1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-27314
CITYSCAPE FINANCIAL CORP.
-------------------------
DELAWARE 11-2994671
-------- ----------
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (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)
--------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR IF CHANGED SINCE
LAST REPORT)
INDICATE BY CHECK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO
BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
30,855,067 SHARES $.01 PAR VALUE, OF
COMMON STOCK, AS OF MAY 5, 1997
-------------------------------
2
CITYSCAPE FINANCIAL CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1997
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statement of Financial Condition at March 31, 1997 and
December 31, 1996 2
Consolidated Statements of Operations for the three months ended March 31,
1997 and 1996 3
Consolidated Statements of Cash Flows for the three months ended March 31,
1997 and 1996 4
Notes to Consolidated Financial Statements 5 - 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 9 - 16
PART II - OTHER INFORMATION 17 - 18
3
CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED) (AUDITED)
ASSETS
Cash and cash equivalents $ 332,503 $ 2,107,285
Cash held in escrow 14,813,612 15,038,729
Securities purchased under agreements to resell 50,424,202 154,176,608
Available-for-sale securities 12,872,738 14,618,194
Mortgage servicing receivables 252,128,509 242,895,313
Trading securities 155,048,891 103,199,936
Prepaid commitment fees 34,022,000 35,917,000
Mortgage loans held for sale, net 109,281,387 102,222,184
Credit enhancement deposits 51,687,000 35,082,000
Equipment and leasehold improvements, net 15,961,819 13,947,037
Goodwill 44,939,041 47,466,835
Other assets 35,968,601 43,531,238
============ ============
Total assets $777,480,303 $810,202,359
============ ============
LIABILITIES
Warehouse financing facilities $ 98,980,756 $ 89,434,291
Securities sold but not yet purchased 49,527,020 152,862,526
Accounts payable and other liabilities 61,378,547 50,244,387
Allowance for losses 31,350,798 33,715,614
Income taxes payable 54,743,428 56,896,337
Standby financing facility 7,966,292 7,966,292
Notes and loans payable 180,103,491 136,520,719
Convertible subordinated debentures 143,620,000 143,730,000
------------ ------------
Total liabilities 627,670,332 671,370,166
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 5,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, $.01 par value, 50,000,000 shares authorized;
29,744,322 and 29,649,133 issued and outstanding at
March 31, 1997 and December 31, 1996, respectively 297,443 296,491
Additional paid-in capital 58,201,282 57,782,609
Foreign currency translation adjustment, net of taxes 4,575,764 9,765,137
Unrealized gain on available-for-sale securities, net of taxes 7,281,685 8,328,950
Retained earnings 79,453,797 62,659,006
------------ ------------
Total stockholders' equity 149,809,971 138,832,193
------------ ------------
COMMITMENTS AND CONTINGENCIES
------------ ------------
Total liabilities and stockholders' equity $777,480,303 $810,202,359
============ ============
See accompanying notes to consolidated financial statements.
2
4
CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
------------------------------
1997 1996
----------- -----------
REVENUES
Gain on sale of loans $60,663,074 $24,092,738
Interest 19,421,467 3,017,683
Mortgage origination income 784,130 836,096
Servicing income 669,247 560,704
Other 2,998,193 271,847
----------- -----------
Total revenues 84,536,111 28,779,068
----------- -----------
EXPENSES
Salaries and employee benefits 15,383,244 5,382,345
Interest expense 16,455,512 1,698,045
Selling expenses 11,203,898 1,362,967
Other operating expenses 12,345,345 4,044,398
Amortization of goodwill 1,156,794 493,794
----------- -----------
Total expenses 56,544,793 12,981,549
----------- -----------
Earnings before income taxes 27,991,318 15,797,519
Provision for income taxes 11,196,527 6,524,375
----------- -----------
NET EARNINGS $16,794,791 $ 9,273,144
=========== ===========
Primary earnings per share of common stock $ 0.54 $ 0.31(1)
=========== ===========
Fully diluted earnings per share of common stock $ 0.50 -
=========== ===========
Weighted average number of shares outstanding
and common stock equivalents:
Primary 30,880,485 29,805,920(1)
=========== ===========
Fully diluted 36,354,709 -
=========== ===========
(1) Amounts have been restated to reflect the 100% stock dividend paid in July
1996.
