratio would be 75.5%.
(2) Includes $51.9 million of loans acquired from J&J, 75.0% of which were
secured by second mortgages, with a weighted average interest rate of 23.6%
and a weighted average initial loan-to-value ratio of 45.6%, and includes
$190.5 million of loans acquired from Greyfriars, 82.0% of which were
secured by second mortgages, with a weighted average interest rate of 14.5%
and a weighted average initial loan-to-value ratio of 52.5%.
(3) The loan-to-value ratio of a loan secured by a first mortgage is determined
by dividing the amount of the loan by the appraised value of the mortgaged
property at origination. The loan-to-value ratio of a loan secured by a
second mortgage is determined by taking the sum of the loans secured by the
first and second mortgages and dividing by the appraised value of the
mortgaged property at origination.
Loan Underwriting -- US
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Underwriting Guidelines for One- to Four-Family Loans. The following is a
description of the underwriting guidelines customarily and currently employed by
the Company with respect to mortgage loans which it originates or purchases from
others. The Company revises such guidelines from time to time in connection with
changing economic and market conditions. These underwriting guidelines are
applied consistently with respect to all of the Company's US one- to four-family
loans, whether originated through mortgage brokers or purchased on a flow basis
under the Wholesale Loan Acquisition Program.
The Company's business consists primarily of originating, purchasing and
servicing mortgage loans. The principal balance of the loans purchased or
originated by the Company generally ranges from a minimum of $8,500 to a maximum
of $450,000, with the exception of jumbo loans, which range from a minimum of
$500,000 to a maximum of $3.5 million. Under the Company's current policy, the
majority of the mortgage loans the Company acquires or originates (other than
"Sav*-A-Loans(R)") have loan-to-value ratios which do not exceed 85%, except
that in some instances, on an exception basis, the Company may accept a loan
with a loan-to-value ratio up to 91%.
The Company specializes in mortgage loans that do not conform to the
underwriting standards of FNMA or FHLMC and typically applied by banks and other
primary lending institutions, particularly with regard to a prospective
borrower's credit history. In analyzing loan applications, the Company analyzes
both the borrower's credit and the value of the underlying property which will
secure the loan, including the characteristics of the underlying first lien, if
any.
The Company considers factors pertaining to the borrower's current
employment, stability of employment and income, financial resources, and
analysis of credit, reflecting not only the ability to pay, but also the
willingness to repay contractual obligations. The property's age, condition,
location, value and continued marketability are additional factors considered in
each risk analysis.
The Company's underwriting standards are designed to provide a program for
all qualified applicants in an amount and for a period of time consistent with
their ability to repay. All of the Company's underwriting determinations are
made without regard to sex, marital status, race, color, religion, age or
national origin. Each application is evaluated on its individual merits,
applying the guidelines set forth below, to ensure that each application is
considered on an equitable basis.
The Company originates mortgage loans with different credit characteristics
depending on the credit profiles of individual borrowers. Except for "Balloon
Loans" (i.e., mortgage loans that provide on the date of origination for
scheduled monthly payments in level amounts substantially lower than the amount
of the final scheduled payment), the mortgage loans originated by the Company
generally have amortization schedules ranging from 15 years to 30 years and
require monthly payments which are due as of a scheduled day of each month which
is fixed at the time of origination. Balloon Loans generally provide for
scheduled amortization over 30 years with a due date and a balloon payment at
the end of the fifteenth year. The collateral securing loans acquired or
originated by the Company are generally one- to four-family residences,
including condominiums, manufactured housing and townhomes and such properties
may or may not be occupied by the owner. It is the Company's policy not to
accept mobile or commercial properties (other than mixed-use properties) or
unimproved land as collateral. However, the Company will accept small
multi-family properties which consist of more than four residential units.
The Company's mortgage loan program includes: (i) a full documentation
program and (ii) a non-income verification program. Under the full documentation
program, the borrower's total monthly debt obligations (which include principal
and interest on the new loan and all other mortgages, loans, charge accounts and
scheduled indebtedness) generally cannot exceed 50% of the borrower's monthly
gross income. Loans to borrowers who are salaried employees must be supported by
current employment information in addition to employment history, which
information is generally verified based on written confirmation from employers,
one or more pay-stubs, recent W-2 tax forms, recent tax returns or
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telephone confirmation from the employer. For the Company's non-income
verification program, proof of employment or self-employment is required.
The Company requires that a full appraisal of the property used as
collateral for any loan that it acquires or originates be performed in
connection with the origination of the loan. All appraisals are performed by
third party, fee-based appraisers and generally conform to current FNMA/FHLMC
secondary market requirements for residential property appraisals. Each such
appraisal generally includes, among other things, an inspection of the exterior
and interior of the subject property and, where available, data from sales
within the preceding 12 months of similar properties within the same general
location as the subject property.
A credit report by an independent, nationally recognized credit reporting
agency reflecting the applicant's complete credit history is also required. The
credit report typically contains information reflecting delinquencies,
repossessions, judgments, foreclosures, bankruptcies and similar instances of
adverse credit that can be discovered by a search of public records. An
applicant's recent credit performance weighs heavily in the evaluation of risk
by the Company. The credit report is used to evaluate the borrower's record and
must be current at the time of application. A lack of credit history will not
necessarily preclude a loan if the borrower has sufficient equity in the
property. Slow payments on the borrower's credit report must be satisfactorily
explained and will normally reduce the amount of the loan for which the
applicant can be approved.
The Company requires title insurance coverage issued by an approved ALTA
title insurance company on all property securing mortgage loans it originates or
purchases. The Company and its assignees are generally named as the insured.
Title insurance policies indicate the lien position of the mortgage loan and
protect the Company against loss if the title or lien position is not as
indicated. The applicant is also required to secure hazard and, in certain
instances, flood insurance in an amount sufficient to cover the lesser of (i)
the new loan and any senior mortgage and (ii) an amount sufficient to cover
replacement costs of the mortgaged property.
The Company has established classifications with respect to the credit
profiles of loans based on certain of the borrower's characteristics. Each loan
applicant is placed into one of four letter ratings ("A" through "D," with
subratings within those categories), depending upon a number of factors
including the applicant's credit history, based on credit bureau reports and
employment status. Terms of loans made by the Company, as well as the maximum
loan-to-value ratio and debt service to income coverage (calculated by dividing
fixed monthly debt payments by gross monthly income), vary depending upon the
classification of the borrower. Borrowers with lower credit ratings generally
pay higher interest rates and loan origination fees.
The following table sets forth certain information with respect to loan
applicants for one- to four-family loans based on the Company's internal
borrower classification, along with weighted average coupons, during the years
ended December 31, 1996 and 1995.
ONE- TO FOUR-FAMILY US LOAN ORIGINATIONS
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------------------- -----------------------------------------
THE COMPANY'S TOTAL WEIGHTED TOTAL WEIGHTED
BORROWER (DOLLARS IN % OF AVERAGE (DOLLARS IN % OF AVERAGE
CLASSIFICATION MILLIONS) TOTAL COUPON MILLIONS) TOTAL COUPON
---------------- ------------------------- ----------- -------------------------- ---------
"A" Risk........ $ 546.2 49.6% 11.2% $ 181.2 44.6% 11.2%
"B" Risk........ 364.4 33.1 11.6 152.0 37.4 12.0
"C" Risk........ 107.4 9.7 12.8 46.0 11.3 13.2
"D" Risk........ 83.8 7.6 14.8 27.1 6.7 14.2
------- ------- ------ ------- ------- ------
Total...... $1,101.8 100.0% 11.8% $ 406.3 100.0% 11.9%
======== ======= ====== ======= ======= ======
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The criteria currently used by the Company in classifying loan applicants
for one- to four-family loans can be generalized as follows:
"A" Risk. Under the "A" risk category, a loan applicant must have
generally repaid installment or revolving debt according to its terms.
- Existing mortgage loans: required to be current at the time the
application is submitted, with a maximum of one (or two on a
case-by-case basis) 30-day late payment(s) within the last 12 months
being acceptable.
- Non-mortgage credit: minor derogatory items are allowed, but a letter of
explanation is required; any recent open collection accounts or open
charge-offs, judgments or liens would generally disqualify a loan
applicant from this category.
- Bankruptcy filings: must have been discharged more than four years prior
to closing with credit re-established.
- Maximum loan-to-value ratio: up to 80% (or 90% on an exception basis) is
permitted for a loan secured by an owner-occupied one-to-four family
residence; 75% (or up to 80% on an exception basis) for a loan secured
by an owner-occupied condominium; and 70% (or up to 80% on an exception
basis) for a loan secured by a non-owner occupied one- to four-family
residence.
- Debt service-to-income ratio: generally 45% or less.
"B" Risk. Under the "B" risk category, a loan applicant must have
generally repaid installment or revolving debt according to its terms.
- Existing mortgage loans: required to be current at the time the
application is submitted, with a maximum of three (or four on a
case-by-case basis) 30-day late payments within the last 12 months being
acceptable.
- Non-mortgage credit: some prior defaults may have occurred, but major
credit paid or installment debt paid as agreed may offset some
delinquency; any open charge-offs, judgments or liens would generally
disqualify a loan applicant from this category.
- Bankruptcy filings: must have been discharged more than two years prior
to closing with credit re-established.
- Maximum loan-to-value ratio: up to 80% (or 90% on an exception basis) is
permitted for a loan secured by an owner-occupied one- to four-family
residence; and 70% (or 80% on an exception basis) for a loan secured by
a non-owner-occupied one- to four-family residence.
- Debt service-to-income ratio: generally 50% or less (45% or less for 90%
loan-to-value ratios).
"C" Risk. Under the "C" risk category, a loan applicant may have
experienced significant credit problems in the past.
- Existing mortgage loans: must be brought current from loan proceeds;
applicant is allowed a maximum of five 30-day late payments and two
60-day late payment within the last 12 months.
- Non-mortgage credit: significant prior delinquencies may have occurred,
but major credit paid or installment debt as agreed may offset some
delinquency; all delinquent credit must be current or paid off.
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- Bankruptcy filings: must have been discharged, and a minimum one year of
re-established credit is required.
- Maximum loan-to-value ratio: up to 75% (or 80% on an exception basis for
first time liens only) is permitted for a loan secured by an
owner-occupied one- to four-family residence; 65% for a loan secured by
an owner-occupied condominium; and 70% for a non-owner-occupied one- to
four-family residence.
- Debt service-to-income ratio: generally 50% or less.
"D" Risk. Under the "D" risk category a loan applicant may have
experienced significant credit problems in the past.
- Existing mortgage loans: must be brought current from loan proceeds and
no more than 150 days delinquent at closing; an explanation for such
delinquency is required.
- Non-mortgage credit: significant prior defaults may have occurred, but
the applicant must be able to demonstrate regularity in payment of some
credit obligations; all charge-offs, judgments, liens or collection
accounts must be paid off.
- Bankruptcy filings: open Chapter 13 bankruptcies will be considered with
evidence that the plan is being paid according to terms; outstanding
balance must be paid in full and discharged from loan proceeds.
- Maximum loan-to-value ratio: up to 70% is permitted for a loan secured
by an owner-occupied one- to four-family residence; 60% for a loan
secured by an owner-occupied condominium; and 65% for a non-
owner-occupied one- to four-family residence.
- Debt service-to-income ratio: generally 50% or less.
Exceptions. As described above, the Company uses the foregoing categories
and characteristics only as guidelines. On a case-by-case basis, the Company may
determine that the prospective mortgagor warrants a risk category upgrade, a
debt service-to-income ratio exception, a pricing exception, a loan-to-value
exception or an exception from certain requirements of a particular risk
category (collectively called an "Upgrade" or an "Exception"). An Upgrade or
Exception may generally be allowed if the application reflects certain
compensating factors, among others: low loan-to-value ratio; pride of ownership;
stable employment or length of occupancy at the applicant's current residence.
An Upgrade or Exception may also be allowed if the applicant places a down
payment in escrow equal to at least 20% of the purchase price of the mortgaged
property, or if the new loan reduces the applicant's monthly aggregate debt
load. Accordingly, the Company may classify in a more favorable risk category
certain mortgage loans that, in the absence of such compensating factors, would
satisfy only the criteria of a less favorable risk category.
Underwriting Guidelines for Multi-Family and Mixed-Use Properties. The
Company originates mortgage loans secured by residential properties consisting
of more than four units as well as mortgage loans secured by mixed-use
properties. A potential mortgagor of such a property must have established
credit and any excessive judgment liens or bankruptcies generally would
disqualify the application. If a potential mortgagor is attempting to obtain a
mortgage on a multi-family or mixed-use property with two to six units, then
such multi-family or mixed-use property should have net income at least equal to
debt service. If a potential mortgagor is attempting to obtain a mortgage on a
multi-family or mixed-use property with seven units or more, then such
multi-family or mixed-use property should have net income of at least 120% of
debt service. The maximum loan-to-value ratio the Company allows for a mixed-use
property is usually no greater than 65%. The Company requires a Phase I
Environmental Report for mortgage loans secured by properties with seven or more
units and may require a Phase I Report on other
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property depending on the use or prior use of the subject property or the
contents of the related appraisal report.
Underwriting Guidelines for Conventional Home Improvement Loans and Title I
Loans. Borrowers of home improvement loans partially insured by the FHA under
Title I are evaluated primarily based upon the ratio of their total monthly debt
obligations to monthly gross income, which, by Company policy, generally cannot
exceed 45% (however, monthly debt-to-income ratios up to 50% are accepted by
HUD), rather than the loan-to-value ratio on the underlying property. All Title
I loans require a title search. The borrower must have at least a one-half
interest in the property and furnish the Company with a detailed description of
the improvements to be financed. In accordance with government requirements, the
home improvements financed by Title I loans are inspected within six months of
their funding date.
Specified loan underwriting requirements must be satisfied prior to loan
approval and disbursement of funds. For secured Title I loans, the lender must
verify that the borrower has at least a one-half interest in the mortgaged
property. Additionally, the Company requires that all owners in fee simple have
signed the lien instrument. In addition, the loan file must contain the
promissory note, lien instrument and other documents required by regulation. The
borrower's current paying habits and previous credit history must be ascertained
by obtaining a consumer credit report and by other credit investigation. For
Title I loans, a two-year written verification of income and employment is also
required, whereas conventional home improvement loans require only oral
confirmation of the two-year income and employment history plus the applicant's
latest pay stub. This may include review of any one of the following: (i) recent
payroll stubs (year-to-date plus current); (ii) verification of employment
forms; (iii) signed tax returns (self-employed); (iv) financial statements
(self-employed); or (v) W-2 forms.
Conventional home improvement loans are underwritten in the same manner as
Title I loans except that the loan proceeds may be used for projects that do not
qualify for Title I loans, the amount of the loan may exceed applicable FHA
limits and the loan maturity may be longer than applicable FHA limits (however,
the Company does not currently anticipate underwriting such loans with stated
maturities in excess of the applicable FHA limits). Conventional home
improvement loans and contracts are not insured by the FHA. For conventional
home improvement loans, the borrower must have a 100% interest in the property
and the borrower's loan-to-debt ratio cannot exceed 50% without the approval of
the Company's senior management. In addition, for conventional home improvement
loans, no appraisal is required for certain high credit quality borrowers.
The loan proceeds from Title I loans are disbursed directly to the borrower.
The loan proceeds from conventional home improvement loans are disbursed
directly to the borrower or directly to the dealer on behalf of the borrower.
Costs incurred by the mortgagor for loan origination, including origination
points, legal and title fees, are often included in the amount financed. Under
Title I, the discount fee, if any, must be paid outside of closing.
Underwriting Guidelines for "Sav*-A-Loans(R)." The Company's
"Sav*-A-Loan(R)" program is designed for homeowners who may have little or no
equity in their property, but who possess good to excellent credit histories and
provable income, who use the proceeds for home improvements or debt
consolidation. Under the "Sav*-A-Loan(R)" program, the Company obtains credit
information from two sources and generally does not permit the ratio of total
monthly debt obligations to monthly gross income to exceed 45%. The borrower
must generally fall within one of the two highest credit classifications
established by the Company. The principal amount of the "Sav*-A-Loans(R)"
purchased or originated by the Company generally ranges from a minimum of
$10,000 to a maximum of $75,000, with interest rates generally ranging from
13.0% to 16.0%. Under current policy, the majority of the mortgage loans the
Company acquires or originates have loan-to-value ratios which do not exceed
125%. The loan may be secured by a first, second or third lien on the related
property. The property must be a completed and owner-occupied one- or two-family
property and must have been occupied for at least six months.
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Underwriting Guidelines for Jumbo Loans. The principal amount of the jumbo
loans originated by the Company generally range from a minimum of $500,000 to a
maximum of $3.5 million, with adjustable interest rates based on LIBOR. Jumbo
loans on second homes or investment properties may not exceed $2.0 million. The
Company currently requires that the borrower have post-closing liquidity of at
least 20% of the jumbo loan amount (net of any cash proceeds from the jumbo loan
if it is a refinancing of a prior mortgage which includes a cash payment to the
borrower).
A borrower's total monthly debt obligations (which include principal and
interest on the new loan and all other mortgages, loans, charge accounts and
scheduled indebtedness) generally cannot exceed 60% of the borrower's monthly
gross income. Loans to borrowers who are salaried employees must be supported by
current employment information in addition to employment history. A financial
statement prepared by an accountant must be submitted by a borrower who is
self-employed. Copies of three years' signed federal tax returns are required
from all jumbo loan applicants.
The Company requires that two full appraisals of the property used as
collateral for any jumbo loan that it originates be performed in connection with
the origination of the loan. At least one appraisal must be performed by a third
party appraiser selected by the Company. Each such appraisal generally includes,
among other things, an inspection of the exterior and interior of the subject
property and, where available, data from sales within the preceding 12 months of
similar properties within the same general location as the subject property.
A credit report with information from three independent, nationally
recognized credit reporting agencies reflecting the applicant's complete credit
history is required. Each credit report typically contains information
reflecting delinquencies, repossessions, judgments, foreclosures, bankruptcies
and similar instances of adverse credit that can be discovered by a search of
public records. An applicant's recent credit performance weighs heavily in the
evaluation of risk by the Company. The credit report is used to evaluate the
borrower's record and must be current at the time of application. Slow payments
on the borrower's credit report must be satisfactorily explained and will
normally reduce the amount of the loan for which the applicant can be approved.
Loan Underwriting -- UK
In the UK, the Company has implemented an underwriting process to assist
mortgage brokers in the loan screening process which is similar to that of the
Company's US operations. Independent mortgage brokers generally submit
applications to the Company at CSC-UK's offices by facsimile transmission or via
the Company's proprietary on-line loan application software. The Company's
on-line computer software enables brokers to receive loan pricing information
and expedites the loan application and underwriting process. Upon receipt of
either a simple fact sheet or a completed application form, an initial
assessment is made based on the loan applicant's income, credit history and
loan-to-value information. If pre-approved, a loan offer and mortgage documents
are produced the same day and are sent to the broker and the loan applicant.
Through December 31, 1996, the Company's experience has been that less than 30%
of approved loans are ultimately funded by the Company upon completion of the
underwriting process. Loans typically are rejected by the Company, in part, for
objective reasons such as the appraised value of the underlying property being
lower than the value stated in the application or inadequate borrower income
and, in part, for subjective reasons based on management's past experience. In
addition, in some cases the borrower chooses not to complete the loan.
The Company has implemented policies in the UK that it believes will
minimize losses on its UK loans in the event the Company has to foreclose on the
underlying property including requiring conservative loan-to-value ratios and
full disclosure to borrowers. Specifically, the Company has a range of
loan-to-value levels based on the borrower's credit position and ability to pay.
On its standard mortgage product, the Company does not lend at loan-to-value
levels in excess of 65% (75% in the case of loan for less than (pound)50,000),
in order to provide significant collateral coverage for home value deflation
and/or
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disposal expenses before any losses are incurred. Exceptions to this rule are
made upon individual evaluation of applications.
As part of the underwriting process, each loan application requires an
appraisal of the collateral property prior to loan approval. Generally, the
Company supplies its mortgage brokers with a pre-approved list of appraisers
that are professionally licensed. In the case of loans originated by Greyfriars,
the collateral property is evaluated using assessed valuation indices coupled
with a drive-by. If the indices and the drive-by produce valuations which differ
by more than 10%, Greyfriars engages an appraiser directly to appraise the
property. Appraisers are required to use standardized appraisal forms developed
by the Company which solicit information such as fair market value of the
property, internal and external conditions of the property, comparable property
sales and local demand for such property, among others. All appraisals must be
dated no more than three months prior to closing.
The Company also requires a title search to be conducted on all properties
securing loans prior to loan approval. Registered title deeds are maintained by
a UK governmental agency and are inspected by outside counsel, all of whom are
required to carry compulsory professional negligence insurance. Such registered
documents verify ownership of the collateral property, reveal any pending prior
third party interests requiring correction before closing and create priority
periods during which no intervening liens may be filed. The documents registered
with the UK governmental agency serve as conclusive evidence of ownership,
therefore eliminating the need for title insurance.
Although UK law does not require extensive disclosure to borrowers, the
Company has adopted a policy to provide each loan applicant with detailed
information about the prospective loan. The Company generally supplies the loan
applicant at the time of application with a Customer Care Booklet (or, in the
case of regulated loans, a customer care statement contained in the loan
documentation) that highlights, among other things, (i) the loan's relatively
high Standard Rate, (ii) the Concessionary Rate, if applicable, (iii) the fact
that the amount due in the case of a prepayment is calculated under the Rule of
78s method, (iv) the independence of the mortgage broker in the entire loan
review process and (v) the fact that failure to make payments on the loan may
result in the borrower losing his or her home. The borrower's signature on the
Customer Care Booklet (or a written acknowledgment that the customer care
statement has been read and understood) is a requirement of the loan application
process. Additionally, the Company offers all borrowers the opportunity to
rescind the loan for a period of up to one week after funding.
Upon completion of the underwriting process, the closing of the loan is
scheduled with a Company-approved closing attorney or agent. The closing
attorney or agent is responsible for completing the loan closing transaction in
accordance with applicable law and the Company's operating procedures.
Loan Sales
The Company sells its loan origination and purchase volume primarily through
securitizations and sales into loan purchase facilities and, to a lesser extent,
through whole loan sales. By employing this strategy, the Company is better able
to manage its cash flow, diversify its exposure to the potential volatility of
the capital markets and maximize the revenues associated with the gain on sale
of loans given market conditions existing at the time of disposition. During
1996, 1995 and 1994, the Company sold $1.3 billion, $359.0 million and $138.0
million of loans, representing 99.1%, 85.9% and 89.4% of total US originations
and purchases during these periods, respectively. In addition, the Company sold
$451.9 million and $41.4 million of UK loans, representing 97.5% and 100%,
respectively, of its total UK loan originations and purchases, including the
loan portfolios acquired as a result of the J&J Acquisition and the Greyfriars
Acquisition, during 1996 and 1995.
Securitizations. During 1996 and 1995, the Company sold $993.6 million and
$235.0 million, respectively, of its US loan origination and purchase volume in
securitizations. Pursuant to the US Greenwich Facility (defined herein under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources"), the Company sold loans to
Greenwich
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which were subsequently included in securitizations. During 1996 and 1995, sales
of loans to Greenwich accounted for 70.5% and 23.5%, respectively, of the
Company's total revenues. In US loan sales through securitizations, the Company
sells loans that it has originated or purchased to a real estate mortgage
investment conduit ("REMIC") trust for a cash purchase price and interests in
such REMIC trust consisting of interest-only regular interests and the residual
interest which are represented by the interest-only and residual certificates.
The Company retains no interest in the loans sold into such REMIC trust other
than its interest as a holder of the interest-only and residual certificates
issued by such REMIC trust. The cash purchase price is raised through an
offering by the REMIC trust of pass-through certificates representing regular
interests in the REMIC trust. Following the securitization, the purchasers of
the pass-through certificates receive the principal collected and the investor
pass-through interest rate on the principal balance, while the Company
recognizes as current revenue the fair value of the interest-only and residual
certificates. An interest-only certificate represents an interest in a REMIC
trust with fixed terms that unconditionally entitles the holder to receive
interest payments that are either fixed or derived from a formula. A residual
certificate represents the interest in the REMIC trust which has no principal
amount and does not unconditionally entitle the holder to receive payments. A
holder of the residual certificate is entitled only to the remainder, if any, of
the interest cash flow from the mortgage loans sold to the REMIC trust after
payment of all other interests in such trust and as such bears the greatest
degree of risk regarding the performance of such mortgage loans. Securitizations
take the form of pass-through certificates which represent undivided beneficial
ownership interests in a portfolio consisting of Company-originated or purchased
loans that the Company has sold to a trust. The Company, if it remains as
servicer of the loan portfolio, remits the principal and part of the interest
payments on such loans to the trust which in turn passes them to investors in
the pass-through certificates. A portion of the Company's US securitizations
have also included the payment of pre-funded amounts. In March 1995, the Company
completed in a private placement its first loan sale through the securitization
of a portfolio of $50.0 million of principal amount of loans secured by one- to
four-family residences.
The Company recognizes as current revenue the fair value of the
interest-only and residual certificates. Fair value is determined based on
various economic factors, including loan type, balance, interest rate, date of
origination, term and geographic location. The Company also uses other available
information such as reports on prepayment rates, collateral value, economic
forecasts and historical default and prepayment rates of the portfolio under
review. The Company estimates the expected cash flows that it will receive over
the life of a portfolio of loans. These expected cash flows constitute the
excess of the interest rate payable by the obligors of loans over the interest
rate paid on the related securities, less applicable fees and credit losses. The
Company discounts the expected cash flows at a discount rate which it believes
to be consistent with the required risk-adjusted rate of return to an
independent third party purchaser of the interest-only and residual
certificates.
In a securitization, the Company purchases credit enhancements to the senior
interest in the related REMIC trusts in the form of insurance policies provided
by insurance companies. The pooling and servicing agreements that govern the
distribution of cash flows from the loans included in the REMIC trusts require
either (i) the establishment of a reserve that may be funded with an initial
cash deposit by the Company or (ii) the over-collateralization of the REMIC
trust intended to result in receipts and collections on the loans that exceed
the amounts required to be distributed to holders of senior interests. To the
extent that borrowers default on the payment of principal or interest on the
loans, losses will be paid out of the reserve account or will reduce the
over-collateralization to the extent that funds are available and will result in
a reduction in the value of the interest-only and residual certificates held by
the Company. If payment defaults exceed the amount in the reserve account or the
amount of over-collateralization, as applicable, the insurance policy maintained
by the Company will pay any further losses experienced by holders of the senior
interests in the related REMIC trust. The delinquency rates on the pool of loans
sold in two of the Company's earlier securitizations have exceeded the permitted
limits set forth in the related pooling and servicing agreements. As a result of
the exceeded limits, the Company has been required to maintain in the related
reserve account all funds that would have otherwise been paid to the Company in
respect of the interest-only and residual certificates.
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Loans originated by the Company in the UK are immediately sold to Greenwich.
During 1996 and 1995, such sales to Greenwich represented 100.0% of the
Company's UK loan origination and purchase volume. The loans are then pooled by
CSC-UK and/or Greenwich for future sale either through securitizations or whole
loan sales. The Company completed its first UK loan sale through a public
securitization of (Pound Sterling)32.0 million ($49.6 million) in March 1996.
Prior to acquisition by the Company, J&J and Greyfriars held all of their loans
for investment. Following the respective acquisitions, the Company sold, with
servicing retained, $47.5 million of J&J's loan portfolio and $153.7 million of
Greyfriars' loan portfolio pursuant to the terms of the UK Greenwich Facility.
In the case of a UK securitization, or the sale of loans into a loan purchase
facility, the Company records a mortgage servicing receivable. The Company
calculates the value of its mortgage servicing receivables in much the same
manner as it does the value of its interest-only and residual certificates.
In loan sales through UK securitizations, the Company sells loans that it
has originated or purchased to a UK issuer vehicle. Immediately following such
sale, the vehicle either issues notes to a receivable trust that holds the
assets or retains the benefit of the mortgage loans. The Company receives a cash
purchase price upon the sale of its loans and acquires an uncertificated
residual interest in the excess cash flows generated by the securitization. All
payments made on the mortgage loans are collected and distributed first to the
vehicle and second to the Company which is entitled to the residual amounts. In
securitizations without a receivable trust, profits are derived pursuant to a
contractual right of the Company to receive deferred consideration (i.e.,
additional consideration for the sale of the loans, deferred until sufficient
funds are available in any month). The amount of that deferred consideration
approximates the amounts the Company would have been entitled to as seller under
the receivables trust structure. In neither UK securitization structure are the
interests in the securitization "certificated" as such interests are in the
Company's US securitizations.
The Company recognizes as current revenue the fair value of the
residual interests acquired upon securitization. Realization of the value of
these residual interests in cash is subject to the prepayment and loss
characteristics of the underlying loans and to the timing and ultimate
realization of the stream of cash flows associated with such loans. The Company
also provides credit enhancement on UK securitizations in the form of
overcollateralization. These overcollateralization accounts take the form of
initial deposits provided by the Company and additional reserve funds to build
overcollateralization levels through the retention of excess servicing
distributions.
Following the sale of UK loans into securitizations, the Company
retains no control over the loans sold and has no control over the borrowers'
performance under such loans and no control over the ability to realize
prepayments calculated using the Rule of 78s or interest rates in excess of the
concessionary rate. Accordingly, even though under the terms of the Company's UK
securitizations, the Company is entitled to such prepayments and interest in
excess of the concessionary rate, there can be no assurance that such payments
or excess interest can be achieved. In addition, in the event of a forced sale,
any proceeds would be distributed first to pay related enforcement expenses,
then to pay any aggregate outstanding concessionary interest and then to pay the
holders of the senior interests, before any proceeds were available to pay the
holder of the residual interest.
In both US and UK securitizations, the Company may be required either to
repurchase or to replace loans which do not conform to the representations and
warranties made by the Company in the pooling and servicing agreements entered
into when the portfolios of loans are sold through a securitization.
Loan sales through securitizations and sales into loan purchase facilities
accounted for 98.9% ($154.5 million) and 86.9% ($33.2 million) of the Company's
total (US and UK) gain on sale of loans for 1996 and 1995, respectively.
Whole Loan Sales. Whole loan sales represented all of the Company's US loan
sales during 1994, and with the initiation of the sale of loans through
securitizations, declined to 24.8% and 5.8%, respectively,
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of all US loan sales in 1995 and 1996. The Company disposes of loans through
whole loan sales when management believes that the Company is able to achieve a
greater return through whole loan sales than through a securitization. Loans are
generally sold in portfolios. Upon the sale of a loan portfolio, the Company
generally receives a "premium," representing a cash payment in excess of the par
value of the loans (par value representing the unpaid balance of the loan amount
given to the borrower) or in a few instances a "yield differential" whereby the
Company receives a portion of the interest paid by the borrower for the life of
the loan. Premiums on US whole loan sales represented 0.9%, 10.2% and 50.9%,
respectively, of the Company's total revenues in 1996, 1995 and 1994.
The Company has sold substantially all of its US loan origination and
purchase volume to various institutional purchasers on a non-recourse basis with
customary representations and warranties covering loans sold. The Company,
therefore, may be required to repurchase loans pursuant to its representations
and warranties and may have to return a portion of the premium earned if a loan
is prepaid during a limited period of time after sale, usually six months and
not greater than one year. The Company typically repurchases a loan if a default
occurs within the first month following the date the loan was originated or if
the loan documentation is alleged to contain misrepresentations made by the
borrower. During 1996, the Company repurchased 73 loans for $4.7 million and
gave premium rebates totaling $92,908. In 1995, the Company repurchased seven
loans for $623,300 and gave premium rebates totaling $247,651. In 1994, the
Company repurchased one loan for $95,550 and gave premium rebates totaling
$72,393.
For 1996, 1995 and 1994, premiums from whole loan sales accounted for 2.2%
($1.7 million), 19.0% ($5.0 million) and 100% ($5.7 million), respectively, of
the Company's total US gain on sale of loans.
Loan Servicing and Collections -- US
In conjunction with the purchase of Astrum in January 1994, the Company
expanded into the business of loan servicing. Loan servicing is the collection
of payments due under a loan, the monitoring of the loan, the remitting of
payments to the holder of the loan, furnishing reports to such holder and the
enforcement of such holder's rights, including attempting to recover
delinquencies and instituting loan foreclosures. The Company currently services
its own loans and acts as a master servicer on loans serviced by others as well
as contract servicer on loans that are held by other institutions. Under a
contract servicing arrangement, the Company is responsible for servicing loan
portfolios held by other institutions for a fee. Under a master servicing
arrangement, another servicer is responsible for borrower contact while the
Company is responsible for monitoring that servicer's performance and assisting
in actual loan collection if necessary.
Management believes that the business of loan servicing provides an
additional and profitable revenue stream and one that is less cyclical than the
business of loan origination and purchasing. The Company intends to increase its
loan servicing operations by negotiating for the retention of servicing rights
on a greater percentage of the loan origination and purchase volume it sells in
order to diversify and stabilize its revenue stream. To illustrate this
strategy, the Company retained the servicing rights to 97.8% of the $1.3 billion
in US loans it sold during 1996 and 74.2% of the $359.0 million in US loans it
sold during 1995.
As of December 31, 1996, the Company was servicing 24,820 US loans
representing an aggregate of $1.5 billion, including $34.1 million of loans as
master servicer for other servicers, $15.0 million as contract servicer of loans
held by third parties and the balance as servicer of loans originated or
purchased by the Company. Revenue generated from loan servicing amounted to 1.9%
and 1.6% of total revenues for 1996 and 1995, respectively.
In August 1996, the Company converted its loan servicing computer operations
to CPI/Alltel ("CPI"), a service bureau located in Jacksonville, Florida. CPI's
system allows the Company to service adjustable rate loans and to begin offering
escrow services to borrowers, whereby a borrower deposits monthly
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payments of certain tax and insurance expenses. The Company then makes full
payment of the applicable expenses from the amounts deposited in escrow by the
borrower. In addition, CPI's system offers a more sophisticated and
comprehensive reporting package. The new computer system is expected to help
facilitate the growth of the Company's servicing operations.
The Company utilizes loan servicing software which enables it to implement
servicing and collection procedures and to provide a series of adaptable custom
designed reports including a trial balance, a remittance report, a paid-off
report and a delinquency report. The CPI system provides additional capacity for
the Company's increased loan origination and purchase volume and provides
greater flexibility in monitoring the various types of loan product the Company
offers. Company collectors have computer access to telephone numbers, payment
histories, loan information and all past collection notes. In the first quarter
of 1997, the Company implemented a "predictive dialer" program, whereby
delinquent accounts are automatically telephoned and the call transferred
immediately to the next available collector whose computer will simultaneously
provide the relevant information on the account. Following a start-up period,
the Company believes that this program will improve the efficiency of the
Company's collectors.
In November 1996, the Company began subcontracting the servicing of its
loans more than ten but less than 30 days delinquent, which allows the Company's
collectors to focus on its more seriously delinquent accounts. Account
information is transmitted by the Company to the subcontractor and the
subcontractor places calls to delinquent accounts on a daily basis.
The Company has a specific policy which sets forth actions to be taken at
various stages of delinquency beginning on the tenth and extending to the
ninetieth day after the payment due date. Between 90-105 days of delinquency,
the Company decides whether to foreclose or to take other action. All collection
activity, including the date collection letters were sent and detailed notes on
the substance of each collection telephone call, is entered into a permanent
collection history for each account. Additional guidance with the collection
process is derived through the Loan Performance Monitoring Committee, a group
comprised of members of the Company's senior management.
The CPI system tracks and maintains homeowners' insurance information.
Expiration reports are generated weekly listing all policies scheduled to expire
within 30 days. When policies lapse, a letter is issued advising the borrower of
the lapse and that the Company will obtain force placed insurance at the
borrower's expense. The Company also has an insurance policy in place that
provides coverage automatically for the Company in the event that the Company
fails to obtain force placed insurance.
The Company funds and closes loans throughout the month. Most of the
Company's loans require a first payment 30 days after funding. Accordingly, the
Company's servicing portfolio consists of loans with payments due at varying
times each month. This system alleviates the cyclical highs and lows that some
servicing companies experience as a result of heavily concentrated due dates.
The Company believes that its collections policy identifies payment problems
sufficiently early to permit the Company to address collection problems quickly
and to preserve equity in a pre-foreclosure property. The Company believes that
these policies, combined with the experience level of the Company's independent
appraisers, reduce the incidence of charge-offs of a first mortgage loan or a
second mortgage loan. Notwithstanding the above, there are occasions when
charge-offs will be necessary.
The following table provides data on delinquency experience and real estate
owned ("REO") properties for the Company's US serviced portfolio (excluding loan
balances under contract servicing or master servicing agreements).
AS OF DECEMBER 31, AS OF DECEMBER 31, AS OF DECEMBER 31,
1996 1995 1994
---------------------- ----------------------- --------------------------
% OF % OF % OF
DOLLARS IN SERVICED DOLLARS IN SERVICED DOLLARS IN SERVICED
THOUSANDS PORTFOLIO THOUSANDS PORTFOLIO THOUSANDS PORTFOLIO
------------------------- ----------------------- --------------------------
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US serviced portfolio..... $1,470,344 100.0% $ 311,649 100.0% $ 23,904 100.0%
---------- ------- --------- ------- -------- -------
30-59 days delinquent... 55,182 3.7 5,479 1.8 -- --
60-89 days delinquent... 20,358 1.4 1,580 0.5 142 0.6
90 days or more delinquent 55,684 3.8 4,968 1.6 679 2.8
--------- ------- --------- ------- -------- -------
Total US delinquencies.... $ 131,224 8.9% $ 12,027 3.9% $ 821 3.4%
========= ======= ========= ======= ======== =======
US REO property........... $ 1,010 0.1% $ 141 -- $ 130 0.5%
========= ======== ========= ======= ======== =======
Foreclosure -- US Regulation and practices in the US regarding the
liquidation of properties (e.g., foreclosure) and the rights of the mortgagor in
default vary greatly from state to state. Loans originated or purchased by the
Company are secured by mortgages, deeds of trust, trust deeds, security deeds or
deeds to secure debt, depending upon the prevailing practice in the state in
which the property securing the loan is located. Depending on local law,
foreclosure is effected by judicial action and/or non-judicial sale, and is
subject to various notice and filing requirements. If foreclosure is effected by
judicial action, as in New York and Illinois for example, the foreclosure
proceedings may take several months.
In general, the borrower, or any person having a junior encumbrance on the
real estate, may cure a monetary default by paying the entire amount in arrears
plus other designated costs and expenses incurred in enforcing the obligation
during a statutorily prescribed reinstatement period. Generally, state law
controls the amount of foreclosure expenses and costs, including attorneys'
fees, which may be recovered by a lender.
After the reinstatement period has expired without the default having been
cured, in certain states the borrower or junior lienholder has the right of
redemption of the property by paying the loan in full to prevent the scheduled
foreclosure sale. For example, in Illinois the right of redemption exists for 90
days from the date of foreclosure judgment; New York law does not recognize a
right of redemption.
There are a number of restrictions that may limit the Company's ability to
foreclose on a property. A lender may not foreclose on the property securing a
second mortgage loan unless it forecloses subject to each senior mortgage, in
which case the junior lender or purchaser at such a foreclosure sale will take
title to the property subject to the lien securing the amount due on the senior
mortgage. Moreover, if a borrower has filed for bankruptcy protection, a lender
may be stayed from exercising its foreclosure rights. Also, certain states
provide a homestead exemption which may restrict the ability of a lender to
foreclose on residential property. In such states, the Company requires the
borrower to waive his or her right of homestead. While such waivers are
generally enforceable in Illinois, waivers of homestead rights may not be
enforceable in other states.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien due to several factors,
including the difficulty of determining the exact status of title to the
property, the possible deterioration of the property during the foreclosure
proceedings and a requirement that the purchaser pay for the property in cash or
by cashier's check. Thus, the foreclosing lender often purchases the property
from the trustee or referee for an amount equal to the principal amount
outstanding under the loan, accrued and unpaid interest and the expenses of
foreclosure. Depending upon market conditions, the ultimate proceeds of the sale
may not equal the lender's investment in the property. If, after determining
that purchasing a property securing a loan will minimize the loss associated
with the defaulted loan, the Company may bid at the foreclosure sale for such
property or accept a deed in lieu of foreclosure.
Loan foreclosures are the responsibility of the Company's loan servicing
operations. Prior to a foreclosure, the Company performs a foreclosure analysis
with respect to the mortgaged property to determine the value of the mortgaged
property and the bid that the Company will make at the foreclosure sale. This is
based on (i) a current valuation of the property obtained through a drive-by
appraisal conducted by an independent appraiser, (ii) an estimate of the sale
price of the mortgaged property obtained by sending two local realtors to
inspect the property, (iii) an evaluation of the amount owed, if any, to a
senior mortgagee and for real estate taxes and (iv) an analysis of marketing
time, required repairs and other costs, such as real estate broker fees, that
will be incurred in connection with the
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foreclosure sale. The Company has established a committee comprised of members
of senior management to perform the foreclosure analyses.
The Company assigns all foreclosures to outside counsel located in the same
state as the mortgaged property. Bankruptcies filed by borrowers are also
assigned to appropriate local counsel who are required to provide monthly
reports on each loan file.
Loan Servicing and Collections -- UK
In the UK, the Company's loan collection and servicing process used with
respect to loans originated by CSC-UK and J&J is very similar to its US process
except for certain additional procedures. Prior to the first payment date of the
loan, servicing representatives call to remind the borrower of payment and the
benefit of the concessionary flat interest rate.
To the extent that a loan falls into arrears by more than 30 days, the
Company uses the services of independent debt counselors who are instructed to
make personal contact with a borrower at the borrower's home. The purpose of
this visit is (i) to understand the borrower's reasons for arrears, gather
information concerning the borrower's other debts and obligations and suggest
solutions to the arrears problem, (ii) to confidentially assess the condition
and true value of the home (at the point of the visit) and (iii) to make a
recommendation as to whether the loan can be brought current in the near term.
The costs associated with the debt counselors' visit are incurred by the
borrower as an addition to his loan balance.
In the event that the borrower remains in arrears and fails to comply with
the terms of the agreement set out by the debt counselors, proceedings for
physical possession of the property are commenced. Realizing the security
inherent in a mortgaged property requires eviction which is actioned by a court
possession order, typically received within 120 days after filing for
possession. Failure to comply with the terms of the court order enables the
holder of the loan to ask the court for physical possession of the property.
The loan collection and servicing process used with respect to loans
originated by Greyfriars differs in a few meaningful ways, centering around a
segmented and automated computer system. This computer system automatically
generates a reminder letter when a payment is more than 0.2% in arrears on the
seventh calendar day following the due date; additional letters are generated
every subsequent tenth day thereafter until such arrears are paid. The system
also generates such reminders to the collector to telephone the borrower. If a
borrower falls two payments in arrears, Greyfriars sends a default notice to the
borrowers and contacts the senior mortgagee, if any, to establish the status of
that loan. If no payment or other arrangement is then made, Greyfriars sends a
letter instructing the borrower to contact Greyfriars' collections department
within seven days. If no contact is made, the account is passed to the
pre-litigation department.
Greyfriars' pre-litigation department attempts to save legal fees and
prevent write-offs by personally visiting borrowers and setting up payment
arrangements in order to return files to the collection department when arrears
are paid. If the arrears are not paid or other arrangements made, Greyfriars
will commence proceedings for a possession order in an attempt to encourage
payment. If payment is still not made, Greyfriars pursues recourse in court. The
repossessions department administers and monitors the marketing and sale of
properties repossessed through court action or voluntarily surrendered by the
borrower. This department also monitors the sale of properties by the senior
lender in circumstances where Greyfriars should receive a portion of the sale
proceeds. Greyfriars also has departments which review various accounts and
recommend the most effective method of collection, recovery or indemnification
from the insurer.
The following table provides data on delinquency experience for the
Company's UK serviced portfolio (excluding loan balances under contract
servicing agreements). The Company does not have any REO properties in the UK.
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AS OF DECEMBER 31,
------------------------------------------------------------------
1996 (1) 1995
---------------------------- ------------------------------
% OF % OF
DOLLARS IN SERVICED DOLLARS IN SERVICED
THOUSANDS PORTFOLIO THOUSANDS PORTFOLIO
UK serviced portfolio........... $511,140 100.0% $40,299 100.0%
-------- ------- ------- -------
30-59 days delinquent......... 24,024 4.7 1,087 2.7
60-89 days delinquent......... 10,734 2.1 423 1.1
90 days or more delinquent.... 43,958 8.6 1,926 4.8
------- ------- ------- -------
Total UK delinquencies $78,716 15.4% $ 3,436 8.6%
======= ======= ======= =======
- ------------------
(1) Includes the J&J serviced portfolio of $41.9 million with total
delinquencies of $18.2 million or 43.3%, of which $3.8 million or 9.0% was
30-59 days delinquent, $2.6 million or 6.3% was 60-89 days delinquent and
$11.8 million or 28.1% was 90 days or more delinquent. Includes the
Greyfriars serviced portfolio of $233.5 million with total delinquencies of
$21.9 million or 9.4%, of which $7.8 million or 3.3% was 30-59 days
delinquent, $3.1 million or 1.3% was 60-89 days delinquent and $11.0 million
or 4.7% was 90 days or more delinquent. Excluding the portfolios acquired as
a result of the J&J Acquisition and the Greyfriars Acquisition, the UK
delinquency ratio would have been 16.5% at December 31, 1996.
The Company believes that its UK underwriting policies, specifically its
standard maximum loan-to-value ratio of 65% (75% in the case of loan for less
than (pound)50,000), help to reduce the likelihood that the Company will incur
losses on property dispositions. There were no loan losses recorded for the
period from May 2, 1995 (inception) through December 31, 1996 on the CSC-UK loan
servicing portfolio. During 1996, the average balance of loans serviced totaled
$330.0 million. With the acquisitions of J&J and Greyfriars, CSC-UK has expanded
its loan servicing business in the UK. As a result of the J&J Acquisition and
the Greyfriars Acquisition, the Company acquired additional loan serviced
portfolios of an aggregate of $242.4 million.
Foreclosure- UK Regulations and practices regarding the liquidation of
properties (e.g. power of sale) and the rights of the mortgagor in default are
generally uniform throughout England, Scotland and Wales. Unlike the US, lenders
in the UK seldom "foreclose" on the mortgaged property due to the arcane
procedures required to be followed to conduct a foreclosure under applicable UK
laws. The standard remedy for a lender in the case of a defaulted mortgage loan
is to rely on the contractual power of sale contained in the mortgage to sell
the mortgaged property. A lender does not have to take title to the mortgaged
property when exercising a power of sale and therefore can avoid possibly
becoming responsible for certain liabilities of title holders such as local
property taxes.
In order to deliver a mortgaged property sold upon exercise of a power of
sale, a lender must generally evict the mortgagee prior to the sale. The
lender's first eviction step is to obtain a possession order from a court
authorizing vacant possession. Typically, a hearing on an application for a
possession order will be held eight to 12 weeks following the application date.
At the hearing, generally the only dispute that will arise will be the terms
under which the court will suspend an order for possession. The court will
consider a number of factors in determining if a suspension of a possession
order is warranted such as the reasons for the default, the prospects of the
mortgagor paying off the arrears in installments in addition to the normal
scheduled payments as due and the adequacy of the security. Although it is
difficult to predict how long a court may be willing to suspend a possession
order, if at all, suspensions of possession orders generally last less than six
months.
If a possession order is not suspended or was suspended for a specified
period and such period expired without satisfaction to the lender, or the
borrower fails to honor the possession order, a lender is entitled,
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in most instances, to apply to the court for a bailiff's appointment under which
the bailiff will take physical possession of the mortgage property (typically
four to six weeks after the application). Borrowers are entitled to apply for
the suspension of the bailiff's appointment subject to production of evidence of
the borrower's ability to discharge the original possession order.
After the bailiff takes physical possession of the mortgaged property the
lender will exercise its power of sale and will typically either auction the
mortgaged property or market the same. At the time of sale, the lender is
required to realize the best price reasonably obtainable in the open market.
In addition, in the case of mortgage loans regulated under the CCA,
borrowers are able to apply to a court to alter the rate of interest due on the
unpaid installments under the loan. Mortgages securing regulated loans are by
statute only enforceable by court order which order can be suspended at the
discretion of the court.
In the case of a loan secured by a second mortgage, the junior lienholder
may institute proceedings and take possession of the property only after notice
of such proceedings have been given to the senior lienholder. Junior lienholders
are obligated to apply any monies upon a sale of the mortgaged property to repay
the debt owed to the senior lienholder prior to applying such monies, to the
extent available, to discharge the debt owed to such junior lienholder.
An application for bankruptcy by the borrower or any third party does not
stop or adjourn proceedings, nor does the UK have the equivalent of homestead
rights.
Through December 31, 1996, the Company exercised its power of sale with
respect to five mortgaged properties, of which one has been sold. Exercising
powers of sale are the responsibility of the Company's UK loan servicing
operations. The Director of Loan Servicing must approve all decisions to proceed
against a mortgaged property. Prior to proceeding to sale, the Company will
perform an analysis of the mortgaged property to determine its value and the
amount, if any, of the senior mortgage. The Company's in-house valuation
personnel will determine the initial valuation of the mortgaged property. If
such valuation differs significantly from the expected valuation, a more formal
appraisal and inspection will be conducted.
The Company's consultant, an independent third party firm that specializes
in disposals of mortgaged properties, is responsible for conducting an analysis
of the marketing time necessary to sell the mortgaged property, providing advice
on alternative disposal methods and overseeing the sale of the property. The
sale of the property is handled by one of the Company's outside solicitors.
MARKETING
The Company focuses its marketing efforts on sources of loan originations,
as opposed to individual borrowers, through its 75 business development
representatives and six regional managers. These business development
representatives and regional managers seek to establish and maintain the
Company's relationships with its principal sources of loan originations --
independent mortgage brokers, other mortgage bankers and financial institutions,
including commercial banks and thrifts. Through its focus on sources of
originations as opposed to loan applicants, the Company avoids the high fixed
costs associated with a large network of retail offices and retail advertising.
The business development representatives provide various levels of
information and assistance to the Company's sources of loan originations
depending on the sophistication and resources of the particular customer, and
are primarily responsible for maintaining the Company's relationships with its
sources of loan originations. The business development representatives endeavor
to increase the volume of loan originations from independent mortgage brokers,
financial institutions and other mortgage bankers located within the geographic
territory assigned to such representative through, among other actions, visits
to customer offices and attendance at trade shows, as well as print
advertisements in broker trade
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magazines. These representatives also provide the Company with information
relating to customers, competitive products and pricing and new market entrants,
all of which assist the Company in refining its programs and its classifications
of borrowers in order to meet competitive needs. The business development
representatives are compensated with a base salary and commissions based on the
volume of loans that are originated or purchased as a result of their efforts.
When the Company enters a new geographic market and is prepared to begin
loan origination and purchase activities, it typically conducts a seminar for
brokers in that region. This seminar introduces the brokers to the Company's
products, services, underwriting process and funding resources, and has helped
the Company penetrate new markets.
In the UK, the Company's current direct marketing to potential borrowers is
limited to marketing of a new loan product designed for occupants of
government-owned residential properties in the UK. Independent mortgage brokers
advertise their services to borrowers through several means, including
advertisements in national UK newspapers and, more recently, on television. The
Company markets to these independent mortgage brokers through business
development representatives who visit mortgage brokers to familiarize them with
the Company's products and competitive distinctions. The business development
representatives stress the advantages of the Company's proprietary on-line loan
application software and its unique loan programs. The Company anticipates that
future marketing efforts will be directed toward UK realtors and insurance
agents, who the Company believes will prove to be effective referral sources and
who are typically unaware of mortgage financing available to borrowers with
impaired or unsubstantiated credit histories and/or unverifiable income.
COMPETITION
As a consumer finance company, the Company faces intense competition.
Traditional competitors in the financial services business include other
mortgage banking companies, commercial banks, credit unions, thrift
institutions, credit card issuers and finance companies. Many of these
competitors in the consumer finance business are substantially larger and have
considerably greater financial, technical and marketing resources than the
Company. In addition, many financial service organizations have formed national
networks for loan origination substantially similar to the Company's 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 Company,
targeting customers similar to those of the Company. Competition can take many
forms including convenience in obtaining a loan, customer service, marketing and
distribution channels, amount and term of the loan, and interest rates. In
addition, the current level of gains realized by the Company and its existing
competitors on the sale of loans could attract additional competitors into this
market with the possible effect of lowering gains on future loan sales owing to
increased loan origination competition. With the increase in competition during
1996, the Company experienced an increase in the weighted average loan-to-value
ratio on its Core Products and in the premiums it paid under its Wholesale Loan
Acquisition Program to its correspondents, and experienced a slower rate of
growth in originations from its independent mortgage brokers. The Company is
unable at this time to determine whether such increases and slowing will
continue in 1997.
The Company believes that it is able to compete on the basis of providing
prompt and responsive service, consistent underwriting and competitive loan
programs to borrowers whose needs are not met by traditional financial
institutions.
In the UK, banks, building societies and other finance companies generally
make mortgage loans to borrowers. The Company believes, however, that these
Conventional UK Lenders are not currently participating in the market for loans
to borrowers with impaired or unsubstantiated credit histories and/or
unverifiable income due to the higher capital adequacy ratios that they must
maintain to participate in this market as required by applicable banking
regulations. Therefore, the Company's most significant present
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competition is from private investors and, more recently, new market entrants
who are affiliated with some of the Company's US competitors who are currently
funding the origination volume of independent mortgage brokers. Due to the
relative lack of competition for the type of loans the Company originates in the
UK, the Company has attained a substantially higher weighted average gain on
loans in the UK than it has in the US. There can be no assurance that
Conventional UK Lenders or other consumer finance companies will not initiate
loan programs in the UK that are similar to those offered by the Company.
INVESTMENT IN IMC MORTGAGE COMPANY
In July 1993, the Company acquired a limited partnership interest in
Industry Mortgage Company, L.P., the predecessor to IMC. In June 1996, the
partnership converted into corporate form and effected a public offering of
common stock. The Company's limited partnership interest, which was 9.1% at
December 31, 1995, was converted into a 5.8% equity interest in the corporation
as a result of the public offering. IMC originates, purchases, sells and
services mortgage loans that are primarily secured by one-to four-family
residences. Pursuant to a contractual agreement with IMC, the Company is
obligated to offer to sell an average of $1.0 million of loans per month to IMC
at market prices. The Company entered into an agreement with IMC whereby, in
return for the payment of a fee, such monthly obligation was eliminated. For the
years ended December 31, 1996 and 1995, IMC contributed approximately $754,000
and $480,000, respectively, to the Company's pre-tax income. As a result of
IMC's conversion into corporate form, the Company's interest in IMC is no longer
accounted for under the equity method of accounting whereby the Company
recognized its relative portion of the partnership earnings as revenues, but
rather as a marketable security available for sale in accordance with SFAS No.
115. Available for sale securities are reported on the statement of financial
condition at fair market value with any corresponding change in value reported
as an unrealized gain or loss (if assessed to be temporary) as an element of
stockholders' equity after giving effect for taxes.
REGULATION
US
The Company's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of its operations. The Company's 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 ("ECOA"), the Fair
Credit Reporting Act of 1970, as amended, the Federal Real Estate Settlement
Procedures Act ("RESPA"), and Regulation X, the Home Mortgage Disclosure Act,
the Federal Debt Collection Practices Act and the National Housing Act of 1934,
as well as other federal and state statutes and regulations affecting the
Company's activities. The Company is also subject to the rules and regulations
of, and examinations by, HUD and state regulatory authorities with respect to
originating, processing, underwriting, selling, securitizing and servicing
loans. These rules and regulations, among other things, impose licensing
obligations on the Company, establish eligibility criteria for mortgage loans,
prohibit discrimination, provide for inspections and appraisals of properties,
require credit reports on loan applicants, regulate assessment, collection,
foreclosure and claims handling, investment and interest payments on escrow
balances and payment features, mandate certain disclosures and notices to
borrowers and, in some cases, fix maximum interest rates, fees and mortgage loan
amounts. Failure to comply with these requirements can lead to loss of approved
status, termination or suspension of servicing contracts without compensation to
the servicer, demands for indemnifications or mortgage loan repurchases, certain
rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement actions.
The Company believes that it is in compliance in all material respects with
applicable federal and state laws and regulations.
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UK
A portion of the Company's mortgage lending business in the UK is subject to
regulations promulgated under the CCA applicable to loans made to individuals or
partnerships with principal balances of (pound)15,000 or less. Loans with
principal balances in excess of (pound)15,000 are not currently regulated within
the UK, except in limited circumstances. The government has announced its
intention to bring before Parliament regulations that would increase this
amount. The Company cannot predict the likelihood of enactment of these
regulations nor the extent of such increase. The CCA and regulations promulgated
thereunder, among other things, impose licensing obligations on CSC-UK, define
certain requirements relating to the form, content, legibility, execution and
delivery of loan documents, restrict communication with the borrower prior to
completion of a transaction, require information and notice of enforcement to be
given to the borrower, generally limit a lender to a one-month deferment with
any calculations of prepayment interest under the Rule of 78s method, require
rebates to the borrower on early settlement and create a cause of action for an
"extortionate credit bargain." A license is required to service loans in the UK
irrespective of the size of the loan. Failure to comply with the requirements of
these rules and regulations can result in the revocation or suspension of the
license to do business and render the mortgage unenforceable in the absence of a
court order. Approximately 36.9% (as a percentage of aggregate principal
balances) of the Company's UK loans were subject to the CCA and the regulations
promulgated thereunder at December 31, 1996. Of the $51.9 million of loans
acquired as a result of the J&J Acquisition and the $190.5 million of loans
acquired as a result of the Greyfriars Acquisition, 77.5% and 53.8%,
respectively, were subject to the CCA and the regulations promulgated thereunder
on the date of acquisition by CSC-UK.
Although the Company believes that CSC-UK has systems and procedures to
facilitate compliance with the requirements under the CCA and is in compliance
in all material respects with applicable UK laws and regulations, there can be
no assurance that more restrictive laws and regulations will not be adopted in
the future that could make compliance more difficult or expensive (see
discussion regarding the Office of Fair Trading (the "OFT") initiative below).
The Company cannot predict the likelihood of the enactment of regulations
increasing the regulated amount under the CCA or any other change to the CCA or
any other legislation. The announced OFT regulatory initiative or other future
regulation, if enacted, could limit the Company's ability to impose fees and
charges and could have a material adverse effect on the Company's results of
operations and financial condition.
There can be no assurance that regulatory developments in the UK, including
those that might be brought about by a change in the political party whose
members constitute a majority of Parliament as a result of May 1997 elections,
will not result in significant changes relating to certain provisions of many
CSC-UK loans, most notably the calculation of prepayments using the Rule of 78s
and the use of the standard/concessionary rate structure. The Company believes
that these provisions are enforceable under English law and do not violate
common law prohibitions on penalty interest. The enforceability of these
provisions, however, has not been tested in English courts and accordingly, no
assurance can be given that such a court will not reach a holding that
negatively affects the terms of such loans, which holding could have a material
adverse effect on the Company's results of operations and financial condition.
In addition, CSC-UK received a letter in March 1997 from the OFT, the
Director General of which has responsibility, under the CCA, for the granting of
consumer credit licenses to mortgage lenders and for the subsequent monitoring
of their activities to ensure continued fitness to hold such licenses. The
Company believes the letter was also sent to other lenders, as well as
intermediaries and other entities involved directly or indirectly in the
non-status lending market. The letter states that, when determining the fitness
of licensees, the OFT will consider whether the licensee or its associates have
engaged in business practices which appear to be inappropriate, regardless of
their legality. The letter specifically sets forth certain practices deemed by
the OFT to fall within such categories.
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The majority of the stated business practices are either (i) not applicable
to CSC-UK's operations or (ii) practices in which CSC-UK engages and believes
itself to be in compliance or easily able to modify its operations in order to
comply with the OFT letter. The OFT letter, however, questions the
appropriateness of standard/concessionary rate structures, as well as the
calculation of prepayments using the Rule of 78s method. The Company is
reviewing and evaluating its practices with respect to each issue raised in the
letter, but has not discussed with the OFT the concerns raised in the letter.
The Company does not believe regulatory initiatives set forth in the letter will
have a material adverse effect on any of its existing mortgage loans or to the
continuance of its licenses, although no assurances to that effect can be given
at this time.
The Company believes that it may be required to modify aspects of its
standard/concessionary rate structure in response to the regulatory initiatives
set forth in the OFT letter. No assurances can be given as to the effect of such
modifications or that the OFT will not require the elimination of the
standard/concessionary rate structure, either of which could have a material
adverse effect in future periods on the Company's results of operations and
financial condition. The Company anticipates that it will continue to broaden
its UK product offerings with products that do not utilize the Rule of 78s to
calculate prepayments and, in light of the initiatives set forth in the OFT
letter, that the pace of such product broadening will accelerate. In future
periods, the Company believes that long-term loans utilizing the Rule of 78s
prepayments will represent an increasingly smaller percentage of its UK loan
origination and purchase volume and that the OFT's regulatory initiatives are
likely to result in the Company's elimination or modification of long-term loan
products utilizing the Rule of 78s. Such elimination or modification could have
a material adverse effect in future periods on the Company's results of
operations and financial condition, especially if the Company is unsuccessful in
its product broadening efforts. The Company is unable to determine at this time
how soon such elimination or modification will occur.
ENVIRONMENTAL MATTERS
To date, the Company has not been required to perform any investigation or
clean up activities, nor has it been subject to any environmental claims. There
can be no assurance, however, that this will remain the case in the future.
US
In the course of its business, the Company has acquired, and may acquire in
the future, properties securing loans which are in default. Although the Company
primarily lends to owners of residential properties, there is a risk that the
Company could be required to investigate and clean up hazardous or toxic
substances or chemical releases at such properties after acquisition by the
Company, and may be held liable to a governmental entity or to third parties for
property damage, personal injury and investigation and cleanup costs incurred by
such parties in connection with the contamination. In addition, the owner or
former owners of a contaminated site may be subject to common law claims by
third parties based on damages and costs resulting from environmental
contamination emanating from such property. On all loan applications for
properties exceeding seven units or on loan applications where the Company
believes there may exist, or an appraisal may indicate, a possible environmental
problem, the Company requires a Phase I Environmental Report.
UK
"Owners" or "occupiers" of contaminated land in the UK are potentially
liable under UK environmental laws. Such persons can be required to clean up
affected land, cease polluting activities, obtain licenses in connection with
disposal of waste, reimburse relevant enforcement authorities for clean-up costs
related to land and controlled waters and pay fines for non-compliance with
relevant laws and regulations. The potential liability of such persons may be
substantial and the presence of any polluting substances or the failure to
properly remediate such land may adversely affect the owner's or occupier's
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ability to sell or rent the property on such land or to borrow using such
property as security. In addition to liability under statute, such persons may
be liable to third parties at common law for property damage, economic loss and
personal injury.
A lender may be deemed to be an "owner" upon enforcement of its interest in
a mortgaged property following default by a borrower depending on the method of
enforcement employed. A lender may also, depending on the degree of control it
has, be liable as a person who has caused or knowingly permitted pollution to
occur. A new statutory framework providing for the identification and allocation
of responsibility for costs associated with the investigation and clean-up of
contaminated land is set out in the Environmental Protection Act 1990, as
amended, and is expected to be implemented during 1997. Under this framework,
local authorities will have a duty to inspect land within their jurisdiction for
the purpose of identifying contamination.
There are currently no registers which identify contaminated land. In order
to identify such land prior to making a loan, the Company relies on its
appraisers to identify potential environmental problems. There can be no
assurance that a previous or current owner or occupier of a mortgaged property
complied with environmental laws or that in the future lenders will not be
subject to additional environmental liabilities.
EMPLOYEES
As of December 31, 1996, the Company had a total of 638 US employees, eight
of whom were part-time employees and 630 of whom were full-time employees and
267 UK employees. Of the Company's employees, 4.2% were in management, 67.6%
were in sales and marketing, 14.1% were in administrative support and 14.1% were
in servicing. The Company had 409 employees working at its New York headquarters
as of December 31, 1996. None of the Company's employees is covered by a
collective bargaining agreement. The Company considers its relations with its
employees to be good.
ITEM 2. PROPERTIES
The Company's US executive and administrative offices and the majority of
its US mortgage banking operations are located at 565 Taxter Road in Elmsford,
New York, where the Company leases approximately 40,000 square feet of office
space at an aggregate annual rent of approximately $564,000. The leases expire
on August 31, 2000. The Company has leased an additional 17,000 square feet of
office space at 8 Skyline Drive, Hawthorne, New York and an additional 36,000
square feet of office space at 555 White Plains Road, Tarrytown, New York. The
Hawthorne lease provides for an initial aggregate annual rent of approximately
$246,500 and for scheduled increases in square footage up to an aggregate of
approximately 35,000 square feet and annual rent up to an aggregate annual rent
of approximately $510,000 and expires in 2001. The Tarrytown lease provides for
an initial aggregate rent of approximately $750,000 and for scheduled increases
in annual rent up to an aggregate rent of approximately $810,000 and expires in
2001. The Company's UK offices are located at Croxley Business Park, Watford,
Hertfordshire, where, commencing September 1996, the Company leases
approximately 57,000 square feet of office space at an aggregate annual rent of
approximately $1.4 million, an increase from the previous lease of 10,500 square
feet at an aggregate annual rent of approximately $236,000 to accommodate the
Company's expanding production and future growth needs. The lease provides for
increases at the end of each five year period to the market rate at such time
and expires in 2021, subject to the ability of the Company to terminate the
lease on the tenth anniversary thereof. The Company believes that its offices
are suitable and adequate for present purposes and for anticipated increases in
its business activities in the UK but anticipates requiring additional office
space in the US to meet its growth needs for the next 12 months.
ITEM 3. LEGAL PROCEEDINGS
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The Company is a party to various legal proceedings arising out of the
ordinary course of its business. Management believes that none of these actions,
individually or in the aggregate, will have a material adverse affect on the
results of operations or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began to trade on the Nasdaq National Market
("Nasdaq") on December 20, 1995 under the symbol "CTYS." From April 29, 1994
until December 19, 1995, the Company's Common Stock was listed on the National
Quotation Bureau, Inc. OTC Bulletin Board (the "Pink Sheets") under the symbol
"CTYS." A public trading market for the Company's Common Stock began in the
fourth quarter of 1994 with quotes commencing on December 1, 1994. Prior to
trading on Nasdaq, there had been only limited trading in the Common Stock. As a
result, prices reported for the Common Stock prior to December 20, 1995 reflect
the relative lack of liquidity and may not be reliable indicators of market
value.
The following table sets forth the range of high and low bid prices per
share for the Common Stock for the periods indicated as reported in the Pink
Sheets through December 19, 1995 (reflecting inter-dealer prices, without retail
mark-up, mark-down or commission which may not represent actual transactions),
and the range of high and low bid prices per share as reported by Nasdaq from
December 20, 1995 and reflects the 100% stock dividends paid by the Company in
September 1995 and July 1996.
HIGH LOW
---- ---
Year ended December 31, 1995:
First quarter................................. $1.38 $0.91
Second quarter................................ 3.00 1.38
Third quarter................................. 7.75 2.75
Fourth quarter (through December, 19, 1995)... 13.00 7.50
Fourth quarter (from December 20, 1995)....... 10.75 9.63
Year ended December 31, 1996:
First quarter................................. 17.75 9.88
Second quarter................................ 25.63 18.88
Third quarter................................. 36.00 24.75
Fourth quarter................................ 29.50 19.00
As of December 31, 1996, there were 267 stockholders of record of the
Company's Common Stock.
The Company has never paid any cash dividends on its Common Stock. The
Company intends to retain all of its future earnings to finance its operations
and does not anticipate paying cash dividends in the foreseeable future. Any
decision made by the Company's Board of Directors to declare dividends in the
future will depend upon the Company's future earnings, capital requirements,
financial condition and other factors deemed relevant by the Company's Board of
Directors. In addition, certain agreements to which the Company is a party
restrict the Company's ability to pay dividends on common equity. The Company
conducts substantially all of its operations through its subsidiaries.
Accordingly, the Company's ability to pay dividends is also dependent upon the
ability of its subsidiaries to make cash distributions to the Company. The
payment of dividends to the Company by its subsidiaries is and will continue to
be restricted by or subject to, among other limitations, applicable provisions
of laws of national or state governments, contractual provisions, the earnings
of such subsidiaries and various business
34
35
considerations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below as of December 31,
1993 and 1992 and for the years then ended have been derived from the audited
consolidated financial statements of CSC. The selected consolidated financial
data set forth below as of December 31, 1996, 1995 and 1994 and for the years
then ended have been derived from the consolidated financial statements of the
Company that have been audited by KPMG Peat Marwick LLP, whose report thereon,
insofar as it relates to the financial statements of CSC-UK as of and for the
year ended December 31, 1995, is based upon the report of BDO Stoy Hayward. The
following data should be read in conjunction with the Consolidated Financial
Statements of the Company and Notes thereto and with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing
elsewhere in this Report.
COMPANY CSC (1)
----------------------------------- -----------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
----------------------------------- -----------------------
1996 1995 1994 (2) 1993 1992
----------- ----------- ----------- ----------- --------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Gain on sale of loans........ $156,252 $ 38,198 $ 5,691 $ 2,088 $ 1,005
Net mortgage origination
income..................... 2,791 2,963 2,551 1,455 1,251
Interest income.............. 29,304 6,706 1,900 536 612
Servicing income............. 3,750 777 414 -- --
Earnings from partnership
interest................... 754 482 391 -- --
Other........................ 6,364 385 227 378 131
-------- -------- ------- ------- -------
Total revenues.......... 199,215 49,511 11,174 4,457 2,999
Costs and expenses:
Salaries and benefits........ 40,852 12,165 4,280 1,939 1,188
Other costs and expenses..... 73,255 14,581 5,041 2,195 1,718
-------- -------- ------- ------- -------
Total costs and
expenses.............. 114,107 26,746 9,321 4,134 2,906
Earnings before minority
interest, income taxes and
extraordinary item........... 85,108 22,765 1,853 323 93
Minority interest.............. -- 2,379 -- -- --
------- -------- ------- ------- ------
Earnings before income taxes and
extraordinary item........... 85,108 20,386 1,853 323 93
Income taxes................... 34,427 8,515 1,450(3) 8 3
-------- -------- ------- ------- -------
Earnings before extraordinary 50,681 11,871 403 315 90
item.........................
Extraordinary item............. -- (296)(4) -- -- --
------- -------- ------- ------- ------
Net earnings................... $ 50,681 $ 11,575 $ 403 $ 315 $ 90
======== ======== ======= ======= =======
Earnings per share before
extraordinary item........... $ 1.66 $ 0.50 $ 0.02 $ 0.02 $ 0.01
Extraordinary item............. -- (0.01)(4) -- -- --
------- --------- ------- ------- ------
Earnings per share:
Primary...................... $ 1.66 $ 0.49 $ 0.02 $ 0.02 $ 0.01
======== ========= ======== ======== ========
Fully diluted................ $ 1.59 N/A N/A N/A N/A
======== ======== ======= ======= =======
Weighted average number of shares
outstanding:
Primary...................... 30,537 23,838 20,560 20,000 20,000
======== ======== ======= ======= =======
Fully diluted................ 34,153 N/A N/A N/A N/A
======== ======== ======= ======= =======
COMPANY CSC(1)
----------------------------------- -----------------------
DECEMBER 31, DECEMBER 31,
----------------------------------- -----------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Total assets............... $ 810,202 $ 152,519 $21,816 $13,605 $ 8,609
Mortgage servicing 242,895 24,561 -- -- --
receivables...............
Trading securities(5)...... 103,200 15,571 -- -- --
Mortgage loans held for 102,222 73,852 16,681 10,271 6,430
sale, net.................
Goodwill and other 47,467 19,258 -- -- --
intangibles...............