See accompanying notes to consolidated financial statements.
3
5
CITYSCAPE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------------
1997 1996
------------- -------------
Cash flows from operating activities:
Net earnings $ 16,794,791 $ 9,273,144
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization 5,628,354 1,059,098
Income taxes payable 2,004,864 6,380,726
Unrealized gain on securities (656,250) -
Increase in mortgage servicing receivables (9,233,196) (23,025,031)
Increase in trading securities (51,848,955) (9,602,900)
Provision for losses (2,364,816) 1,128,704
Net purchases of securities under agreements to resell 104,408,656 -
Proceeds from securities sold but not yet purchased (103,335,506) -
Proceeds from sale of mortgages 481,590,058 206,789,547
Mortgage origination funds disbursed (486,834,219) (194,143,267)
Increase in credit enhancement deposits (16,605,000) -
Other, net 9,457,917 (4,919,769)
------------- -------------
Net cash used in operating activities (50,993,302) (7,059,748)
------------- -------------
Cash flows from investing activities:
Purchases of equipment (3,220,342) (504,485)
Net distributions from partnership - 145,912
------------- -------------
Net cash used in investing activities (3,220,342) (358,573)
------------- -------------
Cash flows from financing activities:
Increase (decrease) in warehouse financings 9,546,465 (8,714,758)
Increase in standby financing facility - 7,194,931
Proceeds from notes and loans payable 49,000,000 9,000,000
Repayment of notes and loans payable (6,417,228) -
Net proceeds from issuance of common stock 309,625 -
------------- -------------
Net cash provided by financing activities 52,438,862 7,480,173
------------- -------------
Net increase (decrease) in cash and cash equivalents (1,774,782) 61,852
Cash and cash equivalents at beginning of period 2,107,285 3,598,549
============= =============
Cash and cash equivalents at end of period $ 332,503 $ 3,660,401
============= =============
Supplemental disclosure of cash flow information:
Income taxes paid during the period $ 4,628,346 $ 92,528
============= =============
Interest paid during the period $ 7,694,674 $ 512,829
============= =============
See accompanying notes to consolidated financial statements.
4
6
CITYSCAPE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
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 3). CSC-UK had no operations
and no predecessor operations prior to May 1995.
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and do not include all
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments consisting of normal recurring accruals, considered necessary for a
fair presentation of the results for the interim period have been included.
Operating results for the three months ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997. The accompanying consolidated financial statements and the information
included under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations" should be read in conjunction with the
consolidated financial statements and related notes of the Company for the year
ended December 31, 1996.
The consolidated financial statements of the Company include the
accounts of CSC and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation. The CSC
Acquisition, the UK Acquisition, the J&J Acquisition and the Greyfriars
Acquisition (as such terms are defined below) have been accounted for under the
purchase method of accounting and with respect to the CSC Acquisition as a
"reverse acquisition" as described in Note 3 below.
Certain amounts in the statements have been reclassified to conform
with the 1997 classifications.
3. 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
5
7
Acquisition has been accounted for as a "reverse acquisition" for financial
reporting purposes, and CSC is deemed to have acquired a 100% interest in the
Company, as of the date of the acquisition, and therefore the historical
financial statements presented are those of CSC.
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 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 sterling 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, a mortgage lender based in Reading, England (formerly
known as Heritable Group Limited and referred to herein as "Greyfriars"), in
exchange for pound sterling 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.
6
8
4. New Accounting Pronouncements
On January 1, 1997, the Company adopted Statement of Financial
Accounting Standards ("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 No. 125 is generally effective for transactions
that occur after December 31, 1996, and it is to be applied prospectively. SFAS
No. 125 requires 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 requires
the Company to provide additional disclosure about the retained certificates.