Total debt(6).............. 377,651 75,673 16,100 10,165 6,310
Total liabilities.......... 671,370 95,420 18,030 11,207 6,563
Total stockholders' equity. 138,832 57,099 3,177 2,398 2,046
35
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COMPANY CSC (1)
--------------------------------------- -----------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------------------------------- -----------------------
1996 (7) 1995 1994 (2) 1993 1992
------------ ------------ ------------ ------------ ----------
(DOLLARS IN THOUSANDS)
OPERATING STATISTICS:
Loan originations and
purchases:
US:
Core Products............ $1,115,959 $417,864 $154,410 $ 77,586 $ 43,353
Specialty Products....... 137,318 -- -- -- --
Other Products........... 36,078 -- -- -- --
---------- ---------- ---------- ---------- ---------
Total US............ $1,289,355 $417,864 $154,410 $ 77,586 $ 43,353
UK......................... 463,546 41,395 -- -- --
-------- -------- -------- -------- -------
Total loan originations and
purchases................ $1,752,901 $459,259 $154,410 $ 77,586 $ 43,353
========== ======== ======== ======== ========
Average principal balance per
loan originated and purchased:
US........................... $ 62 $ 70 $ 77 $ 74 $ 56
UK........................... 17 43 -- -- --
Weighted average initial
loan-to-value ratio:
US(8)........................ 72.5% 66.4% 59.7% -- --
UK........................... 56.0 49.0 -- -- --
Loan sales:
US........................... $1,277,500 $358,997 $138,041 $ 61,293 $ 40,975
UK........................... 451,907 41,395 -- -- --
-------- -------- -------- -------- -------
Total loan sales........... $1,729,407 $400,392 $138,041 $ 61,293 $ 40,975
========== ======== ======== ======== ========
Loans serviced:
US(9)........................ $1,519,395 $386,720 $ 56,340 -- --
UK........................... 511,140 40,299 -- -- --
-------- -------- -------- -------- -------
Total loans serviced....... $2,030,535 $427,019 $ 56,340 -- --
========== ======== ======== ======== =======
Loans 30+ days past due as a
percentage of serviced
portfolio:
US........................... 8.9% 3.9% 3.4% -- --
UK(10)....................... 15.4 8.5 -- -- --
Charge-offs:
US........................... $ 167 $ 52 -- -- --
UK(10)....................... -- -- -- -- --
- ------------------
(1) The historical financial data presented have been derived exclusively from
the financial statements of CSC, which was acquired by the Company on
April 27, 1994.
(2) Gives effect to the Company's purchase of the capital stock of CSC as if
such purchase occurred on January 1, 1994. On April 27, 1994, the Company
acquired all of the capital stock of CSC in an acquisition in which the
shareholders of CSC acquired beneficial ownership of approximately 92% of
the Company's Common Stock. The CSC Acquisition was accounted for as a
reverse acquisition for financial reporting purposes with CSC being deemed
to have acquired a 100% interest in the Company as of the date of the
acquisition. From the date of its formation in 1988 through the date of
the CSC Acquisition, the Company's activities were limited to (i) the sale
of initial shares in connection with its organization, (ii) a registered
public offering of securities and (iii) the pursuit of a combination, by
merger or acquisition. The Company presently has no business operations
other than those incidental to its ownership of all the capital stock of
CSC.
(3) Includes a one-time charge of $680,000 related to the change in tax status
in 1994 from an "S" corporation to a "C" corporation.
(4) Represents a loss, net of taxes, related to the early extinguishment of
subordinated debentures in December 1995.
(5) Represents the interest-only and residual mortgage securities that the
Company receives upon loan sales through securitizations in the US.
36
37
(6) Includes short-term borrowings due under a warehouse facility and a US
standby facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
(7) Includes UK loan originations and purchases of $51.9 million and $190.5
million, average principal balance per UK loan originated and purchased of
$9,382 and $14,705, UK loan sales of $47.5 million and $153.7 million, UK
loans serviced of $51.9 million and $190.5 million, and loans 30 or more
days past due as a percentage of UK serviced portfolio of 4.7% and 5.7%,
due to the loans acquired as a result of the J&J Acquisition and the
Greyfriars Acquisition, respectively.
(8) Excludes the Company's Specialty Products and Other Products.
(9) Includes master servicing and contract servicing operations by the
Company. See "Business -- Loans -- Loan Servicing and Collections -- US."
(10) The Company has been servicing loans in the UK only since May 1995.
Accordingly, the UK loans serviced portfolio is unseasoned. Excluding the
portfolios acquired as a result of the J&J Acquisition and the Greyfriars
Acquisition, the UK delinquency ratio would have been 16.5% at December
31, 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and accompanying notes for the years ended
December 31, 1996, 1995 and 1994. The following Management's Discussion and
Analysis of Financial Condition and Results of Operations contains
forward-looking statements which involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements. Factors that might cause such a difference include
those discussed below, as well as general economic and business conditions,
competition and other factors discussed elsewhere in this Report. The Company
undertakes no obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of anticipated or unanticipated events.
GENERAL
Restatements
On September 26, 1996, the Company announced that it had determined that
certain adjustments should be made to the Company's previously issued financial
statements for the quarter ended June 30, 1996, to reflect a change in the
accounting treatment with respect to the valuation of assets acquired as a
result of the acquisitions of J&J and Greyfriars. The Company initially valued
the mortgage loans in the J&J Acquisition and the Greyfriars Acquisition at the
respective fair values which were estimated to approximate par (or historical
book value). Upon the subsequent sale of the mortgage portfolios, the Company
recognized the fair value of the mortgage servicing receivables retained and
recorded a corresponding gain for the fair value of such mortgage servicing
receivables. Upon subsequent review, the Company determined that the fair value
of such mortgage servicing rights should have been included as part of the fair
value of the mortgage loans acquired as a result of such acquisition. The effect
of this accounting change resulted in the Company eliminating $50.9 million in
revenues and approximately $6.3 million of expenses originally recorded in
connection with the acquisitions and a reduction in reported earnings of $26.5
million, or $0.78 per fully diluted share. Additionally, as a result of this
accounting change the goodwill initially recorded in connection with such
acquisitions was reduced from $60.5 million to $10.6 million resulting in a
reduction of goodwill amortization of approximately $496,000 from the previously
reported figure for the second quarter. The Staff of the Securities and Exchange
Commission has requested additional information from the Company in connection
with the
37
38
accounting related to the J&J Acquisition and the Greyfriars Acquisition. The
Company is supplying such requested information.
On November 19, 1996, the Company announced that it had determined that
certain additional adjustments relating to the J&J Acquisition and the
Greyfriars Acquisition should be made to the financial statements for the
quarter ended June 30, 1996. These adjustments reflect a change in the
accounting treatment with respect to the $5.0 million of restructuring charges
and the $17.3 million of deferred taxes recorded as a result of such
acquisitions. The effect of these adjustments resulted in the Company increasing
the goodwill as initially restated in September 1996 from $10.6 million to $30.6
million reflecting the reclassification, as costs of the acquisitions, of (i)
the restructuring charges, previously recorded as an expense, and (ii) the
offset to the tax liability incurred as part of the purchase accounting
adjustments which had been previously recorded as a deferred tax asset. This
increase in goodwill resulted in an increase of amortization expense as
previously reported in the second quarter of 1996 of $170,692 and will result in
a $502,150 per quarter increase in amortization expense through the first
quarter of 2006. As a result of these adjustments, second quarter net earnings
increased by $2.8 million or $0.08 per fully diluted share, from $8.3 million or
$0.27 per fully diluted share, to $11.1 million or $0.35 per fully diluted
share. For the six months ended June 30, 1996, net earnings increased from the
previously reported $17.6 million or $0.58 per fully diluted share to $20.4
million or $0.66 per fully diluted share. Further, as a result of these
adjustments, there was increased goodwill amortization recorded during the third
quarter of 1996 which resulted in a $502,150 decrease in previously announced
net earnings of $0.02 per fully diluted share from $14.9 million or $0.45 per
fully diluted share to $14.4 million or $0.43 per fully diluted share. For the
nine months ended September 30, 1996, net earnings increased $2.3 million to
$34.8 million or $1.11 per fully diluted share from the previously announced
results of $32.5 million or $1.04 per fully diluted share.
Overview
The Company is a consumer finance company engaged in the business of
originating, purchasing, selling and servicing mortgage loans secured primarily
by one- to four-family residences. The Company primarily generates income from
gain on sale of loans sold through securitizations, gains recognized from
premiums on loans sold through whole loan sales to institutional purchasers,
interest earned on loans held for sale, excess mortgage servicing receivables,
origination fees received as part of the loan application process and fees
earned on loans serviced. Gain on sale of loans includes gain on securitization
representing the fair value of the interest-only and residual certificates that
the Company receives upon the sale of loans through securitizations in the US
which are reflected as trading securities and the value of mortgage servicing
receivables that it recognizes through UK securitizations. Included in gain on
sale of loans is the present value of the differential between the interest rate
payable by an obligor on a loan over the interest rate passed through to the
purchaser acquiring an interest in such loan, less applicable recurring fees,
including the costs of credit enhancements and trustee fees and, in the case of
CSC-UK loans sold prior to January 1, 1996, a third party investment bank's
significant participation in the cash flows associated with such loans. Gain on
sale of loans constituted approximately 78.4% of total revenues in 1996, 77.2%
of total revenues in 1995 and 50.9% of total revenues in 1994. The Company
completed its first US securitization in the first quarter of 1995 and its first
UK securitization in the first quarter of 1996. The Company anticipates that it
will continue to sell a substantial portion of its loans through securitizations
and into loan purchase facilities, with the balance sold in whole loan sales to
institutional purchasers.
Recent Growth
The Company has experienced significant growth in the past few years,
particularly since January 1, 1994. Management believes that this growth is
primarily attributable to: (i) the Company's geographic expansion program
pursuant to which the Company expanded its operations from five states as of
December 31, 1993 to 42 states as of December 31, 1996; (ii) the development of
a loan servicing capability; (iii) the commencement of the Company's Wholesale
Loan Acquisition Program in 1994; (iv)
38
39
the Company's increased access to funding; (v) the formation in May 1995 of
CSC-UK and its access to financing through a loan purchase facility for the
origination, sale and servicing of mortgage loans in the UK; (vi) the
acquisitions of J&J and Greyfriars in the UK.; and (vii) the introduction and
expansion of new products such as "Sav*-A-Loans(R)" in the US.
Although there can be no assurance that the Company will be able to sustain
its historical growth rate, management believes that the Company will continue
to grow significantly over the next 12 months. Any future growth of the Company
will be limited by, among other things, the Company's need for continued funding
sources, dependence on securitizations, potential changes in the valuation of
interest-only and residual certificates and mortgage servicing receivables,
possible termination of servicing rights, sensitivity to economic slowdown and
fluctuation in interest rates, loan delinquencies and defaults particularly with
respect to loans made to high-risks borrowers, the effects of the Company's
recent expansion and product extensions, credit risks associated with loans made
at high loan-to-value ratios, the effects of acquisitions, risks related to
operations in the UK, contingent risks on loans, geographic concentration of US
operations, competition and legislative and regulatory risks.
Loan Originations and Purchases
The following table highlights certain selected information relating to the
origination and purchase of loans by the Company during the periods shown.
LOAN ORIGINATION AND PURCHASES
US UK
------------------------ --------------------------
FOR THE YEAR FROM
FOR THE YEAR ENDED ENDED FORMATION TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------------------ ------------ ------------
1996 1995 1996 1995
-------- -------- -------- -------
Loan originations and
purchases:
Core Products:
Independent mortgage
brokers.......... $ 414,411 $291,907 $220,034 $41,395
Wholesale Loan
Acquisition
Program.......... 572,484 125,957 1,045 --
-------- -------- -------- -------
Total Core
Products...... 986,895 417,864 221,079 41,395
Specialty Products.... 137,318 -- -- --
Other Products........ 36,078 -- -- --
Bulk purchases........ 129,064 -- 242,467(1) --
-------- -------- -------- -------
Total originations
and purchases.... $1,289,355 $417,864 $463,546 $41,395
========== ======== ======== =======
Weighted average interest
rate(2)............... 12.0% 11.9% 16.4% 16.4%
Weighted average initial
loan-to-value
ratio(3).............. 72.5 66.4 56.0 49.0
Percentage of loans
secured by first
mortgages ............ 89.6 89.0 67.8 92.0
- ------------------
(1) Includes $51.9 million of loans acquired as a result of the J&J Acquisition,
75.0% of which were secured by second mortgages, with a weighted average
interest rate of 23.6% and a weighted average initial loan-to-value ratio of
45.6%, and includes $190.5 million of loans acquired as a result of the
Greyfriars Acquisition, 82.0% of which were secured by second mortgages,
with a weighted average interest rate of 14.5% and a weighted average
initial loan-to-value ratio of 52.5%.
39
40
(2) The UK weighted average interest rate represents the weighted average
blended rate. The weighted average flat rates were 15.7 % and 17.4% and the
weighted average concessionary rates were 12.9% and 10.6% as of December 31,
1996 and 1995, respectively.
(3) Excludes the Company's Specialty Products and Other Products. The
loan-to-value ratio of a loan secured by a first mortgage is determined by
dividing the amount of the loan by the appraised value of the mortgaged
property at origination. The loan-to-value ratio of a loan secured by a
second mortgage is determined by taking the sum of the loans secured by the
first and second mortgages and dividing by the appraised value of the
mortgaged property at origination.
The Company increased its US loan originations and purchases in 1996 to $1.3
billion from $417.9 million in 1995, representing an annual growth rate of
208.5% over the 12 month period. The average principal balance of the Company's
US loans for 1996 was $61,801. The Company's US originations of Core Products
from brokers increased in 1996 to $414.4 million from $291.9 million in 1995,
representing an increase of $122.5 million (or 42.0%). During 1996, however, the
Company's US originations of Core Products from brokers did not change
materially on a quarter by quarter basis. Furthermore, as a source of the
Company's loan originations and purchases, the Company's Wholesale Loan
Acquisition Program grew faster than loans sourced through independent brokers
during 1996. The Company attributes these results to (i) the Company's policy,
as a result of regulatory concerns, against paying broker yield spread premiums
(the Company believes that many of its competitors make such payments) and (ii)
the shift in broker originations from Core Products to Specialty Products during
the second half of 1996. The Company's UK loan originations and purchases for
1996 were $463.5 million, including loan portfolios of $51.9 million and $190.5
million acquired as a result of the J&J Acquisition and the Greyfriars
Acquisition, respectively. The average principal balance of the Company's UK
loans for 1996 was $17,400, a decrease of $25,720 from the average principal
balance of the Company's UK loans for 1995 of $43,120 primarily due to the
inclusion of the loans acquired as a result of the J&J Acquisition ($51.9
million of loans at an average principal balance of $9,382) and the Greyfriars
Acquisition ($190.5 million of loans at an average principal balance of
$14,705). During 1996, the Company broadened its UK loan products to include
loans that do not use the Rule of 78s prepayment calculation and that generally
have lower broker commissions as compared to those paid with respect to
long-term Rule of 78s loan products.
During 1996, the weighted average initial loan-to-value ratio on the
Company's US Core Products increased to 72.5% from 66.4% during 1995 primarily
due to an increase in originations of the Company's "A" risk loans (49.6% of
total Core Product originations in 1996 as compared to 44.6% in 1995), as well
as the Company's new programs offering loans with higher loan-to-value ratios to
borrowers with higher credit quality in response to competition. The rate of
increase in the loan-to-value ratios declined in the second half of 1996, and
the Company expects such rate of increase will slow during 1997 and stabilize
near the current level. Such slowing or stabilization, however, can not be
assured and will depend upon many factors, including the acceptance of new
products offered by the Company and the effect of increased competition in the
Company's markets.
Loan Sales
The Company sells, without recourse, virtually all of the loans it
originates or purchases in loan sales through securitizations, into the US and
UK loan purchase facilities and in whole loan sales. See "Business -- Loans --
Loan Sales." During 1996 and 1995, the Company sold $1.7 billion and $400.4
million of loans, respectively, of which $73.5 million and $105.8 million were
sold in whole loan sales, respectively. Gains on the sale of loans through
securitizations and into loan purchase facilities were $154.5 million and $33.2
million, or 77.6% and 67.1% of the Company's total revenues in 1996 and 1995,
respectively. Gains on whole loan sales represented 1.1% and 10.2% of the
Company's total revenues in 1996 and 1995, respectively.
40
41
During 1996 and 1995, loan sales included $1.3 billion and $359.0 million of
US loan sales, respectively, and $451.9 million and $41.4 million of UK loan
sales, respectively. During 1996 and 1995, gains on US loan sales totaled $76.8
million (6.0% weighted average gain) and $26.3 million (7.3% weighted average
gain), respectively, and gains on UK loan sales totaled $79.4 million (31.7%
weighted average gain excluding the $201.2 million of loans sold that were
acquired as a result of the J&J Acquisition and the Greyfriars Acquisition) and
$11.9 million (28.7% weighted average gain), respectively.
The higher weighted average gain on UK loan sales as compared to US loan
sales was primarily a result of the higher average blended interest rate on UK
loan originations (16.4% for UK loan originations as compared to 12.0% for US
loan originations for 1996), greater prepayment calculations in the UK and
pass-through rates to investors in the Company's UK securitizations that are
similar to the pass-through rates on certificates issued in the Company's US
securitizations for the period. The Company believes that the higher average
blended interest rates on its UK loan originations is primarily a result of the
highly fragmented UK market that is generally underserved by Conventional UK
Lenders. Such higher average blended interest rates contribute to higher
weighted average gains on UK loan sales. See "Business - UK Overview."
Typically, the Company's UK loans are calculated using a standard rate of
interest and may provide the opportunity for a borrower to pay a concessionary
rate to the extent that the borrower pays his or her loan when due and is
current on previous loan payments. During 1996, standard interest rates on the
Company's UK loans ranged from 7.3% to 20.7% expressed as a flat rate, or 12.0%
to 27.6% expressed as an annual percentage rate, and concessionary rates ranged
from 5.4% to 9.9% expressed as a flat rate, or 10.36% to 14.25% expressed as an
annual percentage rate. The blended interest rate on UK loans is an assumed rate
based upon the weighted average standard rate of 15.7% and a weighted average
concessionary rate of 12.9% for 1996. The appropriateness of loan products that
utilize standard/concessionary rate structures has recently been questioned by
the OFT. See "Business- Regulation- UK."
Under the terms of some of the Company's loans in the UK, the amount due in
the case of a prepayment is based upon the amount of interest, at the Standard
Rate or the Concessionary Rate (whichever is in effect on the date of
prepayment), that has been "earned" and calculated in accordance with the "Rule
of 78s" method with a one- to six-month deferment (i.e., for purposes of
calculating the amount of interest that has been earned, the redemption date is
set at one to six months after the date of actual redemption by the borrower).
In a hypothetical (pound)35,000 loan, the prepayments after the 18th, 120th and
180th months calculated using a six-month deferment at the Standard Rate would
require the borrower to pay (pound)45,872 or 31.1% more than the original
principal balance (or (pound)41,080 or 17.4% more than the original principal
balance if the prepayment were calculated using a one-month deferment),
(pound)54,651 or 56.1% more than the original principal balance ((pound)48,869
or 39.6% more than the original principal balance if the prepayment were
calculated using a one-month deferment) and (pound)51,440 or 47.0% more than the
original principal balance ((pound)32,277 or 7.8% less than the original
principal balance if the prepayment were calculated using a one-month
deferment), respectively. The appropriateness of secured long term loan products
that utilize Rule of 78s prepayments have recently been questioned by the OFT.
In future periods, the Company believes that long-term loans utilizing Rule of
78s prepayments will represent an increasingly smaller percentage of its UK loan
origination and purchase volume and that the OFT's regulatory initiatives are
likely to result in the Company's elimination or modification of long-term loan
products utilizing Rule of 78s. Such elimination or modification could have a
material adverse effect in future periods on the Company's results of operations
and financial condition, especially if the Company is unsuccessful in its
product broadening efforts. The Company is unable to determine at this time how
soon such elimination or modification will occur.
The Company has used, and may use in the future, pre-funding mechanisms in
certain of its securitizations both as a relatively inexpensive borrowing
source, as well as to hedge its interest rate exposure. In a typical Company
securitization transaction with a pre-funding account, the investors purchase
certificates with a higher aggregate principal balance than that of the mortgage
loans transferred to the securitization trust on the closing date (such
increment, the "Pre-funded Amount"). During the
41
42
period up to 90 days after the closing date (the "Pre-funding Period"), the
Company sells mortgage loans to the trust which in turn pays for them with the
Pre-funded Amount.
The pre-funding mechanism effectively permits the Company during the
Pre-funding Period to borrow from the certificate investors an amount equal to
the Pre-funded Amount and pay the investors an interest rate equal to the
certificate rate which is a rate lower than that at which the Company can borrow
from its other funding sources. Furthermore, the Company fixes at the
certificate rate the pricing at which it can sell an amount (equal to the
Pre-funded Amount) of its mortgage loans, thereby insulating the Company during
the Pre-funding Period from risks associated with interest rate movements (that
would ultimately impact the pass-through rate on securities issued in a
securitization) to which it would be exposed if it were forced to hold the
mortgage loans during such period.
Loan Servicing
Prior to 1994, the Company typically sold loans with servicing rights
released. In 1996 and 1995, however, the Company retained the servicing or
master servicing rights for approximately 98.4% and 74.2%, respectively, of the
loans it sold. As of December 31, 1996, the Company was servicing 24,820 US
loans with an aggregate principal balance of $1.5 billion, representing a 371.9%
increase over an aggregate principal balance of $311.6 million serviced as of
December 31, 1995. Revenue generated from loan servicing amounted to 1.9% and
1.6% of total revenues for 1996 and 1995, respectively. Management believes that
the business of loan servicing provides an additional and profitable revenue
stream and one that is less cyclical than the business of loan origination and
purchasing.
The following table provides data on delinquency experience and REO
properties for the Company's US serviced portfolio (excluding loan balances
under contract servicing or master servicing agreements). Because the Company
has only expanded into the business of loan servicing during the last three
years, the Company's US serviced portfolio was relatively unseasoned in 1995 and
1994. Accordingly, during 1996 the Company experienced an expected increase in
total US delinquencies as a percentage of the US serviced portfolio as a result
of the seasoning of the US serviced portfolio. No assurances, however, can be
given as to the Company's future delinquency experience.
AS OF DECEMBER 31,
-----------------------------------------------------------------------------
1996 1995 1994
---------------------- ----------------------- -------------------------
% OF % OF % OF
DOLLARS IN SERVICED DOLLARS IN SERVICED DOLLARS IN SERVICED
THOUSANDS PORTFOLIO THOUSANDS PORTFOLIO THOUSANDS PORTFOLIO
---------- --------- ---------- --------- ---------- ---------
US serviced portfolio..... $1,470,344 100.0% $311,649 100.0% $23,904 100.0%
---------- ------- -------- ------- ------- -------
30-59 days delinquent... 55,182 3.7 5,479 1.8 -- --
60-89 days delinquent... 20,358 1.4 1,580 0.5 142 0.6
90 days or more
delinquent............ 55,684 3.8 4,968 1.6 679 2.8
---------- ------- -------- ------- ------- -------
Total US delinquencies.... $ 131,224 8.9% $ 12,027 3.9% $ 821 3.4%
========== ======= ======== ======= ======= =======
US REO property........... $ 1,010 0.1% $ 141 -- $ 130 0.5%
========== ======= ======== ======= ======= =======
The Company has been servicing loans in the UK since the inception of CSC-UK
in May 1995. As of December 31, 1996, CSC-UK was servicing UK loans with an
aggregate principal balance of $511.1 million.
The following table provides data on delinquency experience for the
Company's UK serviced portfolio. The Company does not have any REO properties in
the UK. Because the Company has only serviced loans in the UK for a short period
of time, the Company's UK serviced portfolio is unseasoned. No assurance can be
given that delinquencies as a percentage of the UK serviced portfolio as of
December 31, 1996, will be indicative of delinquency experience in the future.
AS OF DECEMBER 31, 1996 (1) AS OF DECEMBER 31, 1995
----------------------------- ------------------------------
DOLLARS IN % OF SERVICED DOLLARS IN % OF SERVICED
THOUSANDS PORTFOLIO THOUSANDS PORTFOLIO
UK serviced portfolio......... $511,140 100.0% $40,299 100.0%
-------- ------- ------- -------
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30-59 days delinquent....... 24,024 4.7 1,087 2.7
60-89 days delinquent....... 10,734 2.1 423 1.1
90 days or more delinquent.. 43,958 8.6 1,926 4.8
------- ------- ------- -------
Total UK delinquencies... $78,716 15.4% $ 3,436 8.6%
======= ======= =========== ============
- ------------------
(1) Includes the J&J serviced portfolio of $41.9 million with total
delinquencies of $18.2 million or 43.3%, of which $3.8 million or 9.0% was
30-59 days delinquent, $2.6 million or 6.3% was 60-89 days delinquent and
$11.8 million or 28.1% was 90 days or more delinquent. Includes the
Greyfriars serviced portfolio of $233.5 million with total delinquencies of
$21.9 million or 9.4%, of which $7.8 million or 3.3% was 30-59 days
delinquent, $3.1 million or 1.3% was 60-89 days delinquent and $11.0 million
or 4.7% was 90 days or more delinquent. Excluding the portfolios acquired as
a result of the J&J Acquisition and the Greyfriars Acquisition, the UK
delinquency ratio would have been 16.5% at December 31, 1996.
RESULTS OF OPERATIONS
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total revenues increased $149.7 million or 302.4% to $199.2 million in 1996
from $49.5 million in 1995. This increase was due primarily to higher gains on
sale of loans resulting from the combined US and UK increased loan origination
and purchase volume and volume of loans sold compared to the prior period and
increased interest income resulting from higher average balances of loans held
for sale, as well as increased discount accretion recognized on higher average
balances of mortgage servicing receivables.
Gain on sale of loans increased $118.0 million or 308.9% to $156.2 million
in 1996 from $38.2 million in 1995. This increase was due primarily to CSC-UK's
gain on sale of loans of $79.4 million representing a 31.7% gain on the $250.7
million of loan sales in 1996 (which excludes the $201.2 sale of portfolios
acquired as a result of the J&J Acquisition and Greyfriars Acquisition) compared
to gain on sale of loans of $11.9 million representing a 28.7% gain on the $41.4
million of loan sales in 1995. The higher average gain on sale in 1996, was due
primarily to the termination of the previous UK purchase facility pursuant to
which Greenwich retained a significant participation in such gain. Additionally,
the increase was due to increased volume of US loan sales at lower average gains
($1.3 billion of loan sales at a weighted average gain of 6.0% ($76.8 million)
in 1996 as compared to $359.0 million of loan sales at a weighted average gain
of 7.3% ($26.3 million) in 1995). The lower average US gain on sale of loans
recognized in 1996 was due primarily to the lower average margins from bulk
purchases which began during the second quarter of 1996, lower margins from
correspondent wholesale loans, as well as lower margins from changes in interest
rates during the second quarter of 1996 offset by higher margins on the sale of
the Specialty Products. The Company expects that the UK gain on sale margin as a
percentage of loan sales will decline in the future resulting from new product
offerings that are expected to carry lower weighted average coupons and lower
prepayment fees.
Mortgage origination income decreased $171,910 or 5.8% to $2.8 million in
1996 from $3.0 million in 1995. This decrease was due primarily to lower fees
earned on the Company's domestic broker originations. It is anticipated that the
Company's domestic origination fees as a percentage of loans originated will
continue to decrease in the future. Mortgage origination income as a percentage
of revenues decreased to 1.4% in 1996 from 6.0% in 1995.
Interest income increased $22.6 million or 337.3% to $29.3 million in 1996
from $6.7 million in 1995. This increase was due primarily to the increased
balance of loans held for sale during 1996 resulting from the increased loan
origination and purchase volume in excess of loans sold during the period, as
well as interest income resulting from the accretion of the discount recorded on
mortgage servicing receivables.
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Servicing income increased $2.9 million or 382.6% to $3.7 million in 1996
from $777,066 in 1995. This increased income was due primarily to an increase in
the average balances of US loans serviced to $933.6 million in 1996 from $140.3
million in 1995 and the increase in the average balances of UK loans serviced to
$330.0 million in 1996 from $17.3 million in 1995.
Earnings from partnership interest increased $271,874 or 56.4% to $753,663
in 1996 from $481,789 in 1995. This increase was due primarily to increased
earnings recognized from the equity interest in IMC during 1996. In June 1996,
IMC converted from partnership to corporate form and effected a public offering
of its common stock. As a result of the offering, the Company's interest in IMC
is no longer accounted for under the equity method of accounting, whereby the
Company recognized its relative portion of the partnership's earnings as
revenues, but rather as available-for-sale securities in accordance with SFAS
No. 115.
Total expenses increased $87.4 million or 327.3% to $114.1 million in 1996
from $26.7 million in 1995. This increase was due primarily to increased
salaries, selling expenses and operating expenses related to increased loan
origination and purchase volume during 1996. Total expenses as a percentage of
total revenues increased to 57.2% in 1996 from 54.0% in 1995. During 1996,
amortization of goodwill related to the UK Acquisition, the J&J Acquisition and
the Greyfriars Acquisition totaled $3.8 million.
Salaries and benefits increased $28.7 million or 235.2% to $40.9 million in
1996 from $12.2 million in 1995. This increase was due primarily to increased
staffing levels to 638 US employees at December 31, 1996 compared to 264 US
employees at December 31, 1995 and the increased staffing levels associated with
the UK operations (267 UK employees at December 31, 1996 compared to 71 UK
employees at December 31, 1995) resulting from the growth in loan origination
and purchase volume and geographic expansion, increased loans serviced as well
as the J&J Acquisition and the Greyfriars Acquisition.
Interest expense increased $15.6 million or 339.1% to $20.2 million in 1996
from $4.6 million in 1995. This increase was due primarily to the interest costs
associated with the $143.8 million of Convertible Debentures (the "Debentures")
issued during the second quarter of 1996, as well as an increased balance of
loans held pending sale during 1996, resulting from the increased loan
origination and purchase volume during 1996.
Selling and other expenses increased $39.8 million or 418.9% to $49.3
million in 1996 from $9.5 million in 1995. This increase was due primarily to
increased selling costs of $21.0 million or 724.1% to $23.9 million in 1996 from
$2.9 million in 1995 as a result of increased selling and commission costs for
UK loan originations (primarily as a result of the higher commissions paid to
brokers who have entered into right of first refusal agreements with the
Company) and increased professional fees, travel and entertainment and occupancy
costs incurred to support the increased loan origination and purchase volume.
Net earnings increased $39.1 million or 337.1% to $50.7 million in 1996 from
$11.6 million in 1995. This growth in net earnings was due primarily to
increased revenues resulting from an increase in US and UK loan origination and
purchase volume and volume of loans sold during 1996 as the Company expanded its
geographic base to 42 states and the District of Columbia and further penetrated
existing markets.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total revenues increased $38.3 million or 342.0% to $49.5 million in 1995
from $11.2 million in 1994. This increase was primarily the combined result of
higher gains on sale of loans resulting from the increased loan origination and
purchase volume and volume of loans sold compared to the prior period, the
inclusion of the operating results of CSC-UK, not in existence during 1994, an
increase in net
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mortgage origination income due to an increased loan origination volume and an
increase in servicing income.
Gain on sale of loans increased $32.5 million or 570.2% to $38.2 million for
the year ended December 31, 1995 from $5.7 million in 1994. This increase was a
result of (i) the increased volume of US whole loan sales as well as higher
average premiums earned on US whole loan sales during 1995 ($209.0 million of US
whole loan sales at a 5.7% ($12.0 million) weighted average premium as compared
to a weighted average premium of 4.1% ($5.7 million) on $138.0 million of whole
loan sales during 1994), (ii) the inclusion of CSC-UK's gain on loan sales of
$11.9 million for the period from its formation to December 31, 1995
representing a 28.7% premium on the $41.4 million of UK loan sales during this
period and (iii) the initiation of loan sales through securitizations in 1995.
The Company completed loan securitizations in March, August and December 1995,
generating gain on securitization of $14.3 million (representing the fair value
of the interest-only and residual certificates of $15.6 million, less $1.3
million of costs associated with the transactions), or a weighted average gain
on securitization of 9.5% on the Company's participation in the $235.0 million
of loans sold through securitizations, excluding pre-funding.
Net mortgage origination income increased $411,765 or 15.8% to $3.0 million
in 1995 from $2.6 million in 1994. This increase was a result of the increase in
US loan origination and purchase volume to $417.9 million in 1995 from $154.4
million in 1994, partially offset by lower average origination fees earned.
Interest income increased $4.8 million or 252.6% to $6.7 million in 1995
from $1.9 million in 1994. This increase was due primarily to the increased
balance of loans held for sale during the year resulting from the increased loan
origination and purchase volume in excess of loans sold during the period.
Servicing income increased $362,893 or 87.6% to $777,066 in 1995 from
$414,173 in 1994. This increased income was due primarily to an increase in the
average balances of loans serviced to $140.3 million in 1995 from $23.4 million
in 1994.
Earnings from partnership interest increased $90,789 or 23.2% to $481,789 in
1995 from $391,000 in 1994 as a result of the inclusion of the equity interest
of IMC. For the year ended December 31, 1995, IMC recorded revenues of
approximately $19.7 million comprised primarily of $15.1 million from gain on
sale of loans.
Total expenses increased $17.4 million or 187.1% to $26.7 million in 1995
from $9.3 million in 1994. This increase was a result of increased salaries,
selling expenses and operating expenses related to increased loan origination
and purchase volume during 1995, as well as inclusion of the operating results
of CSC-UK, as compared to 1994. Total expenses as a percentage of total revenues
decreased to 54.0% for 1995 from 83.4% in 1994. During 1995, amortization of
goodwill totaled $493,794, related to the UK Acquisition. In future periods,
total expenses will be impacted by $2.0 million of amortization expense on an
annualized basis related to the goodwill recorded in connection with the UK
Acquisition.
Salaries and benefits increased $7.9 million or 183.7% to $12.2 million in
1995 from $4.3 million in 1994. This increase was primarily due to increased US
staffing levels to 264 employees at December 31, 1995 from 114 employees at
December 31, 1994 in connection with the Company's growth in loan origination
and purchase volume and geographic expansion, as well as an increase in loans
serviced.
Interest expense increased $3.0 million or 187.5% to $4.6 million in 1995
from $1.6 million in 1994. The increase was attributable to the interest costs
associated with a larger balance of loans held pending sale during 1995
resulting from the increased loan origination and purchase volume during the
year.
Other expenses increased $6.0 million or 171.4% to $9.5 million in 1995 from
$3.5 million in 1994. This increase was primarily a result of increased selling
costs of $2.3 million or 392.3% to $2.9 million in
45
46
1995 from $588,029 in 1994, increased professional fees of $796,343 or 106.9% to
$1.5 million in 1995 from $745,105 in 1994 and increased other operating costs
of $2.9 million or 131.8% to $5.1 million in 1995 from $2.2 million in 1994
incurred to support the $304.8 million increase in loan origination and purchase
volume.
Minority interest was $2.4 million for 1995. There was no minority interest
for the comparable period in 1994. The minority interest was recognized during
1995 due to the inclusion of the consolidated operating results of CSC-UK,
although CSC-UK was only 50% owned by the Company prior to September 30, 1995.
Earnings before extraordinary item increased $11.5 million or 2,842.2% to
$11.9 million in 1995 from $403,459 in 1994. This growth was due primarily to
increased revenues resulting from an increase in loan origination and purchase
volume and volume of loans sold during 1995 as the Company expanded its
geographic base to 31 states and the District of Columbia and further penetrated
existing markets. Additionally, the inclusion of CSC-UK's earnings, since its
formation in May 1995, contributed $5.2 million, after taxes, to net income
during 1995.
An extraordinary loss of $295,943, net of taxes, was recorded due to early
extinguishment of subordinated debentures in December 1995. The Company
recognized as a loss the unamortized portion of the discount which was initially
recorded as a result of the detachable warrants received by the lender in
connection with the debt. After giving effect to the extraordinary loss, net
earnings increased $11.2 million or 2,800.0% to $11.6 million in 1995 from
$403,459 in 1994.
FINANCIAL CONDITION
December 31, 1996 Compared to December 31, 1995
Cash and cash equivalents decreased $1.5 million or 41.7% to $2.1 million at
December 31, 1996 from $3.6 million at December 31, 1995.
Securities purchased under agreements to resell represent US Treasury
securities borrowed from the repo desk of a counterparty to facilitate the
delivery of US Treasury securities sold short as part of the Company's strategy
to manage interest rate risk on loan originations. The balance at December 31,
1996 was $154.2 million, and there was no corresponding asset at December 31,
1995.
Available-for-sale securities in the amount of $14.6 million were recorded
as an asset at December 31, 1996 as a result of the Company's equity interest in
IMC. Prior to June 1996, the Company had recorded a 9.1% limited partnership
interest in IMC. At December 31, 1995, the Company's investment in partnerships
was $758,315 and was recorded as other assets. In June 1996, IMC converted into
corporate form and effected a public offering of common stock. As a result of
the offering, the Company's interest in IMC is no longer accounted for under the
equity method of accounting, whereby the Company recognized its relative portion
of the partnership earnings as revenues, but rather as available-for-sale
securities in accordance with SFAS No. 115. Available-for-sale securities are
reported on the Company's statement of financial condition at fair market value
with any corresponding change in value reported as an unrealized gain or loss
(if assessed to be temporary) as an element of stockholders' equity after giving
effect for taxes.
Mortgage servicing receivables increased $218.3 million or 887.4% to $242.9
million at December 31, 1996 from $24.6 million at December 31, 1995. This
increase was due primarily to the $50.9 million of mortgage servicing
receivables recorded as a result of the J&J Acquisition and the Greyfriars
Acquisition and the $187.0 million recognized as a result of the increase of
loan sales primarily in the UK with servicing retained, partially offset by
$19.6 million of amortization.
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Trading securities, which consist of interest-only and residual
certificates, increased $87.6 million or 561.5% to $103.2 million at December
31, 1996 from $15.6 million at December 31, 1995. This increase was due to the
$993.6 million of US securitizations completed during 1996.
Prepaid commitment fees of $38.0 million were recorded as an asset at March
31, 1996 as a result of the UK Greenwich Facility entered into by CSC-UK and
Greenwich International Ltd., a subsidiary of Greenwich Capital Markets, Inc.
(referred to herein, including any affiliates as "Greenwich") in March 1996, to
be amortized over the 20-year life of the UK Greenwich Facility. The unamortized
balance at December 31, 1996 was $35.9 million. There was no corresponding
asset at December 31, 1995.
Mortgage loans held for sale, net increased $28.3 million or 38.3% to $102.2
million at December 31, 1996 from $73.9 million at December 31, 1995. This
increase was due primarily to the volume of US loans originated exceeding loan
sale volume in 1996 and loans acquired as part of the Greyfriars Acquisition
which were not yet sold.
Mortgage loans held for investment, net increased $7.3 million or 730.0% to
$8.3 million at December 31, 1996 from $1.0 million at December 31, 1995. This
increase was due primarily to the Company's increased loan origination and
purchase volume and the inclusion of $3.1 million of mortgages held for
investment by CSC-UK. As a percentage of total assets, mortgage loans held for
investment increased to 1.0% at December 31, 1996 from 0.7% at December 31,
1995.
Credit enhancement deposits represent initial reserve funds established on
UK securitizations and sales into purchase facilities. The balance at December
31, 1996 was $35.1 million, and there was no corresponding asset at December 31,
1995.
Goodwill, net of amortization, increased $28.2 million or 146.1% to $47.5
million at December 31, 1996 from $19.3 million at December 31, 1995. This
increase was due primarily to the goodwill recorded in connection with the J&J
Acquisition and Greyfriars Acquisition of $5.2 million and $25.4 million,
respectively, offset by $3.8 million of amortization during 1996.
Other assets increased $25.0 million or 581.4% to $29.3 million at December
31, 1996 from $4.3 million at December 31, 1995. This increase was due primarily
to the inclusion of subwarehouse loan receivables at December 31, 1996 of $14.9
million compared to $1.6 million at December 31, 1995 and the inclusion of
deferred costs of $5.3 million related to the issuance of the Debentures.
Warehouse financing facilities outstanding increased $14.5 million or 19.4%
to $89.4 million at December 31, 1996 from $74.9 million at December 31, 1995.
This increase was due primarily to the increased origination and purchase volume
in excess of the volume of loans sold as reflected in the increase in mortgages
held for sale, net.
Securities sold but not yet purchased represent US Treasury securities sold
short as part of the Company's strategy to manage interest rate risk on loan
originations. The balance at December 31, 1996 was $152.9 million, and there was
no corresponding liability at December 31, 1995.
Accounts payable and other liabilities increased $33.8 million or 206.1% to
$50.2 million at December 31, 1996 from $16.4 million at December 31, 1995. This
increase was due primarily to the inclusion of CSC-UK and increased escrow
balances associated with the increased loan servicing portfolio.
Allowance for losses increased $31.6 million or 1,504.8% to $33.7 million at
December 31, 1996 from $2.1 million at December 31, 1995. This increase was due
primarily to increased loans sold in the UK with servicing rights retained.
Notes and loans payable totaled $136.5 million at December 31, 1996
representing the $100.0 million outstanding under the Senior Secured Facility
with CIBC, $25.0 million note payable recorded in
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connection with the UK Greenwich Facility, $6.5 million of advances under the US
Greenwich Facility and the $5.0 million term loan with the Bank of Boston.
Stockholders' equity increased $81.7 million or 143.1% to $138.8 million at
December 31, 1996 from $57.1 million at December 31, 1995. This increase was due
primarily to net earnings of $50.7 million in 1996 and stock issued in
connection with the J&J Acquisition and Greyfriars Acquisition totaling $12.3
million, in addition to an $8.3 million unrealized gain on available-for-sale
securities, net of taxes and a foreign currency translation adjustment, net of
taxes of $9.8 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business requires substantial cash to support its operating
activities. The Company's principal cash requirements include the funding of
loan originations and purchases, payment of interest expenses, funding the
overcollateralization requirements for securitizations, operating expenses,
income taxes and capital expenditures. The Company uses its cash flow from whole
loan sales, loans sold through securitizations, capital markets offerings,
pre-funding mechanisms through securitizations, loan origination fees,
processing fees, net interest income and borrowings under its warehouse
facility, US purchase facilities, standby facilities and UK purchase facility to
meet its working capital needs and to fund acquisitions such as the J&J
Acquisition and the Greyfriars Acquisition.
Adequate credit facilities and other sources of funding, including the
ability of the Company to sell loans, are essential to the continuation of the
Company's ability to originate and purchase loans. As a result of increased loan
originations and purchases and its growing securitization program, the Company
has operated, and expects to continue to operate, on a negative cash flow basis.
During fiscal 1996, 1995 and 1994, the Company used operating cash of
approximately $165.5 million, $76.0 million, and $5.4 million, respectively.
Additionally, in 1995 and 1994, the Company used $1.5 million and $470,244,
respectively, in investing activities. In 1996, $100.7 million of cash was
provided by investing activities, primarily from the proceeds from the sale of
loan portfolios acquired as a result of the J&J Acquisition and the Greyfriars
Acquisition. The Company's sale of loans through securitizations has resulted in
a gain on sale of loans through securitizations recognized by the Company. The
recognition of this gain on sale has a negative impact on the cash flow of the
Company because significant costs are incurred upon closing of the transactions
giving rise to such gain and the Company is required to pay income taxes on the
gain on sale in the period recognized, although the Company does not receive the
cash representing the gain until later periods as the related loans are repaid
or otherwise collected. During the same periods, the Company received cash from
financing activities of $63.4 million, $80.2 million and $6.7 million,
respectively.
The Company is required to comply with various operating and financial
covenants as defined in the agreements described below, including maintaining an
adjusted leverage ratio of senior debt to adjusted tangible net worth of less
than 10:1, an adjusted tangible net worth greater than $50.0 million and a
collateral coverage ratio of 1.2:1. The covenants in certain of the Company's
sources of funding also restrict actions by the Company and its subsidiaries,
including, among other things (i) the incurrence and existence of indebtedness,
(ii) the incurrence and existence of liens or other encumbrances, (iii) the
payment of dividends and repurchases of capital stock, (iv) investments, loans
and advances, (v) the incurrence and existence of contingent obligations, (vi)
consolidations, mergers and sales of assets, (vii) the incurrence and existence
of payment restrictions affecting subsidiaries, (viii) certain transactions with
affiliates, (ix) changes in lines of businesses, (x) transfers of assets to
subsidiaries and (xi) the incurrence and existence of negative pledges. The
descriptions above of the covenants contained in the Company's credit facilities
and other sources of funding does not purport to be complete and is qualified in
its entirety by reference to the exhibits incorporated by reference in this
Report. The continued availability of funds provided to the Company under these
agreements is subject to the Company's continued compliance with these
covenants. In addition, the Indenture governing the Debentures and the
Debentures permit the
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holders of the Debentures to require the Company to purchase the Debentures upon
a Change of Control (as defined in the Indenture).
The Company's business requires continual access to short- and long-term
sources of debt and equity capital. While management believes that it will be
able to refinance or otherwise repay its debt in the normal course of business,
there can be no assurance that existing lines of credit can be extended or
refinanced or that funds generated from operations will be sufficient to satisfy
such obligations.
The Company's cash requirements may be significantly influenced by possible
acquisitions or strategic alliances, although there are no present agreements
with respect to any significant acquisitions or strategic alliances.
The Company anticipates that it will need to raise additional cash in the
immediate future through the issuance of additional debt or equity securities or
additional bank borrowings or a combination thereof. The Company has no
commitments for additional debt, equity or bank financings and there can be no
assurance that any sources will be available to the Company at any given time or
as to the favorability of the terms on which such sources may be available.
Credit Facilities
Warehouse Facility. The Company borrows funds on a short-term basis to
support the accumulation of loans prior to sale. These short-term borrowings are
made under a warehouse line of credit with a group of banks for which CoreStates
Bank N.A. ("CoreStates") serves as agent (the "Warehouse Facility"). Pursuant to
the Warehouse Facility, the Company has available a secured revolving credit
line of $72.0 million to finance the Company's origination or purchase of loans,
pending sale to investors or for holding certain loans in its own portfolio (the
"Revolving Credit Line"). The Revolving Credit Line is settled on a revolving
basis in conjunction with ongoing loan sales and bears interest at a variable
rate based on the prime and LIBOR rates (7.4% at December 31, 1996) based on (i)
25 basis points over the higher of either the prime rate or the federal funds
rate plus 50 basis points, or (ii) LIBOR (A) divided by the result of one minus
the stated maximum rate at which reserves are required to be maintained by
Federal Reserve System member banks, (B) plus 175 basis points, as periodically
elected by the Company. The outstanding balance of this portion of the Warehouse
Facility was $66.3 million at December 31, 1996. The Revolving Credit Line
extends through June 1997.
The Warehouse Facility also permits the Company to use up to 20.0% of the
Revolving Credit Line to provide subwarehouse lines of credit to certain loan
correspondents from whom the Company purchases loans. In July 1995, the Company
began lending funds on a short-term basis to assist in the funding of loans
originated by certain of the Company's loan correspondents. Each borrowing under
these subwarehouse credit lines has a term of not more than 30 days. The Company
requires personal guarantees of the credit line from the principals of the
related loan correspondents. At December 31, 1996, the aggregate balance of
loans outstanding under this program was $14.9 million (including self-funded
loans), with applications pending for an additional $19.3 million of loans.
The Company also has a loan and security agreement with CoreStates whereby
CoreStates agrees to lend the Company up to $10.0 million to fund loan
originations and purchases. Borrowings under the agreement bear interest at the
prime rate plus 25 basis points (8.5% at December 31, 1996) and are due upon
demand. The agreement terminates on June 30, 1997. The outstanding balance under
the loan and security agreement was $5.9 million at December 31, 1996.
US Purchase Facilities and Standby Facilities. The Company has a $50.0
million loan purchase agreement (the "US Purchase Facility") with ContiTrade
whereby the Company originates and then sells loans to ContiTrade and retains
the right to repurchase loans at a future date for whole loan sales to
institutional investors or for sales through securitizations. This agreement
extends through June 1999. The aggregate principal balance of loans sold to and
retained by ContiTrade at December 31, 1996 under
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the US Purchase Facility was $3.6 million. The Company also has a standby
financing arrangement with ContiTrade (the "Conti Standby Facility") whereby
ContiTrade provides the Company up to $10.0 million line of credit which is
secured by the interest-only and residual certificates the Company receives upon
loan sales through securitizations. As of December 31, 1996, the Company had
$2.0 million available under the Conti Standby Facility. The Conti Standby
Facility bears interest at a variable rate based on LIBOR plus 200 basis points
(7.5% at December 31, 1996) and the agreement extends through June 1999. In
October 1996, the Company entered into a $5.0 million unsecured revolving credit
facility with the Bank of Boston (the "Bank of Boston Facility"). The Bank of
Boston Facility bears interest at a variable rate based on the Bank of Boston
Base Rate plus 50 basis points (8.75% at December 31, 1996). Advances under the
Bank of Boston Facility are due on October 24, 1997. As of December 31, 1996,
the outstanding balance of the unsecured revolving credit facility was $5.0
million.
In June 1996, the Company entered into a purchase and sale agreement with
Greenwich, effective as of February 2, 1996 (the "US Greenwich Facility"), with
respect to mortgage loans originated or purchased by the Company in the US.
Pursuant to the US Greenwich Facility, the Company sold loans to Greenwich which
were subsequently included in securitizations. In addition, the Company was
advanced amounts based on a percentage of the principal balance of the loans
sold to Greenwich. Advanced amounts outstanding under this facility bear
interest at a rate of LIBOR plus 175 basis points (7.3% at December 31, 1996).
The US Greenwich Facility provided for the purchase and sale of $1.0 billion of
loans. The Company and Greenwich continued to purchase and sell loans after the
facility amount was exceeded through December 1996. The Company has a commitment
from Greenwich to enter into agreements to provide a $3.0 billion mortgage loan
financing facility at a rate of LIBOR plus 150 basis points, a $25.0 million
residual financing facility at a rate of LIBOR plus 300 basis points and a $3.0
billion securitization facility, each for a term of one year, subject to
execution of definitive documents satisfactory to Greenwich as well as certain
other conditions. The Company and Greenwich, pending the completion of
definitive documents, are operating under the terms of the US Greenwich Facility
structured consistent with the new proposed arrangement, however, as a financing
facility. No definitive agreement exists with respect to the new arrangement nor
can any assurance be given that such an agreement will be reached. Because it is
structured as a financing facility and not as a purchase and sale facility, the
new arrangement with Greenwich could affect the timing of the Company's reported
gain on sale, adversely affecting gain on sale in a future period if the Company
fails to sell or securitize the loan origination and purchase volume for such
period. The Company retains servicing rights on all loans sold pursuant to the
US Greenwich Facility.
In October 1996, the Company entered into a $100.0 million Senior Secured
Credit Agreement ("Senior Secured Facility') with a group of lenders for which
CIBC Wood Gundy Securities Corp. ("CIBC") serves as agent. In January 1997, the
Senior Secured Facility was increased to $150.0 million. The Senior Secured
Facility terminates on October 30, 1998, and carries an initial interest rate of
11.0%, increasing 0.5% on the first day of each quarter commencing July 1, 1997
up to a maximum of 15.0%. Pursuant to the Senior Secured Facility, the Company
paid a 1.0% commitment fee and is required to pay (i) a 1.0% funding fee on the
amount of each borrowing, (ii) extension fees of 1.0% on June 30, 1997 and 0.5%
on the last day of each fiscal quarter thereafter on the amount outstanding on
such dates and (iii) commitment cancellation and prepayment fees of 1.0% of the
amount canceled or prepaid if terminated on or before July 1, 1997, 2.0% of the
amount canceled or prepaid if terminated after July 1, 1997 but on or before
April 1, 1998 and 3.0% of the amount canceled or prepaid if terminated
thereafter. As of March 25, 1997, the outstanding balance under the Senior
Secured Facility was $150.0 million, of which $30.0 million was used to repay an
outstanding note with the Bank of Boston and $13.0 million was used to repay an
outstanding note with Greenwich.
UK Purchase Facility. In March 1996, CSC-UK entered into a mortgage loan
purchase agreement with Greenwich effective as of January 1, 1996 (the "UK
Greenwich Facility"), that includes a working capital facility with respect to
the funding of variable rate, residential mortgage loans originated or purchased
by CSC-UK in the UK and terminated a previous facility with Greenwich. Pursuant
to the UK Greenwich Facility and with certain exceptions, CSC-UK sells all of
the loans it originates to Greenwich
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which must buy such loans. CSC-UK and/or Greenwich will subsequently resell
these loans through whole loan sales or securitizations. The UK Greenwich
Facility includes a working capital facility pursuant to which CSC-UK is
advanced amounts based on a percentage of the principal balance of loans
originated or purchased by CSC-UK and sold to Greenwich, which advance may not
exceed pound sterling10.0 million in the aggregate outstanding at any time.
Outstanding amounts under this working capital facility bear interest at a rate
of LIBOR plus 255 basis points (8.1% at December 31, 1996). This agreement
expires as to the working capital facility on December 31, 2000 and as to the
purchase facility on December 31, 2015. Both CSC-UK and Greenwich are prohibited
from entering into substantially similar transactions with other parties. CSC-UK
agreed to pay a fee to Greenwich in connection with the UK Greenwich Facility in
the aggregate amount of $38.0 million evidenced by two notes bearing interest at
a rate of 6.2%, $13.0 million of which was paid in December 1996 and $25.0
million of which is payable on December 15, 1997. Such fee is amortized over the
life of the UK Greenwich Facility. The outstanding balance under the working
capital facility portion of the UK Greenwich Facility was pound sterling10.0
million ($17.1 million) at December 31, 1996.
Convertible Debentures
In May 1996, the Company issued $143.8 million of 6% Convertible
Subordinated Debentures (the "Debentures") due 2006 convertible at any time into
shares of Common Stock, currently at a conversion price of $26.25 per share,
subject to adjustment. The terms of the indenture governing the Debentures do
not limit the incurrence of additional indebtedness by the Company, nor do they
limit the Company's ability to make payments such as dividends. During the
fourth quarter of 1996, $20,000 of the Debentures were converted into shares of
Common Stock. In 1997, an additional $110,000 of the Debentures have been
converted into Common Stock.
Loan Sales
The Company disposes of loans through whole loan sales when management
believes that the Company is able to achieve a greater return through whole loan
sales than through a securitization. In 1996, 1995 and 1994, the Company sold
$73.5 million, $105.8 million and $138.0 million in whole loan sales,
respectively, accounting for 5.6%, 24.8% and 100% of all loan sales in the
respective periods.
In connection with its securitizations, the Company continually seeks
to improve its structures to reduce upfront costs and to maximize excess cash
flow available to the Company. The Company may consider alternative
securitization structures, including senior/subordinated tranches, and
alternative forms of credit enhancement, such as letters of credit and surety
bonds. The structure of each securitized sale of loans will depend on market
conditions, costs of securitization and the availability of credit enhancement
options to the Company. The Company has used, and may use in the future,
pre-funding mechanisms in certain of its securitizations both as a relatively
inexpensive borrowing source, as well as to hedge its interest rate exposure.
The Company also uses overcollateralization accounts as a means of providing
credit enhancement for its securitizations. This mechanism slows the flow of
cash to the Company and causes some or all of the amounts otherwise
distributable to the Company as cash flow in excess of amounts payable as
current interest and principal on the securities issued in its securitizations
to be deposited in an overcollateralization account for application to cover
certain losses or to be released to the Company later if not so used. This
temporary or permanent redirection of such excess cash flows reduces the present
value of such cash flows, which are the principal component of the gain on the
sale of the securitized loans recognized by the Company in connection with each
securitization. See "- General - Loan Sales."
If interest rates rise between the time the Company originates or
purchases the loans and the time the loans are priced at securitization, the
spread narrows, resulting in a loss in the value of the loans. In the US, to
protect against such risk, the Company, from time to time, sells short United
States Treasury securities. Under this strategy, there is an inverse
relationship between the value of the treasury securities and the value of the
loans. If interest rates increase, the value of the short position would
increase,
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offsetting the decrease in the value of the loans. Conversely, if interest rates
decrease, the value of the short position would decrease, offsetting the
increase in the value of the loans. Thus, through the use of this strategy, the
Company is able to stabilize its financing cost. Before employing this strategy,
the Company performs an analysis of its loans taking into account, among other
things, interest rates and maturities to determine the amount, type, duration
and proportion of each treasury security to sell short so that such risk is more
effectively managed. The Company executes the short sale of the treasury
securities with a large, reputable securities firm and uses the proceeds
received to acquire treasury securities under repurchase agreements.
The Company also reduces its interest rate risk for its US
securitizations by employing, from time to time, a pre-funding strategy. Under
this strategy, the Company securitizes a portion of its loans held for sale
while selling future loans in a pre-funded securitization. In a pre-funded
securitization, the principal amount of the asset-backed securities issued in
the securitization exceeds the principal balance of loans initially delivered to
the securitization trust. The proceeds from the pre-funded portion are held in
trust earning money market yields until released upon delivery of additional
loans. The Company agrees to deliver additional loans into the securitization
trust in an aggregate amount equal to the excess of the principal balance of the
asset-backed securities over the principal balance of the loans initially
delivered. In pre-funded securitizations, the Company predetermines the
borrowing costs with respect to loans it subsequently purchases and delivers
into the securitization trust. However, the Company incurs an expense in
pre-funding securitizations equal to the difference between the money market
yields earned on the proceeds held in trust prior to the subsequent delivery of
loans and the interest rate paid on the asset-backed securities.
The Company derives a significant portion of its income by recognizing
gains upon the sale of loans through securitizations based on the fair value of
the interest-only and residual certificates that the Company receives upon the
sale of loans through securitizations in the US and the value of mortgage
servicing receivables recognized through UK securitizations and on sales into
loan purchase facilities. In loan sales through US securitizations, the Company
sells loans that it has originated or purchased to a REMIC trust for a cash
purchase price and interests in such REMIC trust consisting of interest-only
regular interest and the residual interest which are represented by the
interest-only and residual certificates. The cash purchase price is raised
through an offering by the REMIC trust of pass-through certificates representing
regular interests in the REMIC trust. Following the securitization, the
purchasers of the pass-through certificates receive the principal collected and
the investor pass-through interest rate on the principal balance, while the
Company recognizes as current revenue the fair value of the interest-only and
residual certificates.
In its UK securitizations, the Company acquires an uncertificated
residual interest, carried on the Company's balance sheet as mortgage servicing
receivables, in the excess cash flows generated by such securitizations.
Following the sale of UK loans into securitizations, the Company retains no
control over the loans sold and has no control over the borrowers' performance
under such loans and no control over the ability to realize prepayments
calculated using the Rule of 78s or interest rates in excess of the
concessionary rate. Accordingly, even though under the terms of the Company's UK
securitizations, the Company is entitled to such prepayments and interest in
excess of the concessionary rate, there can be no assurance that such
prepayments or excess interest can be achieved. In addition, in the event of a
forced sale, any proceeds would be distributed first to pay related enforcement
expenses, then to pay any aggregate outstanding concessionary interest and then
to pay the holders of the senior interests, before any proceeds were available
to pay the holder of the residual interests.
In the case of a UK securitization, or the sale of loans into a
purchase facility, the Company recognizes as a gain the value of the excess
mortgage servicing receivable retained. In addition, since it adopted SFAS No.
122, "Accounting for Mortgage Servicing Rights" in October 1995, the Company
also recognizes as an asset the capitalized value of mortgage servicing rights
(including normal servicing and other ancillary fees) as a mortgage servicing
receivable based on their fair values. The fair value of these assets is
determined based on various economic factors, including loan types, sizes,
interest rates, dates of
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origination, terms and geographic locations. The Company also uses other
available information applicable to the types of loans the Company originates
and purchases (giving consideration to such risks as default and collection)
such as reports on prepayment rates, interest rates, collateral value, economic
forecasts and historical default and prepayment rates of the portfolio under
review. The Company estimates the expected cash flows that it will receive over
the life of a portfolio of loans. These expected cash flows constitute the
excess of the interest rate payable by the obligors of loans over the interest
rate passed through to the purchaser, less applicable recurring fees and credit
losses. The Company discounts the expected cash flows at a discount rate that it
believes is consistent with the required risk-adjusted rate of return to an
independent third party purchaser of the interest-only and residual certificates
or mortgage servicing receivables. As of December 31, 1996, the Company's
balance sheet reflected the fair value of interest-only and residual
certificates and mortgage servicing receivables of $103.2 million and $242.9
million, respectively.
The UK non-conforming lending industry is a very fragmented,
underserved market and, therefore, lacks published industry information on other
portfolios that would aid in developing the Company's prepayment models. As a
result, the Company's gain on sale assumptions have been based on CSC-UK's
historical operating experience since its inception in May 1995, as well as on
the performance of portfolios originated and serviced by an entity formerly
operated by the managing directors of CSC-UK. The Company believes these
additional portfolios serve as an appropriate model to use in determining its
assumptions because the loans that comprise such portfolios are similar to the
loans originated by the Company in that both portfolios consist of loans that
are (i) non-conforming, (ii) primarily in first lien position and (iii) at
relatively low loan-to-value ratios. With respect to the Company's typical UK
loan product that provides for prepayments based on the Rule of 78s, during 1996
and 1995, the Company recorded a gain on sale of approximately 40% of which gain
approximately half was contributed from assumed prepayment interest. The
calculation assumes prepayment rates on an annualized basis of the then
outstanding principal balance of the loan pool of 7.5% in year one, 15% in year
two, 20% in year three and 25% in year four and thereafter. The actual
prepayment rates for such loans during 1996 and 1995 approximated 7.9%. For
comparison, the prepayment rate during such periods on the Company's US loans
approximated 16%. In addition, such calculation assumes a loss rate of 1.8% per
annum on the outstanding principal balance of the underlying mortgage loans
calculated from the date of inception of the securitization. On such loans, the
Company also assumes that 70.0% of the borrowers will pay interest at the
concessionary rate. This assumption yields an effective interest rate on such
loans of approximately 16.4% which is consistent with the Company's actual
weighted average interest rate on such loans in the UK loan portfolio at
December 31, 1996 and 1995.
Realization of the value of these interest-only and residual certificates
and mortgage servicing receivables in cash is subject to the prepayment and loss
characteristics of the underlying loans and to the timing and ultimate
realization of the stream of cash flows associated with such loans. If actual
experience differs from the assumptions used in the determination of the asset
value, future cash flows and earnings could be negatively affected and the
Company could be required to write down the value of its interest-only and
residual certificates and mortgage servicing receivables. In addition, if
prevailing interest rates rose, the required discount rate might also rise,
resulting in impairment of the value of the interest-only and residual
certificates and mortgage servicing receivables. See "Business -- Loan Sales --
Securitizations."
ACCOUNTING CONSIDERATIONS
On January 1, 1997, the Company adopted SFAS No. 125, "Accounting for
Transfer and Servicing of Financial Assets and Extinguishment of Liabilities."
SFAS No. 125 addresses the accounting for all types of securitization
transactions, securities lending and repurchase agreements, collateralized
borrowing arrangements and other transactions involving the transfer of
financial assets. SFAS No. 125 distinguishes transfers of financial assets that
are sales from transfers that are secured borrowings. SFAS
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No. 125 is generally effective for transactions that occur after December 31,
1996, and it is to be applied prospectively. SFAS No. 125 will require the
Company to allocate the total cost of mortgage loans sold to the mortgage loans
sold (servicing released), retained certificates and servicing rights based on
their relative values. The pronouncement also will require the Company to
provide additional disclosure about the retained certificates. The adoption of
SFAS No. 125 will not have a material impact on the Company's gain on sale from
securitizations as they are currently structured; however, there can be no
assurance that SFAS No. 125 will not have a material adverse effect on future
securitization structures the Company may employ, reduce the Company's gain on
sale of loans in the future or otherwise adversely affect the Company's results
of operations or financial condition.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" which
simplifies the standards for computing earnings per share previously found in
APB No. 15, "Earnings per Share" and makes them comparable to international
earnings per share standards. SFAS No. 128 is effective for historical
statements issued for periods ending after December 15, 1997. The Company has
not completed its analysis of this statement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
PAGE
----
Cityscape Financial Corp. Financial Statements:
Report of Independent Auditors by KPMG Peat Marwick LLP............... 55
Report of Independent Auditors by BDO Stoy Hayward,
Registered Auditors................................................ 56
Consolidated Statements of Financial Condition at December 31, 1996
and 1995........................................................... 57
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994................................... 58
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994................................... 59
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994................................... 60
Notes to Consolidated Financial Statements............................ 61
J&J Securities Limited Financial Statements:
Report of Independent Auditors by BDO Stoy Hayward,
Registered Auditors................................................ 80
Statements of Financial Condition at March 31, 1996 (unaudited)
and September 30, 1995 and 1994.................................... 81
Statements of Operations for the six months ended March 31, 1996
and 1995 (unaudited) and the years ended September 30, 1995,
1994 and 1993...................................................... 82
Statements of Stockholders' Equity for the six months ended March 31,
1996 (unaudited) and the years ended September 30, 1995, 1994
and 1993........................................................... 83
Statements of Cash Flows for the six months ended March 31, 1996
and 1995 (unaudited) and the years ended September 30, 1995,
1994 and 1993...................................................... 84
Notes to Financial Statements......................................... 85
Greyfriars Group Limited (formerly known as Heritable Finance Limited)
Financial Statements:
Report of Independent Auditors by KPMG, Registered Auditors........... 89
Consolidated Statements of Financial Condition at March 31, 1996
(unaudited) and December 31, 1995 and 1994......................... 90
Consolidated Statements of Operations for the three months ended
March 31, 1996 and 1995 (unaudited) and the years ended
December 31, 1995, 1994 and 1993................................... 91
Consolidated Statements of Stockholders' Equity for the three months
ended March 31, 1996 (unaudited) and the years ended December 31,
1995, 1994 and 1993................................................ 92
Consolidated Statements of Cash Flows for the three months ended
March 31, 1996 and 1995 (unaudited) and the years ended
December 31, 1995, 1994 and 1993................................... 93
Notes to Consolidated Financial Statements............................ 94
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INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cityscape Financial Corp.:
We have audited the accompanying consolidated statements of financial
condition of Cityscape Financial Corp. and Subsidiary (the "Company") as of
December 31, 1996 and 1995 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the 1995 financial statements
of City Mortgage Corporation Limited, a wholly-owned subsidiary, which
statements reflect total assets constituting 12 percent and total revenues
constituting 26 percent of the related consolidated totals as of and for the
year ended December 31, 1995. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for City Mortgage Corporation Limited, is based solely on
the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1996 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
February 28, 1997
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CITY MORTGAGE CORPORATION LIMITED
REPORT OF THE AUDITORS
To the shareholders of City Mortgage Corporation Limited.
We have audited the consolidated financial statements of City Mortgage
Corporation Limited (the "Company") and its subsidiaries as of and for the
period ended December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of City Mortgage Corporation
Limited and its subsidiaries as of December 31, 1995 and the results of their
operations and their cash flows for the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
BDO STOY HAYWARD
Chartered Accountants
and Registered Auditors
London
27 March 1996
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CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
-------------------------------
1996 1995
------------- ------------
ASSETS
Cash and cash equivalents ................ $ 2,107,285 $ 3,598,549
Cash held in escrow ...................... 15,038,729 5,920,118
Securities purchased under agreements
to resell ............................... 154,176,608 --
Available-for-sale securities ............ 14,618,194 --
Mortgage servicing receivables ........... 242,895,313 24,561,161
Trading securities ....................... 103,199,936 15,571,455
Accrued interest receivable .............. 1,353,274 555,031
Accounts receivable ...................... 4,387,388 604,577
Prepaid commitment fees .................. 35,917,000 --
Mortgage loans held for sale, net ........ 102,222,184 73,852,293
Mortgage loans held for investment, net .. 8,270,618 1,024,204
Real estate owned, net ................... 220,782 141,266
Credit enhancement deposits .............. 35,082,000 --
Equipment and leasehold improvements,
net ..................................... 13,947,037 2,380,571
Investment in partnership ................ -- 758,315
Goodwill ................................. 47,466,835 19,258,011
Other assets ............................. 29,299,176 4,293,430
------------ ------------
Total assets .............................. $810,202,359 $152,518,981
============ ============
LIABILITIES
Warehouse financing facilities ........... $ 89,434,291 $ 74,901,975
Securities sold but not yet purchased .... 152,862,526 --
Accounts payable and other liabilities ... 50,244,387 16,410,833
Allowance for losses ..................... 33,715,614 2,130,954
Income taxes payable ..................... 56,896,337 1,204,803
Standby financing facility ............... 7,966,292 771,361
Notes and loans payable .................. 136,520,719 --
Convertible subordinated debentures ...... 143,730,000 --
------------ ------------
Total liabilities ......................... 671,370,166 95,419,926
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.1 par value, 5,000,000
shares authorized; no shares issued and
outstanding ............................. -- --
Common stock, $0.1 par value; 50,000,000
shares authorized; 29,649,133 and
28,900,732 issued and outstanding at
December 31, 1996 and 1995,
respectively ............................ 296,491 289,007
Additional paid-in capital ............... 57,782,609 44,838,143
Foreign currency translation adjustment,
net of taxes ............................ 9,765,137 (6,219)
Unrealized gain on available-for-sale
securities, net of taxes ................ 8,328,950 --
Retained earnings ........................ 62,659,006 11,978,124
------------ ------------
Total stockholders' equity ................ 138,832,193 57,099,055
------------ ------------
COMMITMENTS AND CONTINGENCIES
Total liabilities and stockholders'
equity .................................. $810,202,359 $152,518,981
============ ============
See accompanying notes to consolidated financial statements
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CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------
1996 1995 1994
------------- ------------- -----------
REVENUES
Gain on sale of loans $156,252,290 $38,198,121 $5,691,165
Mortgage origination income 2,791,534 2,963,444 2,551,679
Interest 29,303,781 6,705,675 1,899,684
Servicing income 3,750,348 777,066 414,173
Earnings from partnership interest 753,663 481,789 391,000
Other 6,363,927 384,543 226,758
------------ ----------- -----------
Total revenues 199,215,543 49,510,638 11,174,459
------------ ----------- -----------
EXPENSES
Salaries and employee benefits 40,851,642 12,165,225 4,279,823
Interest expense 20,223,755 4,610,186 1,563,428
Selling expenses 23,889,544 2,895,113 588,029
Other operating expenses 25,367,110 6,581,244 2,889,720
Amortization of goodwill 3,775,176 493,794 --
------------ ----------- -----------
Total expenses 114,107,227 26,745,562 9,321,000
------------ ----------- -----------
Earnings before minority interest,
income taxes and extraordinary item 85,108,316 22,765,076 1,853,459
Minority interest -- 2,379,235 --
------------ ----------- -----------
Earnings before income taxes and
extraordinary item 85,108,316 20,385,841 1,853,459
Provision for income taxes 34,427,434 8,515,233 1,450,000
------------ ----------- -----------
Earnings before extraordinary item 50,680,882 11,870,608 403,459
Loss from extinguishment of debt,
net of taxes -- 295,943 --
------------ ----------- -----------
Net earnings $ 50,680,882 $11,574,665 $ 403,459
============ =========== ===========
PRIMARY EARNINGS PER SHARE OF
COMMON STOCK (1):
Before extraordinary item $1.66 $ 0.50 $0.02
Extraordinary item -- (0.01) --
------------ ----------- -----------
Net earnings per share $1.66 $ 0.49 $0.02
============ =========== ===========
FULLY DILUTED EARNINGS PER SHARE OF
COMMON STOCK $1.59 N/A N/A
============ =========== ===========
Weighted average number of shares
outstanding and common stock equivalents(1):
Primary 30,537,539 23,838,000 20,560,944
============ =========== ===========
Fully diluted 34,152,924 N/A N/A
============ =========== ===========
(1) All amounts have been restated to reflect the 100% stock dividends paid in
September 1995 and July 1996.
See accompanying notes to consolidated financial statements.
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CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1996, 1995 and 1994
ADDITIONAL
COMMON PAID-IN TRANSLATION UNREALIZED RETAINED
SHARES(1) AMOUNT(1) CAPITAL(1) ADJUSTMENT GAIN EARNINGS TOTAL
----------- ---------- ------------ ------------- ----------- ------------ --------
Balance at December 31, 1993........... 20,000,480 $ 200,004 $ 825,400 $ -- $ -- $ 1,372,875 $ 2,398,279
Reclassification of S corporation
earnings.............................. -- -- 1,372,875 -- -- ( 1,372,875) --
Issuance of common stock warrants..... -- -- 225,000 -- -- -- 225,000
Issance of common stock............... 214,500 2,145 147,855 -- -- -- 150,000
Net earnings.......................... -- -- -- -- -- 403,459 403,459
----------- ---------- ---- ----- -------- -------- ---------- -----------
Balance at December 31, 1994........... 20,214,980 202,149 2,571,130 -- -- 403,459 3,176,738
Issuance of common stock.............. 5,085,752 50,858 20,680,513 -- -- -- 20,731,371
UK Acquisition........................ 3,600,000 36,000 21,586,500 -- -- -- 21,622,500
Foreign currency translation
adjustment, net of taxes.............. -- -- -- (6,219) -- -- (6,219)
Net earnings........................... -- -- -- -- -- 11,574,665 11,574,665
----------- ---------- ---------- -------- --------- ---------- ------------
Balance at December 31, 1995............ 28,900,732 289,007 44,838,143 (6,219) -- 11,978,124 57,099,055
Unrealized gain on available-for-sale
securities, net of taxes.............. -- -- -- -- 8,328,950 -- 8,328,950
Issuance of common stock............... 101,039 1,010 672,246 -- -- -- 673,256
J&J Acquisition........................ 548,000 5,480 9,789,164 -- -- -- 9,794,644
Greyfriars Acquisition................. 99,362 994 2,483,056 -- -- -- 2,484,050
Foriegn currency translation
adjustment, net of taxes............... -- -- -- 9,771,356 -- -- 9,771,356
Net earnings........................... -- -- -- -- -- 50,680,882 50,680,882
Balance at December 31, 1996............ ---------- ---------- ----------- ---------- ---------- ----------- ------------
29,649,133 $ 296,491 $57,782,609 $9,765,137 $8,328,950 $62,659,006 $138,832,193
========== ========== ========== ========= ========== =========== ============
(1) All amounts have been restated to reflect the 100% stock dividends paid in
September 1995 and July 1996.