The adoption of SFAS No. 125 has not had 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 Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share" which simplifies the standards for computing
earnings per share previously found in Accounting Principles Board Opinion 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.
5. 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 dividend effected in July 1996. 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 (as defined in "-- Liquidity and
Capital Resources"), 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.
6. Subsequent Events
6% Convertible Preferred Stock, Series A. On April 9, 1997, the Company
completed a private placement of 5,000 shares of 6% Convertible Preferred Stock,
Series A (the "Series A Preferred Stock") with a liquidation preference (the
"Liquidation Preference") of $10,000 per share and related five-year warrants to
purchase 500,000 share of Common Stock, pursuant to which the Company received
aggregate net proceeds (after transaction fees and expenses) of $49.3 million.
The net proceeds from the Series A Preferred Stock will be used for working
capital purposes or for the repayment of outstanding indebtedness. The Series A
Preferred Stock is redeemable at the option of the Company at a redemption price
equal to 105% of the Liquidation Preference at any time prior to July 9, 1997
and thereafter at 120% under certain circumstances. The Series A Preferred Stock
is convertible into shares of Common Stock, subject to certain restrictions and
redemption rights, at a conversion price equal to the lowest daily sales price
of the Common Stock during the four consecutive trading days immediately
preceding such conversion, discounted by up to 4% and subject to certain
adjustments. To date, an aggregate of 385 shares of Series A Preferred Stock
have been converted into an aggregate of 319,757 shares of Common Stock.
Conversion Transactions. In April 1997, the Company induced the
conversion of $14.0 million aggregate principal amount of its Convertible
Debentures resulting in the issuance upon conversion of 533,332 shares of Common
Stock (at a conversion price of $26.25 per share) pursuant to the terms of the
Convertible Debentures. To induce conversion, the Company issued an additional
342,708 shares of Common Stock and paid the holders of the induced Convertible
Debentures $420,000 in cash. These transactions will result, in the second
quarter of 1997, in the reduction of Convertible Debentures by $14.0
7
9
million, a charge to earnings of $4.8 million related to the fair market value
of such 342,708 shares ($4.4 million) and such cash payment and an increase in
stockholders' equity of $18.8 million due to the issuance of the conversion
shares and the inducement shares. The net effect of these transactions will be
an increase of $14.0 million to stockholders' equity in the second quarter of
1997.
Senior Notes. The Company anticipates that it will issue $300.0 million
aggregate principal amount of 12 3/4% Senior Notes due 2004 (the "Notes") in a
private placement on May 14, 1997. The Notes are not redeemable prior to
maturity except in limited circumstances. The net proceeds from the sale of the
Notes will be used for the repayment of outstanding indebtedness and for
general corporate purposes.
8
10
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements. 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
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. Gain on sale of
loans constituted approximately 71.8% and 83.7% of total revenues for the three
months ended March 31, 1997 and 1996, respectively. 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.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
Total revenues increased $55.7 million or 193.4% to $84.5 million for
the three months ended March 31, 1997 from $28.8 million for the comparable
period in 1996. 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 $36.6 million or 151.9% to $60.7
million for the three months ended March 31, 1997 from $24.1 million for the
comparable period in 1996. This increase was due primarily to CSC-UK's gain on
sale of loans of $33.9 million representing a 28.9% gain on the $117.4 million
of loan sales in the three months ended March 31, 1997 compared to gain on sale
of loans of $12.2 million representing a 45.0% gain on the $27.1 million of loan
sales in the comparable period in 1996. Additionally, the increase was due to
increased volume of US loan sales at higher average gains ($364.2 million of
loan sales at a weighted average gain of 7.4% ($26.8 million) in the three
months ended March 31, 1997 as compared to $175.9 million of loan sales at a
weighted average gain of 6.8% ($11.9 million) in the comparable period in 1996).
The decrease in the UK gain on sale margin was a result of the Company's
introduction of new loan products targeting higher credit quality borrowers as
well as new loan products with lower prepayment fees. The increase in the US
gain on sale margin was primarily a result of higher average gains recognized on
the Company's Sav*-A-Loan(R) product (loans to homeowners with little or no
equity in their property but who possess a favorable credit profile and
debt-to-income ratio) of
9
11
$128.8 million at an average net gain of 10.0%. The Sav*-A-Loan(R) product
represented 35.4% of the Company's US loan sales and 48.1% of the gain on sale
of loans during the first quarter of 1997. The increase was offset by higher
premiums paid on the Company's core home equity product wholesale originations,
increasing from an average of 4.6% for the first quarter of 1996 to 6.2% for the
first quarter of 1997. The Company does not pay a yield spread premium on its US
broker originations.
The Company anticipates that the UK gain on sale margin will continue
to decrease in the future as a result of the introduction of such new loan
products and as a result of the Company's intention to discontinue originating
unregulated loans that utilize the Rule of 78s method commencing in the early
part of the second half of 1997. In March 1997, the Company received a letter
from the Office of Fair Trading (the "OFT") which has responsibility 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.
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 and is in discussions with the OFT regarding its concerns. 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 on the
continuance of its licenses, although no assurances to that effect can be given
at this time. In partial response to the OFT letter and after preliminary
discussions with the OFT, the Company volunteered to discontinue originating
unregulated loans that utilize the Rule of 78s method commencing in the early
part of the second half of 1997.
The Company commenced broadening its UK product offerings with products
that calculate prepayment without using the Rule of 78s in anticipation of
potential regulatory initiatives like those set forth in the OFT letter. The
elimination of Rule of 78s loan products 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. In
addition, 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 assurance 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
averse effect in future periods on the Company's results of operations and
financial condition.
Interest income increased $16.4 million or 546.7% to $19.4 million for
the three months ended March 31, 1997 from $3.0 million for the comparable
period in 1996. This increase was due primarily to the increased balance of
loans held for sale during the three months ended March 31, 1997 resulting from
the increased loan origination and purchase volume during the period, as well as
increased interest income resulting from the accretion of the discount recorded
on higher average balances of mortgage servicing receivables.
Mortgage origination income decreased $51,966 or 6.2% to $784,130 for
the three months ended March 31, 1997 from $836,096 for the comparable period in
1996. This decrease was due primarily to lower fees earned on the Company's
domestic broker originations. It is anticipated that the Company's increased
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 0.9% for the three months ended March 31, 1997 from 2.9% for the
comparable period in 1996.
Servicing income increased $108,543 or 19.4% to $669,247 for the three
months ended March 31, 1997 from $560,704 for the comparable period in 1996.
This increased income was due primarily to an increase in the average balances
of US loans serviced to $1.6 billion for the three months ended March 31,
10
12
1997 from $378.0 million for the comparable period in 1996 and the increase in
the average balances of UK loans serviced to $539.3 million for the three months
ended March 31, 1997 from $53.0 million for the comparable period in 1996.
Total expenses increased $43.5 million or 334.6% to $56.5 million for
the three months ended March 31, 1997 from $13.0 million for the comparable
period in 1996. This increase was due primarily to increased salaries, interest
expense, selling expenses and operating expenses related to increased loan
origination and purchase volume during the three months ended March 31, 1997.
Total expenses as a percentage of total revenues increased to 66.9% for the
three months ended March 31, 1997 from 45.1% for the comparable period in 1996.
During the first quarter of 1997, amortization of goodwill related to the UK
Acquisition, the J&J Acquisition and the Greyfriars Acquisition totaled $1.2
million.
Salaries and employee benefits increased $10.0 million or 185.2% to
$15.4 million for the three months ended March 31, 1997 from $5.4 million for
the comparable period in 1996. This increase was due primarily to increased
staffing levels to 809 US employees at March 31, 1997 compared to 334 US
employees at March 31, 1996 and the increased staffing levels associated with
the UK operations (320 UK employees at March 31, 1997 compared to 98 UK
employees at March 31, 1996) resulting from the growth in loan origination and
purchase volume, geographic expansion and increased loans serviced, as well as
the J&J Acquisition and the Greyfriars Acquisition.