See accompanying notes to consolidated financial statements.
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CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
---------------------------------------------------------
1996 1995 1994
------------------ ------------- -----------------
Cash flows from operating activities:
Net earnings ................................................ $ 50,680,882 $ 11,574,665 $ 403,459
Adjustments to reconcile net earnings
to net cash used in operating activities:
Depreciation and amortization.............................. 9,463,244 801,780 126,195
Income taxes payable ...................................... 19,122,922 (23,197) 1,205,000
Earnings from partnership interest ........................ (753,663) (481,789) (391,000)
Unrealized gain on securities ............................. (429,688) -- --
Increase in mortgage servicing receivables ................ (166,865,152) (24,561,161) --
Increase in trading securities ............................ (87,628,481) (15,571,455) --
Provision for losses ...................................... 31,584,660 2,130,954 282,210
Net purchases of securities under agreement to resell ..... (153,796,920) -- --
Proceeds from securities sold but not yet purchased ....... 152,862,526 -- --
Increase in accrued interest receivable ................... (798,243) (206,124) (113,423)
Proceeds from sale of mortgages ........................... 1,528,266,000 401,716,611 147,999,989
Mortgage origination funds disbursed ...................... (1,510,507,760) (459,258,490) (154,410,000)
Increase in credit enhancement deposits ................... (35,082,000) -- --
Other, net ................................................ (1,657,632) 7,857,401 (484,891)
--------------- -------------- -------------
Net cash used in operating activities ........................ (165,539,305) (76,020,805) (5,382,461)
--------------- -------------- -------------
Cash flows from investing activities:
Acquisition of J&J and Greyfriars............................ (89,143,306) -- --
Purchases of equipment ...................................... (12,341,647) (1,941,417) (226,244)
Net (advances to) distributions from partnership ............ 1,099,488 428,474 (114,000)
Increase in real estate owned ............................... (79,516) (11,266) (130,000)
Proceeds from sale of acquired J&J and Greyfriars
portfolios ................................................. 201,141,000 -- --
--------------- -------------- -------------
Net cash provided by (used in) investing activities .......... 100,676,019 (1,524,209) (470,244)
--------------- -------------- -------------
Cash flows from financing activities:
Increase in warehouse facility .............................. 14,532,316 60,221,540 4,715,157
Increase in standby financing facility ...................... 7,194,931 771,361 --
Proceeds from notes and loan payable ........................ 144,520,719 -- --
Repayment of notes and loans payable ........................ (46,000,000) -- --
Proceeds from issuance of convertible .......................
subordinated debentures .................................... 136,060,800 -- --
Proceeds (redemption) of subordinated debentures ............ -- (2,000,000) 1,800,000
Net proceeds from issuance of common stock in CSC-UK ........ -- 500,000 --
Net proceeds from issuance of common stock .................. 653,256 20,731,371 150,000
Repayment of acquisition debt ............................... (193,590,000) -- --
--------------- -------------- -------------
Net cash provided by financing activities..................... 63,372,022 80,224,272 6,665,157
--------------- -------------- -------------
Net increase (decrease) in cash and cash equivalents ......... (1,491,264) 2,679,258 812,452
Cash and cash equivalents at beginning of the year .......... 3,598,549 919,291 106,839
--------------- -------------- -------------
Cash and cash equivalents at end of the year ................ $ 2,107,285 $ 3,598,549 $ 919,291
=============== ============== =============
Supplemental disclosure of cash flow
information:
Income taxes paid during the year .......................... $ 19,711,577 $ 9,049,002 $ 245,000
=============== ============= =============
Interest paid during the year .............................. $ 12,856,958 $ 6,705,675 $ 1,439,075
=============== ============= =============
See accompanying notes to consolidated financial statements.
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CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. ORGANIZATION
Cityscape Financial Corp. ("Cityscape" or the "Company") is a consumer
finance company that, through its wholly-owned subsidiary, Cityscape Corp.
("CSC"), engages in the business of originating, purchasing, selling and
servicing mortgage loans secured primarily by one- to four-family residences.
The majority of the Company's loans are made to owners of single family
residences who use the loan proceeds for such purposes as debt consolidation,
financing of home improvements and educational expenditures, among others. In
the US, the Company is licensed or registered to do business in 42 states and
the District of Columbia. The Company commenced operations in the United Kingdom
in May 1995 with the formation of City Mortgage Corporation Limited ("CSC-UK"),
an English corporation that originates, sells and services loans in England,
Scotland and Wales in which the Company initially held a 50% interest and
subsequently purchased the remaining 50% (see Note 2). CSC-UK had no operations
and no predecessor operations prior to May 1995.
2. ACQUISITIONS
On April 27, 1994, the Company acquired all of the capital stock of CSC
in an acquisition in which the shareholders of CSC acquired beneficial ownership
of 16,560,000 shares or 92% of the Company's Common Stock (the "CSC
Acquisition"). In connection with the CSC Acquisition, the Company changed its
name to Cityscape Financial Corp. From the date of its formation through the
date of the CSC Acquisition, the Company's activities were limited to (i) the
sale of initial shares in connection with its organization, (ii) a registered
public offering of securities and (iii) the pursuit of a combination, by merger
or acquisition. The CSC Acquisition was effective as of January 1, 1994, for
financial reporting purposes.
The CSC Acquisition and the issuance of Common Stock to the former CSC
shareholders resulted in the former shareholders of CSC obtaining a majority
voting interest in the Company. Generally accepted accounting principles require
that the company whose shareholders retain the majority interest in a combined
business be treated as the acquirer for accounting purposes. As a consequence,
the CSC Acquisition has been accounted for as a "reverse acquisition" for
financial reporting purposes and CSC is deemed to have acquired 100% interest in
the Company, as of the date of the acquisition, and therefore the historical
financial statements presented are those of CSC.
The figures for the year ended December 31, 1994 include the results of
both the Company and CSC for the full year.
In January 1994, CSC acquired Astrum Funding Corp. ("Astrum") in
exchange for 6.3% of the outstanding shares of the Company. This transaction was
accounted for using the purchase method of accounting. The Astrum acquisition
resulted in the Company acquiring net assets of $1,185 and obtaining licenses to
act as a mortgage banker in 11 states in which it had not previously been
licensed. No additional fair market value was assigned to the net assets
received. Although the Company acquired the new licenses earlier than if it had
applied for licensing on its own, the Company assigned no value to such licenses
because they could have been obtained independently. Further, the Company
determined that due to the illiquidity of the Company's stock as well as the
relatively minimal interest granted to the Astrum shareholders, the Company's
stock had no fair value in excess of the net assets received in the acquisition.
In May 1995, the Company and three principals of a privately held
UK-based mortgage lender formed CSC-UK. CSC-UK operates in the United Kingdom
(excluding Northern Ireland, the "UK"), and lends to individuals who are unable
to obtain mortgage financing from conventional mortgage sources such as banks
and building societies ("Conventional UK Lenders") because of impaired or
unsubstantiated credit histories and/or unverifiable income. On September 29,
1995, the Company entered into an agreement with the three other shareholders of
CSC-UK to acquire their 50% interest in CSC-UK not then owned by the Company
through the issuance of 3,600,000 shares of the Company's Common Stock valued at
$21.6 million (the "UK Acquisition"). The UK Acquisition was completed as of
September 30, 1995. The UK Acquisition resulted in the recognition of $19.7
million of goodwill which is being amortized using the straight-line method over
a life of ten years. In addition to the goodwill, the Company acquired assets of
$9.0 million, consisting primarily of mortgage servicing receivables and
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assumed $4.1 million of liabilities. The UK Acquisition was accounted for as a
purchase transaction. No additional fair market value was assigned to the net
assets received in the UK Acquisition.
In April 1996, CSC-UK acquired all the outstanding capital stock of J&J
Securities Limited, a London-based mortgage lender ("J&J"), in exchange for
(pound)15.3 million ($23.3 million based on the Noon Buying Rate on the date of
such acquisition) in cash and 548,000 shares of Common Stock valued at $9.8
million based upon the closing price of the Common Stock on the date of such
acquisition less a discount for restrictions on the resale of such stock and
incurred closing costs of $788,000 (the "J&J Acquisition"). J&J provides
primarily second lien mortgage loans to UK borrowers who, similar to the
Company's UK borrowers, are unable or unwilling to obtain mortgage financing
from Conventional UK Lenders. Pursuant to the J&J Acquisition, the Company
acquired assets with a fair value of $73.8 million consisting primarily of
mortgage loans of $73.0 million (inclusive of the $21.8 million value assigned
to the acquired mortgage servicing rights), and assumed liabilities with a fair
value of $45.1 million. The J&J Acquisition resulted in the recognition of $5.2
million of goodwill, which is being amortized using the straight-line method
over a life of ten years. Restructuring charges of $250,000 were recorded in
connection with the J&J Acquisition and have been included as a component of the
fair value of the liabilities assumed in such acquisition. These charges
represent the costs to integrate J&J's operations into CSC-UK's operations,
consisting primarily of (i) costs incurred to relocate J&J's operations to
CSC-UK's headquarters and (ii) employee severance costs. The integration and
relocation of J&J's operations are intended to provide greater efficiencies due
to the consolidation of the operations. From the inception of the restructuring
plan to December 31, 1996, there have been staff reductions of approximately 20
former J&J employees at a cost of approximately $96,000. Additionally,
approximately $89,000 of costs related to vacated properties under lease have
been incurred through December 31, 1996.
In June 1996, CSC-UK acquired all of the outstanding capital stock of
Greyfriars Finance Limited, a mortgage lender based in Reading, England
(formerly known as Heritable Group Limited and referred to herein as
"Greyfriars"), in exchange for (pound)41.8 million ($64.1 million based on the
Noon Buying Rate on the date of such acquisition) in cash and 99,362 shares of
Common Stock valued at $2.5 million based upon the closing price of the Common
Stock on the date of such acquisition and incurred closing costs of $2.3 million
(the "Greyfriars Acquisition"). Greyfriars provides mortgage loans to borrowers
that generally have higher quality credit profiles than the Company's typical UK
borrowers. Pursuant to the Greyfriars Acquisition, the Company acquired assets
with a fair value of $225.4 million, consisting primarily of mortgage loans of
$221.2 million (inclusive of the $29.2 million value assigned to the acquired
mortgage servicing rights), and assumed liabilities with a fair value of $181.9
million. The Greyfriars Acquisition resulted in the recognition of $25.4 million
of goodwill, which is being amortized using the straight-line method over a life
of ten years. Restructuring charges of $4.8 million were recorded in connection
with the Greyfriars Acquisition and have been included as a component of the
fair value of the liabilities assumed in such acquisition. These charges
represent the costs in integrate Greyfriars' operations into CSC-UK's
operations, consisting primarily of (i) costs incurred to relocate Greyfriars'
operations to CSC-UK's headquarters including establishing reserves for leases
on premises to be vacated as part of this relocation and (ii) employee severance
costs. The integration and relocation of Greyfriars' operations are intended to
provide greater efficiencies due to the consolidation of the operations. From
the inception of the restructuring plan to December 31, 1996, there have been
staff reductions of approximately 43 former Greyfriars employees at a cost of
approximately $383,000. Additionally, approximately $139,000 of costs related to
vacated properties under lease have been incurred through December 31, 1996.
Relocation costs of approximately $589,000 have also been incurred through
December 31, 1996.
The following pro forma information illustrates the estimated effects
of the CSC-UK Acquisition as if such transaction were consummated at May 2,
1995, and the J&J Acquisition and Greyfriars Acquisition as if such transactions
were consummated at January 1, 1995:
1996 1995
---- ----
(in thousands, except per share data)
Total revenues As reported $ 199,215 $ 49,511
Pro forma 203,753 61,451
Earnings before As reported $ 50,681 $ 11,871
extraordinary item Pro forma 47,528 7,855
Primary earnings As reported $ 1.66 $ 0.49
per share Pro forma 1.52 0.29
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Fully diluted earnings As reported $ 1.59 N/A
per share Pro forma 1.47 N/A
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of the Company include the
accounts of CSC and its wholly owned subsidiaries. The consolidated statements
of operations include the accounts of CSC-UK with a corresponding minority
interest for the earnings from May 2, 1995 to September 29, 1995, representing
the 50% interest not held by the Company during this period. All significant
intercompany balances and transactions have been eliminated in consolidation.
The CSC Acquisition, the UK Acquisition, the J&J Acquisition, and the Greyfriars
Acquisition have been accounted for under the purchase method of accounting and,
more specifically with respect to the CSC Acquisition only, a "reverse
acquisition" as described in Note 2 above.
Revenue Recognition
Gains and losses on sale of mortgage loans are recognized when mortgage
loans are sold to investors. The Company primarily sells loans on a non-recourse
basis, at a price above the face value of the loan. Gain on the sale of loans is
recorded on the settlement date. Included in gain on sale of loans is the
present value of the differential between the interest rate payable by an
obligor on a loan over the interest rate passed through to the purchaser
acquiring an interest in such loan, less applicable recurring fees including the
costs of credit enhancements and trustee fees and, in the case of CSC-UK loans
sold prior to January 1, 1996, a third party investment bank's significant
participation in the cash flows associated with such loans. In the case of a UK
securitization, or a sale into a loan purchase facility, the Company records a
mortgage servicing receivable.
In connection with the Company's pre-funding commitments in its
securitization transactions, investors deposit in cash a pre-funded amount into
the related trust to purchase loans the Company commits to sell on a forward
basis. This pre-funded amount is invested pending subsequent transfers of loans
to the trusts in short term obligations which pay a lower interest rate than the
interest the trust is obligated to pay the certificate investors on the
outstanding balance of the pre-funded amount. The Company is required to deposit
at the closing of the related transaction an amount sufficient to make up the
difference between these rates. The amount of the deposit which is not recovered
by the Company is recorded as an expense of the transaction and a reduction of
the gain recognized.
Included in the gain on sale of loans is gain on US securitizations
representing the fair value of the interest-only and residual certificates
received by the Company which are reflected as trading securities. Gains on
sales from securitization represents the difference between the proceeds
received from the trust plus the fair value of the interest-only and residual
certificates less the carrying value of the loans sold. Fair value of these
certificates is determined based on various economic factors, including loan
types, sizes, interest rates, dates of origination, terms and geographic
locations. The Company also uses other available information such as reports on
prepayment rates, collateral value, economic forecasts and historical default
and prepayment rates of the portfolio under review. The Company reviews these
factors and, if necessary, adjusts the remaining asset to the fair value of the
interest-only and residual certificates, pursuant to SFAS No. 115.
Although the Company believes it has made reasonable estimates of the
fair value of the interest-only and residual certificates likely to be realized,
the rate of prepayment and the amount of defaults utilized by the Company are
estimates and actual experience may vary from its estimates. The gain on
securitization recognized by the Company upon the sale of loans through
securitizations will have been overstated if prepayments or losses are greater
than anticipated. Higher than anticipated rates of loan prepayments or losses
would require the Company to write down the fair value of the interest-only and
residual certificates, adversely impacting earnings. Similarly, if
delinquencies, liquidations or interest rates were to be greater than was
initially assumed, the fair value of the interest-only and residual certificates
would be negatively impacted which would have an adverse effect on income for
the period in which such events occurred. Should the estimated average loan life
assumed for this purpose be shorter than the actual life, the amount of cash
actually received over the lives of the loans would exceed the gain previously
recognized at the time the loans were sold through securitizations and would
result in additional income.
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Interest income includes income from mortgage loans held for sale and
mortgage loans held for investment, in each case, calculated using the interest
method and recognized on an accrual basis.
Servicing income includes servicing fees, prepayment fees and late
payment charges earned for servicing mortgage loans owned by investors. All fees
and charges are recognized into income when collected.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and money market
funds. Such funds are deemed to be cash equivalents for purposes of the
statements of cash flows.
Interest Rate Risk Management
From time to time, to manage interest rate risk on loan originations,
the Company sells short United States Treasury securities which approximately
match the duration of the mortgage loans held for sale and invests the proceeds
in securities purchased under agreements to resell.
Securities sold but not yet purchased are recorded at trade date and
are initially carried at their sale amount. At the financial statement date, the
securities are marked to market, and any resultant gain or loss is recognized in
income as a component of the gain on sale of loans. Interest expense on the
securities sold but not yet purchased is recorded as incurred.
Securities purchased under agreements to resell are recorded at trade
date and are carried at the amounts at which the securities will be resold, plus
accrued interest income.
Available-for-Sale Securities
Available-for-sale securities are reported on the Statement of
Financial Condition at fair market value with any corresponding change in value
reported as an unrealized gain or loss (if assessed to be temporary) as an
element of stockholders' equity after giving effect for taxes.
Mortgage Servicing Rights
Effective October 1, 1995, the Company adopted SFAS No. 122,
"Accounting for Mortgage Servicing Rights." The Statement amends SFAS No. 65 to
require that a mortgage banking enterprise recognize as separate assets the
rights to service mortgage loans for others, however those servicing rights are
acquired. The Statement requires the assessment of capitalized mortgage
servicing rights for impairment to be based on the current fair value of those
rights. Mortgage servicing rights are amortized in proportion to and over the
period of the estimated net servicing income.
Mortgage Loans Held for Sale, Net
Mortgage loans held for sale, net, are reported at the lower of cost or
market value, determined on an aggregate basis. Market value is determined by
current investor yield requirements in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 65 "Accounting for Certain Mortgage Banking
Activities." There was no allowance for market losses on mortgage loans held for
sale at December 31, 1996 and 1995, respectively.
Mortgage Loans Held for Investment, Net
In May 1993, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114
requires lenders to measure the impairment based on the present value of
expected future cash flows discounted at the loan's effective interest rate. As
an alternative approach, SFAS No. 114 permits recognition of impairment based on
an observable market price for the loan or on the fair value of the collateral
of the loan if the loan is collateral dependent. An allowance for loan losses is
to be maintained if the measure of the impaired loan is less than its recorded
value.
SFAS No. 114 was amended by SFAS No. 118 which allows for existing
income recognition practices to continue. As required, the Company adopted these
standards effective January 1, 1995, with no material impact on the financial
statements.
Real Estate Owned, Net
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Real estate owned consists of real estate acquired through foreclosure
or deed-in-lieu of foreclosure on defaulted loan receivables. These properties
are carried at the lower of fair values less estimated selling costs or the
acquisition cost of the properties.
Equipment and Leasehold Improvements, Net
Equipment and leasehold improvements, net, are stated at original cost
less accumulated depreciation and amortization. Depreciation is computed
principally by using the straight-line method based on the estimated lives of
the depreciable assets.
Expenditures for maintenance and repairs are charged directly to the
appropriate operating account at the time the expense is incurred. Expenditures
determined to represent additions and betterments are capitalized. Cost of
assets sold or retired and the related amounts of accumulated depreciation are
eliminated from the accounts in the year of sale or retirement. Any resulting
profit or loss is reflected in the statement of earnings.
Deferred Debt Issuance Costs
The Company capitalizes costs incurred related to the issuance of
long-term debt. These costs are deferred and amortized on a straight-line basis
over the life of the related debt and recognized as a component of interest
expense.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under the asset and liability method of SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement and tax
reporting bases of existing assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax laws. Deferred tax liabilities and
assets are adjusted for the effect of a change in tax laws or rates.
Foreign Currency Translation, Net of Taxes
The Company reflects the results of CSC-UK in accordance with SFAS No.
52, "Foreign Currency Translation." To the extent there are foreign currency
translation gains or losses, such gains or losses are considered unrealized and
are recorded and reported net of taxes as a separate component of stockholders'
equity.
Goodwill Amortization
The Company recognizes goodwill for the purchase price in excess of the
fair market value of net assets acquired in a business combination accounted for
as a purchase transaction. Goodwill is amortized as an expense on a
straight-line basis over a period of ten years. The carrying value of goodwill
is analyzed quarterly by the Company based upon the expected revenue and
profitability levels of the acquired enterprise to determine whether the value
and future benefit may indicate a decline in value. If the Company determines
that there has been a decline in the value of the acquired enterprise, the
Company writes down the value of the goodwill to the revised fair value.
Earnings Per Share
Primary earnings per share are based on the net earnings applicable to
Common Stock divided by the weighted average number of Common Stock and Common
Stock equivalents outstanding during the period, after giving effect to a 100%
stock dividends effected in September 1995 and July 1996 (see Note 19). Fully
diluted earnings per share are based on the net earnings applicable to Common
Stock adjusted for the after-tax interest expense on the Convertible Debentures,
divided by the weighted average number of Common Stock and Common Stock
equivalents outstanding during the period increased by the assumed conversion of
the Convertible Debentures into shares of Common Stock.
Reclassifications
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Certain amounts in the statements have been reclassified to conform
with the 1996 classifications.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
New Accounting Pronouncements
On January 1, 1997, the Company adopted SFAS No. 125, "Accounting for
Transfer and Servicing of Financial Assets and Extinguishment of Liabilities."
SFAS No. 125 addresses the accounting for all types of securitization
transactions, securities lending and repurchase agreements, collateralized
borrowing arrangements and other transactions involving the transfer of
financial assets. SFAS No. 125 distinguishes the transfers of financial assets
that are sales from transfers that are secured borrowings. SFAS No. 125 is
generally effective for transactions that occur after December 31, 1996, and it
is applied prospectively. SFAS No. 125 will require the Company to allocate the
total cost of mortgage loans sold to the mortgage loans sold (servicing
released), retained certificates and servicing rights based on their relative
values. The pronouncement also will require the Company to provide additional
disclosure about the retained certificates in its securitizations and to
account for these assets at fair value in accordance with SFAS No. 115. The
Company does not believe that SFAS No. 125 will have a material effect on the
Company's securitizations as currently structured; however, there can be no
assurance that SFAS No. 125 will not have a material adverse effect on future
securitization structures the Company may employ, reduce the Company's gain on
sale of loans in the future or otherwise adversely affect the Company's results
of operations or financial condition.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share,"
which simplifies the standards for computing earnings per share previously found
in APB No. 15, "Earnings per Share" and makes them comparable to international
earnings per share standards. SFAS No. 128 is effective for historical
statements issued for periods ending after December 15, 1997. The Company has
not completed its analysis of this statement.
4. MORTGAGE SERVICING RECEIVABLES
This represents the unamortized net present value of the mortgage
servicing retained by the Company taking into account several factors including
industry practices. The amount is amortized over the estimated lives of the
underlying receivables sold.
The activity in the mortgage servicing receivables is summarized as
follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
------------- -------------
Balance, beginning of year $ 24,561,161 $ --
Additions from operations 187,032,033 24,877,622
Additions from acquisitions 50,927,000 --
Amortization (19,624,881) (316,461)
------------- -------------
Balance, end of year $ 242,895,313 $ 24,561,161
============= =============
The Company discounts the cash flows on the underlying loans sold at a
rate it believes a purchaser would require as a rate of return. The weighted
average rates used to discount the cash flows for the periods ended December 31,
1996 and 1995 were approximately 11.0% and 10.1%, respectively. The mortgage
servicing receivable is amortized using the same discount rate used to determine
the original servicing recorded.
Effective October 1, 1995, the Company adopted SFAS No. 122 "Accounting
for Mortgage Servicing Rights." This statement changed the methodology used to
measure impairments of its mortgage servicing receivable. The new accounting
methodology measures the asset's impairment on a disaggregate basis based on the
predominant risk characteristic of the portfolio and discounts the asset's
estimated future cash flow using a current market rate. The Company has
determined the predominant risk characteristics to be interest rate risk and
prepayment risk. On a quarterly basis, the Company reviews the mortgage
servicing receivables for impairment.
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At December 31, 1996 and 1995, the carrying amount of existing mortgage
servicing rights is considered to be a reasonable estimate of fair value.
Accordingly, no valuation allowance is required. The fair value was determined
by estimating the present value of future cash flows related to the mortgage
servicing receivables. In using this valuation method, the Company incorporated
assumptions that market participants would use in estimating future cash flows
which included estimates of the cost of servicing per loan, the discount rate,
an inflation rate, ancillary income per loan, prepayment speeds and default
rates.
5. TRADING SECURITIES
The interests that the Company receives upon loan sales through its US
securitizations are in the form of interest-only and residual mortgage
securities which are classified as trading securities.
In conjunction with loans sold through these securitizations, the
Company held interest-only and residual certificates totaling $103.2 million and
$15.6 million which approximates their fair value at December 31, 1996 and 1995,
respectively.
In accordance with SFAS No. 115, the Company classifies the
interest-only and residual certificates as "trading securities" and, as such,
they are recorded at their fair value. Fair value of these certificates is
determined based on various economic factors, including loan types, sizes,
interest rates, dates of origination, terms and geographic locations. The
Company also uses other available information such as reports on prepayment
rates, interest rates, collateral value, economic forecasts and historical
default and prepayment rates of the portfolio under review. If the fair value of
the interest-only and residual certificates is different from the recorded
value, the unrealized gain or loss will be reflected on the Consolidated
Statements of Operations.
During the years ended December 31, 1996 and 1995, the Company sold
$993.6 million and $235.0 million of its US loan origination and purchase volume
in securitizations. In loan sales through securitizations, the Company sells
loans that it has originated or purchased to a real estate mortgage investment
conduit ("REMIC") trust for a cash purchase price and interests in such REMIC
trusts which are represented by the interest-only and residual certificates. The
cash purchase price is raised through an offering of pass-through certificates
by the REMIC trust.
6. INTEREST RATE RISK MANAGEMENT
From time to time, to manage interest rate risk on loan originations,
the Company sells short United States Treasure securities which approximately
match the duration of the mortgage loans held for sale and invests the proceeds
in securities purchased under agreements to resell.
At December 31, 1996, the carrying amount of securities purchased under
agreements to resell was $154,176,608, consisting of principal of $152,980,010
and accrued interest receivable of $1,196,598. During the year ended December
31, 1996, the Company recognized interest income on securities purchased under
agreements to resell of $1,528,797.
At December 31, 1996, securities sold but not yet purchased had a
market value of $152,862,526, consisting of principal of $150,085,938 and
accrued interest payable of $2,776,588. During the year ended December 31, 1996,
the Company recognized interest expense on securities sold but not yet purchased
of $1,844,403.
The Company also recognized gain on these transactions of $429,688,
resulting when a Treasury position was settled and when the remaining
instruments were marked to market at December 31, 1996. This amount was included
in gain on sale of loans.
7. CREDIT ENHANCEMENT DEPOSITS
Pursuant to the terms of certain of the UK securitizations and sales
into the UK purchase and sales facilities, the Company is required to establish
an initial reserve fund as a form of an additional credit enhancement. Such
reserves are generally funded with an initial cash deposit by the Company and
earn interest at the prevailing overnight rate, which approximated 5.0% during
1996. These deposits will be returned to the Company in accordance with the
over-collateralization and credit enhancement provisions of the agreements.
8. EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
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Equipment and leasehold improvements, net, at cost, are summarized as
follows:
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
Office equipment $ 17,684,375 $ 2,473,365
Leasehold improvements 349,347 37,076
Capitalized leases 673,535 337,415
------------ ------------
18,707,257 2,847,856
Accumulated depreciation (4,760,220) (467,285)
------------ ------------
Balance, end of year $ 13,947,037 $ 2,380,571
============ ============
9. AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities represent the fair value of the 1,090,910
shares (after giving effect to a February 1997 100% stock dividend) of IMC
Mortgage Company, including its predecessor Industry Mortgage Company, L.P.,
("IMC") Common Stock owned by the Company at December 31, 1996. IMC originates,
purchases, sells and services mortgage loans that are secured primarily by one-
to four-family residences.
The Company held a limited partnership interest in IMC, a Delaware
limited partnership (the predecessor company to IMC), which was formed in 1993.
In June 1996, IMC converted into corporate form and effected a public offering
of Common Stock. In connection with this conversion, the Company's limited
partnership interest (which had been accounted for using the equity method) was
converted into IMC Common Stock, and accounted for as available-for-sale
securities in accordance with SFAS No. 115. Such securities were marked to
market at December 31, 1996, resulting in an unrealized gain of $8.3 million
(net of deferred taxes) which, in accordance with SFAS No. 115, was reflected as
a component of stockholders' equity.
Pursuant to the terms of IMC's limited partnership agreement, the
Company was obligated to offer to sell $1.0 million of loans per month through
June 30, 2001 to IMC at market prices. During 1995, the Company entered into an
agreement with IMC, whereby, in return for the payment of a $420,000 fee (which
was amortized using the straight-line method over a life of 14 months), such
monthly obligation was eliminated for the period November 1, 1995 through
December 31, 1996. During 1996, the Company entered into an agreement with IMC
whereby in return for annual payments of $360,000 each on January 1, 1997,
through January 1, 2000, and a payment of $180,000 on January 1, 2001, such
obligation would be canceled. The Company has recorded the present value of such
required payments ($1.3 million) as an expense in 1996.
Prior to IMC's conversion to corporate form, the Company recorded its
investment under the equity method of accounting and as such recognized equity
earnings of $753,663 for the period ended June 25, 1996 (the date IMC converted
to corporate form) and $481,789 and $391,000 of equity earnings for the years
ended December 31, 1995 and 1994, respectively.
10. OTHER ASSETS
Other assets at December 31, 1996 and 1995 consist of the following:
1996 1995
---- ----
Notes and loans receivable $ 2,305,252 $ 232,813
Prepaid expenses 5,864,238 421,839
Deferred expenses 5,336,923 244,335
Loans receivable-subwarehousing 14,888,497 1,602,632
Long-term receivables 425,750 588,778
Other 478,516 1,203,033
----------- -----------
Total $29,299,176 $ 4,293,430
=========== ===========
Included in notes receivable above, are notes receivable from directors
and officers totaling $40,252 and $79,952 at December 31, 1996 and 1995,
respectively. These loans are at fixed rates of interest between six percent and
nine percent and are for terms between one and three years. Loans
receivable-subwarehousing represent funds lent on a short term-basis to assist
in the funding of loans by certain of the Company's loan correspondents. Each
borrowing under these subwarehouse credit lines has
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a term of not more than 30 days. At December 31, 1996, there were applications
pending for an additional $19.3 million of such loans.
In June 1996, the Company acquired an equity interest in an entity
subsequently acquired by City Auto Resource Services, Inc. ("City Auto"), a
newly formed entity that recently began originating, purchasing and servicing
sub-prime automobile loans. The Company owns 5,000,000 shares of Common Stock of
City Auto (a 34.0% equity interest at December 31, 1996). The Company records
its investment under the equity method of accounting and as such recognized
$62,500 of losses during 1996, representing a full write-down of the Company's
initial investment. City Auto's Common Stock has experienced limited trading on
the National Quotation Bureau, Inc. OTC Bulletin Board.
11. FINANCING FACILITIES AND LOAN PURCHASE AGREEMENTS
Warehouse Financing Facilities
As of December 31, 1996, the Company had available a warehouse line of
credit with a group of banks for which CoreStates Bank, N.A. ("CoreStates")
serves as agent (the "Warehouse Facility"). Pursuant to the Warehouse Facility,
the Company has available a secured revolving credit line of $72.0 million in
order to finance the Company's origination or purchase of loans, pending sale to
investors or for holding certain loans in its own portfolio (the "Revolving
Credit Line"). The Revolving Credit Line is settled on a revolving basis in
conjunction with ongoing loan sales and bears interest at a variable rate based
on (i) 25 basis points over the higher of either the prime rate or the federal
funds rate plus 50 basis points or (ii) LIBOR (A) divided by the result of one
minus the stated maximum rate at which reserves are required to be maintained by
Federal Reserve System member banks, (B) plus 175 basis points, as periodically
elected by the Company. The Revolving Credit Line portion of the Warehouse
Facility extends through June 1997. The balance outstanding at December 31, 1996
and 1995 totaled $66.3 million and $72.1 million, respectively. In addition, the
Warehouse Facility provided for a secured revolving working capital credit line
of up to $3.0 million to be used by the Company for general corporate purposes
(the "Working Capital Credit Line"). The Working Capital Credit Line operated as
a revolving facility. The Working Capital Credit Line bore interest at a
variable rate based on 100 basis points over the higher of the prime rate or the
federal funds rate plus 50 basis points. The Working Capital Credit Line was
terminated on November 12, 1996.
The Warehouse Facility also permits the Company to use up to 20.0% of
the Revolving Credit Line to provide a subwarehouse line of credit to certain
loan correspondents from whom the Company purchases loans. In July 1995, the
Company began lending funds on a short-term basis to assist in the funding of
loans originated by certain of the Company's loan correspondents. Each borrowing
under these subwarehouse credit lines has a term of not more than 30 days. The
Company requires personal guarantees of the credit line from the principals of
the related loan correspondents. At December 31, 1996 and 1995, the aggregate
balance of loans outstanding under this program was $14.9 million and $1.6
million (including self-funded loans), with applications pending for an
additional $19.3 million and $4.1 million of loans.
The Company also has a loan and security agreement with CoreStates
whereby CoreStates agrees to lend the Company up to $10.0 million to fund loan
originations and purchases. Borrowings under the agreement bear interest at the
prime rate plus 25 basis points (8.5% at December 31, 1996) and are due upon
demand. The agreement terminates on June 30, 1997. The outstanding balance under
the loan and security agreement was $5.9 million at December 31, 1996.
Loan Purchase Agreements
The Company has a $50.0 million loan purchase agreement (the "US
Purchase Facility") with ContiTrade Services Corporation ("ContiTrade") whereby
the Company originates and then sells loans and retains the rights to repurchase
loans at a future date for whole loan sales to institutional investors or for
sales through securitizations. The US Purchase Facility extends through June
1999. The aggregate principal balance of loans sold to and retained by
ContiTrade at December 31, 1996 and 1995 under the US Purchase Facility was $3.6
million and $48.7 million, respectively.
In June 1996, the Company entered into a purchase and sale agreement
with Greenwich, effective as of February 2, 1996 (the "US Greenwich Facility"),
with respect to mortgage loans originated or purchased by the Company in the US.
Pursuant to the US Greenwich Facility, the Company sells loans to Greenwich for
subsequent inclusion in securitizations. In addition, the Company is advanced
amounts based on a percentage of the principal balance of the loans sold to
Greenwich. Advanced amounts outstanding under this facility bear interest at a
rate of LIBOR plus 175 basis points (7.3% at December
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31, 1996). The US Greenwich Facility provided for the purchase and sale of $1.0
billion of loans. When such amount was exceeded, Greenwich and the Company
continued to purchase and sell loans through December 1996. The Company has a
commitment from Greenwich to enter into agreements to provide a $3.0 billion
mortgage loan financing facility at a rate of LIBOR plus 150 basis points, a
$25.0 million residual financing facility at a rate of LIBOR plus 300 basis
points and a $3.0 billion securitization facility, each for a term of one year,
subject to execution of definitive documents satisfactory to Greenwich as well
as certain other conditions; however, no definitive agreement exists nor can any
assurance be given that such an agreement will be reached. The Company retains
servicing rights on all loans sold into the US Greenwich Facility.