Interest expense increased $14.8 million or 870.6% to $16.5 million for
the three months ended March 31, 1997 from $1.7 million for the comparable
period in 1996. This increase was due primarily to the interest costs associated
with the $143.8 million of Convertible Debentures issued during the second
quarter of 1996 and the Senior Secured Facility (as defined below), as well as
an increased balance of loans held pending sale financed by the Company's
warehouse lines during the first quarter of 1997 resulting from the increased
loan origination and purchase volume during 1996.
Selling and other expenses increased $18.1 million or 335.2% to $23.5
million for the three months ended March 31, 1997 from $5.4 million for the
comparable period in 1996. This increase was due primarily to increased selling
costs of $9.8 million or 700.0% to $11.2 million for the three months ended
March 31, 1997 from $1.4 million for the comparable period in 1996 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 $7.5 million or 80.6% to $16.8 million for the
three months ended March 31, 1997 from $9.3 million for the comparable period in
1996. 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 the three months ended March 31, 1997 as the Company
expanded its geographic base and further penetrated existing markets.
FINANCIAL CONDITION
March 31, 1997 Compared to December 31, 1996
Cash and cash equivalents decreased $1.8 million or 84.2% to $332,503
at March 31, 1997 from $2.1 million at December 31, 1996.
Securities purchased under agreements to resell decreased $103.8
million or 67.3% to $50.4 million at March 31, 1997 from $154.2 million at
December 31, 1996. 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. This decrease was
due primarily to the closing of three positions prior to March 31, 1997.
11
13
Available-for-sale securities represents the fair value less a discount
for the restrictions on the resale of such stock of the 1,090,910 shares of
common stock of IMC Mortgage Company ("IMC") owned by the Company at March 31,
1997. Available-for-sale securities decreased $1.7 million or 11.6% to $12.9
million at March 31, 1997 from $14.6 million at December 31, 1996 as a result of
the decrease in the fair market value of IMC common stock.
Mortgage servicing receivables increased $9.2 million or 3.8% to $252.1
million at March 31, 1997 from $242.9 million at December 31, 1996. The increase
represents $53.6 million of mortgage servicing receivables recognized as a
result of loans sold in the UK and the US with servicing rights retained. Such
increase was offset by amortization and the transfer of $34.5 million of
mortgage servicing receivables to trading securities as a result of US
securitization transactions.
Trading securities, which consist of interest-only and residual
certificates, increased $51.8 million or 50.2% to $155.0 million at March 31,
1997 from $103.2 million at December 31, 1996. This increase was due to the
$492.2 million of US securitizations completed during the three months ended
March 31, 1997.
Prepaid commitment fees, which represent a fee paid to Greenwich (as
defined below) as a result of the UK Greenwich Facility (as defined below)
entered into by CSC-UK and Greenwich in March 1996, decreased $1.9 million or
5.3% to $34.0 million at March 31, 1997 from $35.9 million at December 31, 1997
as a result of amortization of such fee over the 20-year life of the UK
Greenwich Facility.
Mortgage loans held for sale, net increased $7.1 million or 6.9% to
$109.3 million at March 31, 1997 from $102.2 million at December 31, 1996. This
increase was due primarily to the volume of US loans originated exceeding loan
sale volume in the US during the three months ended March 31, 1997.
Credit enhancement deposits, which represent initial reserve funds
established on UK securitizations and sales into purchase facilities, increased
$16.6 million or 47.3% to $51.7 million at March 31, 1997 from $35.1 million at
December 31, 1996. This increase was due primarily to $169.8 million of UK
securitizations during the first quarter of 1997.
Goodwill, net of amortization, decreased $2.6 million or 5.5% to $44.9
million at March 31, 1997 from $47.5 million at December 31, 1996. This decrease
represented the amortization of the goodwill recorded in connection with the UK
Acquisition, the J&J Acquisition and the Greyfriars Acquisition.
Other assets decreased $7.5 million or 17.2% to $36.0 million at March
31, 1997 from $43.5 million at December 31, 1996. This decrease was due
primarily to the decrease in subwarehouse loan receivables to $7.7 million at
March 31, 1997 compared to $14.9 million at December 31, 1996.
Warehouse financing facilities outstanding increased $9.6 million or
10.7% to $99.0 million at March 31, 1997 from $89.4 million at December 31,
1996. 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
mortgage loans held for sale, net.
Securities purchased under agreements to resell decreased $103.4
million or 67.6% to $49.5 million at March 31, 1997 from $152.9 million at
December 31, 1996. 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 decrease was due primarily to the closing of
three positions prior to March 31, 1997.
Accounts payable and other liabilities increased $11.2 million or 22.3%
to $61.4 million at March 31, 1997 from $50.2 million at December 31, 1996. This
increase was due primarily to increased accrued interest expense due to the
Convertible Debentures and Senior Secured Facility, increased reserve for losses
and increased UK accounts payable.
Allowance for losses decreased $2.3 million or 6.8% to $31.4 million at
March 31, 1997 from $33.7 million at December 31, 1996. This decrease was due
primarily to the transfer of $34.5 million of US
12
14
mortgage servicing receivables with $9.2 million of allowance for losses to
trading securities as a result of US securitization transactions, which are
recorded net of such allowance for losses. Excluding the impact of this
transfer, the Company's allowance for losses increased $6.9 million during the
first quarter of 1997.
Notes and loans payable increased $43.6 million or 31.9% to $180.1
million at March 31, 1997 from $136.5 million at December 31, 1996. This
increase was due to the $50.0 million increase in the Senior Secured Facility
during the first quarter of 1997 partially offset by the repayment of $6.4
million of premium advances under the US Greenwich Facility (as defined below).
Stockholders' equity increased $11.0 million or 7.9% to $149.8 million
at March 31, 1997 from $138.8 million at December 31, 1996 due primarily to net
earnings of $16.8 million for the three months ended March 31, 1997. This
increase was offset by an unrealized loss on available-for-sale securities, net
of taxes of $1.0 million, and a foreign currency translation adjustment, net of
taxes of $5.2 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 the three months ended March 31, 1997 and 1996, the Company used
operating cash of $51.0 million and $7.1 million, respectively. Additionally,
during the three months ended March 31, 1997 and 1996, the Company used $3.2
million and $358,573, respectively, in investing activities. 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
$52.4 million and $7.5 million, respectively.
The Company is required to comply with various operating and financial
covenants as defined in the agreements described above, 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 do not purport to be complete and are qualified in
their entirety by reference to the exhibits incorporated by reference in the
Company's Annual Report on Form 10-K. The continued availability of funds
provided to the Company under these agreements is subject to the Company's
continued compliance with these covenants. In addition, the Notes, the
Convertible Debentures and the Series A Preferred Stock permit the holders of
such securities to require the Company to purchase such securities upon a
change of control (as defined in the respective Indentures or the Certificate
of Designation, as the case may be).
13
15
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
during the fourth quarter of 1997 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 other
than as described herein 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 (7.6% at March 31, 1997) 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 $54.7 million at March 31, 1997. 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 March 31, 1997, the aggregate balance of
loans outstanding under this program was $7.7 million, with applications pending
for an additional $23.0 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 (8.75% at March 31, 1997) and are due upon
demand. The agreement terminates on June 30, 1997. The outstanding balance under
the loan and security agreement was $141,855 at March 31, 1997.