In May 1995, CSC-UK and Greenwich International Ltd., a subsidiary of
Greenwich Capital Markets, Inc. (referred to herein, including any subsidiaries
as "Greenwich") entered into a mortgage loan purchase agreement that included a
working capital facility with respect to the funding of fixed and variable rate,
residential mortgage loans originated or purchased by CSC-UK in the UK (the "Old
Greenwich Facility"). Pursuant to the Old Greenwich Facility, CSC-UK sold all of
the loans it originated during 1995 to Greenwich which was required to buy such
loans. After the payment of certain fees and expenses to CSC-UK, Greenwich
received under the terms of Old Greenwich Facility a significant participation
in the cash flows associated with such 1995 loans, which participation with
respect to such 1995 loans was purchased by CSC-UK prior to 1995 year-end. The
aggregate principal balance of loans sold to Greenwich at December 31, 1995
under the Old Greenwich Facility was $41.4 million. Outstanding amounts under
the working capital facility portion of the Old Greenwich Facility accrued
interest at a rate of LIBOR plus 250 basis points during 1995 (9.1% at December
31, 1995). The outstanding balance under this working capital facility was
(pound)1.8 million ($2.8 million) at December 31, 1995.
In March 1996, CSC-UK and Greenwich entered into a new mortgage loan
purchase agreement effective as of January 1, 1996 that includes a working
capital facility with respect to the funding of variable rate, residential
mortgage loans originated or purchased by CSC-UK in the UK (the "New Greenwich
Facility") and terminated the Old Greenwich Facility. Pursuant to the New
Greenwich Facility and with certain exceptions, CSC-UK sells all of the loans it
originates to Greenwich which must buy such loans. CSC-UK and/or Greenwich will
subsequently resell these loans through whole loan sales or securitizations. The
New Greenwich Facility includes a working capital facility pursuant to which
CSC-UK is advanced amounts based on a percentage of the principal balance of
loans originated or purchased by CSC-UK and sold to Greenwich, which advance may
not exceed (pound)10.0 million in the aggregate outstanding at any time.
Outstanding amounts under this working capital facility bear interest at a rate
of LIBOR plus 255 basis points. The balance outstanding under the working
capital facility portion of the UK Greenwich Facility was (POUND STERLING)10.0
million ($17.1 million) at December 31, 1996. This agreement expires as to the
working capital facility on December 31, 2000 and as to the purchase facility on
December 31, 2015. Both CSC-UK and Greenwich are prohibited from entering into
substantially similar transactions with other parties. CSC-UK agreed to pay a
fee to Greenwich in connection with the New Greenwich Facility in the aggregate
amount of $38.0 million evidenced by two notes bearing interest at a rate of
6.2%, $13.0 million of which was paid on December 15, 1996 and $25.0 million of
which is payable on December 15, 1997. Such fee is amortized over the life of
the New Greenwich Facility.
Standby Financing Facilities
The Company also has a standby financing arrangement with ContiTrade
(the "Standby Facility") whereby ContiTrade provides the Company a $10.0 million
line of credit which is secured by the interest-only and residual certificates
the Company receives upon loan sales through securitizations. As of December 31,
1996 and 1995, this line had an outstanding balance of $8.0 million and
$771,361, respectively. The Standby Facility bears interest at a variable rate
based on LIBOR plus 200 basis points (7.5% at December 31, 1996) and the
agreement extends through June 1999. In connection with this standby facility,
the Company issued 900,000 common stock warrants in 1994 which were exercised at
$0.875 per share in connection with the Company's December 1995 stock offering.
Notes and Loans Payable
In June 1996, the Company entered into a $30.0 million term loan with
the First National Bank of Boston ("Bank of Boston") to fund loan originations
and purchases and working capital needs, secured by the first and second liens
on the interest-only and residual certificates the Company receives upon loan
sales through securitizations. The term loan bore interest at a rate of 11.0%
per annum. In October 1996, the Company terminated the agreement and repaid all
amounts outstanding under this loan with proceeds from the Senior Secured
Facility.
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In October 1996, the Company entered into a $100.0 million Senior
Secured Credit Agreement ("Senior Secured Facility") with a group of lenders for
which CIBC Wood Gundy Securities Corp. ("CIBC") serves as agent. In January
1997, the Senior Secured Facility was increased to $150.0 million. The Senior
Secured Facility terminates on October 30, 1998, and carries an initial interest
rate of 11.0%, increasing 0.5% on the first day of each quarter commencing July
1, 1997 up to a maximum of 15.0%. Pursuant to the Senior Secured Facility, the
Company paid a 1.0% commitment fee and is required to pay (i) a 1.0% funding fee
on the amount of each borrowing, (ii) extension fees of 1.0% on June 30, 1997
and 0.5% on the last day of each fiscal quarter thereafter on the amount
outstanding on such dates and (iii) commitment cancellation and prepayment fees
of 1.0% of the amount canceled or prepaid if terminated on or before July 1,
1997, 2.0% of the amount canceled or prepaid if terminated after July 1, 1997
but on or before April 1, 1998 and 3.0% of the amount canceled or prepaid if
terminated thereafter. The Company initially drew down $50.0 million which was
used to repay an outstanding $30.0 million term loan with the Bank of Boston,
fund loan originations and for general corporate purposes. Through December 31,
1996, the Company had additional draws totaling $50.0 million (bringing the
total amount outstanding under this facility to $100.0 million as of year end).
These funds were used primarily to fund additional loan originations and to pay
to Greenwich $13.0 million pursuant to a note in connection with the UK Credit
Facility.
In October 1996, the Company entered into a $5.0 million unsecured
revolving credit facility with the Bank of Boston. Advances under the line of
credit are due on October 24, 1997 and bear interest at the Bank of Boston's
Base Rate plus 50 basis points (8.75% at December 31, 1996). As of December 31,
1996, the outstanding balance of the unsecured credit facility was $5.0 million.
The Company is required to comply with various operating and financial
covenants as defined in the agreements described above. The continued
availability of funds provided to the Company under these agreements is subject
to the Company's continued compliance with these covenants.
The carrying amount of the financing facilities is considered to be a
reasonable estimate of fair value.
12. ALLOWANCE FOR LOSSES
During 1996 and 1995, the Company sold $993.6 million and $235.0
million of its US loan origination and purchase volume in securitizations. In
loan sales through securitizations, the Company sells loans that it has
originated or purchased to a REMIC trust for a cash purchase price and interest
in such REMIC trust consisting of interest-only regular interests and the
residual interest which are represented by the interest-only and residual
certificates which are classified as trading securities in accordance with SFAS
115. In the case of a UK securitization, or a sale into a loan purchase
facility, the Company records a mortgage servicing receivable.
In initially valuing its trading securities and mortgage servicing
receivables, the Company establishes an allowance for expected losses and
calculates that allowance on the basis of historical experience and management's
best estimate of future credit losses likely to be incurred. In the case where
the securitization of loans results in the retention by the Company of
interest-only and/or residual certificates, such allowance is embodied in the
fair value of such certificates. In the case where the securitization, or sale
into a loan purchase facility, results in the retention of mortgage servicing
rights, such allowance is reported in the liability section of the statement of
financial condition. The amount of this provision is reviewed quarterly and
adjustments are made if actual experience or other factors indicate management's
estimate of losses should be revised. While the Company retains a substantial
amount of risk of default on the loan portfolios that it sells, such risk has
been substantially reduced through the sales of loans through securitization.
Through the Company's loan sales through securitizations and loan
purchase facilities, the Company has provided investors with a variety of
additional forms of credit enhancements. In a securitization, the Company
purchases credit enhancements to the senior interest in the related
securitization trusts in the form of insurance policies provided by insurance
companies. The pooling and servicing agreements that govern the distribution of
cash flows from the loans included in the securitization trusts require either
(i) the establishment of a reserve that may be funded with an initial cash
deposit by the Company or (ii) the over-collateralization of the securitization
trust intended to result in receipts and collections on the loans that exceed
the amounts required to be distributed to holders of senior interests. To the
extent that borrowers default on the payment of principal or interest on the
loans, losses will be paid out of the reserve account or will reduce the
over-collateralization to the extent that
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funds are available and will result in a reduction in the value of the
interest-only and residual certificates held by the Company.
An analysis of the allowance for losses at December 31, 1996 and 1995 is
presented below:
1996 1995
Allowance attributable to:
Interest-only and residual certificates $17,624,117 $ 1,528,874
Mortgage servicing rights 33,715,614 2,130,954
---------- ---------
Total $51,339,731 $ 3,659,828
=========== ===========
Such allowances represented 2.6% and 1.0% of mortgages serviced for
others at December 31, 1996 and 1995 respectively.
13. EXTRAORDINARY ITEM
During 1994, the Company issued senior subordinated debentures in the
principal amount of $2.0 million which bore interest at a fixed rate of 8% with
an original maturity date of July 21, 1999. In connection with this financing,
the lender received detachable warrants with a put option feature to purchase
1,600,000 shares of common stock. The put option feature permitted the warrant
holder to require the Company to retire the warrants at any time after July 21,
1999. These warrants were initially valued at $609,205 based upon the terms of
the agreement and were subsequently exercised in connection with the Company's
December 1995 stock offering. The valuation of these warrants resulted in an
original issue discount on the debt, which was being amortized over the term of
the put option (five years) using the effective interest method. In December
1995, the Company extinguished this debt with proceeds from the public offering
of its Common Stock (as more fully described in Note 19). As a result of this
early extinguishment of debt, the Company recorded an extraordinary loss of
$295,943, net of taxes.
14. CONVERTIBLE SUBORDINATED DEBENTURES
In May 1996, the Company issued $143.8 million of 6% Convertible
Subordinated Debentures due 2006 (the "Convertible Debentures"), convertible at
any time prior to redemption or maturity, at the holder's option, into shares of
the Company's Common Stock at a conversion price of $26.25, subject to
adjustment. The Convertible Debentures may be redeemed, at the option of the
Company, in whole or in part, at any time after May 15, 1999 at predetermined
redemption prices together with accrued and unpaid interest to the date fixed
for redemption. The coupon at 6% per annum, is payable semi-annually on each May
1 and November 1 which commenced November 1, 1996. The terms of the indenture
governing the Convertible Debentures do not limit the incurrence of additional
indebtedness by the Company, nor do they limit the Company's ability to make
payments such as dividends. During 1996, $20,000 of the Convertible Debentures
were converted into shares of Common Stock.
15. OTHER OPERATING EXPENSES
Other operating expenses include the following:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------
ACCOUNT DESCRIPTION 1996 1995 1994
- ------------------------ ----------- ----------- -----------
Professional fees $ 6,911,908 $ 1,541,448 $ 745,105
Travel and entertainment 3,148,164 1,093,426 365,200
Telephone 1,746,232 679,765 305,020
Foreclosure costs 161,490 34,388 283,909
Insurance 1,600,638 318,567 199,396
Occupancy 1,806,309 626,354 139,170
Office supplies 2,417,768 588,902 185,087
Other 7,574,598 1,698,394 666,833
----------- ----------- -----------
Total $25,367,107 $ 6,581,244 $ 2,889,720
=========== =========== ===========
16. INCOME TAXES
For years ending December 31, 1993 and prior, CSC had elected to be
treated as a subchapter S Corporation for federal and, where permitted, state
income tax purposes. As an S Corporation, CSC was
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not responsible for the payment of federal income taxes. On January 1, 1994, CSC
terminated its S Corporation status and, accordingly, has been subject to
federal and state income taxes as a C Corporation since that date. As a result
of the termination of the S Corporation status, net deferred tax liabilities
totaling $680,000 were reinstated as of January 1, 1994 and were included as an
income tax provision in 1994.
Earnings before income taxes from foreign sources for the years ended
December 31, 1996, and 1995 are $43.9 million and $6.3 million. There were no
sources of foreign earnings in the year ended 1994 as the Company did not
commence foreign operations until May 1995.
The provision for income taxes for the years ended December 31, 1996,
1995 and 1994 are comprised of the following:
1996 1995 1994
------------ ------------ ------------
Current
Federal $ 13,436,306 $ 5,295,717 $ 814,020
State 3,638,803 1,388,288 159,980
Foreign 15,102,974 2,105,155 --
------------ ------------ ------------
32,178,083 8,789,160 974,000
Deferred
Federal 1,999,996 (224,620) 397,817
State 249,355 (49,307) 78,183
------------ ------------ ------------
2,249,351 (273,927) 476,000
------------ ------------ ------------
Provision for income taxes $34,427,434 $ 8,515,233 $ 1,450,000
============ ============ ============
The reconciliation of income tax computed at the US federal statutory
tax rate to the effective income tax rate for the years ended December 31, 1996,
1995 and 1994 is as follows:
1996 1995 1994
---- ---- ----
Federal income tax at statutory rate 35.0% 35.0% 35.0%
State and local taxes, net of federal tax benefit 2.7 4.2 6.5
Difference in effective tax rate on foreign earnings (0.6) 0.2 -
Deferred income taxes resulting from change in tax status - - 36.7
Other, net 3.4 2.4 -
-------- ------- -----
40.5% 41.8% 78.2%
===== ===== =====
Deferred income taxes included in the statements of financial condition
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for tax reporting purposes primarily resulting from the use of the
cash basis for tax reporting purposes.
Deferred taxes as of December 31, 1996, 1995 and 1994 are as follows:
1996 1995 1994
----------- ----------- -----------
Gross deferred tax assets $10,293,342 $ 868,406 $ 148,884
Less: valuation allowance -- (284,779) --
----------- ----------- -----------
Net deferred assets 10,293,342 583,627 148,884
Deferred tax liabilities 14,111,508 785,702 624,884
----------- ----------- -----------
Net deferred tax liabilities $ 3,818,166 $ 202,075 $ 476,000
=========== =========== ===========
The net change in the total valuation allowance for the year ended
December 31, 1995 was an increase of $284,779 representing a 100% valuation
allowance taken against the excess foreign tax credits from UK source income.
17. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution plan (401(k)) for all eligible
employees. Contributions to the plan are in the form of employee salary
deferrals which may be subject to an employer matching contribution up to a
specified limit at the discretion of the Company. In addition, the Company may
make
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a discretionary annual profit sharing contribution on behalf of its employees.
The Company's contribution to the plan amounted to $87,126, $25,319 and $11,000
for the years ended December 31, 1996, 1995, and 1994 respectively.
Certain employees of CSC-UK are members of a non-contributory pension
plan. The Company's contribution to the plan amounted to $258,000 for the year
ended December 31, 1996.
The Stock Purchase Plan
Effective December 1994, the Board of Directors adopted, and the
stockholders of the Company approved, the Company's 1995 Employee Stock Purchase
Plan (the "Stock Purchase Plan"). The Stock Purchase Plan permits eligible
employees of the Company to purchase Common Stock through payroll deductions of
up to ten percent of their base salary, up to a maximum of $25,000 for all
purchase periods ending within any calendar year. The price of Common Stock
purchased under the Stock Purchase Plan will be 85% of the lower of the fair
market value of a share of Common Stock on the commencement date or the
termination date of the relevant offering period as determined by the bid price
listed on the National Quotation Bureau, Inc. OTC Bulletin Board or the Nasdaq
National Market System, as applicable.
For the plan periods ending June 30, 1995 and December 31, 1995,
employees purchased 43,752 and 23,524 shares at a price of $0.77 and $2.34 per
share, respectively. For the plan periods ending June 30, 1996 and December 31,
1996, employees purchased 13,034 and 8,921 shares at a price of $8.82 and $22.31
per share, respectively. In accordance with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees", the Stock Purchase
Plan is deemed to be non-compensatory and results in no expense.
The Directors Plan
Directors who are not employees of the Company receive stock options
pursuant to the Company's 1995 Non-Employee Directors Stock Option Plan (the
"Directors Plan"). The Directors Plan provides for automatic grants of an option
to purchase 40,000 shares of Common Stock to the Company's eligible non-employee
directors upon their election to the Board of Directors of the Company. Each
eligible non-employee director is granted an additional option, subject to
certain restrictions, to purchase 6,000 shares of Common Stock on each
anniversary of his or her election so long as he or she remains an eligible
non-employee director of the Company. Initial options granted under the
Directors Plan generally vest 50% upon the first anniversary of the grant date
and 50% upon the second anniversary of the grant date. Additional options
generally vest upon the first anniversary of the grant date. The exercise price
of any options granted under the Directors Plan is the fair market value of the
Common Stock on the date of grant. No more than 400,000 shares of Common Stock
may be issued upon exercise of options granted under the Directors Plan, subject
to adjustment to reflect stock splits, stock dividends and similar capital stock
transactions. Options may be granted under the Directors Plan until June 1,
2005.
The Stock Option Plan
Effective June 1, 1995, the Board of Directors adopted, and the
stockholders of the Company approved, the 1995 Stock Option Plan (the "Stock
Option Plan"). No more than 3,600,000 shares of Common Stock may be issued upon
exercise of options granted under the Stock Option Plan, and no eligible person
may receive options to purchase more than 600,000 shares of Common Stock during
any calendar year, subject to adjustment to reflect stock splits, stock
dividends and similar capital stock transactions. Options granted under the
Stock Options Plan vest over periods not exceeding six years. The exercise price
of the options granted under the Stock Option Plan cannot be less than the fair
market value of the Common Stock on the date of grant. Options may be granted
under the Stock Option Plan until June 1, 2005.
SFAS No. 123, "Accounting for Stock-Based Compensation" was issued by
the FASB in October 1995. SFAS No. 123 encourages the adoption of a new
fair-value based accounting method for employee stock-based compensation plans.
SFAS No. 123 also permits companies to continue accounting for stock-based
compensation plans as prescribed by APB Opinion No. 25. However, companies
electing to continue accounting for stock-based compensation plans under the APB
Opinion No. 25, must make pro forma disclosures as if the company adopted the
cost recognition requirements under SFAS No. 123. The Company has continued to
account for stock-based compensation under the APB Opinion No. 25 and therefore,
pro forma disclosure is provided below.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996 and 1995,
74
75
respectively: (1) dividend yield of zero; (2) expected volatility of 51% and
50%; (3) risk-free interest rates of 6.1% and 6.0% and (4) expected lives of 5.2
and 4.8 years.
A summary of the status of the Company's two stock option plans as of
December 31, 1996 and 1995, and changes during the years ending on these dates
is presented below:
1996 1995
------------------------------- -----------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Outstanding at beginning of year 940,000 $ 2.52 -- $ --
Granted 1,104,000 16.40 940,000 2.52
Exercised (54,800) 4.50 -- --
Canceled (1,000) 10.00 -- --
---------- ----------
Outstanding at end of year 1,988,200 10.17 940,000 2.52
========== ==========
Options exercisable at year-end 540,200 180,000
========== ==========
Weighted average fair value of
options granted during the year $ 9.21 $ 1.26
========== ==========
The following table summarizes information about stock options
outstanding at December 31, 1996:
Options Outstanding Options Exercisable
------------------------------------------------- ----------------------------------
Number Weighted Number
Weighted Outstanding at Average Weighted Exercisable at Average
Range of December 31, Remaining Average December 31, Exercise
Exercise Prices 1996 Contractual Life Exercise Price 1996 Price
(Years)
- ------------------ -------------- ---------------- -------------- -------------- ----------------
$2.50 to $2.63 900,000 7.5 $2.52 480,000 $2.52
$9.88 to $10.88 440,200 4.5 10.04 60,200 10.15
$20.50 to $23.13 648,000 6.7 20.88 - -
---------- --------
$2.50 to $23.13 1,988,200 6.6 10.17 540,200 3.37
========= =======
Had compensation costs for the Company's 1996 and 1995 grants for its
stock-based compensation plans been determined consistent with SFAS No. 123, the
Company's net earnings and earnings per share would have been reduced to the pro
forma amounts indicated below:
1996 1995
---- ----
(in thousands, except per share data)
Net earnings As reported $50,681 $11,575
Pro forma $49,255 $11,404
Primary earnings per share As reported $1.66 $0.49
Pro forma $1.61 $0.48
Fully diluted earnings per share As reported $1.59 N/A
Pro forma $1.55 N/A
The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts. There were no awards prior to 1995, and
additional awards in future years are anticipated.
18. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases premises and equipment under operating leases with
various expiration dates. Minimum annual rental payments at December 31, 1996
are as follows:
1997 $4,039,075
1998 4,184,414
1999 4,198,813
75
76
2000 4,120,226
2001 3,277,524
Thereafter 30,202,071
----------
Total $50,022,123
===========
Rent expense for office space amounted to $1.8 million, $576,884, and
$110,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Obligations under capital leases total $4.9 million and represent
leases for office furniture, equipment, motor vehicles, and computer hardware
and software. Minimum annual capital lease payments at December 31, 1996 are as
follows:
1997 $1,277,968
1998 1,237,507
1999 1,160,345
2000 843,672
2001 352,817
----------
Total $4,872,309
==========
Litigation
In the normal course of business, the Company is subject to various
legal proceedings and claims, the resolution of which, in management's opinion,
will not have a material adverse effect on the consolidated financial position
or the results of operations of the Company.
Other
The Securities and Exchange Commission has requested additional
information from the Company in connection with the accounting for the J&J and
Greyfriars Acquisitions. The Company is supplying such requested information.
Employee agreements
The Company has employment agreements with 12 officers of the Company.
The Company guarantees annual compensation ranging from $150,000 to $275,000 per
year, plus bonuses (where applicable) in amounts as defined in the agreements.
The officers' compensation will be increased each year by an amount approved by
the Board of Directors. The agreements terminate upon the occurrence of certain
events as defined by the respective agreements.
19. STOCKHOLDERS' EQUITY
In April 1994, the Company effected a 12 for 1 forward stock split of
the existing 30,010 (120,040 after giving effect to the 1995 Dividend and 1996
Dividend as discussed below) Common Stock shares of the Company and then issued
4,140,000 (16,560,000 after giving effect to the 1995 Dividend and 1996 Dividend
as discussed below) shares of its Common Stock in exchange for 100% of the
Common Stock (300 shares) of CSC (see Note 2). During 1994, the par value of the
Common Stock was restated to $.01 per share. Immediately following the CSC
Acquisition, 500,000 (2,000,000 after giving effect to the 1995 Dividend and
1996 Dividend as discussed below) shares of Common Stock were issued to
executive officers of the Company for net proceeds of $100,000.
In June 1994, the Company issued warrants to purchase 225,000 (900,000
after giving effect to the 1995 Dividend and 1996 Dividend discussed below)
shares of Common Stock in connection with obtaining a standby facility (see Note
11). These warrants were recorded as an increase to additional paid in capital
for the excess of the fair value over the exercise price at the time of
issuance.
During the fourth quarter of 1994, the Company issued an additional
53,625 (214,500 after giving effect to the 1995 Dividend and 1996 Dividend as
discussed below) shares of Common Stock to employees of the Company, resulting
in net proceeds of $50,650. The Company recognized approximately $19,000 as
compensation expense representing the difference between the fair market value
and the purchase price of the stock issued.
76
77
During 1995, the Company issued 21,438 shares, (85,752 after giving
effect to the 1995 Dividend and 1996 Dividend as discussed below), of Common
Stock resulting in an increase to Stockholders' equity of $158,568.
On September 29, 1995 the Company effected a 2 for 1 Common Stock split
in the form of a 100% stock dividend increasing the shares of Common Stock
outstanding by 5,075,183 (the "1995 Dividend"). As more fully described in Note
2 in conjunction with the UK Acquisition, the Company issued an additional
1,800,000 (3,600,000 after giving effect to the 1996 Dividend as discussed
below) shares of Common Stock resulting in an increase of $21.6 million to
Stockholders' equity.
In December 1995, the Company completed a public offering of its Common
Stock in which the Company sold 1,250,000 (2,500,000 after giving effect to the
1996 Dividend as discussed below) shares of Common Stock at a public offering
price of $18.00 ($9.00 after giving effect to the 1996 Dividend as discussed
below) per share and the former warrant holders (as more fully described above)
sold 1,250,000 (2,500,000 after giving effect to the 1996 Dividend as discussed
below) shares at the same price resulting in net proceeds of approximately $20.7
million to the Company.
During April and June 1996, the Company issued 274,000 (548,000 after
giving effect to the 1996 Dividend as discussed below) and 49,681 (99,362 after
giving effect to the 1996 Dividend as discussed below) shares of Common Stock,
respectively, in exchange for all of the capital stock of J&J and Greyfriars
(see Note 2) resulting in an increase of $12.3 million to Stockholders' equity.
On July 1, 1996, the Company effected a 2 for 1 Common Stock split in
the form of a 100% stock dividend, increasing the shares of Common Stock
outstanding by 14,806,709 (the "1996 Dividend").
During 1996, the Company issued 101,039 shares of Common Stock
resulting in an increase to Stockholders' equity of $673,256.
20. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition, for which it
is practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based upon estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and the estimated future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. SFAS No. 107 excludes certain
financial instruments and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts does not represent
the underlying value of the Company.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and cash equivalents: The carrying amount of cash on hand and
money market funds is considered to be a reasonable estimate of fair market
value.
Securities purchased under agreements to resell: The carrying amount of
securities purchased under agreements to resell is considered to be a reasonable
estimate of fair value.
Available-for-sale securities: The fair value was determined based upon
the market value of the securities less a discount for restrictions on the
resale of such securities.
Mortgage servicing receivables: The fair value was determined by using
estimated discounted future cash flows taking into consideration the current
interest rate environment, current prepayment rates and default experience. The
carrying amount is considered to be a reasonable estimate of fair market value.
Trading securities: The fair value was determined by using estimated
discounted future cash flows taking into consideration the current interest rate
environment, current prepayment rates and default experience. Such securities
are carried at fair value.
77
78
Mortgage loans held for sale, net: The fair values were estimated by
using current institutional purchaser yield requirements. The fair value of the
mortgage loans held for sale, net totaled $108.4 million and $79.4 million at
December 31, 1996 and 1995, respectively.
Mortgage loans held for investment, net: The fair value has been
estimated using a combination of the current interest rate at which similar
loans with comparable maturities would be made to borrowers with similar credit
ratings, and adjustments for the additional credit risks associated with loans
of this type. Since the loans have a weighted average coupon rate of 16.7% and
15.1% at December 31, 1996 and 1995, respectively, and since additional credit
risk adjustments have been provided through reserves for loan losses, the
carrying value is a reasonable estimate of fair value.
Warehouse financing facilities: This facility has an original maturity
of less than 120 days and, therefore, the carrying value is a reasonable
estimate of fair value.
Securities sold but not yet purchased: The carrying amount of
securities purchased under agreements to resell is considered to be a reasonable
estimate of fair value.
Standby financing facilities: The carrying amount of standby financing
facilities is considered to be a reasonable estimate of fair market value.
Notes and loans payable: The carrying amount of notes and loans payable
is considered to be a reasonable estimate of fair market value.
Convertible subordinated debentures: Fair value was estimated based on
rates currently available for debt with similar terms and remaining maturities.
As of December 31, 1996, the estimated fair value of the Convertible Debentures
(see Note 14) based on a quoted market price exceeded the carrying value by $6.5
million.
The notes included above reflect fair values where appropriate for the
financial instruments of the Company, utilizing the assumptions and
methodologies as defined.
21. SEGMENTAL REPORTING
For the years ended December 31, 1994, 1995 and 1996, revenues from
loan sales and loan servicing constituted the primary source of the Company's
revenues. For the year ended December 31, 1994, there were three institutional
purchasers who each individually accounted for 10% or more of the total revenues
(18.3%, 12.2% and 10.0%, respectively). For the years ended December 31, 1996
and 1995, there was one institutional purchaser who acted as a conduit to
securitize the Company's loan originations that accounted for 10% or more of the
total revenues. For the years ended December 31, 1996 and 1995, this
institutional purchaser accounted for 70.5% and 23.5% of total revenues,
respectively.
Since May 1995, the Company's business activities have been conducted
in the US and the UK. Operating profit is total revenues less operating
expenses. In determining operating profit for each geographic area, the
following items have not been considered: interest expense, amortization of
goodwill and income taxes.
The following table summarizes the Company's business activities by
geographic region for the years ended December 31, 1996 and 1995.
US UK CONSOLIDATED
-- -- ------------
1996
Revenues $ 100,283,543 $ 98,932,000 $ 199,215,543
============= ============= =============
Operating profit $ 52,922,450 $ 56,192,000 $ 109,114,450
Interest expense (20,223,755)
Amortization of goodwill (3,775,176)
Corporate and other expenses (7,200)
-------------
Earnings before income taxes $ 85,108,319
=============
Identifiable assets $ 471,341,096 $ 296,579,000 $ 767,920,096
Corporate assets 4,885,699
78
79
Goodwill 47,466,835
-------------
Total assets $ 820,272,630
=============
1995
Revenues $ 36,471,702 $ 13,038,936 $ 49,510,638
============= ============= =============
Operating profit $ 19,036,352 $ 8,832,704 $ 27,869,056
Interest expense (4,610,186)
Amortization of goodwill (493,794)
Minority interest (UK) (2,379,235)
-------------
Earnings before income taxes and extraordinary item $ 20,385,841
=============
Identifiable assets $ 112,005,523 $ 21,255,447 $ 133,260,970
Goodwill 19,258,011
-------------
Total assets $ 152,518,981
=============
22. SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
The following is a summary of the significant noncash investing and
financing activities during the year ended 1996:
Commitment fee financed by lender $38,000,000
Available-for-sale securities received 14,618,194
Reclassification of mortgages held for sale to mortgages held for investment 4,182,414
Conversion of convertible subordinated debentures into common stock 20,000
23. SELECTED QUARTERLY DATA (UNAUDITED)
The following represents selected quarterly financial data for the
Company:
THREE MONTHS ENDED
------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
------------ ----------- ------------ -------------
1994
Revenues $ 1,803,455 $ 2,295,501 $ 2,304,948 $ 4,770,555
Net earnings (482,878) 176,114 62,927 647,296
Net earnings per share (0.03) 0.01 0.01 0.03
1995
Revenues $ 5,836,052 $10,272,702 $14,734,050 $18,667,834
Earnings before
extraordinary item 1,049,236 2,377,792 3,786,431 4,657,149
Net earnings 1,049,236 2,377,792 3,786,431 4,361,206
Earnings per share
before extraordinary
item 0.04 0.11 0.17 0.18
Net earnings per share 0.04 0.11 0.17 0.17
1996
Revenues $ 28,779,068 $38,452,701 $58,269,931 $73,713,843
Net earnings 9,273,144 11,125,996 14,414,837 15,866,908
Primary net earnings per share 0.31 0.37 0.47 0.51
79
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J & J SECURITIES LIMITED
REPORT OF THE AUDITORS
To the shareholders of J & J Securities Limited:
We have audited the accompanying statements of financial condition of J & J
Securities Limited as of September 30, 1995 and 1994, and the related statements
of operations, stockholders' equity and cash flows for each of the years in the
three year period ended September 30, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United Kingdom, which do not differ in any material respect
from auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of J & J Securities Limited as
of September 30, 1995 and September 30, 1994 and the results of its operations
and its cash flows for each of the three years ended September 30, 1995 in
conformity with United States generally accepted accounting principles.
BDO STOY HAYWARD
Chartered Accountants
and Registered Auditors
London
November 30, 1995
80
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J & J SECURITIES LIMITED
STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30,
--------------------------
MARCH 31,
NOTE 1996 1995 1994
---- ----------- ----------- ------------
(UNAUDITED) (AUDITED)
ASSETS
Cash at bank and in hand......................... $ 7,343 $ 1,401,175 $ 3,778,941
Mortgage loans held for investment, net.......... 5 48,839,093 46,657,205 48,950,652
Fixed assets net of accumulated depreciation..... 4 318,613 332,414 177,563
Other assets..................................... 108,421 106,870 72,047
------------ ----------- -----------
Total assets........................... $49,273,470 $48,497,664 $ 52,979,203
============ =========== ===========
LIABILITIES
Bank loans and overdrafts........................ $ 5,461,951 $12,345,060 $ 12,300,600
Other creditors and accrued expenses............. 809,547 781,243 649,224
Deferred taxation................................ 2,808,873 -- --
Income taxes..................................... 619,915 -- --
Obligations under hire purchase agreements....... 167,761 100,047 15,398
Bank loan........................................ 8 27,477,000 43,804,708 51,358,135
------------ ----------- -----------
Total liabilities...................... $37,345,047 57,031,058 64,323,357
------------ ----------- -----------
Commitments and contingencies....................
STOCKHOLDERS' EQUITY
Common stock: 1,000 shares issued and
outstanding, $1.50 par value per share......... 1,496 1,496 1,496
Retained earnings/(deficit)...................... 11,118,060 (9,404,324) (12,268,882)
Cumulative translation adjustment................ 808,867 869,434 923,232
------------ ----------- -----------
Total stockholders' equity.................. 11,928,423 (8,533,394) (11,344,154)
------------ ----------- -----------
Total liabilities and stockholders'
equity............................... $49,273,470 $48,497,664 $ 52,979,203
============ =========== ===========
See accompanying notes to financial statements.
81
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J & J SECURITIES LIMITED
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED
------------------------- FOR THE YEAR ENDED SEPTEMBER 30,
MARCH 31, MARCH 31, ---------------------------------------
NOTE 1996 1995 1995 1994 1993
---- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (AUDITED)
INTEREST
Interest income.................... $ 5,568,832 $ 6,395,581 $13,022,053 $13,695,765 $12,505,268
Interest expense................... (1,029,034) (2,383,791) (4,641,334) (4,851,944) (5,603,931)
----------- ----------- ----------- ----------- -----------
Net interest income................ 4,539,798 4,011,790 8,380,719 8,843,821 6,901,337
Provision for loan losses.......... 27,226 624,468 1,046,700 1,766,313 3,140,497
----------- ----------- ----------- ----------- -----------
Net interest income after provision
for loan losses.................. 4,512,572 3,387,322 7,334,019 7,077,508 3,760,840
Other income....................... 215,586 318,030 336,597 235,846 490,958
----------- ----------- ----------- ----------- -----------
4,728,158 3,705,352 7,670,616 7,313,354 4,251,798
----------- ----------- ----------- ----------- -----------
OTHER EXPENSES
Salaries and employees benefits.... 493,835 462,183 941,969 876,916 927,531
Directors' emoluments.............. 565,546 383,318 759,940 643,539 449,649
Other operating expenses........... 1,897,445 1,496,893 3,104,149 2,605,759 2,374,377
----------- ----------- ----------- ----------- -----------
Total other expenses............... 2,956,826 2,342,394 4,806,058 4,126,214 3,751,557
----------- ----------- ----------- ----------- -----------
Earnings before income taxes and
extraordinary item............... 1,771,332 1,362,958 2,864,558 3,187,140 500,241
(Provision)/credit for income
taxes............................ 6 (624,625) -- -- 140,948 --
----------- ----------- ----------- ----------- -----------
Earnings before extraordinary
item............................. 1,146,707 1,362,958 2,864,558 3,328,088 500,241
Extraordinary gain from
extinguishment of debt, net of
taxes............................ 7 19,375,677 -- -- -- --
----------- ----------- ----------- ----------- -----------
NET EARNINGS......................... $20,522,384 $ 1,362,958 $ 2,864,558 $ 3,328,088 $ 500,241
=========== =========== =========== =========== ===========
Earnings per share before
extraordinary item............... $ 1,146.70 $ 1,362.96 $ 2,864.56 $ 3,328.09 $ 500.24
Extraordinary item................. 19,375.68 -- -- -- --
----------- ----------- ----------- ----------- -----------
Earnings per share................. $ 20,522.38 $ 1,362.96 $ 2,864.56 $ 3,328.09 $ 500.24
=========== =========== =========== =========== ===========
Weighted average number of shares
outstanding...................... 1,000 1,000 1,000 1,000 1,000
=========== =========== =========== =========== ===========
See accompanying notes to financial statements.
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J & J SECURITIES LIMITED
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
----------------- TRANSLATION RETAINED
SHARES AMOUNT ADJUSTMENT EARNINGS/(DEFICIT) TOTAL
------ ------ ----------- ------------------ ------------
AUDITED
Balance at October 1, 1992.... 1,000 $1,496 $(1,208,847) $(16,097,211) $(17,304,562)
Translation adjustment...... -- -- 2,749,753 -- 2,749,753
Net earnings................ -- -- -- 500,241 500,241
------ ------ ----------- ------------------ ------------
Balance at September 30,
1993........................ 1,000 1,496 1,540,906 (15,596,970) (14,054,568)
Translation adjustment...... -- -- (617,674) -- (617,674)
Net earnings................ -- -- -- 3,328,088 3,328,088
------ ------ ----------- ------------------ ------------
Balance at September 30,
1994........................ 1,000 1,496 923,232 (12,268,882) (11,344,154)
Translation adjustment...... -- -- (53,798) -- (53,798)
Net earnings................ -- -- -- 2,864,558 2,864,558
------ ------ ----------- ------------------ ------------
Balance at September 30,
1995........................ 1,000 1,496 869,434 (9,404,324) (8,533,394)
UNAUDITED
Translation adjustment...... -- -- (60,567) -- (60,567)
Net earnings................ -- -- -- 20,522,384 20,522,384
------ ------ ----------- ------------------ ------------
Balance at March 31, 1996... 1,000 $1,496 $ 808,867 $ 11,118,060 $ 11,928,423
===== ====== ========== ============= ===========
See accompanying notes to financial statements.