US Purchase Facilities and Standby Facilities. 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 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 March 31, 1997
under 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 March 31, 1997, the Company had $2.0
million available under the Conti Standby Facility. The Conti Standby Facility
bears interest at a
14
16
variable rate based on LIBOR plus 200 basis points (7.69% at March 31, 1997) and
the agreement extends through June 1999. In October 1996, the Company entered
into a $5.0 million unsecured revolving credit facility with The First National
Bank of Boston (the "Bank of Boston Facility"). The Bank of Boston Facility
bears interest at a variable rate based on The First National Bank of Boston
Base Rate plus 50 basis points (9.0% at March 31, 1997). Advances under the Bank
of Boston Facility are due on October 24, 1997. As of March 31, 1997, 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 Capital Financial Products, Inc., an affiliate of Greenwich
Capital Markets, Inc. (referred to herein, including any affiliates as
"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 bore
interest at a rate of LIBOR plus 175 basis points (7.44% at March 31, 1997). 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. 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 31, 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 which must buy such loans. CSC-UK and/or
Greenwich subsequently resells 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 (8.24%
at March 31, 1997). This agreement expires as to the
15
17
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 sterling 10.0 million
($16.5 million) at March 31, 1997.
Convertible Debentures
In May 1996, the Company issued $143.8 million of 6% Convertible
Subordinated Debentures due 2006 (the "Convertible Debentures") convertible at
any time 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
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. Through the first quarter of 1997, an aggregate of $130,000 principal
amount of Convertible Debentures was converted into Common Stock.
In April 1997, the Company induced the conversion of $14.0 million
aggregate principal amount of its Convertible Debentures resulting in the
issuance upon conversion of 533,332 shares of Common Stock (at a conversion
price of $26.25 per share) pursuant to the terms of the Convertible Debentures.
To induce conversion, the Company issued an additional 342,708 shares of Common
Stock and paid the holders of the induced Convertible Debentures $420,000 in
cash. These transactions will result, in the second quarter of 1997, in the
reduction of Convertible Debentures by $14.0 million, a charge of $4.8 million
related to the fair market value of such 342,708 shares ($4.4 million) and such
cash payment and an increase in stockholders' equity of $18.8 million due to the
issuance of the conversion shares and the inducement shares. The net effect of
these transactions will be an increase of $14.0 million to stockholders' equity
in the second quarter of 1997.
6% Convertible Preferred Stock, Series A.
On April 9, 1997, the Company completed a private placement of 5,000
shares of Series A Preferred Stock with a Liquidation Preference of $10,000 per
share and related five-year warrants to purchase 500,000 share of Common Stock,
pursuant to which the Company received aggregate net proceeds (after transaction
fees and expenses) of $49.3 million. The net proceeds from the Series A
Preferred Stock will be used for working capital purposes or for the repayment
of outstanding indebtedness. The Series A Preferred Stock is redeemable at the
option of the Company at a redemption price equal to 105% of the Liquidation
Preference at any time prior to July 9, 1997 and thereafter at 120% under
certain circumstances. The Series A Preferred Stock is convertible into shares
of Common Stock, subject to certain restrictions and redemption rights, at a
conversion price equal to the lowest daily sales price of the Common Stock
during the four consecutive trading days immediately preceding such conversion,
discounted by up to 4% and subject to certain adjustments. To date, an aggregate
of 385 shares of Series A Preferred Stock have been converted into an aggregate
of 319,757 shares of Common Stock.
All references herein to "$" are to United States dollars; all
references to "pound sterling" are to British Pounds Sterling. Unless otherwise
specified, translation of amounts from British Pounds Sterling to United States
dollars has been made herein using exchange rates at the end of the period for
which the relevant statements are prepared for balance sheet items and the
weighted average exchange rates for the relevant period for statement of
operations items, each based on the noon buying rate in New York City for cable
transfers in foreign currencies as certified for customs purposes by the Federal
Reserve Bank of New York.
16
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is 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 effect
on the results of operations or financial condition of the Company.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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 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 as declared
effective by the Commission on April 18, 1997.
11.1* Computation of Earnings Per Share
27.1* Financial Data Schedule
- ---------------------------
* Filed herewith
(b) Reports on Form 8-K
None.
17
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cityscape Financial Corp.
Date: May 12, 1997 By: /s/ Tim S. Ledwick
------------ ----------------------------
Tim S. Ledwick
Title: Chief Financial Officer
(as chief accounting officer and
on behalf of the registrant)
18