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J & J SECURITIES LIMITED
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS
ENDED MARCH 31, FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------- -----------------------------------------
NOTE 1996 1995 1995 1994 1993
---- ------------ ------------ ------------ ------------ -----------
(UNAUDITED) (UNAUDITED) (AUDITED)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings................... $ 20,522,384 $ 1,362,958 $ 2,864,558 $ 3,328,088 $ 500,241
ADJUSTMENTS TO RECONCILE NET
EARNINGS TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Depreciation charges........... 70,130 76,060 172,441 114,109 156,106
Income taxes payable........... 624,625 -- -- 402,666 128,728
Gain on extinguishment of
debt......................... (19,375,677) -- -- -- --
Loss/(Profit) on sale of
tangible fixed assets........ -- -- (57,228) (7,410) 21,404
Provisions for losses.......... (2,937,829) (763,966) (1,595,065) (3,213,008) 177,185
NET CHANGES IN OPERATING ASSETS
AND LIABILITIES:
Increase in accrued interest
payable...................... 1,003,278 2,383,791 4,626,663 4,848,573 1,339,379
Decrease/(increase) in
receivables.................. (5,386) (43,697) (34,718) (35,719) (20,034)
Other, net..................... 128,279 (78,108) 215,227 61,105 52,933
------------ ------------ ------------ ------------ -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES..................... 29,804 2,937,038 6,191,878 5,498,404 2,355,942
------------ ------------ ------------ ------------ -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Mortgage originations.......... (9,167,751) (5,294,700) (11,900,423) (9,358,388) (13,732,146)
Mortgage repayments............ 8,241,281 8,166,294 15,967,974 17,539,489 12,618,654
Net purchase of equipment...... (67,859) (172,942) (269,520) (101,608) (60,408)
------------ ------------ ------------ ------------ -----------
NET CASH PROVIDED BY/(USED IN)
INVESTING ACTIVITIES........... (994,329) 2,698,652 3,798,031 8,079,493 (1,173,900)
------------ ------------ ------------ ------------ -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Bank loan repayments........... (386,003) (6,211,920) (12,400,440) (11,792,820) 217,075
------------ ------------ ------------ ------------ -----------
NET CASH PROVIDED BY/(USED IN)
FINANCING ACTIVITIES........... (386,003) (6,211,920) (12,400,440) (11,792,820) 217,075
------------ ------------ ------------ ------------ -----------
Net (decrease)/increase in cash
and cash equivalents........... (1,350,528) (576,230) (2,410,531) 1,785,077 1,399,117
Cash and cash equivalents at
beginning of period.......... 1,401,175 3,778,941 3,778,941 1,987,280 714,204
Effects of foreign exchange
rate charges................. (43,304) 80,267 32,765 6,584 (126,041)
------------ ------------ ------------ ------------ -----------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD...................... $ 7,343 $ 3,282,978 $ 1,401,175 $ 3,778,941 $ 1,987,280
============ ============ ============ ============ ===========
SUPPLEMENTED DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid during the
period....................... 158,900 -- -- -- --
============ ============ ============ ============ ===========
Income taxes (received)/paid
during the period............ -- -- -- $ 402,666 $ (127,500)
============ ============ ============ ============ ===========
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J & J SECURITIES LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS
MARCH 31, 1996 (UNAUDITED) AND 1995 (UNAUDITED)
AND SEPTEMBER 30, 1995, 1994 AND 1993
1. ORGANIZATION
J & J Securities Limited ("J&J") is a UK based company, incorporated in
England in 1977, that originates and services mortgage loans for investment
purposes secured by residential properties. J&J conducts all its business in the
UK and lends on the basis of first and second mortgages on residential
properties.
2. UNAUDITED INFORMATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and do not include all
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments consisting of normal recurring accruals, considered necessary for a
fair presentation of the results for the interim period have been included.
Operating results for the six months ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the fiscal year ended
September 30, 1996.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared under and are in accordance
with generally accepted accounting procedures in the US. The following principal
accounting policies have been applied:
Mortgage loans held for investment, net
Mortgage loans are stated at cost plus accrued interest income less any
provision for permanent diminution in value. Specific provisions for permanent
diminution in value are made by reference to doubtful loans which fail to meet
certain criteria. This includes management's estimate of the value of the
underlying collateral. Recovery of the carrying value of such loans is dependent
to a great extent on economic, operating and other conditions that may be beyond
J&J's control. In addition a general provision is made in respect of losses
which, although not specifically identified, are likely to exist in any
portfolio of loans of this type.
Loans are placed on nonaccrual status on the occurrence of the criteria
referred to above. Loans may be reinstated to accrual status when, in the
opinion of management, the criteria are no longer applicable.
SFAS No. 114 "Accounting by Creditors for Impairment of a Loan" as amended
by SFAS No. 118 "Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosures" is effective for accounting periods beginning after
December 15, 1994. SFAS No. 114 addresses accounting by creditors for impairment
of a loan by specifying how allowances for credit losses for certain loans
should be determined. A loan is impaired when it is probable that the creditor
will be unable to collect all amounts in accordance with the contractual terms
of the loan agreement. As an expedient, impairment is measured based on the fair
value of the loan's collateral. The adoption of these standards had no material
impact on the financial statements.
Revenue recognition
Mortgage loan interest accrues and is credited to the profit and loss
account on a monthly basis. Other interest, chargeable expenses and sundry
income are included on an accrual basis. All income derives from activities
within the United Kingdom.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and money market funds.
Such funds are deemed to be cash equivalents for purposes of the statements of
cash flows.
85
86
J & J SECURITIES LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
Equipment and vehicles, net
Equipment and vehicles are stated at original cost less accumulated
depreciation. Depreciation is computed by using the straight-line method based
on the estimated lives of the depreciable assets.
Expenditures for maintenance and repairs are charged directly to the
appropriate operating account at the time the expense is incurred. Expenditures
determined to represent additions are capitalized. Cost of assets sold or
retired and the related amounts of accumulated depreciation are eliminated from
the accounts in the year of sale or retirement. Any resulting profit or loss is
reflected in the statement of earnings.
Income taxes
J&J accounted for income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes." Under the asset and liability method of SFAS No. 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement and tax
reporting bases of existing assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax laws. Deferred tax liabilities and
assets are adjusted for the effect of a change in tax laws or rates.
J&J has potential net operating losses (NOL's) carried forward against
which a valuation reserve has been fully provided at each balance sheet date as
future income tax benefit in respect of these NOL's is only available as a
consequence of future income sufficient to enable the benefit to be realized.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Foreign currency translation
J&J reflects the result of its operations in accordance with SFAS No. 52,
"Foreign Currency Translation." To the extent there are foreign currency
translation gains or losses, such gains or losses are considered unrealized and
are recorded as a separate component of stockholders' equity.
4. FIXED ASSETS
SEPTEMBER 30,
--------------------------
1995 1994
----------- ------------
Cost
Office equipment....................................... $ 376,080 $ 293,404
Motor vehicles......................................... 365,522 342,668
------------ -----------
741,602 636,072
Less:
Accumulated depreciation............................ 409,188 458,509
------------ -----------
Balance at end of period............................ $ 332,414 $ 177,563
============ ===========
5. MORTGAGE LOANS HELD FOR INVESTMENT, NET
The mortgage loan balance is summarized as follows:
SEPTEMBER 30,
--------------------------
1995 1994
----------- ------------
Mortgage loans held for investment, net.................. $55,460,242 $ 59,304,209
Provisions for losses.................................. (8,803,037) (10,353,557)
----------- -----------
Balance, end of year................................... $46,657,205 $ 48,950,652
=========== ===========
86
87
J & J SECURITIES LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
The activity in the reserve for mortgage loans is summarized as follows:
FOR THE YEAR ENDED SEPTEMBER
30,
----------------------------
1994 1993
----------- ------------
Balance, beginning of year....................... $13,000,982 $ 12,824,868
Provision for losses........................... 1,766,313 3,140,497
Charge-offs.................................... (4,979,321) (2,963,312)
Effects of foreign exchange.................... 565,583 (1,071)
----------- -----------
Balance, end of year........................ $10,353,557 $ 13,000,982
=========== ===========
6. INCOME TAXES
The net provision for income taxes as presented in the statements of
operations for the years ended September 30, 1995 and 1994 is as follows:
FOR THE YEAR ENDED
SEPTEMBER 30,
--------------------------------
1995 1994 1993
-------- -------- --------
Current (provision)/credit........................... -- $140,948 --
======== ======== ========
7. EXTRAORDINARY GAIN
On November 20, 1995, J&J entered into an agreement with its bankers to
extinguish the long-term loan (see Note 8). This resulted in an extraordinary
gain of $19,375,677 net of taxes ($22,165,677 less applicable deferred income
taxes of $2,790,000).
8. LONG-TERM LOAN
J&J has a term loan with a bank secured by its mortgage portfolio. The
interest rate is 21 1/2% above the bank's prime rate. The aggregate amount of
the bank debt maturing at September 30 in each of the next five years and
thereafter is as follows:
YEAR ENDING SEPTEMBER 30, AMOUNT
---------------------------------------------------------------- -----------
1996............................................................ $12,345,060
1997............................................................ 12,345,060
1998............................................................ 12,345,060
1999............................................................ 6,769,528
2000............................................................ --
-----------
$43,804,708
===========
Subsequent to the year end, on November 20, 1995 (see Note 11), J&J entered
into an agreement with its bankers to discharge the liability at that time which
resulted in an extraordinary gain arising from the extinguishment of part of
this debt (see Note 7). The new loan facilities included a three year term loan
of $28.5 million and a $7.9 million demand note. Interest on each of the new
facilities bears interest at a variable rate of 2.5% over the lender's prime
rate.
9. DIRECTORS' INTEREST IN TRANSACTIONS
A J&J director is a partner in a legal practice which provided legal and
management services to J&J for fees of $516,825, $386,296 and $604,392 for the
years ended September 30, 1995, 1994 and 1993, respectively.
87
88
J & J SECURITIES LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
A J&J director is a beneficial shareholder in Latchglen Limited trading as
London Trust Securities which received introductory commissions of $136,209,
$138,922 and $47,698 for the years ended September 30, 1995, 1994 and 1993,
respectively.
10. COMMITMENTS UNDER OPERATING LEASES
J&J leases premises under operating leases with various expiration dates.
Minimum annual rental payments at September 30, 1995 are as follows:
1996.............................................................. $105,860
1997.............................................................. 105,860
1998.............................................................. 105,860
1999.............................................................. 31,600
2000.............................................................. 31,600
Thereafter........................................................ 31,600
--------
$412,380
========
Rent expenses for office space amounted to $72,456, $47,519 and $54,525 for
the years ended September 30, 1995, 1994 and 1993, respectively.
11. POST BALANCE SHEET EVENTS
On November 20, 1995, J&J's indebtedness to its previous principal bankers,
The National Mortgage Bank Plc, was repaid in full after agreement for the
forgiveness of a certain amount of the debt outstanding.
On April 23, 1996 J&J was acquired by City Mortgage Corporation Limited.
From that date J&J ceased its lending operations while continuing to incur
certain incidental expenditures. It is anticipated that as of September 30,
1996, J&J will be wholly-dormant.
88
89
HERITABLE FINANCE LIMITED
REPORT OF INDEPENDENT AUDITORS
Auditors' report to:
The members of Heritable Finance Limited
We have audited the accompanying consolidated statements of financial
condition of Heritable Finance Limited and subsidiaries as of December 31, 1995
and 1994 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Heritable
Finance Limited and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with United States
generally accepted accounting principles.
KPMG
Chartered Accountants
Registered Auditors
London, United Kingdom
April 2, 1996
89
90
HERITABLE FINANCE LIMITED
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
----------- ------------ ------------
(UNAUDITED)
ASSETS
Cash.................................................... $ -- $ 47 $ 58
Accrued interest receivable............................. 1,755 1,699 1,583
Unamortized fees........................................ 4,279 3,962 2,982
Accounts receivable..................................... 217 379 799
Mortgage loans held for investment, net................. 176,001 172,702 159,806
Furniture, equipment and vehicles, net.................. 609 588 524
Other assets............................................ 1,916 2,125 2,142
-------- -------- --------
Total assets.................................... $184,777 $181,502 $167,894
======== ======== ========
LIABILITIES
Accounts payable and other liabilities.................. $ 2,383 $ 1,678 $ 1,588
Income taxes payable.................................... 3,045 2,127 1,095
Due to The Heritable and General Investment Bank
Limited.............................................. 171,415 171,028 163,037
Due to City Mortgage Corporation........................ -- -- --
Negative goodwill....................................... 1,797 1,882 2,116
-------- -------- --------
Total liabilities............................... 178,640 176,715 167,836
-------- -------- --------
STOCKHOLDERS' EQUITY
Common stock 1,000 L1.00 par value "A" ordinary shares
authorized, issued and outstanding in 1996, 1995 and
1994................................................. 2 2 2
Common Stock, 9,000 L1.00 par value "B" ordinary shares
authorized, issued and outstanding in 1996, 1995 and
1994................................................. 14 14 14
Foreign currency translation adjustment................. (78) 7 86
Retained earnings(deficit).............................. 6,199 4,764 (44)
-------- -------- --------
Total stockholders' equity.............................. 6,137 4,787 58
-------- -------- --------
Total liabilities and stockholders' equity...... $184,777 $181,502 $167,894
======== ======== ========
See accompanying notes to consolidated financial statements
90
91
HERITABLE FINANCE LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED FOR THE YEAR ENDED
--------------------------- ------------------------------------------
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1995 1994 1993
----------- ----------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
REVENUES
Interest income................. $ 6,256 $ 6,014 $ 25,842 $ 17,978 $ 16,608
Fee and commission income....... 1,506 1,133 4,530 3,846 2,355
----------- ----------- ------------ ------------ ------------
Total revenues............. 7,762 7,147 30,372 21,824 18,963
----------- ----------- ------------ ------------ ------------
EXPENSES
Salaries and employee
benefits..................... 1,193 1,155 4,017 2,980 1,903
Interest expense................ 2,859 2,843 12,278 7,644 11,339
Fee and commission expenses..... 1,306 950 4,456 2,776 1,209
Other operating expenses........ 294 788 2,455 4,071 4,881
Release of general provisions on
sale of loans................ -- -- -- -- --
----------- ----------- ------------ ------------ ------------
Total expenses............. 5,652 5,736 23,206 17,471 19,332
----------- ----------- ------------ ------------ ------------
EARNINGS (LOSS) BEFORE INCOME
TAXES........................... 2,110 1,411 7,166 4,353 (369)
Provision (credit) for income
taxes........................ 675 448 2,358 1,191 (84)
----------- ----------- ------------ ------------ ------------
NET EARNINGS (LOSS)............... $ 1,435 $ 963 $ 4,808 $ 3,162 $ (285)
========= ========= ========== ========== ==========
Earnings (loss) per share....... $143.50 $ 96.30 $ 480.80 $ 316.20 $ (28.50)
========= ========= ========== ========== ==========
Weighted average number of
shares outstanding........... 10,000 10,000 10,000 10,000 10,000
========= ========= ========== ========== ==========
See accompanying notes to consolidated financial statements.
91
92
HERITABLE FINANCE LIMITED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
FOREIGN
RETAINED CURRENCY
COMMON EARNINGS/ TRANSLATION
STOCK (DEFICIT) ADJUSTMENT TOTAL
------ ---------- ---------- -------
BALANCE AT DECEMBER 31, 1992.............................. $ 16 $ 990 $ -- $ 1,006
Net loss.................................................. -- (285) -- (285)
Foreign currency translation adjustment................... -- -- (20) (20)
------- ------- ------- -------
BALANCE AT DECEMBER 31, 1993.............................. 16 705 (20) 701
Net earnings.............................................. -- 3,162 -- 3,162
Dividend paid in year..................................... -- (3,911) -- (3,911)
Foreign currency translation adjustment................... -- -- 106 106
------- ------- ------- -------
BALANCE AT DECEMBER 31, 1994.............................. 16 (44) 86 58
Net earnings.............................................. -- 4,808 -- 4,808
Foreign currency translation adjustment................... -- -- (79) (79)
------- ------- ------- -------
BALANCE AT DECEMBER 31, 1995.............................. 16 4,764 7 4,787
Net earnings (unaudited).................................. -- 1,435 -- 1,435
Foreign currency translation adjustment(unaudited)........ -- -- (85) (85)
------- ------- ------- -------
BALANCE AT MARCH 31, 1996 (UNAUDITED)..................... $ 16 $ 6,199 $ (78) $ 6,137
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
92
93
HERITABLE FINANCE LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE
THREE MONTHS ENDED FOR THE YEAR ENDED
--------------------- ------------------------------------------
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1995 1994 1993
----------- ----------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)......................... $ 1,435 $ 963 $ 4,808 $ 3,162 $ (285)
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities:
Depreciation and amortization....... (12) (14) 59 262 324
Income taxes payable................ 918 242 1,071 301 27
Provision for losses................ 548 1,483 797 2,236 (1,141)
(Gain) loss on disposal of fixed
assets............................ -- (4) 13 (20) 49
Net changes in operating assets and
liabilities:
Other............................... (234) 9,238 (566) (2,683) 328
(Increase) decrease in accrued
interest receivable............... (57) (179) (115) (952) 193
-------- -------- -------- -------- --------
Net cash provided by (used in)
operating activities........... 2,598 11,729 6,067 2,306 (505)
-------- -------- -------- -------- --------
Cash flows from investing activities:
Payment for acquisition of former
associate................................ -- -- -- (912) --
Mortgage originations....................... (13,277) (17,945) (47,145) (31,995) --
Mortgage repayments......................... 9,430 1,942 33,452 23,636 24,038
Net purchases of equipment.................. (95) (102) (376) (224) (249)
-------- -------- -------- -------- --------
Net cash (used in) provided by investing
activities............................... (3,942) (16,105) (14,069) (9,495) 23,789
-------- -------- -------- -------- --------
Cash flows from financing activities:
Dividends paid.............................. -- -- -- (3,911) --
Increase (decrease) in amounts due to: The
Heritable and General Investment Bank
Limited.................................. 387 3,663 7,991 10,720 (23,265)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities.................................. 387 3,663 7,991 6,809 (23,265)
-------- -------- -------- -------- --------
Net increase (decrease) in cash............... (957) (713) (11) (380) 19
Cash at the beginning of the period........... 47 58 58 438 419
-------- -------- -------- -------- --------
Cash at the end of the period................. $ (910) $ (655) $ 47 $ 58 $ 438
======== ======== ======== ======== ========
Supplemental disclosure of cash flow
information:
Income taxes paid (recovered)............... -- -- $ 1,479 $ 342 $ (951)
======== ======== ======== ======== ========
Interest paid............................... $ 2,859 $ 2,843 $ 12,278 $ 7,644 $ 11,339
======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
93
94
HERITABLE FINANCE LIMITED
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 (UNAUDITED) AND 1995 (UNAUDITED)
AND DECEMBER 31, 1995, 1994 AND 1993
1. ORGANIZATION
Heritable Finance Limited ("the Company") is a consumer finance company
that engages in the business of providing mortgage loans secured primarily by
family residences in the UK. The majority of the Company's loans are second
mortgages made to owners of single family residences who use the loan proceeds
for such purposes as debt consolidation and financing of home improvements,
amongst others.
For the purposes of these financial statements the Group is defined as
Heritable Finance Limited and its subsidiary companies. The principal
subsidiaries at December 31, 1995, which are all registered in England and
Wales, are wholly owned, and are listed below:
Undertaking
Assured Funding Corporation Limited
Greyfriars Financial Services Limited
Heritable Capital Plan Limited
Home and Family Finance Limited
Home Mortgage Corporation Limited
Home Mortgages Limited
Homestead Finance Limited
Secured Funding Limited
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of preparation
The financial statements have been prepared in conformity with generally
accepted accounting principles. The preparation of the financial statements
requires the management of the Company to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as at the date of the financial statements and
the reported revenues and expenses for the reported periods. Actual results
could differ from those estimates.
Unaudited information
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and do not include all
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments consisting of normal recurring accruals, considered necessary for a
fair presentation of the results for the interim period have been included.
Operating results for the three months ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1996. The interim period financial statements for the three months ended March
31, 1996 and 1995 have been presented to provide the latest comparative
financials available prior to the June 14, 1996 acquisition as described in Note
11, "Subsequent Events."
Combination
The Group financial statements consolidate those of the Company and its
subsidiary companies as at December 31, 1995, 1994 and 1993.
94
95
HERITABLE FINANCE LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The consideration paid for companies acquired is allocated to each class of
tangible net asset on the basis of the fair value to the Group of those assets
at the date of acquisition. The excess of the purchase consideration over the
fair value of the tangible net assets at the date of acquisition is capitalised
as goodwill and is amortized over a period not exceeding ten years.
Where the purchase consideration is less than the fair value of the
tangible net assets acquired, negative goodwill is recognized which is allocated
against the fair value of any non-current assets acquired. Where non-current
assets are subsequently reduced to zero or, where there are no non-current
assets to allocate negative goodwill against, the balance is carried forward and
amortized over a period not exceeding ten years.
All significant intercompany transactions and balances among the
consolidated entities have been eliminated.
Non-origination fees and commission income
Non-origination fees and commission income are recognized when earned and
have either been paid or are considered to be recoverable with reasonable
certainty.
Origination fees and costs
Origination fees and costs are recognized over the life of the loan to
yield a result which is not materially different from that arising from the
application of SFAS No. 91. Costs incurred in granting each advance are
individually identified, and are amortized in proportion to income earned on the
advance over its term. In the event of early repayment, any unamortized costs
relating to that loan are written off immediately. The total of unamortized cost
at the balance sheet date is included in advances to customers.
Bad and doubtful debts
An allowance for bad and doubtful debts is recorded on loans which fall
more than four installments in arrears. Specific provisions are also provided on
the unsecured value of loans (which may be fully performing) to the extent that
there is a shortfall in security, and also where the outstanding loan balance
taken as a whole represents in excess of 150% of the loan balance at inception.
When there is no prospect of recovery, outstanding debt is written off.
In addition, general provisions are made having regard to the overall size
and characteristics of the Group's loan portfolio.
Furniture, equipment and vehicles, net
Furniture, equipment and vehicles, net are stated at original cost less
accumulated depreciation and amortization. Depreciation is computed principally
by using the straight line method based on the estimated lives of the
depreciable assets which are between three and five years.
Expenditures for maintenance and repairs are charged directly to the
appropriate operating account at the time the expense is incurred. Expenditures
determined to represent additions and betterments are capitalized. The cost of
assets sold or retired and the related amounts of accumulated depreciation are
eliminated from the accounts in the year of sale or retirement. Any resulting
profit or loss is reflected in the statement of operations.
Mortgage loans held for investment, net
Interest income includes income from mortgage loans held for investment,
and is recognized on an accrual basis.
95
96
HERITABLE FINANCE LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SFAS No. 114 "Accounting by Creditors for Impairment of a Loan" (SFAS No.
114) as amended by SFAS No. 118 "Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosures" (SFAS No. 118) is effective for
accounting periods beginning after December 15, 1994. SFAS No. 114 addresses
accounting by creditors for impairment of a loan by specifying how allowances
for credit losses for certain loans should be determined. A loan is impaired
when it is probable that the creditor will be unable to collect all amounts in
accordance with the contractual terms of the loan agreement. As an expedient,
impairment is measured based on the fair value of the loan's collateral. The
adoption of these standards had no material impact on the financial statements.
At December 31, 1995, the Group's net investment in impaired loans was
$36,097,950 after specific provisions of $13,004,578. The average net investment
during 1995 in such loans was $41,381,164. Each investment in impaired loans is
provided an allowance for loan losses. These disclosures are based on the
Group's provisioning policy as described above.
Income Taxes
United Kingdom corporation tax and overseas taxes are provided, at
appropriate rates, on the taxable profits for the year.
Fair value of financial instruments
SFAS No. 107 "Disclosures about Fair Value of Financial Instruments" (SFAS
No. 107) requires disclosure of fair value information about financial
instruments, whether or not recognized in the statement of financial condition
for which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair value is based upon estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and the estimated future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realised
in immediate settlement of the instrument. SFAS 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amount does not represent the underlying
value of the Company.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
Cash
The carrying amount of cash on hand is considered to be a reasonable
estimate of fair market value.
Mortgage loans held for investment
The carrying value of loans held for investment is considered to be a
reasonable estimate of the fair market value.
Foreign currency translation
The functional currency of the Group is pounds' sterling. Assets and
liabilities are translated to US dollars at rates current on December 31. Profit
and loss items are translated at average rates of exchange for the period.
Exchange differences arising from translation are reported as a component of
shareholders' equity.
96
97
HERITABLE FINANCE LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. INCOME TAXES
The provision for income taxes is summarized as follows:
DECEMBER 31, DECEMBER 31,
1995 1994
DOLLARS IN DOLLARS IN
THOUSANDS THOUSANDS
------------ ------------
Current:
UK corporation tax......................................... $1,697 $1,003
Deferred................................................... 430 92
------ ------
$2,127 $1,095
====== ======
The reconciliation of income tax computed at the UK corporation tax rate to
the effective income tax rate is as follows:
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
UK corporation tax rate...................................... 33.0% 33.0%
Release of deferred tax valuation allowance.................. -- (6.3)
Other........................................................ (0.1) 0.7
---- ----
32.9% 27.4%
==== ====
Deferred taxes are summarized as follows:
DECEMBER 31, DECEMBER 31,
1995 1994
DOLLARS IN DOLLARS IN
THOUSANDS THOUSANDS
------------ ------------
Deferred tax liabilities
Arising from tax treatment of acquisition costs........ $1,110 $ 681
------ -----
Gross deferred tax assets
Capital allowances and depreciation.................... 55 47
General provision................................... 594 542
Other............................................... 31 --
------ -----
680 589
------ -----
Net deferred tax liabilities............................. $ 430 $ 92
====== =====
97
98
HERITABLE FINANCE LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. RESERVE FOR LOSSES
The activity in the reserve for losses on mortgage loans held for
investment is summarized as follows:
Specific reserve
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------------------
1995 1994 1993
DOLLARS IN DOLLARS IN DOLLARS IN
THOUSANDS THOUSANDS THOUSANDS
------------ ------------ ------------
Balance at beginning of year.................. $12,267 $ 4,844 $ 5,726
Acquisition of former associate company....... -- 5,029 --
Provision for losses.......................... 4,380 4,890 2,883
Charge-offs................................... (3,002) (2,646) (3,430)
Recoveries.................................... (533) (271) (215)
Foreign currency translation adjustment....... (107) 421 (120)
------- ------- -------
Balance at end of year........................ $13,005 $12,267 $ 4,844
======= ======= =======
General Reserve
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------------------
1995 1994 1993
DOLLARS IN DOLLARS IN DOLLARS IN
THOUSANDS THOUSANDS THOUSANDS
------------ ------------ ------------
Balance at beginning of year.................. $1,729 $ 851 $1,108
Acquisition of former associate company....... -- 685 --
Provision for losses.......................... 87 126 (234)
Foreign currency translation adjustment....... (15) 67 (23)
------ ------ ------
Balance at end of year........................ $1,801 $1,729 $ 851
====== ====== ======
The amounts in the reserve for losses are expressed gross. The Company
continues to record interest on impaired assets as an addition to the related
mortgage loan balance. The amount of interest credited on these loans amounted
to $3,649,561, $2,562,669 and $1,620,863 for the years ended December 31, 1995,
1994 and 1993, respectively. However, except to the extent that each is
received, these amounts are offset by a corresponding charge to the reserve for
losses, such that the net balance of mortgage loans held for investment after
deducting the reserve for losses remains unchanged.
98
99
HERITABLE FINANCE LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. FURNITURE, EQUIPMENT AND VEHICLES, NET
Furniture, equipment and vehicles, net at cost are summarized as follows:
DECEMBER 31, DECEMBER 31,
1995 1994
DOLLARS IN DOLLARS IN
THOUSANDS THOUSANDS
------------ ------------
Furniture.................................................. $ 65 $ 305
Equipment.................................................. 710 1,628
Vehicles................................................... 335 302
----- ------
1,110 2,235
Less: accumulated depreciation............................. (522) (1,711)
------ -------
Furniture, equipment and vehicles, net..................... $ 588 $ 524
====== ======
6. AMOUNTS OWED TO THE HERITABLE AND GENERAL INVESTMENT BANK
DECEMBER 31, DECEMBER 31,
1995 1994
DOLLARS IN DOLLARS IN
THOUSANDS THOUSANDS
------------ ------------
Advances from The Heritable and General Investment Bank
Limited................................................ $170,766 $158,684
Group relief payable..................................... 262 442
Dividend payable......................................... -- 3,911
-------- --------
$171,028 $163,037
======== ========
At December 31, 1995, advances of $152,494,819 bear interest at market
rates based on the three-month LIBOR rate plus a margin of 0.9%. The remaining
$18,270,997 bears no interest.
7. ACQUISITION OF HOME MORTGAGES LIMITED
On July 29, 1994, Heritable Finance Limited acquired the entire share
capital of Home Mortgages Limited.
The acquisition was accounted for under the purchase method of accounting.
The excess of the fair value of tangible net assets acquired over the
consideration paid gave rise to negative goodwill of $2,159,838 which has been
carried forward as a deferred credit and is being amortized over a period of ten
years.
8. EMPLOYEE BENEFIT PLAN
Heritable Finance Limited is a member of a non-contributory defined
benefits pension plan, The Heritable Group Retirement and Death Benefits Scheme.
Employees become eligible to join the plan following a probationary employment
period of six months and a minimum age of twenty-five years.
During the years ended December 31, 1995, 1994 and 1993, respectively,
$507,578, $436,578 and $394,242 were recognized as pension costs in the profit
and loss account.
9. CONCENTRATION OF RISK
The Company operates as a mortgage provider in the UK domestic market with
various regional concentrations and is therefore vulnerable to fluctuations in
the UK housing market. For the year ended
99
100
HERITABLE FINANCE LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1995 and 1994, there were no customers who individually accounted
for 10% or more of total revenues.
10. SUBSEQUENT EVENTS
At December 31, 1995, the Company was owned by The Heritable and General
Investment Bank Limited whose ultimate parent company was CoreStates Financial
Corp., a company incorporated in the US.
On June 14, 1996, Heritable Finance Limited was acquired by City Mortgage
Corporation Limited, an indirect wholly-owned subsidiary of Cityscape Financial
Corp., in exchange for cash and shares of that company's common stock.
Cityscape Financial Corp. is a US incorporated consumer finance company,
engaged in the business of originating, purchasing, selling and servicing
mortgage loans secured primarily by one- to four-family residences.
11. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases premises and equipment under operating leases with
various expiration dates. Both leases are subject to renegotiation every five
years. Minimum annual rental payments at December 31, 1995 are as follows:
DOLLARS IN
YEAR ENDED THOUSANDS
--------------------------------------------------------------------------- ----------
1996....................................................................... $ 331
1997....................................................................... 331
1998....................................................................... 331
1999....................................................................... 331
2000....................................................................... 331
Thereafter................................................................. 3,338
------
Total...................................................................... $4,993
======
Rent expense for office space amounted to $333,070, $265,188 and $316,962
for the years ended December 31, 1995, 1994 and 1993, respectively.
Litigation
In the normal course of business, the Company is subject to various legal
proceedings and claims, the resolution of which, in management's opinion, will
not have a material adverse effect on the consolidated statements of financial
condition or on the related consolidated statements of operations, stockholders'
equity and cash flows of the Company.
12. LOAN COMMITMENTS
At December 31, 1995 and 1994 there were no material undrawn loan
commitments.
100
101
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position with the Company
of each person who is an executive officer or director of the Company or its
subsidiaries.
NAME AGE POSITIONS WITH THE COMPANY
- ---- --- --------------------------
Robert Grosser 39 Chairman of the Board, Chief Executive Officer,
President and Director; President and Director of CSC;
Director of CSC-UK
Robert C. Patent 46 Vice Chairman of the Board, Executive Vice President,
Treasurer and Director; Executive Vice President,
Treasurer, Assistant Secretary and Director of CSC;
Director of CSC-UK
Asher Fensterheim 67 Director; Director of CSC
Jonah L. Goldstein 61 General Counsel and Director; General Counsel and
Director of CSC; Secretary and Director of CSC-UK
Arthur P. Gould 79 Director
Hollis W. Rademacher 61 Director
Robert M. Stata 39 Director; Senior Vice President/Originations and
Director of CSC
Cheryl P. Carl 44 Secretary; Senior Vice President/Operations, Secretary
and Director of CSC
Steven P. Weiss 40 Senior Vice President/Sales and Director of CSC
Eric S. Goldstein 35 Senior Vice President/Loan Servicing of CSC
Tim S. Ledwick 39 Chief Financial Officer; Senior Vice President, Chief
Financial Officer of CSC
Robert J. Blackwell 58 Senior Vice President/Title I Division of CSC
Steven M. Miller 41 Senior Vice President/Managing Director of CSC
CSC-UK:
David A. Steene 37 Director; Managing Director and Director of CSC-UK
Martin H.S. Brand 60 Lending Director and Director of CSC-UK
Gerald Epstein 47 Financial Director and Director of CSC-UK
Director and officer positions of CSC and CSC-UK are currently for a term of
one year. Effective with the Company's 1996 annual meeting of stockholders held
on June 12, 1996, the Board of Directors of the Company has been divided into
three classes as nearly equal in size as is practicable and directors of the
Company serve staggered terms of three years. Executive officers of the Company,
CSC and CSC-UK are appointed by their respective Boards of Directors. The name
and business experience during the past five years of each director and
executive officer of the Company are described below:
Robert Grosser has been Chief Executive Officer, President and a Director of
the Company since April 1994 and its Chairman of the Board since September 1995.
Mr. Grosser has also served in each of these offices of CSC since he founded the
organization in 1985. Mr. Grosser has served as a Director of CSC-UK since its
formation. Mr. Grosser currently serves on the board of the National Home Equity
Mortgage Association. Mr. Grosser is the son-in-law of Asher Fensterheim.
101
102
Robert C. Patent has been Executive Vice President and a Director of the
Company since April 1994, Treasurer since June 1995 and the Vice Chairman of its
Board since September 1995. Mr. Patent also has served as Executive Vice
President and as Director of CSC since October 1990 and as Treasurer since
January 1994. Mr. Patent has served as a Director of CSC-UK since its formation.
Mr. Patent currently serves as President of Colby Capital Corp. and as a
director of New York Federal Savings Bank, a federally chartered thrift
institution located in New York City.
Asher Fensterheim has been a Director of the Company since June 1995. Mr.
Fensterheim has served as a Director of CSC since January 1995. Mr. Fensterheim
is an attorney in the State of New York who specializes in consumer and
commercial finance, real estate, mortgage banking and related areas. From 1988
to 1993, he was a partner with Fink Weinberger P.C. Since 1994, he is the sole
shareholder of Asher Fensterheim P.C. which renders legal services to the
Company. Mr. Fensterheim is the father-in-law of Robert Grosser.
Jonah L. Goldstein has been General Counsel of the Company since September
1995 and a Director since June 1995. Mr. Goldstein served as a consultant to CSC
from December 1993 through June 1995 and has served as a Director since January
1995 and as General Counsel since January 1996. Effective July 1, 1995, Mr.
Goldstein entered into an employment agreement with the Company. Mr. Goldstein
also has served as Secretary and as a Director of CSC-UK since its formation.
From its formation in 1980 until its acquisition by CSC in 1994, Mr. Goldstein
was President and Chairman of Astrum, a mortgage banker. Mr. Goldstein currently
serves as Chairman and Director of Advance Abstract Corp., a company that sells
title insurance. He is also sole shareholder of Jonah L. Goldstein, P.C. Mr.
Goldstein is the father of Eric S. Goldstein.
Arthur P. Gould has been a Director of the Company since June 1995. Since
1973, Mr. Gould has served as President of Arthur P. Gould & Co., an investment
firm (formerly a division of Inter-Regional Financial Group Inc.). Previously,
Mr. Gould was President of Golden Shield Corporation, a subsidiary of General
Telephone & Electronics Corporation and then President, Corporate Development
Division of Laidlaw & Co. Incorporated and Vice President and Director of
Laidlaw & Co. Incorporated.
Hollis W. Rademacher has been a Director of the Company since June 1995.
Currently, Mr. Rademacher is actively involved in a variety of financial
consulting and corporate director capacities. Mr. Rademacher serves as a
director of four suburban Chicago area banks, Hinsdale Bank and Trust, Hinsdale,
Illinois, North Shore Community Bank and Trust, Wilmette, Illinois, Lake Forest
Bank and Trust, Lake Forest, Illinois and Libertyville Bank and Trust,
Libertyville, Illinois, and several other closely held organizations in the
financial service, distribution and real estate industries. He also serves as
Director of Schawk, Inc., a public company engaged in producing molded plastic
products and pre-press services and products for printed packaging applications.
From 1988 to 1993, Mr. Rademacher served as Chief Financial Officer of
Continental Bank Corp.
Robert M. Stata has been a Director of the Company since June 1995. Mr.
Stata also has served as Vice President of CSC, responsible for lending
originations, since November 1992 and as Director and as Vice
President/Originations of CSC since January 1994. Mr. Stata was promoted to
Senior Vice President/Originations of CSC in June 1996. Mr. Stata was the
President/Founder of Suburban Equity Corp., a mortgage banker specializing in
non-conventional loans, from 1985 to 1992.
Cheryl P. Carl has been Secretary of the Company since June 1994. Ms. Carl
also has served as Vice President/Operations of CSC since January 1994,
Secretary of CSC since June 1994 and as Assistant Treasurer and as Director of
CSC since January 1995. Ms. Carl was promoted to Senior Vice
President/Operations of CSC in June 1996. From its formation in 1980 until its
acquisition by CSC in 1994, Ms. Carl was Executive Vice President and Director
of Astrum, a mortgage banker specializing in non-conventional loans. Ms. Carl
also is a Director and Secretary of Advance Abstract Corp., a company that sells
title insurance.
102
103
Steven P. Weiss has been Vice President/Sales of CSC since January 1994 and
a Director of CSC since January 1995. Mr. Weiss was promoted to Senior Vice
President/Sales of CSC in June 1996. From June 1993 to December 1993, Mr. Weiss
held the position of Vice President of Astrum, a mortgage banker specializing in
non-conventional loans. From 1989 to 1993, Mr. Weiss was founder and President
of Record Research, a title search company, and President of County Seat Capital
Corporation, a broker of non-conventional loans.
Eric S. Goldstein has been Vice President/Loan Servicing of CSC since
January 1994. Mr. Goldstein was promoted to Senior Vice President/Loan Servicing
of CSC in June 1996. From 1987 to 1993, Mr. Goldstein was Vice President of
Astrum, a mortgage banker specializing in non-conventional loans. Mr. Goldstein
is the son of Jonah L. Goldstein.
Tim S. Ledwick has been Chief Financial Officer of the Company since March
1995. Mr. Ledwick also has served as Vice President, Chief Financial Officer of
CSC since September 1994. Mr. Ledwick was promoted to Senior Vice President of
CSC in March 1997. From 1992 until 1994, Mr. Ledwick was Vice
President/Controller-Subsidiaries and from 1989 until 1992 was
Controller-Subsidiaries for River Bank America.
Robert J. Blackwell has been Vice President/Title I Division of CSC since
January 1996. In August 1996, Mr. Blackwell was promoted to Senior Vice
President/Title I Division of CSC. From 1985 to 1995, Mr. Blackwell was the
Executive Vice President, Chief Operating Officer and a Director of Alliance
Funding Company, presently a division of Superior Bank F.S.B.
Steven M. Miller has been Senior Vice President/Managing Director of CSC
since March 1997. Mr. Miller's responsibilities include direction of the
Company's securitizations and capital markets and strategic planning activities.
Previously, Mr. Miller was Senior Vice President and Co-Head of the Asset Backed
Group of Greenwich Capital Markets, Inc. Mr. Miller became a Senior Vice
President at Greenwich Capital Markets, Inc. in 1992 and in May 1995 he was also
appointed Co-Head of the Asset Backed Group. Prior to that time, Mr. Miller was
a Vice President at Greenwich Markets, Inc.
CSC-UK:
David A. Steene has been a Director of the Company since October 1995. Mr.
Steene also has served as Managing Director and as Director of CSC-UK since its
formation. Mr. Steene was an equity partner of Brand Montague, Solicitors from
September 1985 to September 1994. Mr. Steene was an elected member of Elstree
Ward, Hertsmere Borough Council from May 1991 to May 1995, serving as Vice
Chairman of the Planning Committee in 1992 and Chairman of the Housing Committee
in 1993.
Martin H.S. Brand has been Lending Director and a Director of CSC-UK since
its formation. Mr. Brand served as a director of Metropolitan Mortgage
Corporation Ltd. from 1986 to 1993. Mr. Brand was a partner of Brand Montague,
Solicitors from March 1960 until September 1994.
Gerald Epstein has been Financial Director and a Director of CSC-UK since
its formation. Since 1972, Mr. Epstein has been a senior partner of Downham
Train Epstein, a general accounting practice, where he specializes in tax and
corporate finance. Mr. Epstein is also a director and shareholder of DTE
Insurance Services Limited.
BOARD OF DIRECTORS
In September 1995, the Company created a compensation committee, an audit
committee, a stock option plan committee and a stock purchase plan committee of
the Board of Directors. Messrs. Grosser, Patent, Goldstein and Stata were
appointed to the compensation committee, Messrs. Gould, Rademacher and Patent
were appointed to the audit committee and Messrs. Rademacher and Fensterheim
were appointed to the stock option plan committee and the stock purchase plan
committee.
103
104
Directors who are not employees of the Company receive stock options
pursuant to the Company's 1995 Non-Employee Directors Stock Option Plan (the
"Directors Plan"). The Directors Plan provides for automatic grants of an option
to purchase 40,000 shares of Common Stock to the Company's eligible non-employee
directors upon their election to the Board of Directors of the Company. Each
eligible non-employee director is granted an additional option, subject to
certain restrictions, to purchase 6,000 shares of Common Stock on each
anniversary of his or her election so long as he or she remains an eligible non-
employee director of the Company. The exercise price of any options granted
under the Directors Plan is the fair market value of the Common Stock on the
date of grant. No more than 400,000 shares of Common Stock may be issued upon
exercise of options granted under the Directors Plan, subject to adjustment to
reflect stock splits, stock dividends and similar capital stock transactions.
Options may be granted under the Directors Plan until June 1, 2005.
In addition, non-employee directors of the Company receive an annual
retainer of $10,000 (the "Annual Retainer") and are reimbursed for reasonable
expenses incurred in connection with attendance at Board of Directors' meetings
or committee meetings.
On June 1, 1995 and June 12, 1996, Messrs. Gould, Rademacher and Fensterheim
each were granted options to purchase 40,000 shares and 6,000 shares,
respectively, of Common Stock under the Directors Plan.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's executive officers, directors and
greater than 10% stockholders to file initial reports of ownership (on Form 3)
and periodic changes in ownership (on Forms 4 and 5) of the Company's securities
with the Securities and Exchange Commission (the "Commission"). Based solely on
its review of copies of such forms and such written representations regarding
compliance with such filing requirements as were received from its executive
officers, directors and greater than 10% stockholders, the Company believes
that, other than as described in the following two sentences, all such Section
16(a) filing requirements were complied with during 1996. Mr. Tim Ledwick failed
to include in his report on Form 4 filed with the Commission pursuant to Section
16(a) of the Exchange Act on February 5, 1996 relating to transactions which
occurred in January 1996, options to purchase 100,000 shares of Common Stock
that were granted to him in January 1996. Mr. Ledwick has amended his Form 4 to
include this information by filing a Form 4 amendment on March 27, 1997. Mr.
Robert Grosser failed to include in his report on Form 5 filed with the
Commission pursuant to Section 16(a) of the Exchange Act on February 13, 1997
relating to transactions which occurred in December 1996, an aggregate of 1,600
shares of Common Stock held in trust for his two daughters, which shares are
considered indirectly owned by Mr. Grosser. Mr. Grosser has amended his Form 5
to include this information by filing a Form 5 amendment on March 27, 1997.
Other information required by this item is included in the section entitled
"Executive Compensation and Other Information" of the Company's Proxy Statement
which will be filed with the Securities and Exchange Commission no later than
120 days after the close of the 1996 fiscal year and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The Company maintains certain employee benefit plans and programs in which
its executive officers are participants. Copies of these plans and programs are
incorporated by reference as Exhibit 10.12 to this report. The additional
information required by this item is included in the section entitled "Executive
Compensation and Other Information" of the Company's Proxy Statement which will
be filed with the Securities and Exchange Commission no later than 120 days
after the close of the 1996 fiscal year and is incorporated herein by reference.
104
105
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the sections entitled
"Security Ownership of Certain Beneficial Owners" and "Security Ownership of
Management" of the Company's Proxy Statement which will be filed with the
Securities and Exchange Commission no later than 120 days after the close of the
1996 fiscal year and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included in the section entitled
"Certain Relationships and Related Transactions" of the Company's Proxy
Statement which will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the 1996 fiscal year and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements included in Item 8:
a) Cityscape Financial Corp. Financial Statements:
Report of Independent Auditors by KPMG Peat Marwick
LLP
Report of Independent Auditors by BDO Stoy Hayward,
Registered Auditors
Consolidated Statements of Financial Condition at
December 31, 1996 and 1995
Consolidated Statements of Operations for the years
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
b) J&J Securities Limited Financial Statements:
Report of Independent Auditors by BDO Stoy Hayward,
Registered Auditors
Statements of Financial Condition at March 31, 1996
(unaudited) and September 30, 1995 and 1994
Statements of Operations for the six months ended
March 31, 1996 and 1995 (unaudited) and the years
ended September 30, 1995, 1994 and 1993
105
106
Statements of Stockholders' Equity for the six months
ended March 31, 1996 (unaudited) and the years ended
September 30, 1995, 1994 and 1993
Statements of Cash Flows for the six months ended
March 31, 1996 and 1995 (unaudited) and the years
ended September 30, 1995, 1994 and 1993
Notes to Financial Statements
c) Heritable Finance Limited (referred to throughout
this Report as Greyfriars) Financial Statements:
Report of Independent Auditors by KPMG, Registered
Auditors
Consolidated Statements of Financial Condition at
March 31, 1996 (unaudited) and December 31, 1995 and
1994
Consolidated Statements of Operations for the three
months ended March 31, 1996 and 1995 (unaudited) and
the years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Stockholders' Equity for
the three months ended March 31, 1996 (unaudited) and
the years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the three
months ended March 31, 1996 and 1995 (unaudited) and
the years ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
2. Financial Statement Schedules: None
3. Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
3.1 Certificate of Incorporation of the Company, as amended,
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 as declared effective by the
Commission on December 20, 1995.
3.2 Bylaws of the Company, as amended, incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-1 as
declared effective by the Commission on December 20, 1995.
4.1 Indenture, dated as of May 7, 1996, between the Company and The
Chase Manhattan Bank, N.A., incorporated by reference to Exhibit
4.2 to the Company's Quarterly Report on Form 10-Q filed with the
Commission on May 15, 1996.
4.2 Registration Rights Agreement, dated as of April 26, 1996, among
the Company, NatWest Securities Limited, Bear, Stearns & Co. Inc.,
CIBC Wood Gundy Securities Corp. and Wasserstein Perella
Securities, Inc., incorporated by reference to Exhibit 4.3 to the
Company's Quarterly Report on Form 10-Q filed with the Commission
on May 15, 1996.
10.1 Lease Agreement, dated as of September 30, 1993, between CSC and
Taxter Park Associates, as amended by the First Amendment to Lease,
dated as of April 19, 1994, and the Second Amendment to Lease,
dated as of May 12, 1995, incorporated by reference to Exhibit 10.1
to
106
107
the Company's Registration Statement on Form S-1 as declared
effective by the Commission on December 20, 1995.
10.2 Sublease Agreement between KLM Royal Dutch Airlines and CSC, dated
as of December 5, 1994, incorporated by reference to Exhibit 10.2
to the Company's Registration Statement on Form S-1 as declared
effective by the Commission on December 20, 1995.
10.3 Employment Agreement, dated as of January 1, 1995, between CSC and
Robert Grosser, incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1 as declared effective
by the Commission on December 20, 1995.
10.4 Employment Agreement, dated as of January 1, 1995, between CSC and
Robert C. Patent, incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1 as declared effective
by the Commission on December 20, 1995.
10.5 Employment Agreement, dated as of November 1, 1992, between CSC and
Robert M. Stata, as amended by the Amendment Agreement, dated as of
January 1, 1994, incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1 as declared effective
by the Commission on December 20, 1995.
10.6 Employment Agreement, dated as of July 1, 1995, between CSC and
Cheryl P. Carl, incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-1 as declared effective
by the Commission on December 20, 1995.
10.7 Employment Agreement, dated as of July 1, 1995, between CSC and
Eric S. Goldstein, incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-1 as declared effective
by the Commission on December 20, 1995.
10.8 Employment Agreement, dated as of July 1, 1995, between CSC and
Steven Weiss, incorporated by reference to Exhibit 10.8 to the
Company's Registration Statement on Form S-1 as declared effective
by the Commission on December 20, 1995.
10.9 Employment Agreement, dated as of July 1, 1995, between CSC and
Jonah L. Goldstein, incorporated by reference to Exhibit 10.10 to
the Company's Registration Statement on Form S-1 as declared
effective by the Commission on December 20, 1995.
10.10 Standby Financing and Investment Banking Services Agreement, dated
as of June 24, 1994, between CSC and ContiTrade, incorporated by
reference to Exhibit 10.15 to the Company's Registration Statement
on Form S-1 as declared effective by the Commission on December 20,
1995.
10.11 Revolving Credit, Security, and Term Loan Agreement, dated as of
June 30, 1995 among CSC, the Company, CoreStates Bank, N.A., Harris
Trust and Savings Bank, NBD Bank and NatWest Bank N.A., as amended
by Amendment No. 1 to the Revolving Credit Agreement, dated as of
August 30, 1995, incorporated by reference to Exhibit 10.19 to the
Company's Registration Statement on Form S-1 as declared effective
by the Commission on December 20, 1995.
10.12 The Company's 1995 Stock Option Plan, incorporated by reference to
Exhibit 10.20 to the Company's Registration Statement on Form S-1
as declared effective by the Commission on December 20, 1995.
10.13 The Company's 1995 Non-Employee Directors Stock Option Plan,
incorporated by reference to Exhibit 10.21 to the Company's
Registration Statement on Form S-1 as declared effective by the
Commission on December 20, 1995.
10.14+ Mortgage Loan Purchase Agreement, dated as of May 26, 1995, between
CSC-UK and Greenwich, incorporated by reference to Exhibit 10.29 to
the Company's Registration Statement on Form S-1 as declared
effective by the Commission on December 20, 1995.
10.15+ Letter, dated as of May 26, 1995, from Greenwich to CSC-UK
regarding purchase commitment with respect to first and second
mortgage loans located in the United Kingdom, incorporated by
reference to Exhibit 10.30 to the Company's Registration Statement
on Form S-1 as declared effective by the Commission on December 20,
1995.
107
108
10.16+ Servicing Agreement, dated as of May 26, 1995, among CSC-UK, City
Mortgage Servicing Limited and Greenwich, incorporated by reference
to Exhibit 10.31 to the Company's Registration Statement on Form
S-1 as declared effective by the Commission on December 20, 1995.
10.17 Stock Purchase Agreement, dated as of September 29, 1995, among the
Company, David Steene, Martin Brand and Gerald Epstein,
incorporated by reference to Exhibit 10.32 to the Company's
Registration Statement on Form S-1 as declared effective by the
Commission on December 20, 1995.
10.18 Service Agreement, dated as of April 5, 1995, between CSC-UK and
David Steene, incorporated by reference to Exhibit 10.33 to the
Company's Registration Statement on Form S-1 as declared effective
by the Commission on December 20, 1995.
10.19 Service Agreement, dated as of April 5, 1995, between CSC-UK and
Martin Brand, incorporated by reference to Exhibit 10.34 to the
Company's Registration Statement on Form S-1 as declared effective
by the Commission on December 20, 1995.
10.20 Service Agreement, dated as of April 5, 1995, between CSC-UK and
Gerald Epstein, incorporated by reference to Exhibit 10.35 to the
Company's Registration Statement on Form S-1 as declared effective
by the Commission on December 20, 1995.
10.21 Agreement, dated as of May 1, 1995, between CSC-UK and J.L.B.
Equities, Inc., incorporated by reference to Exhibit 10.36 to the
Company's Registration Statement on Form S-1 as declared effective
by the Commission on December 20, 1995.
10.22 Stock Option Agreement, dated as of March 6, 1996, by and among the
Company, CSC-UK and Messrs. Jaye and Johnson, incorporated by
reference to Exhibit 2.1 to the Company's Current Report on Form
8-K filed with the Commission on March 14, 1996.
10.23 Asset Purchase Agreement, dated March 6, 1996, by and among CSC-UK,
J&J, UK Credit Corporation Limited ("UK Credit") and certain
shareholders of UK Credit, incorporated by reference to Exhibit 2.2
to the Company's Current Report on Form 8-K filed with the
Commission on March 14, 1996.
10.24+ Letter Agreement, dated as of March 28, 1996, from Greenwich
International, Ltd. to CSC-UK regarding purchase commitment with
respect to first and second mortgage loans located in the United
Kingdom, incorporated by reference to Exhibit 10.46 to the
Company's Annual Report on Form 10-K/A filed with the Commission on
November 4, 1996.
10.25 Letter Agreement, dated March 28, 1996, between Greenwich and
CSC-UK regarding termination of prior agreement, incorporated by
reference to Exhibit 10.46 to the Company's Annual Report on Form
10-K filed with the Commission on April 1, 1996.
10.26 Agreement for the Sale and Purchase of the Entire Issued Share
Capital of Heritable Group Limited, dated June 14, 1996,
incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K filed with the Commission on June 28, 1996.
10.27 Third Amendment to Lease, dated as of April 17, 1996, between CSC
and Taxter Park Associates, incorporated by reference to Exhibit
10.53 to the Company's Quarterly Report on Form 10-Q filed with the
Commission on August 14, 1996.
10.28 Lease, dated as of April 18, 1996, among The Standard Life
Assurance Company, City Mortgage Servicing Limited and CSC-UK,
incorporated by reference to Exhibit 10.54 to the Company's
Quarterly Report on Form 10-Q filed with the Commission on August
14, 1996.
10.29 Purchase and Sale Agreement, dated June 20, 1996 and effective as
of February 2, 1996, between CSC and Greenwich Capital Financial
Products, Inc., incorporated by reference to Exhibit 10.55 to the
Company's Quarterly Report on Form 10-Q filed with the Commission
on August 14, 1996.
10.30 Lease Agreement, dated as of July 7, 1996, between CSC and Robert
Martin Company, incorporated by reference to Exhibit 10.56 to the
Company's Quarterly Report on Form 10-Q
108
109
filed with the Commission on August 14, 1996.
10.31 Loan Agreement, dated as of August 6, 1996, between CSC and
CoreStates, incorporated by reference to S-3 filed on September 9,
1996, as amended on January 30, 1997 and March 14, 1997.
10.32 Employment Agreement, dated as of January 1, 1996, between CSC and
Tim S. Ledwick, incorporated by reference to S-3 filed on September
9, 1996, as amended on January 30, 1997 and March 14, 1997.
10.33 Employment Agreement, dated as of February 1, 1996, between CSC and
Robert J. Blackwell, incorporated by reference to S-3 filed on
September 9, 1996, as amended on January 30, 1997 and March 14,
1997.
10.34 Amendment No. 1 dated as of August 30, 1996, to the Purchase and
Sale Agreement, dated as of February 2, 1996, between CSC and
Greenwich Capital Financial Products, Inc., incorporated by
reference to Exhibit 10.63 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 filed with the Commission on
September 27, 1996.
10.35 Senior Secured Credit Agreement, dated October 30, 1996, among the
Company and CIBC Wood Gundy Securities Corp. and the lenders named
therein, incorporated by reference to Exhibit 10. 60 to the
Company's Quarterly Report on Form 10-Q filed with the Commission
on November 19, 1996.
10.36 Amendment No. 2, dated as of October 30, 1996, to the Purchase and
Sale Agreement, dated as of February 2, 1996, between CSC and
Greenwich Capital Financial Products, Inc., incorporated by
reference to Exhibit 10.62 to the Company's Quarterly Report on
Form 10-Q filed with the Commission on November 19, 1996.
10.37 Registration Rights Agreement, dated as of November 22, 1996, among
the Company, Mutual Shares Fund, Mutual Qualified Fund, Mutual
Beacon Fund, Mutual Discovery Fund, Mutual European Fund, The Orion
Fund Limited, Mutual Shares Securities Fund and Mutual Discovery
Securities Fund, incorporated by reference to Exhibit 10.37 to the
Company's Registration Statement on Form S-3 filed on September 9,
1996, as amended on January 30, 1997 and March 14, 1997.
10.38 Amendment No. 3, dated as of December 30, 1996, to the Purchase and
Sale Agreement, dated as of February 2, 1996, between CSC and
Greenwich Capital Financial Products, Inc., incorporated by
reference to Exhibit 10.38 to the Company's Registration Statement
on Form S-3 filed on September 9, 1996, as amended on January 30,
1997 and March 14, 1997.
10.39 Amendment No. 4, dated as of December 31, 1996, to the Purchase and
Sale Agreement, dated as of February 2, 1996, between CSC and
Greenwich Capital Financial Products, Inc., incorporated by
reference to Exhibit 10.39 to the Company's Registration Statement
on Form S-3 filed on September 9, 1996, as amended on January 30,
1997 and March 14, 1997.
10.40 Amendment No. 1, dated as of January 13, 1997, to the Senior
Secured Credit Agreement, dated October 30, 1996, among the Company
and CIBC Wood Gundy Securities Corp. and the lenders named therein,
incorporated by reference to Exhibit 10.40 to the Company's
Registration Statement on Form S-3 filed on September 9, 1996, as
amended on January 30, 1997 and March 14, 1997.
10.41* Lease, dated as of October 1, 1996, between CSC and Reckson
Operating Partnership, L.P.
11.1* Computation of Earnings Per Share
21.1 Subsidiaries of the Company, incorporated by reference to Exhibit
21.1 to the Company's Registration Statement on Form S-3 filed on
September 9, 1996, as amended on January 30, 1997 and March 14,
1997
23.1* Consent of KPMG Peat Marwick LLP
23.2* Consent of KPMG, Registered Auditors
109
110
23.3* Consent of BDO Stoy Hayward
23.4* Consent of BDO Stoy Hayward
27.1* Financial Data Schedule for the year ended December 31, 1996
* Filed herewith.
+ Confidential treatment has been granted with respect to certain
provisions, the redacted portions of which are indicated by
brackets. This Exhibit has been filed in its entirety separately
with the Commission pursuant to an application for confidential
treatment.
(b) Reports on Form 8-K: None
110
111
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
CITYSCAPE FINANCIAL CORP.
By: /s/Robert C. Patent
-----------------------------
Robert C. Patent
Vice Chairman of the Board,
Executive Vice President and
Director
Date: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated.
Signature Title
--------- -----
/s/Robert Grosser Chairman of the Board, Chief Executive
-------------------------- Officer, President and Director
Robert Grosser (Principal Executive Officer)
/s/Robert C. Patent Vice Chairman of the Board, Executive
-------------------------- Vice President and Director
Robert C. Patent
/s/Asher Fensterheim Director
--------------------------
Asher Fensterheim
/s/Jonah L. Goldstein Director
--------------------------
Jonah L. Goldstein
/s/Arthur P. Gould Director
--------------------------
Arthur P. Gould
/s/Hollis W. Rademacher Director
--------------------------
Hollis W. Rademacher
/s/Robert M. Stata Director
--------------------------
Robert M. Stata
111
112
/s/ David A. Steene
------------------------------ Director
David A. Steene
/s/ Tim S. Ledwick Vice President, Chief Financial Officer
------------------------------
Tim S. Ledwick
Date: March 28, 1997
112
113
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
3.1 Certificate of Incorporation of the Company, as amended,
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 as declared effective by the
Commission on December 20, 1995.
3.2 Bylaws of the Company, as amended, incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-1 as
declared effective by the Commission on December 20, 1995.
4.1 Indenture, dated as of May 7, 1996, between the Company and The
Chase Manhattan Bank, N.A., incorporated by reference to Exhibit
4.2 to the Company's Quarterly Report on Form 10-Q filed with the
Commission on May 15, 1996.
4.2 Registration Rights Agreement, dated as of April 26, 1996, among
the Company, NatWest Securities Limited, Bear, Stearns & Co. Inc.,
CIBC Wood Gundy Securities Corp. and Wasserstein Perella
Securities, Inc., incorporated by reference to Exhibit 4.3 to the
Company's Quarterly Report on Form 10-Q filed with the Commission
on May 15, 1996.
10.1 Lease Agreement, dated as of September 30, 1993, between CSC and
Taxter Park Associates, as amended by the First Amendment to Lease,
dated as of April 19, 1994, and the Second Amendment to Lease,
dated as of May 12, 1995, incorporated by reference to Exhibit 10.1
to the Company's Registration Statement on Form S-1 as declared
effective by the Commission on December 20, 1995.
10.2 Sublease Agreement between KLM Royal Dutch Airlines and CSC, dated
as of December 5, 1994, incorporated by reference to Exhibit 10.2
to the Company's Registration Statement on Form S-1 as declared
effective by the Commission on December 20, 1995.
10.3 Employment Agreement, dated as of January 1, 1995, between CSC and
Robert Grosser, incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1 as declared effective
by the Commission on December 20, 1995.
10.4 Employment Agreement, dated as of January 1, 1995, between CSC and
Robert C. Patent, incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1 as declared effective
by the Commission on December 20, 1995.
10.5 Employment Agreement, dated as of November 1, 1992, between CSC and
Robert M. Stata, as amended by the Amendment Agreement, dated as of
January 1, 1994, incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1 as declared effective
by the Commission on December 20, 1995.
10.6 Employment Agreement, dated as of July 1, 1995, between CSC and
Cheryl P. Carl, incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-1 as declared effective
by the Commission on December 20, 1995.
10.7 Employment Agreement, dated as of July 1, 1995, between CSC and
Eric S. Goldstein, incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-1 as declared effective
by the Commission on December 20, 1995.
10.8 Employment Agreement, dated as of July 1, 1995, between CSC and
Steven Weiss, incorporated by reference to Exhibit 10.8 to the
Company's Registration Statement on Form S-1 as declared effective
by the Commission on December 20, 1995.
10.9 Employment Agreement, dated as of July 1, 1995, between CSC and
Jonah L. Goldstein, incorporated by reference to Exhibit 10.10 to
the Company's Registration Statement on Form S-1 as declared
effective by the Commission on December 20, 1995.
10.10 Standby Financing and Investment Banking Services Agreement, dated
as of June 24, 1994,
113
114
between CSC and ContiTrade, incorporated by reference to Exhibit
10.15 to the Company's Registration Statement on Form S-1 as
declared effective by the Commission on December 20, 1995.
10.11 Revolving Credit, Security, and Term Loan Agreement, dated as of
June 30, 1995 among CSC, the Company, CoreStates Bank, N.A., Harris
Trust and Savings Bank, NBD Bank and NatWest Bank N.A., as amended
by Amendment No. 1 to the Revolving Credit Agreement, dated as of
August 30, 1995, incorporated by reference to Exhibit 10.19 to the
Company's Registration Statement on Form S-1 as declared effective
by the Commission on December 20, 1995.
10.12 The Company's 1995 Stock Option Plan, incorporated by reference to
Exhibit 10.20 to the Company's Registration Statement on Form S-1
as declared effective by the Commission on December 20, 1995.
10.13 The Company's 1995 Non-Employee Directors Stock Option Plan,
incorporated by reference to Exhibit 10.21 to the Company's
Registration Statement on Form S-1 as declared effective by the
Commission on December 20, 1995.
10.14+ Mortgage Loan Purchase Agreement, dated as of May 26, 1995, between
CSC-UK and Greenwich, incorporated by reference to Exhibit 10.29 to
the Company's Registration Statement on Form S-1 as declared
effective by the Commission on December 20, 1995.
10.15+ Letter, dated as of May 26, 1995, from Greenwich to CSC-UK
regarding purchase commitment with respect to first and second
mortgage loans located in the United Kingdom, incorporated by
reference to Exhibit 10.30 to the Company's Registration Statement
on Form S-1 as declared effective by the Commission on December 20,
1995.
10.16+ Servicing Agreement, dated as of May 26, 1995, among CSC-UK, City
Mortgage Servicing Limited and Greenwich, incorporated by reference
to Exhibit 10.31 to the Company's Registration Statement on Form
S-1 as declared effective by the Commission on December 20, 1995.
10.17 Stock Purchase Agreement, dated as of September 29, 1995, among the
Company, David Steene, Martin Brand and Gerald Epstein,
incorporated by reference to Exhibit 10.32 to the Company's
Registration Statement on Form S-1 as declared effective by the
Commission on December 20, 1995.
10.18 Service Agreement, dated as of April 5, 1995, between CSC-UK and
David Steene, incorporated by reference to Exhibit 10.33 to the
Company's Registration Statement on Form S-1 as declared effective
by the Commission on December 20, 1995.
10.19 Service Agreement, dated as of April 5, 1995, between CSC-UK and
Martin Brand, incorporated by reference to Exhibit 10.34 to the
Company's Registration Statement on Form S-1 as declared effective
by the Commission on December 20, 1995.
10.20 Service Agreement, dated as of April 5, 1995, between CSC-UK and
Gerald Epstein, incorporated by reference to Exhibit 10.35 to the
Company's Registration Statement on Form S-1 as declared effective
by the Commission on December 20, 1995.
10.21 Agreement, dated as of May 1, 1995, between CSC-UK and J.L.B.
Equities, Inc., incorporated by reference to Exhibit 10.36 to the
Company's Registration Statement on Form S-1 as declared effective
by the Commission on December 20, 1995.
10.22 Stock Option Agreement, dated as of March 6, 1996, by and among the
Company, CSC-UK and Messrs. Jaye and Johnson, incorporated by
reference to Exhibit 2.1 to the Company's Current Report on Form
8-K filed with the Commission on March 14, 1996.
10.23 Asset Purchase Agreement, dated March 6, 1996, by and among CSC-UK,
J&J, UK Credit Corporation Limited ("UK Credit") and certain
shareholders of UK Credit, incorporated by reference to Exhibit 2.2
to the Company's Current Report on Form 8-K filed with the
Commission on March 14, 1996.
10.24+ Letter Agreement, dated as of March 28, 1996, from Greenwich
International, Ltd. to
114
115
CSC-UK regarding purchase commitment with respect to first and
second mortgage loans located in the United Kingdom, incorporated
by reference to Exhibit 10.46 to the Company's Annual Report on
Form 10-K/A filed with the Commission on November 4, 1996.
10.25 Letter Agreement, dated March 28, 1996, between Greenwich and
CSC-UK regarding termination of prior agreement, incorporated by
reference to Exhibit 10.46 to the Company's Annual Report on Form
10-K filed with the Commission on April 1, 1996.
10.26 Agreement for the Sale and Purchase of the Entire Issued Share
Capital of Heritable Group Limited, dated June 14, 1996,
incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K filed with the Commission on June 28, 1996.
10.27 Third Amendment to Lease, dated as of April 17, 1996, between CSC
and Taxter Park Associates, incorporated by reference to Exhibit
10.53 to the Company's Quarterly Report on Form 10-Q filed with the
Commission on August 14, 1996.
10.28 Lease, dated as of April 18, 1996, among The Standard Life
Assurance Company, City Mortgage Servicing Limited and CSC-UK,
incorporated by reference to Exhibit 10.54 to the Company's
Quarterly Report on Form 10-Q filed with the Commission on August
14, 1996.
10.29 Purchase and Sale Agreement, dated June 20, 1996 and effective as
of February 2, 1996, between CSC and Greenwich Capital Financial
Products, Inc., incorporated by reference to Exhibit 10.55 to the
Company's Quarterly Report on Form 10-Q filed with the Commission
on August 14, 1996.
10.30 Lease Agreement, dated as of July 7, 1996, between CSC and Robert
Martin Company, incorporated by reference to Exhibit 10.56 to the
Company's Quarterly Report on Form 10-Q filed with the Commission
on August 14, 1996.
10.31 Loan Agreement, dated as of August 6, 1996, between CSC and
CoreStates, incorporated by reference to S-3 filed on September 9,
1996, as amended on January 30, 1997 and March 14, 1997.
10.32 Employment Agreement, dated as of January 1, 1996, between CSC and
Tim S. Ledwick, incorporated by reference to S-3 filed on September
9, 1996, as amended on January 30, 1997 and March 14, 1997.
10.33 Employment Agreement, dated as of February 1, 1996, between CSC and
Robert J. Blackwell, incorporated by reference to S-3 filed on
September 9, 1996, as amended on January 30, 1997 and March 14,
1997.
10.34 Amendment No. 1 dated as of August 30, 1996, to the Purchase and
Sale Agreement, dated as of February 2, 1996, between CSC and
Greenwich Capital Financial Products, Inc., incorporated by
reference to Exhibit 10.63 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 filed with the Commission on
September 27, 1996.
10.35 Senior Secured Credit Agreement, dated October 30, 1996, among the
Company and CIBC Wood Gundy Securities Corp. and the lenders named
therein, incorporated by reference to Exhibit 10. 60 to the
Company's Quarterly Report on Form 10-Q filed with the Commission
on November 19, 1996.
10.36 Amendment No. 2, dated as of October 30, 1996, to the Purchase and
Sale Agreement, dated as of February 2, 1996, between CSC and
Greenwich Capital Financial Products, Inc., incorporated by
reference to Exhibit 10.62 to the Company's Quarterly Report on
Form 10-Q filed with the Commission on November 19, 1996.
10.37 Registration Rights Agreement, dated as of November 22, 1996, among
the Company, Mutual Shares Fund, Mutual Qualified Fund, Mutual
Beacon Fund, Mutual Discovery Fund, Mutual European Fund, The Orion
Fund Limited, Mutual Shares Securities Fund and Mutual Discovery
Securities Fund, incorporated by reference to Exhibit 10.37 to the
Company's Registration Statement on Form S-3 filed on September 9,
1996, as amended on January 30, 1997 and March 14, 1997.
10.38 Amendment No. 3, dated as of December 30, 1996, to the Purchase and
Sale Agreement,
115
116
dated as of February 2, 1996, between CSC and Greenwich Capital
Financial Products, Inc., incorporated by reference to Exhibit
10.38 to the Company's Registration Statement on Form S-3 filed on
September 9, 1996, as amended on January 30, 1997 and March 14,
1997.
10.39 Amendment No. 4, dated as of December 31, 1996, to the Purchase and
Sale Agreement, dated as of February 2, 1996, between CSC and
Greenwich Capital Financial Products, Inc., incorporated by
reference to Exhibit 10.39 to the Company's Registration Statement
on Form S-3 filed on September 9, 1996, as amended on January 30,
1997 and March 14, 1997.
10.40 Amendment No. 1, dated as of January 13, 1997, to the Senior
Secured Credit Agreement, dated October 30, 1996, among the Company
and CIBC Wood Gundy Securities Corp. and the lenders named therein,
incorporated by reference to Exhibit 10.40 to the Company's
Registration Statement on Form S-3 filed on September 9, 1996, as
amended on January 30, 1997 and March 14, 1997.
10.41* Lease, dated as of October 1, 1996, between CSC and Reckson
Operating Partnership, L.P.
11.1* Computation of Earnings Per Share
21.1 Subsidiaries of the Company, incorporated by reference to Exhibit
21.1 to the Company's Registration Statement on Form S-3 filed on
September 9, 1996, as amended on January 30, 1997 and March 14,
1997.
23.1* Consent of KPMG Peat Marwick LLP
23.2* Consent of KPMG, Registered Auditors
23.3* Consent of BDO Stoy Hayward
23.4* Consent of BDO Stoy Hayward
27.1* Financial Data Schedule for the year ended December 31, 1996
* Filed herewith.
+ Confidential treatment has been granted with respect to certain
provisions, the redacted portions of which are indicated by
brackets. This Exhibit has been filed in its entirety separately
with the Commission pursuant to an application for confidential
treatment.
116